EU Referendum Bill: Peers or the People - will Cameron seek to overrule the Lords?

Which century do the Lords think they live in?

So the assembled House of Quangocrats (sorry, we couldn't help it), former MPs, diplomats and political hacks otherwise known as the House of Lords has voted to put an end to the Conservative's EU Referendum Bill. David Cameron will most likely now try to use the so-called Parliament Act. This is a rarely used power which allows the House of Commons to effectively over-rule the House of Lords. So this will be a showdown.

We looked at how this could work before. This is the likely sequence of events from here.

Firstly, the Parliament Act requires that the Bill should be rejected twice by the Lords in consecutive sessions of Parliament. Running out of time counts as rejection but the Bill needs to be presented in exactly the same form in the next session of Parliament. This will require the same rigmarole as the first time around - a new Conservative backbench MP taking up the Bill in backbench time, and further votes which will require another abstention by the majority of Labour MPs.

So will there be enough time before the election to actual use the Parliament Act? The biggest risk for the Tories is that the Peers who oppose the Bill continue to debate it until the end of the next session, meaning that Cameron would never get the chance to use the Parliamentary Act. The second session will start in May. That will give the Conservatives a year to get it through the Commons and into the Lords before the election. If it is still in the Lords when the general election is called in May 2015, it could potentially be "Parliament Acted" as one of Parliament's last acts before it is dissolved for the election.

Could John Bercow MP - the Common's speaker - have a role? The legislation states that a certificate is required on the Bill to state the parliament Act has been complied with. It states a "certificate of the Speaker of the House of Commons signed by him that the provisions of this section have been duly complied with" is needed. It would be highly controversial for him not to comply but stranger things have happened.

So it is just possible to get this through before the election, even if the Lords try to talk it out. This will give the Conservative's a symbolic victory and a political advantage but will not bring a referendum on its own. That will require Cameron to win an election.

This has been a tricky Europe week for David Cameron

Rien à voir ici? Hollande says treaty change is "not the priority" for France, but...

David Cameron and François Hollande have just held their joint press conference following the Anglo-French defence summit in Oxfordshire. Predictably, though, most of the questions focused instead on Cameron's EU renegotiation strategy and the prospects of it being achieved by changes to the EU treaties.

Here's what stood out for us:

• Significantly, Cameron explicitly said that renegotiation of the UK's EU membership "will involve elements of treaty change". This is quite a rare admission, and is the most explicit he's been so far on the need to change the EU treaties. As The Times's Sam Coates flagged up, the Prime Minister has been categorical about EU treaty change once before, speaking of "the treaty change that I’ll be putting in place before the referendum", on the Andrew Marr Show earlier this year - although the question was specifically on EU migrants' access to benefits. 

• The Prime Minister also reiterated that "the eurozone needs change...It needs greater co-ordination, it needs those elements that make a single currency succeed. That's why in recent years we've already seen treaty changes."

• Hollande said that "France wants more coordination and integration in the eurozone", but treaty change "is not the priority" for the time being. Though this is what the headlines are likely to focus on, this is nothing new, nor surprising. It's been the French position for ages. However, Hollande didn't rule treaty change out. He said it wasn't "urgent" or "the priority". As we have argued from the beginning (see here, for instance), the timetable remains a weakness in Cameron's plan - not least because discussions on changing the EU treaties can drag on for years and the eurozone remains on an uncertain development path.

• The French President also stressed that major treaty changes (he mentioned the Maastricht Treaty as an example) would have to be put to a referendum in France - while for smaller ones parliamentary approval would be enough.

A couple of points are worth making. It is no secret that one of the reasons France is wary of changing the EU treaties is that referenda are not exactly easy to win (think of the one on the EU Constitution in 2005, but also the one on the Maastricht Treaty, both of which split the country and the political establishment).

This is true assuming that the new Treaty gives the EU more powers. But this is not what Cameron is aiming for. So it is not entirely clear that any UK-led changes would necessarily have to be put to a vote in France.

That said, though, the common wisdom on this point is that an EU treaty change would be part of a 'grand bargain' to strengthen economic coordination in the eurozone - meaning that the UK's new relationship with the EU would be negotiated alongside greater central controls in the euro area. This type of treaty change could clearly trigger a referendum in France (and elsewhere).

The question remains open. With Germany likely to keep pushing for an EU treaty change to complete the overhaul of the eurozone structures, we still think Hollande may have to face the issue sooner rather than later - with the question being what deal Berlin can broker.

And yet again, that brings us back to Angela Merkel.

Is the Tory Party becoming its own worst enemy in Europe?

Our Director Mats Persson writes on his Telegraph blog:

Many commentators have rightly noted that infighting over the EU and immigration could cost the Conservatives the 2015 general election. There's a second dimension to this, however: by tearing itself apart, ironically, the Tory Party also risks becoming a greater obstacle to the new settlement in Europe (that a vast majority of its MPs want) than anyone in Paris or Brussels.

Make no mistake: if that In/Out EU referendum comes in 2017, the Tory Party will – as Virginians say – split like a Baptist Church. I reckon there are about 30 Tory MPs who are “out no matter what”, 20 who are “in at any cost” and the rest are “swing voters” who would probably prefer to stay in a heavily reformed EU. Most Tory MPs will make up their minds based on what deal David Cameron can get in Europe.

Remember though, it’s not unusual for parties to split over Europe – particularly if referenda are involved. In part, this is a sign of a functioning democracy. In the 2003 Swedish referendum on the Euro, the governing Social Democrats were deeply split, with Ministers from the same government even campaigning on different sides. The French socialists were infamously divided over the European Constitution and in the 1975 EU referendum in the UK, Labour was all over the place.

