Thursday, November 27, 2014

Will the new migration figures force the Tories to go one step further on free movement?

Where do migrants to the UK come from the EU or non EU?
David Cameron's hopes of getting back on the front foot on migration have been dealt a blow this morning - ONS figures show that immigration is up, and specifically immigration from the EU is up as well.

These figures are important for two reasons, firstly the timing - these figures come ahead of a much anticipated speech David Cameron is about to deliver on the whole subject. Secondly, the numbers when compared to two targets, firstly the Conservatives' 2010 manifesto migration target of "tens of thousands a year not hundreds of thousands." Secondly, the comparison to migration flows under Labour. Here are some of the headline figures:
  • Total net long-term migration estimated to be 260,000 in the year ending June 2014 up from 182,000 in the previous 12 months.
  • Total gross immigration of 583,000 in the year ending June 2014, a statistically significant increase from 502,000 in the previous 12 months.
  • EU immigration up 45,000 and non-EU up 30,000.
  • 32,000 Romanians and Bulgarians came to the UK up 11,000 and EU15 migration also up 10,000.
  • Estimated employment of EU nationals resident in the UK was 16% higher in July to September 2014 compared to the same quarter in 2013.
Interestingly, while immigration is also up from the new EU member states, the longer term trend driving EU migration is that from the EU15.



So how will all this play out? Well as you can see from the ONS graph below EU migration is not the largest component in total UK migration. That non-EU migration also went up for the first time in a while is politically significant.

However, EU migration is a large portion. The fact it is not showing any sign of decreasing will fuel trust issues over both the EU and migration.


Politically, perhaps the most significant aspect here is that net migration to the UK is now higher than when Labour left office (but lower than the peak during the Labour government). Ukip and some media are already jumping on this. Ahead of the speech, there’s one key question:

Has the Tory leadership already ‘priced in’ today’s figures, or has this made a cap of some sort more likely? 

Wednesday, November 26, 2014

Juncker's investment plan gets cool reception

This is the name which has been given to the long touted €315bn investment fund which European Commission President Jean-Claude Juncker has put front and centre of his programme to deliver jobs and growth. The key points of the proposal (EC press release, Juncker speech, Katainen speech) are:


  • €315bn investment from 2015 – 2017. This is made up of a €16bn guarantee from the EU budget (a 50% guarantee from €8bn of the budget) and €5bn from the European Investment Bank (EIB). This money will be used as a guarantee to raise the targeted €315bn from private financing on the market.**
  • Of the total spend €240bn will go towards long term investments and €75bn to SMEs/mid-cap companies.
  • The EFSI will be under the umbrella of the EIB but will have different goals and do a different type of lending.
  • In conjunction with the EFSI the Commission will create a “project pipeline” along with technical assistance to help identify viable projects for investment at EU level.
  • The investment plan will also contain a road map to remove sector specific regulations that hamper investment, with a focus on the financial sector to tie in with the push towards a Capital Markets Union.
This is the opening salvo of a plan which has long been muted. Judging by the initial reactions, the plan leaves something to be desired. Some thoughts below:
  • As an opening salvo, the plan has already been watered down from what many had expected it to be – a real attempt at fiscal stimulus. Whether or not you agree with that prospect, it’s clear this plan does not constitute such an attempt. As it now enters the negotiation phase with approval from the member states and European parliament needed it could still be restricted and fudged further.
  • This process seems very similar to previous attempts to create such a fund in 2012 (discussed by us here) and the failed attempt to leverage the European Financial Stability Facility from 2011 (which fell down on the reluctance of the ECB to be involved and the level of public guarantees were not sufficient and too highly correlated with potential risks). History suggests pinning significant hopes on these sorts of plans is not usually a good approach.
  • It’s not clear that this buffer will be enough to encourage private investors to take on greater risk. There are numerous factors which are leading to a lack of private investment, risk (at these levels) is only part of it.
  • Furthermore, to the point above, reports now suggest that the €21bn will actually be used by the EIB to borrow €63bn in bonds and cash which will then be used as a first loss buffer for the private investors – however, this does not seem to be mentioned in the press release, factsheets or Q&A. Additionally, we’re not sure what rating these bonds issued solely as loss protection would get or who would want to invest in them (seems akin to the lower riskier mezzanine tranches of asset backed securities).
  • The promise to review the regulatory issues and create a central system of projects could actually prove to be more important than the funds themselves. That said, we have often heard the first point and the Commission has never followed through. The latter project has potential but the focus will be around “EU value added” and “EU objectives”. We’re not sure why the EU thinks it has a better idea of the returns and benefits on private investment than the market more broadly. Furthermore, these objectives already cloud what should be a simple idea – promote economic growth.
  • More generally, questions can be asked about how these funds will be targeted. The focus seems heavily on pan-European infrastructure. While there are sectors where this could be useful – energy and high-tech – such a rigid focus is not needed for a general fund. Many parts of Europe (notably Spain) loaded up on infrastructure in the boom years; they do not really need more of it. What is really needed across Europe is investment in human capital, (re)training and R&D.
  • All this once again highlights the huge amount of waste inside the EU budget, which could of course fill some of these roles. It also raises questions about whether the EIB should rethink its investment priorities.
Overall, the response from all sides has been very lukewarm. The plan seems very similar to previous iterations and, for better or worse, does not involve new money. Negotiations are likely to further impact the structure, while questions can be raised about the target and agenda included in the fund. The accompanying proposals for a project pipeline and improving regulation could be useful and tie in with plans for a single market in capital. That said, the EU’s track record on these fronts is not good and will likely take some time for any real impact to be seen.