Cameron yesterday again fought off a Tory EU rebellion, with two amendments to the Immigration Bill being backed by significant numbers of MPs. Dominic Raab’s amendment in particular – limiting the grounds on which foreign criminals can appeal deportation – encapsulated the ongoing clash between European "rule of law" (in this case the ECHR, not the EU) and Parliamentary democracy. It would be odd for the Tories not to discuss this, and it was a fully legitimate amendment.

However, there clearly comes a point when the Tory Party can become its own worst enemy in Europe. It's one thing for the Tories to split when that referendum comes, another to rob itself of the very opportunity to test the limits of EU reform ahead of the vote.

There's a vicious circle at play here. The UK media never seems to get tired of Tory split stories. It only takes a handful of vocal backbench MPs to create a “Tory rebellion” headline. English being the lingua franca, European politicians and commentators read the UK press, drawing the conclusion that, this is really all about a party talking to itself about itself. The many good reform ideas coming out of the UK are dismissed as a matter of “domestic politics” – an image happily (sometimes dishonestly) conveyed by a whole host of special interests, including those who have invested personal prestige in the EU project and seek to maintain the status quo. Cameron, meanwhile, is seen as an unreliable partner not in control at home. This perception is then fed back to the UK press, as a sign that Cameron is “isolated”, in turn hardening backbench opinion.

How to avoid this? Backbenchers need to be aware that every split – manufactured or real – reverberates far beyond the UK’s borders, often working against their ultimate objective. When the UK presents a united front, it often wins in Europe. Secondly, as I’ve argued before, Cameron just has to stop jumping from headline to headline. He’s giving his European partners whiplash. Finally, European commentators and politicians themselves need to be more intellectually honest. Surely, beyond the headlines, they must understand that the UK’s Europe debate is multi-faceted. Don’t use the Tories as an excuse not to engage on substance in the crucial debate about how to reform Europe.

From the archives: The story of the 3% deficit limit

Okay, we know this is not exactly breaking news (the original story is from September 2012), but it came to our attention again and we felt compelled to post on it.

Back in the heyday of the eurozone crisis, Le Parisien interviewed Guy Abeille (see picture), a senior official at the French Finance Ministry who is thought to have 'invented' the 3% deficit-to-GDP limit later enshrined in the EU treaties and the cornerstone of the famed Stability and Growth Pact.

And Monsieur Abeille made some rather extraordinary revelations:

We came up with this number in less than an hour. It was born on the corner of a table, without any theoretical reflection.

It was a night of May 1981. Pierre Bilger, the Budget Director at the time, summoned us. He told us: [French President François] Mitterrand want us to provide him quickly with an easy rule, that sounds as coming from an economist, and can be opposed to the ministers that walk into his office asking for money.

We needed something simple...We were going towards FF 100bn deficit. That represented a deficit of over 2% [of GDP]. 1%? We dropped that number, impossible to achieve. 2%? That put us under too much pressure. 3%? It's a good number, a number that has gone through the ages, it made one think of the Trinity.

Mitterrand wanted a rule, we gave him one. 

In other words, it seems the deficit rule that has made so many politicians lose sleep, especially in the eurozone periphery, was cooked up in less time than it takes to roast a chicken and wasn't based on any economic theory or even best practice.

We also can't help but be reminded of the famed response of  a senior Anglo Irish Bank member when asked how he came up with the original bailout figure for the bank (which proved far too low) - I "picked it out of my a*se". Quite. And it seems he wasn't the first either.

Some rebels are more rebellious than others

We shouldn't fear a robust debate about Europe - whether in Europe as a whole, domestically or within individual political parties. It's called democracy.

This week’s Westminster news cycle has been dominated by Tory splits and rebellions (again). The Spectator’s leader column wonders whether the hardcore rebels would prefer to see their party lose the next election, and as it rightly points, out: there's a time for everything.

Today will see the Commons debate the Government’s Immigration Bill and, depending on the Speaker and time, potentially debate two ‘rebel amendments’: one is Dominic Raab’s on removing foreign criminals’ right to use the European Convention on Human Rights’ Article 8 on family life to appeal deportation. The other is the demand to reinstate rules preventing Romanians and Bulgarians working in the UK. According to the BBC's Norman Smith, Raab's amendment will be called.

However, these two amendments clearly differ significantly in spirit (it is telling that Raab's amendment has a significant degree of cross-party support). Raab's amendment, whether one agrees with it or not, is a constructive proposal to tackle a practical problem with the interpretation and use of the ECHR in the UK that he and others believe is necessary to ensure the Home Secretary's stated policy works - a clever and perfectly legitimate Parliamentary practice.

The architects of the amendment to reintroduce restrictions on Bulgarian and Romanian migrants - again, whatever we think of its merits - must know full well that their amendment is outright illegal under current EU law. Yes, the discussion about Parliament's sovereignty is legitimate and important. However, it's hard to see what this amendment, at this point in time, can or is meant to achieve.

The long lost Liikanen report returns – but it looks pretty different

Has the Liikanen report become the Barnier plan?

Update 30/01/14 11:45:

Some eagle eyed HM Treasury officials have flagged up that the recitals of the proposal (the preamble points before the articles of the regulation) do allow for the derogation to apply to secondary legislation as long as the key primary legislation has been passed. As we note below, this is the case with Vickers and the UK therefore certainly counts for the derogation. It is a bit strange that this isn't also spelt out in the article of the proposal but its inclusion is likely to be more that sufficient for the UK.

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Okay, maybe long lost is an exaggeration, but it’s certainly been off the front line agenda for some time.

The time away from the spotlight has been used to significantly overhaul the European Commission’s flagship proposal on reforming the banking sector in the aftermath of the crisis.

Here’s the full proposal, out this morning, while here are the press release and Q&A.