**Correction: A previous version of this blog post said €294bn would be raised from private finance. However, the aim will actually be to use the €21bn as a guarantee on issuing €315bn worth of bonds on the market, meaning the entire €315bn will be private financing.

Cross-party consensus developing in favour of OE's proposals for free movement reforms

Deputy Prime Minister Nick Clegg has today said he wants EU migrants to be blocked from accessing the new Universal Credit – which includes income-based jobseeker’s allowance, employment and support allowance, income support, child tax credit, working tax credit and housing benefit – until they have worked in Britain for six months: the benefit would then only be payable for a maximum of six months.

This echoes Open Europe’s proposal that EU migrants should only have access to these benefits after a certain residence period, but that the principle of free movement should stand.

Mr Clegg has also suggested that he wants to permanently restrict the access of migrants to in-work benefits like tax credits, saying they should only be paid to people working the equivalent of a 35-hour week on the minimum wage: a threshold of £227 instead of the current £153.

Writing in the FT, he argues that:
As we streamline our welfare system by combining a range of benefits in a single Universal Credit, we should make sure that only migrants who have worked and contributed can receive the support. New jobseekers should not be eligible. Applying the same principle – that support should be reserved for migrants who are paying something into the pot – we should look at increasing the earnings threshold for in-work benefits such as tax credits. EU migrants could, for example, be required to work the equivalent of full-time hours on the minimum wage in order to qualify.
Meanwhile, Iain Duncan Smith has told MPs that  EU jobseekers will not be able to claim Universal Credit and that access to in-work benefits "will be negotiated" within the EU.

There are two interesting things about this. First, following OE's first pamphlet on this a month ago, there now appears to be cross-party consensus on the need to re-write the rules around in-work benefits - minus Ken "party like its 1992" Clarke, of course.

Secondly, this is a blessing and a curse for Cameron. The former because it boosts the chances of getting stuff done in Europe. The latter, because he does need to differentiate himself somehow from the others and he needs to announce something "new"in his forthcoming speech.

Monday, November 24, 2014

Owen Paterson: Has he called for #Brexit or #EUReform?

BBC reports is is #Brexit
Former Cabinet Minister Owen Paterson has just made a hard hitting speech on the UK’s relationship with the EU. He made a familiar case that the EU is as much a political union as an economic one. He concluded that the UK should remain in the ‘economic’ Single Market but remove itself from the political union.

A clear position? Well, staying in the Single Market, while removing the political aspects of the EU can mean different things – it could mean remaining in the EU while pairing back the worst aspects of the EU’s state building or leaving altogether and negotiating instead a trade agreement in order to retain access to the Single Market.