While the proposal was always expected to be the offspring of the Liikanen report, in this case the apple has fallen quite far from the tree. The proposal is quite a change from the original report and as expected focuses more on a Volcker-style rule on proprietary trading rather than a significant separation of large banks. That said, the focus remains on separating off risky trading activities, meaning the main impact is a lessening of scope. We outline our thoughts below.

A reform overtaken by events?
While this was originally flagged as a key proposal, it has been a long time coming. In the meantime, a new single supervisor has been created, new plans on capital requirements, a new macro prudential framework, new plans on bank bail-ins and a new bank resolution scheme have all been substantially developed. The new framework for the financial sector has largely grown up without this proposal, and how exactly it will fit in – both in terms of timeline and structure – remains unclear.

An EU Volcker rule – the Barnier rule?
The key part of the new proposal is a ban on “proprietary trading in financial instruments and commodities, i.e. trading on own account for the sole purpose of making profit for the bank.” While this is well intentioned, it does come with some complications:

• It has proved very difficult to identify what exactly classifies as proprietary trading, compared to necessary trading to manage risk and to act as a market-maker.
• The current definition in the proposal is fairly narrow, and refers to activities specifically dedicated to making a profit for the bank itself. In other words, it looks as if it could be fairly easily side-stepped. It also exempts trading of government bonds and money market instruments for cash management.

Separation power – moving away from national control?
As we have noted before, the prospect of a supranational body ordering the break-up of a flagship national bank has the potential to be incredibly explosive. The banking union has brought this closer, but final decision on how to resolve a bank remains mostly national. This proposal would allow such a decision to be taken not just to resolve a bank, but also if its non-retail activity was impacting financial stability. However, it seems that the final say will now rest with the ‘competent authority’ (a definition which is never spelled out), which in the case of large eurozone banks would likely be the ECB as the SSM (Single Supervisory Mechanism).

Has the UK secured a derogation?
As expected, a clause has been included on a general derogation (not specific and only applying to the separation rule not the prop trading ban) which allows for the rules on separation to be superseded by any national rules which aim to achieve the same goals. While Vickers would certainly qualify on this front, the text specifies that the derogation can only apply to legislation adopted before 29/01/2014. Currently, all legislation relating to Vickers is not expected to be adopted in the UK until mid-2015. However, the key banking reform act (which includes the ring-fencing plans) was made into law in December.

For the most part then, it seems the UK has secured a derogation, which can be put down as a small but important win for the government. Plenty of other states have also secured scope for their national plans.There is clear encouragement in the wording for states who are yet to put a comprehensive system in place, to adopt the EU framework. That said, with lots of different national plans in place, one has to question how effective this system will really be.

A long way to go
As the points above suggest, this remains a controversial proposal and negotiations will be tricky. Little should happen this year, due to the European Parliament elections and the new Commission entering office. Assuming the next Commission picks up the same proposal (which is not guaranteed) the aim is to have the necessary legislative acts approved by January 2016, with the prop trading ban coming into force at the start of 2017 and the separation powers in mid-2018. As with some of the other regulations, it seems the EU response to the financial crisis will only be in place a decade after the crisis hit.

These are just some of the key points of contention upon first reading. There is much more to go in this process with the input of member states and the European Parliament likely to be very different, and sometimes even adversarial. There is also a lot of scope for the rules to be altered using delegated acts and technical standards – these will ultimately determine how the prop trading ban and separation rule work in practice.

So far, a large part of the banking sector (mostly smaller banks) will probably be happy. Larger banks will see it as an improvement, but will likely push for a further watering down. Questions can still be raised over whether costs will be passed onto consumers and whether it will really help limit risky activity, which can often be related to mundane retail bank activity. But then the idea is that other parts of the framework will also help limit this effects.  

In any case, the proposal is likely to once again fall away from the frontline and it could yet come back with a different face once again.

Did Cameron just lose a close EU ally?

Under its former ODS government, the Czech Republic, was a card carrying member of David Cameron's reform camp. Traditionally wary of "ever closer union", the Czech Republic refused to join the Euro, objected to the Charter of Fundamental Rights and, along with the UK, refused to sign up to the fiscal pact. All this combined with a shared economic liberalism made agreement easy. Unfortunately for David Cameron, they also failed to win an election.

The new Government is a very different creature. Formed from a Coalition of the Socialists, Christian-Democrats and the new insurgent Party ANO (Yes in Czech), the new finance minister has already dropped the former Government's principled objection to the Euro (although membership is still not an immediate likelihood), and now the leading candidate for the Human Rights Minister position seemingly wishes to abandon the country's semi opt-out from the EU's Charter of Fundamental Rights. With a one time self-described EU Federalist President (Milos Zeman) and a pro-integration foreign minister - the Czech Republic's direction of travel has certainly changed. It will likely be a big task for David Cameron to keep them onside.

A peek inside the ECB’s toolkit

Despite being barely a month into 2014, there have already been countless column inches written about the ECB and President Mario Draghi’s potential actions during 2014 (mostly to tackle the ‘deflation ogre’).

Is the ECB toolkit empty?

As we have noted before, while the ECB has an extensive toolkit in the case of an acute crisis, it has so far struggled to find the right tool (if one exists) to help promote lending to the real economy and therefore economic growth.

The favoured policy, widely cited by commentators and mentioned by Draghi previously, is some form of targeted liquidity scheme linked to lending to the real economy – along the lines of the Bank of England's 'Funding for Lending' scheme.

Such an option remains possible, but as Bundesbank Chief Jens Weidmann has pointed out, difficult to implement. We have noted this before, but, given that the ECB is already running unlimited liquidity at near zero interest rates (on loans up to three months) it’s hard to see that there would be huge demand for longer loans tied to specific lending requirements.

Over the weekend, speaking at the World Economic Forum in Davos, Draghi revealed another potential policy – ECB purchases of bundles of bank loans (aka. securitised bank loans or asset backed securities).

Is this a real option?

• The ECB has previously purchased covered bonds and government debt on the secondary market. Hence, securitised bank loans should be possible in theory.
• However, as Draghi himself admitted, the market for such securities remains seriously underdeveloped in the eurozone.
• The idea seems to be in its early stages, and probably requires a lot more discussion within the ECB.
• The move would likely face significant opposition within the Bundesbank, and Germany more generally. This would probably be focused on the risks involved in such asset-backed securities, which are often opaque and continue to have a negative connotation due to their role in the financial crisis.
• These are the reasons why Draghi has previously shied away from direct action in this area, instead suggesting that it is an area for the European Investment Bank (EIB) to act. There have been comments suggesting that work was underway on a joint programme, but nothing ever emerged.

Would it be effective?

• At the moment, no. The market remains significant underdeveloped. According to the Association for Financial Markets (AFME) the outstanding securitisation market is €1,545bn - only €131bn of which related to small business loans, while the very large majority of which relate to Retail Mortgage Backed Securities (RMBS) probably from the UK and Netherlands. While Draghi is probably right in his suggestion that it would develop in response to any ECB action on this front, it has a long way to go.
• Data from AFME give some flavour for the securitisation market in Europe. As the tables below show, the market remained small over the past few years, with less than a fifth of last year’s issuance relating to lending to Small and Medium-sized Enterprises (SMEs).

• Furthermore, in terms of the location of collateral, the markets remain very underdeveloped in the countries which the ECB would likely want to target. The UK and Netherlands account for a large chunk of the European market. Italy and Spain do have some market presence, but it remains small compared to the size of their economies (although this is true for the sector in general).

• The final point to note is that the structure for such securities remains opaque and undefined. Given that they are bundles of various technical products, they will always be difficult to value, and while credit rating agencies have improved their processes, questions will still be asked as to whether their ratings truly reflect the risk and value of these products.

While this option looks to be some way off then, the fact that Draghi felt the need to bring it up will likely encourage the view that the ECB will take some further action in the coming months.

Is the EU Referendum Bill dead?

The EU referendum Bill - pushed forward by Tory backbenchers aiming to legislate now for an EU referendum to be held in next Parliament (post-2015) - passed through the Commons with flying colours but is now stuck in the House of Lords.

Labour and Lib Dem Peers in the Lords have just managed to pass two amendments. These amendments are now sent back to the Commons which will have to decide whether to accept or reject them.

Big question now is whether this Bill will run out of the time, and therefore die an early death. This happens if the 2013-2014 Parliament session runs out before the Bill is passed (in the UK system, all proposals are chopped by the end of a parliamentary session). This ends at the end of April.

The short answer is that's we don't know yet, but it'll go down to the wire.

Parliament could attempt a round of Parliamentary Ping Pong, or "Wiff Waff" as Boris Johnson called it, as the amendments are returned to the Commons to be debated - probably on Friday the 28 February. If their Lordships amendments are reversed by MPs they will be ponged back just in time for the end of the session - at the end of April.

But does the Commons actually need to pong them back or could they simply accept it all in order to speed the Bill on its way? Well, the first amendment is about the actual referendum question:

"Do you think that the UK should be a member of the EU?"

Which the Peers want to change to:

"Should the UK remain a member of the EU or leave the EU?"

Well, opinions are divided as to whether the question will make any difference on the outcome - something we looked at here. But the Electoral Commission felt that some Britons were blissfully unaware the UK was in the EU at all, hence their suggested change. The second amendment, to Commission an impact assessment on the consequences of an EU exit, seems harmless enough but will not really settle anything as any impact assesment will become the subject of the dispute. In any event legislation is not required. So perhaps the Commons could accept this one aswell?

Or would it be better to reject the amendments and use the Parliament Act in the next session as we looked at here?

Regardless, this is a setback to the Conservatives, who will take comfort from the political advantage to be made from telling the public that - in their view - Nick Clegg and Ed Miliband do not trust them.

Is an EU referendum back on the Dutch agenda?

Thierry Baudet

This week, the Dutch Parliament held a debate on whether it is necessary to hold a referendum on transferring new powers to the European Union. The debate was triggered by a campaign, called "Citizen's forum - EU" which managed to gather over 63,000 signatures, above the threshold needed (40,000 signatures necessary) to force it on to the agenda of the Lower House.

The campaign demands:

1. An end to the creeping transfer of powers to the EU.

2.  If powers are transferred to the EU, a referendum must be held so the Dutch population can have a say on this transfer of powers.

Two of the campaigners, Dutch academic Thierry Baudet (photo), and economist Ewald Engelen said in a speech to MPs: 

"The Lower House is about to lose its core competences...You won’t be able to decide policy any more. You abolish yourself. But you don’t have the right at all to do this. Because the sovereignty is with us, the people. You are merely the representatives of the Dutch people."

As De Volkskrant reported, the reception was more positive than expected. It was not only the "usual suspects", like Geert Wilders' PVV, the Socialist Party and the Party for the Animals that welcomed the idea. These parties have expressed support for a Dutch-style "referendum lock" in the past,

More interestingly, the social-democrat PvdAalso  came out in support, with its EU-spokeswoman Marit Maij MP, saying: "the PvdA wants to proceed quickly with a possible referendum" - albeit with a lot of qualifications,The party is only in favour of a non-binding referendum, and wants it to be held according to new rules currently being negotiated in the Dutch Senate, which would make it necessary to first obtain 300,000 signatures, a high threshold in the Netherlands (but something which the EU referendum campaigners are considering).

The Christian Union, which sits with the Tories in the ECR Group in Brussels, support the idea, with its spokesman, Gert-Jan Segers MP, saying that "by means of exception we accept an advisory referendum".