There has been some understandable ambiguity in the reporting of Paterson’s position, this is our under-standing:
Times reports it is "reform"

Firstly, Paterson believes the issue should be solved via a referendum in 2017. But his proposed question is not entity straight forward. His preferred options are:

Yes: The UK leaves the EU and joins the EEA, like Norway; or
No: The UK stays in the EU and joins the euro

An interesting choice, that excludes the possibility of better EU terms or even continuing as a non-Euro state. However, it is clear that Paterson’s negotiation is not a ‘re-negotiation’ but a simple negotiation for #Brexit. He favours joining Iceland, Switzerland, Lichtenstein and Norway in EFTA and joining EFTA’s deal with the EU – known as the EEA (of which Switzerland is not part). And in order to conclude his exit terms and EEA membership he seeks to use a provision of the Lisbon Treaty that allows a two year period after notifying the EU of an intention to exit to attempt to finalise continuity terms – Article 50. We're sceptical of the EEA model as an alternative for the UK outside the EU, at least as currently set out, but let's leave that one to the side for the moment.

It has been argued previously that Article 50 could be used to trigger a full renegotiation of the terms of the UK’s membership within the EU. However Paterson’s proposal is more straightforward – he wants to immediately start to negotiate Brexit terms in 2015 so that a clear proposition is on the table for the 2017 referendum. That may have the benefit of providing the clarity that has so far been lacking in the ‘out’ case – but has three obvious drawbacks.
  1. What happens if the other EU states do not wish to negotiate prior to a referendum outcome – they cannot be forced to.
  2. What happens if the UK votes to stay in – would the other EU member states be compelled to cancel the exit application? Perhaps but at what price?
  3. Article 50 isn't a great negotiating tool. We have previously weighed up the pros and cons of using Article 50 below, but what's clear is that it's giving away a lot leverage over the UK's terms of exit (for example, the final deal will be decided by a qualified majority vote of which the UK won't be part).
Source: Gaming Europe's Future by Open Europe
Paterson may however argue that Article 50 is a legal mechanism and something as important as the UK’s membership will ultimately be decided politically, in the UK and the EU level.

Open Europe report on reforming EU free movement: Make it fair to keep it free

Open Europe this morning published in full the already much cited report on how Cameron can win on EU migration without sacrificing free movement – trailed on the front page of Sunday Times yesterday and featured on BBC News at Ten and the Today Programme, amongst others.

The basic idea is that instead of putting an outright cap on the number of EU migrants who can come here, David Cameron should look elsewhere: Let free movement and its benefits stand, but bring back control over who can access in-work benefits in the UK, restricting EU migrants’ access to tax credits and social housing for an initial period.

It would reduce pressures on both UK wages and local services. At present tax credits provide a big boost to low income wages – sometimes doubling a workers wage. Under OE’s proposal, in some cases, without access to in-work benefits EU migrants’ take home pay would therefore drop below that which they would receive in their home states, meaning that the move would no longer make financial sense. It would also redefine EU free movement to mean the movement of “workers” – not access to benefits – as originally intended. We have a lot of figures to back up our argument that tax credits contribute to the income pull factor to come to the UK – and an annex which elaborates at length about into the Spanish, Bulgarian and Polish income tax, insurance and welfare systems (all done in-house, mind you, Cyrillic alphabet and everything).

A few quick points: First, we clearly note the trade-off: free movement is a net benefit to the UK economy and this would be a way to save it. On Today this morning, John Humphreys tried to frame the debate as us against Ken Clarke, “being on opposite ends of the debate”. The opposite end of the debate would be those who want to end free movement. Our proposal is a pragmatic one which aims to strike the right balance between an open economy and democratic control.

Secondly, Clarke’s substantive point of criticism was that the proposals would be “totally discriminatory”. Why should an EU migrant working in the UK get less, in benefits and tax credits, than a UK worker doing the same job?

  • As we argued on Today, the UK’s system is much less contribution-based than most other EU countries. The UK can choose to either move to a full contribution-based system, or change EU rules to better accommodate for 28 different social and welfare systems.
  • The UK’s tax credits are effectively social policy – not tax policy. There is no direct link between how much tax you pay and how much you get back in tax credits. They were designed to help UK workers back into work – it is not discrimination to say that these benefits, designed to help make work pay for UK workers, should not be open to the entire EU workforce from the outset. Free movement was never meant to be mutual and unrestricted to other countries’ full social policies.
  • If our proposal is discriminatory, taking the argument to its logical conclusion, should we extend tax credits to migrants from outside the EU as well from day one? We look forward to hearing Ken Clarke or others making that particular argument.