Dutch PM Mark Rutte's governing VVD reiterated its support for strengthening national parliaments (something which the PvdA also wants), but is against referendums as a tool of policy.

Meanwhile, a new poll, by prominent pollster Maurice de Hond, reveals that 67% of Dutch citizens want a referendum in the event of new powers be transferred from the Netherlands to the EU:

Ja = Yes, Nee = No

This is against a tricky backdrop: current opinion polls show that Geert Wilders' PVV would have almost as many seats the governing VVD and PvdA combined, if an election was held today (though that goes far beyond Europe as an issue). With the Dutch government's campaign to set limits on the powers of the next European Commission shows, the European election campaign could prove interesting in the Netherlands.

Summer is over as Spain adapts to life outside its bank bailout programme

Spain's first day outside its EU-IMF bank bailout programme started with the publication of the new data on unemployment from the country's national statistics institute (INE). As we predicted on this blog last year (see here and here), the figures after the end of the summer - when a lot more seasonal jobs are on offer - look less encouraging than in the previous two quarters.

Let's start with the headline figures. In the last quarter of 2013, the general unemployment rate increased slightly from the previous quarter - from 25.98% to 26.03%. This means that, at the end of last year, 5,896,300 people in Spain were out of work.

It's worth looking at the figures a bit more in detail:

• The number of unemployed people went down by 8,400 in the fourth quarter of 2013, and by 69,000 in the year as a whole. This is positive, but has to be weighed against a significant fall in the economically active population - those working or actively looking for a job.

• Spain's active population decreased by 73,400 in the last quarter of 2013 alone, and by 267,900 in the year as a whole. As a result, the active population is now 59.43% of the total - the lowest level since the first quarter of 2008. The upshot of this is that, while the number of unemployed people may fall, a lot are simply switching to being economically inactive.

• The number of employed people went down, both in the fourth quarter of 2013 (-65,000 from Q3) and in the year as a whole (-198,900). However, it has to be said that the decline is less sharp than in the previous years.

• On a more positive note, the seasonally adjusted employment rate went up slightly (0.29%) in the fourth quarter of 2013, and it's the first time it happens since the first quarter of 2008. Similarly, the seasonally adjusted unemployment rate decreased by 1.22% from Q3. Again, though, this has to be put into perspective - notably with the reduction in the economically active population.

• One of the most concerning points comes with the level of long-term unemployment, which towards the end of last year reached new record highs. Over 13% of the active population have now been unemployed for twelve months or more (click on the graph below to enlarge). The knock-on effects of this are significant. It is well proven that the longer people are unemployed for, the harder it is for them to find work. It also diminishes their skill level and hampers future earning potential. This is worsened by the fact that, in Spain, many of these are likely to be younger workers.

The latest unemployment figures show that, despite some encouraging signals, it will still take time before Spanish citizens feel the recovery has started. It also means the Spanish government may consider a second round of reforms - perhaps more targeted at closing the gap between the education system and the needs of the labour market.   

ECJ rules against the UK in landmark short-selling case

The ECJ this morning rejected all the UK’s claims against the EU's short selling regulation. The result was surprising given that the Court's Advocate General Niilo Jääskinen issued an opinion supporting the UK’s position last September – court rulings often, but not always, follow these opinions.

The nub of the UK's complaint was that the new regulation transferred too much discretionary power to ESMA (the European Securities and Markets Authority) to ban short-selling over the heads of national regulators. And that the legal base for doing so in the EU treaties was unsatisfactory. The case could therefore set an important precedent.

The UK’s complaint as described by the court:

The United Kingdom contends, inter alia, that ESMA has been given a very large measure of discretion of a political nature which is at odds with EU principles relating to the delegation of powers. The United Kingdom also submits that Article 114 TFEU is not the correct legal basis for the adoption of the rules laid down in Article 28 of the regulation.

The full regulation and article 28 can be found here.

Here is what Jääskinen had to say about the complaint in September:

"The outcome is not harmonisation but the replacement of national decision-making with EU level decision-making. This goes beyond the limits of Article 114."

While he didn’t side with the UK on all issues, he did recommend changing the legal base of the regulation to Article 352, which would have given the UK a veto.

However, the ECJ took a very different line arguing that the regulation is in line with the treaties since ESMA already has a role to play in this area and because the powers are limited to times when financial market stability is in question - of course when this is, remains to be defined by ESMA itself. The court also suggests that, contrary to the Advocate General's view, the new rules do provide for harmonisation.

As we noted before, this ruling has the potential to be very important for the UK and could set the tone/precedent for future rulings. The court’s decision to reject the UK’s claim could have some important implications:

• Firstly, it potentially sets a precedent for the transfer of powers to an EU agency under the single market article (114). This is decided under qualified majority vote (QMV) meaning the UK does not have a veto. Not only that, but the scope of the powers remains vague and widespread, allowing ESMA quite a significant amount of leeway in deciding where to act in what the UK Government would argue are political decisions.

• More generally, there will be a concern that it could allow the use of Article 114 to be stretched – a question which is raised in some of the UK’s other on-going court challenges against EU financial regulation.

• This will raise concerns in the UK over two issues – financial services regulation and the split between euro and non-euro countries. The first is obvious given that the UK may feel its ability to legally protect itself against burdensome regulation is now diminished. The second stems from the potential abuse of the single market article to further the needs of the eurozone - the short-selling ban was largely conceived following the eurozone/financial crisis to combat 'speculators'.

• One saving grace may be that the ruling is quite specific in terms of financial market oversight, a role which the agency in question (ESMA) already has a part in. However, only time and future legal challenges will tell far-reching the implications of this ruling will be.

What happens now?

Given that the ECJ rejected all aspects of the UK's claim, it is dismissed entirely. There is little more the UK can do from a legal aspect, unless it decides to challenge other parts of the regulation but that seems unlikely.

The UK can continue to work behind the scenes to limit the practical power of ESMA and define strict criteria for when it can act on this issue. Of course, if any decision to limit short-selling by ESMA does happen, it could always challenge that specific move.

Nevertheless, this is clearly a political blow to the UK.  

Day 2 of the #EUReform conference: Powerful debate on all levels

Day two of the Open Europe / Fresh Start #EUReform conference saw a thriving exchange of reform ideas between panelists and conference delegates, viral Twitter action for #EUReform via the Twitter wall, as well as numerous media interviews. 

David Lidington, the UK's Europe Minister being greeted by OE Director, Mats Persson.

Eva Kjer Hansen, Chair of the EU Affairs Committee the Danish Parliament discussing the role of national parliaments in the EU.

Swedish columnist Katrine Kielos of Aftonbladet moderated the "Where does democractic authority lie" panel.

Susanna Koski , President of Youth Wing of the National Coalition Party (Finland) and Cecilia Ackerman of Citi in discussion.

German CDU MP  Klaus-Peter Willsch debating how to make the EU more accountable to its member states during a roundtable  discussion with Eva Kjer Hansen, Chair of of the European Affairs Committee (Liberal party) at the Danish Parliament, and Fresh Start MP Chris Heaton-Harris who is member of the European Scrutiny Committee

Several screens showed the lively #EUReform exchange on Twitter

Irish Minister for European Affairs Paschal Donohoe debating with conference delegates

Open Europe's Nina Schick with Fresh Start Project co-founder Andrea Leadsom MP (left) and Latvian MP Daina Kazaka (right)

Irish Minister for European Affairs Paschal Donohoe interviewed by Open Europe's Nina Schick.

Ebba Busch, Deputy Mayor of Uppsala and one of the top MEP candidate for Sweden's governing Christian Democrats on the Future of Europe Panel.

MPs from around Europe getting involved in the #EUreform agenda.

Open Europe's Nina Schick moderating the final panel of the Conference.

Rachida Dati, MEP and Deputy President of the French UMP Party, in an TV interview before her keynote speech in which she called for a "realist revolution" in Europe.

 Susanna Koski, President of the National Coalition Party's Youth Leage (Finland) adresses the Conference during the Future of Europe Panel.

Angel Martin Oro, Director of the Economic Trends Reporter (Spain) in conversation with a fellow delegate.

 

 Delegates attend the interactive round-table discussions.

Banking union hits another bump in the road

As Bloomberg and the FT reported last week, the recently agreed plans for a Single Bank Resolution Mechanism (SRM) could face further problems and possibly even a legal challenge at the European Court of Justice (ECJ).

The European Parliament announced last week that it will today send a letter to Commission President Jose Manuel Barroso outlining significant concerns over the agreement reached between EU member states last month.

The concerns focuses on the agreement to use an intergovernmental treaty to set up the resolution fund – a move demanded by Germany to provide additional legal safeguards against the pooling of risk and resources. The Commission has also raised concerns. More widely it relates to the fact that both the EP and Commission are unhappy with the compromise struck, believing it does not go far enough and does not follow the 'community method'.

According to numerous media reports and a statement by the EP, this dispute could delay the adoption of the SRM until after the European elections – a delay which could increase market uncertainty, especially around the bank stress tests.

The prospect of a legal challenge has also been raised. But, would the EP have a case? Unfortunately, at this stage we have more questions than answers for you, but below are a few points to consider:

• Given that the main point of contention relates to the intergovernmental treaty, which is outside EU law, it’s not clear that the EP has a role to play or has any legal protection to fall back on.
• That said, since much of the rest of the regulation is within the EU framework, the EP could potentially suggest its role as a 'democratic check' is being circumvented.
• To be frank, it’s really not clear either way at this early stage. But this could prove to be a very interesting test case if it ever does come to pass. Throughout the crisis there has been a working assumption that the eurozone can build the necessary structures to help solve the crisis through a combination of EU laws and intergovernmental treaties. If this is thrown into doubt, the view of the future of the euro could begin to change.
• It also has wider implications that affect the UK. The banking union deal illustrates the limits of the existing treaties and, as Chancellor George Osborne told our conference, that they are increasingly unfit for purpose in accommodating different degrees of integration. Intergovernmental treaties have been touted as the answer to any awkward UK treaty demands, but, if the scope for such treaties is limited, full blown treaty change of the sort David Cameron would like to use as a forum for reform might become unavoidable.

In any case, it will be an interesting dispute which could have some bearing on the future set up of the EU. One thing that is for sure though, is that it will lead to more delays and more questions being asked about the banking union deal.

Fact check: Has Germany's Foreign Minister really "isolated" Cameron on EU migration?

Update 1:20pm: The FT has told us that it was the German Perm Rep in Brussels that sent the FT the quote, in reply to the question: "I'm trying to understand what the German position is on this matter and I'd be keen to know whether Berlin shares the UK view of curbing free movement of European Union workers." If that's the case then the German Perm Rep should obviously share some responsibility for recycling the quote and not being clear about the source or context of it. That said, we still think it's an odd basis for such a major splash and, as we argue below, conflates the issues involved since Cameron has not actually advocated a cap on current EU migration.

The FT's front page claims David Cameron "faces EU isolation on anti-immigration stance". Exhibit A in the paper's case is a quote from Germany's SPD Foreign Minister Frank-Walter Steinmeier:

“Germany has benefited tremendously from this and surely more than others. Now many young people from southern Europe are coming to us, to learn and study. That benefits us and also helps the states from which they come. Whoever questions that damages Europe and damages Germany.”