This is a fair proposal to try and square the principle of free movement with differing social welfare systems across the EU, and the fact that the UK’s system is far more open than other systems - this proposal will help to reinstate some trust in free movement.

Responding to our report on Today, the Polish ambassador to the UK, Witold Sobkow said that the report has a “sound analytical basis” but argued that migrants don’t make a sophisticated spreadsheet analysis of income differentials before moving to the UK. That may or may not be the case but they will consider in broad terms how much better off they – and in many cases their families – will be by moving to the UK as migration is not a decision most people make lightly.

It stands to reason that state support will be part of that equation even if the exact level of things like housing benefit is very hard to pin down before moving. As our analysis shows, under our proposals, it would no longer make financial sense for someone to move from the average Polish wage to earn the UK minimum wage due to the withdrawal of the right to immediate in-work benefits – it stands to reason that this will impact on potential migrants’ decisions. But without, of course, taking away the basic right to come here to work.

Thursday, November 20, 2014

UK looking down and out on banker’s bonus cap challenge

It’s a bad start to what looks as if it could be a very challenging day for the UK government with UKIP looking likely to win the by-election in Rochester and Strood.

This morning the European Court of Justice (ECJ) Advocate General Niilo Jaaskinen issued his opinion on the UK’s challenge against the EU’s banker’s bonus cap and it does not make good reading for the UK. Jaaskinen suggested that “all the UK’s pleas should be rejected and that the Court of Justice dismiss the action”. The key points of his reasoning are:
  • The legal basis of the legislation cannot be challenged since remuneration in this sector “impacts directly on the risk profile of financial institutions”, since these operate freely across the EU this can have impacts on markets across the EU.
  • Jaaskinen “accepts that the determination of the level of pay is unquestionably a matter for the Member States”, but since the law is just a stipulation of the ratio and not a direct cap on pay, there is still flexibility to set pay levels.
  • The delegation of power to the European Banking Authority (EBA) is “valid” since it is “merely empowered to elaborate non-binding draft measures” – i.e. create technical standards.
  • There has been sufficient notice of the legislation to allow firms time to adjust to the new rules.
A fairly comprehensive rejection, but there are a few points which we believe have been overlooked or under discussed, laid out below.
  • One of the UK’s main arguments is that this law will result in higher fixed pay which makes remuneration less flexible and raises fixed costs for banks, thereby undermining any attempt to improve financial stability. This issue is not addressed at all in the opinion. Furthermore, while the opinion addresses the issues of remuneration impacting risk and the fact that fixed pay can still vary it does not look at how the two can interact. It is clear that as a result of this fixed pay will increase substantially but there is no question of how this impacts stability. This may be more an economic/financial point but given the issues are discussed separately their interaction should also be examined.
  • The ruling could also have interesting implications for EU jurisdiction when it comes to the rate of pay. Variable pay is very loosely defined. For example, standard overtime paid at double the hourly rate could theoretically fall under EU jurisdiction by the definition used here. This highlights the importance of this ruling as a step into an area which the EU has previously largely steered clear of and the potential precedence it creates. This could develop in many unknown ways in the future.
  • There is no mention of the UK’s claim that this violates international law or is extraterritorial since it applies to all employees of EU banks no matter where they are based. We noted this may not be entirely a legal issue for the ECJ but it deserves some attention. Related to this, it remains unclear whether third countries firms operating in the EU will be forced to institute similar caps if there are to be deemed ‘equivalent’ under rules coming in under MiFID II in 2016.
  • One of the weakest points seems to be on the powers transferred to the EBA. Control over technical standards, particularly here, should not be dismissed lightly. The regulation deals in very broad strokes and leaves significant interpretation for the technical rules – including the exact level of the cap and who it will apply to. This power is being borne out right now with the EBA passing judgement on the way in which the rules are being implemented and whether ‘allowances’ count as variable pay. The EBA retains significant power to judge how the rules are being implemented and adjust the technical standards if it think the spirit of the rule is not being followed.
  • In general, the combination of the ECJ and EBA seem overly focused on the UK (accepted the UK has been pushing the issue as well). But looking at the legislation which Germany has passed on this issue, there are serious questions over how it has implemented the rules. Germany has exempted anyone covered by collective bargaining from all the remuneration requirements of CRD IV, including the bonus cap. This is because collective bargaining is a constitutional right in Germany and cannot be overridden. While it’s not clear how many people this applies to, the principle is concerning and it is a significant exemption. Why this does not merit examination while the use of allowances as a de facto exemption does is not clear.
What happens now?
  • The full ECJ ruling will come early next year and is likely to be in line with the opinion – although the ECJ did previously ignore Jääskinen’s opinion on short selling where to leant towards siding with the UK.
  • The EBA will publish updated guidelines and technical standards in the new year which will incorporate its concerns about allowances. At this point the UK will likely find itself squeezed by both the EBA and ECJ and could face punishment if it is not seen to be implementing the rules properly. The UK could of course refuse, but given the high profile nature of the issue it could escalate the situation. One option for the UK would be to point to other infringements such as the German example above.
  • In terms of the bigger picture, though not a huge issue on its own, this will be another ruling which plays into the hands of those who wish to see the UK exit the EU. It also continues to add to concerns over the role of the ECJ and its ability to be an impartial arbiter, particularly on financial services – an aspect which will likely be crucial if the UK is to remain an EU member both in the short and long term.

Wednesday, November 19, 2014

How close did the Dutch come to ditching the euro?


The Guilder - was it close to making a comeback? 
Yesterday, former Dutch Finance Mininister Jan Kees de Jager, who held the role until November 2012, revealed something very interesting. Apparently, the Dutch government, together with the German govenrment, made contingency plans during the height of the eurozone crisis for the two countries to ditch the euro. A “team” of lawyers, foreign policy experts and economists were employed to investigate different scenarios,. One was to reintroduce the “guilder”:
"The team met regularly on Friday afternoons, but could also be present very quickly in case we needed to make a decision"
He also revealed how Germany was closely involved but other countries were less keen to prepare:
"Some countries considered the fact that several scenarios were being discussed in Europe already very scary. Remarkably enough they did not do this. We were one of the few countries[to discuss scenarios], together with Germany. We even had a team discussing scenarios, Germany-Netherlands.”
Finance Minister Jeroen Dijsselbloem also admitted that the Dutch government was at one point “preparing for the worst case scenario”, saying:  
 “Heads of government, including the Dutch cabinet, always said: ‘We want to keep the euro together and to keep the euro as a single currency.’ That said, we also looked at what would happen if that didn't succeed”.
Dijsselbloem added that no guilder notes were actually printed, and unlike de Jager, he refused to confirm whether Germany had made similar preparations.

This of course is in line with what we've heard before. The Dutch Central Bank has already admitted it made some contingency plans for a euro exit in 2012, while De Volkskrant has revealed that, in June 2012, Prime Minister Mark Rutte threatened the possibility of the Netherlands exiting the euro. Nevertheless, the detail and the format of the planning highlights just how seriously this was taken.

We can't help but feel it puts the continuous protestations by ECB President Mario Draghi that the single currency is  "irreversible" into a new light...

Tuesday, November 18, 2014

Labour turns its attention to restricting EU migrants' access to in-work benefits

Iain Duncan Smith's opposite number, Labour's Rachel Reeves, has written an interesting piece on EU migrants' access to welfare for the Mail Online, in which signals an important shift in Labour's policy.

Last week we noted that IDS had set out that he wanted to restrict EU migrants' access not simply to out-of-work benefits but also in-work benefits such as tax credits - something that our Research Director Stephen Booth and LSE Professor Damian Chalmers proposed in a recent Open Europe pamphlet.