However, a little digging in the German press reveals that there's something fishy about Steinmeier's apparent criticism of Cameron.

Firstly, his comments were first reported on 2 January by German daily Sueddeutsche Zeitung, so this is not a new quote. Secondly, and much more importantly, his comments were not in response to anything proposed by the UK at all. In fact, he was responding to proposals from his CSU coalition partner. The original story made no mention of Cameron or the UK. So, unless Steinmeier repeated the quote to the reporters, the FT effectively extrapolated from a quote that was given specifically in the context of German Coalition politics.

It so happens that the CSU's ideas on EU migration quite closely resemble much of what the UK Government would like to do to tighten rules on access to benefits. Nevertheless, Steinmeier appears to be quoted completely out of context. This was a domestic German dispute about tackling the abuse of EU free movement (the German coalition fought fiercely about this at the turn of the year).

Even disregarding this (which is pretty difficult), the article is unclear on what issue Cameron is isolated over. It mentions outright "curbs" on EU migrants. We agree talk of this is unfortunate and that there's very little appetite for this across Europe. Fortunately, curbs are neither an official Tory or Coalition policy. The article also makes a specific reference to beefed-up transitional controls on migration from future EU accession countries, based on new economic criteria (potentially a GDP per capita threshold) before their citizens are eligible for full free movement rights. We don't know how much support there is for this proposal.

And finally, it also cites rules on access to benefits, for which there is support in Germany and elsewhere (though the extent is still unclear).

Now, we may agree or disagree with Cameron's stated policy on EU migration, and as we've argued before, No 10 could have handled this situation a lot better.

But using a quote taken completely out of context as the key basis for a major splash does nothing to boost the quality of the wider political debate about the EU and immigration.

Why did Latvia join the euro?

Following on from our #EUReform Conference, we will now begin to shift back to normal blogging which was slightly disrupted by the undertaking of organising such a huge event.

One topic which was discussed at the Conference – specifically in the panel on Lessons from Central and Eastern Europe – is whether Latvia has made the correct decision to join the euro at the start of this year.

Many people were understandably surprised that a country would even countenance joining the euro, given that it is still in the midst of a severe crisis. We laid out some of our thoughts in a recent interview with CNN Marketplace Europe, but will develop them further below.

Why did Latvia join the euro?

Political reasons

• The key reason here is to cement ties with the EU and to protect itself further against influence from Russia. The Latvian Finance Minister, Andris Vilks, recently cited the example of the problems in Ukraine as a key reason why they chose to align closely with the EU through the euro. With the euro, the economic influence of Russia is reduced, while any uncertainty is backstopped by the security of the currency. With its own free-floating currency, any clash with Russia would likely cause fluctuations.
• There is also a view that being within the euro may entitle a country to greater levels of support and ‘solidarity’, be this against political or economic uncertainty.

Economic reasons

• As a small country in a world increasingly dominated by large central banks, many believe the euro still offers Latvia a level of protection and certainty. Many small countries in this area would have pegged currencies or de facto use other currencies in any case, so joining the euro may not be as big a choice as it first seems. It can also be very hard to realistically manage a free-floating currency for a small country these days, open to sharp flows of hot money or speculation.
• With this in mind, Latvia has maintained its peg with the euro and endured significant pain to do so. This is an issue we looked at in our internal devaluation paper. In any case, after having endured the worst of having a pegged currency, Latvia may see now as the time to reap the benefits.
• There are also the usual touted benefits of the single currency – notably reduced transaction costs. This is important for Latvia which sees around 30% of its exports go to eurozone countries. It is also likely to increase foreign direct investment and access to financing given the use of the much more liquid euro markets.

What are the potential downsides?

• The biggest risk facing Latvia is that it will repeat the mistakes it made when it joined the EU and which countries such as Ireland, Spain and Greece made when they joined the euro. This would be huge inflows of money prompting significant rises in prices and wages, as well as being funnelled into industry bubbles rather than productive investment. It is hoped Latvia has learnt from its own mistakes and those of others but that remains to be seen.
• The loss of tools to manage the national economy is also well known. Not only will Latvia lose control of its own specific monetary policy (something which we have seen can have perverse effects and potentially worsen he problem mentioned above), but it will also be subject to significantly more oversight and will have to sign up to the fiscal targets and structures set in the eurozone.
• Another big downside is that it seems to be going against the will of the people. All the polls in the run up to the Latvian accession to the euro showed that the public did not want to join. Not only is this undemocratic, particularly given the importance of the issue, but it risks stoking uncertainty. This is especially true since Latvia's previous government, which was a key proponent of the move, resigned.
• The final risk is one which all euro countries share. Latvia has now tied itself more deeply to a group of countries which continue to struggle, and for which the economic outlook remains mixed. It has also joined at a time when the exact structure of the eurozone remains in flux. Further integration seems likely, but what this will mean and cost is unclear.

In the end, only time will tell if this is the correct decision for Latvia. We are not going to pass judgement either way, although it is clear a more democratic approach would have been preferable. The most important point, though, is that Latvia does not repeat the same mistakes as before.

Day 1 of the #EUReform conference: All about substance

Day one of the Open Europe / Fresh Start #EUreform conference covered an enormous amount of ground - kicking off with UK Chancellor George Osborne's widely cited "reform or decline" speech.

300 reformers eager to get on with it, and it was all about substance.

Below are some pictures from the first day.

The Rt Hon. George Osborne giving the opening keynote speech

Reform Lesson from Central and Eastern Europe: Open Europe Berlin's Nora Hesse, Bulgaria's Foreign Minister Kristian Vigenin, Estonia's Foreign Minister Urmas Paet, and former Slovakian PM Iveta Radičová

The Fresh Start MPs giving a press conference 

The breakout sessions discussed a range of ideas for how to make the EU more competitive. 

The Rt Hon. William Hague addressing the "Reformers' Reception" in the evening 

William Hague talking to a group of Swedish MPs

 

#EU reform: The status quo is not an option

Our ground-breaking EU reform conference is now imminent and, as widely trailed in today's media, UK Chancellor George Osborne will be giving the opening keynote speech.

You can join the conversation throughout the day on twitter, using the #EUreform hash tag, or follow @openeurope. Uniquely for this type of a conference, all sessions will be on the record. We call it "Open Europe rules" (as opposed to the more secretive Chatham House rules).

In a letter to today's Guardian, six leading MPs from across Europe, all attending the conference, argue:

Too often, the debate about "Europe" is based on emotional and ideological arguments, with all sides – from those who want more EU integration and those who want less – trading in hyperbole rather than engaging with substantive issues of policy. Of course we need to co-operate across borders in Europe. The question, as ever, is how. How do we square the need for cross-border action with democratic accountability? How do we live up to the promise to make decisions as close as possible to citizens? How do we make Europe really work for growth and jobs at a time when global competition is stiffening?  

Today, we are joining hundreds of parliamentarians and opinion-formers from across Europe at a unique conference in London organised by the thinktank Open Europe and the Fresh Start Project, dedicated to one question: how can we achieve EU reform? While our proposed solutions may differ, we agree on one thing: the status quo in Europe is not an option. If the EU is to thrive, it needs to embrace a series of bold reforms. Some of these will involve EU action, but where democratic and economic factors so dictate, this may also mean "less Europe". We want to replace the emotional point-scoring with a policy-based discussion about how to achieve a Europe that works better for both democracy and growth.

Gustav Blix Swedish MP (Moderate party); ranking member, committee on European Union affairs (Sweden)
Klaus Peter Willsch German MP (CDU); member, committee for economy and energy,
Germany; Deputy head of the committee on education, research and technology (Germany)
Angieszka Pomaska Polish MP (Civic Platform); Chair of the EU affairs committee in the Polish parliament (Poland)
Eva Kjer Hansen Chair of the European affairs committee (Liberal party), Danish parliament (Denmark) Andrea Leadsom MP for South Northamptonshire (Con); co-founder, Fresh Start Project; member of No 10 policy board (UK)
Dr Reinhold Lopatka Spokesperson for foreign and European affairs, Austrian People's party (OeVP); former secretary of state for European and international affairs (Austria)

Open Europe Chairman Lord Leach: We can't do nothing. Only #EUReform will work

Open Europe Chairman Lord Leach of Fairford has an article in today's Times, trailing this week's unprecedented Open Europe-Fresh Start Project pan-European Conference on #EUReform. He argues,

There will be no escaping the European question this year. The European Parliament elections in May will be followed by the selection of a new Commission, the EU’s executive arm and spiritual home for federal-minded officials. This is also the year when the Prime Minister will set out his negotiating strategy for Europe ahead of next year’s general election and the promised referendum in 2017.

Voters across the Continent will be assured by EU leaders that the euro crisis is over. It isn’t. A financial and currency crisis has simply morphed into a social and economic crisis, with youth unemployment running at 50 per cent in parts of Southern Europe. The European elections will return sceptical parties in record numbers.

These flashing warning lights illustrate voters’ deepening frustration with the status quo. An out-of-touch Brussels political elite will no doubt try to frame the debate about Europe’s future as a struggle between moderate idealists who see the EU as an end in itself, a staging post on the journey to a United States of Europe, and dangerous “extremists” who oppose it lock, stock and barrel.

That would be a grave mistake. Without radical change, the legitimacy of the EU will continue to decline in every member state. And if there is a referendum in Britain it will be so close as to leave the issue undecided and half the country feeling resentful and disenfranchised.

However, here’s the good news: as economic and democratic realities mount, the momentum for reform is growing. National politicians increasingly sense that they risk ending up on the wrong side of history if they settle for the “do nothing” option. In an unambiguous sign of the changing mood, Open Europe and the Fresh Start Project of UK MPs are this week hosting a conference for more than 250 leading politicians and opinion-formers from all 28 EU member states. Though we won’t agree on everything, we have a common mission: reform.

For years Europhiles have used conferences to set the agenda, talking to themselves about themselves. No more. For the first time, reformers are joining forces in large numbers to call for sweeping change.

This event is about substance. Beyond the simplistic ideological divide between those who want a superstate and those who want break-up, what is the most effective way to organise Europe, practically, democratically and economically?

Over two days the focus will be on competitiveness and democracy, a testing-ground for fleshing out which concrete EU reforms the Prime Minister can achieve ahead of the 2017 referendum. Our European friends will have constructive ideas of their own.

Countless statistics show how the EU is losing out in the global race. Yet it is not hard to see how to make Europe work for prosperity, rather than against it. A liberalised market, not least in services, with each country free to make its own successes and mistakes, would provide fresh competitive edge. Returning labour market laws to the domestic shop floor, dropping the centralised European management of farm subsidies and national energy policies, ending the grossly inefficient recycling of regeneration subsidies through Brussels and cutting needless regulation across the board — all these would immediately help growth and jobs.

Above all we need a new constitutional settlement to square national democracy with European co-operation. That means facing the existential question that was posed when the euro was created: what is the common cause that defines the EU? Is it the single currency, and its ideological parent “ever closer union”? Or the Single Market?

If the EU becomes a political extension of the euro, sooner or later the UK electorate will vote to leave. Yet there has been acknowledgement — from Berlin to Rome — that it is in no one’s interest to convert countries into first and second-class members, still less to sleepwalk into the exit of one of Europe’s main powers. However, in what will be a long battle, the UK needs allies. They will be worth listening to.