Reeves sets out three proposals to reform the EU rules on access to welfare. Firstly:
"We believe that it is right to extend the period that EU jobseekers need to live and support themselves in the UK before claiming out-of-work benefits from three months to two years."
This had been hinted at by senior Labour figures before. But, for the first time, Labour have said they also want to address in-work benefits:
"We must also look at the role of in-work benefits. It is far too easy for employers in Britain to undercut wages and working conditions by recruiting temporary workers from elsewhere in Europe on very low pay and with no job security, knowing that the benefit system will top up their income." 
"So while some have said that we cannot negotiate changes to benefits paid to people in work, I am determined to look at how we can deliver reform in this area too."
As we have noted before, restricting access to this low-wage welfare supplement could reduce the incentive to migrate to the UK for the lowest paid jobs as the UK's system of in-work benefits can make a significant difference to the incomes of the lowest paid.

And thirdly, Reeves has said:
"We will work with European countries to end the absurdity of child benefit and child tax credits being claimed for children living in other countries."
This is near unanimous consensus among all the main parties on this point.

The change in stance on in-work benefits is significant and would have the biggest impact, and it is therefore interesting why this wasn't given top billing in the article?

Friday, November 14, 2014

As the Ukrainian ceasefire falters what next on sanctions?

UK PM Cameron warns Russia of sanctions ahead of G20
Over the past few days we have seen the situation in Ukraine begin to escalate once again. Both NATO and the Organisation of Security and Co-operation in Europe (OSCE) have said that they have witnessed significant military movements in Eastern Ukraine, most likely from Russian troops. By almost all accounts the ceasefire only continues to exist on paper (although we have pointed out before why both sides might be willing to continue to pretend it is more than that).

Why has the situation suddenly escalated?
In all honesty, it’s not entirely clear how significantly the situation has escalated on the ground in Ukraine, given that there have been continuous reports of fighting since the ceasefire was struck. It could be more a case of attention shifting back to Ukraine ahead of the G20 and EU meetings. That said, Russia continues to push the boundaries with military exercises. Furthermore, the elections (both in Ukraine and the separatist regions) have increased tensions, while Russia is reportedly keen to help further establish the newly elected separatist leaders.

As might be expected, these reports have once again triggered the discussion on whether the US and EU should increase sanctions on Russia. As we reported in our press summary today, numerous leaders have come out warning of the potential increase in sanctions – surprisingly this also includes representatives of Hungary and Slovakia, though both countries remain a bit divided on sanctions.

While there is lots of talk of further sanctions we would not get ahead of ourselves. Crucially, German Chancellor Angela Merkel has already played down the chance of this in the near future as we reported in our press summary earlier in the week. EU officials have also suggested any agreement is unlikely at Monday’s meeting of EU foreign ministers, although a discussion will be had at the meeting of EU leaders in mid-December.

What could be on the table if sanctions are escalated?

We’ve discussed many times before the options for sanctions but below are a reminder of the potential options if they wanted to take the next step up from the current sanctions.
Expanding list of individuals subject to asset freezes and travel bans: This is a virtual certainty and should be agreed at Monday’s meeting. Specifically the newly elected officials for the pro-Russian separatists will be targeted. More broadly, those involved with the elections in the region could be targeted. It’s not yet clear if there will be a broader discussion about adding further people or oligarchs close to Russian President Vladimir Putin to the list (we have pointed out the potential legal concerns on these sorts of sanctions here).
There are a few other options which the EU could consider (many of which we have discussed before):
  • Ban purchases of new Russian sovereign debt – this was reportedly toyed with before but considered too harsh a step. As we noted before, this would probably be manageable for Russia given its fairly low government debt level but it would add another difficulty at a time when the economy and state budget is coming under severe pressure.
  • Broaden scope of technological sanctions – this would involve expanding the list of banned tech exports to Russia, currently very focused on oil exploration. It could also include expanding the ban of services which European firms can provide to Russia, which again is currently focused on oil exploration.
  • Extend financial sanctions – similar to the above, this would involve broadening the existing financial sanctions from just state owned firms to Russian firms more generally, most likely still only in specific sectors such as financial and defence. This would be legally difficult since the ties to the state would become even more indirect and justification would need to be watertight.
  • Broaden scope of financial sanctions – related to the above, rather than expanding the number or type of firms subject to the sanctions, the EU could broaden the scope of the sanctions. This could, for example, mean cutting off all euro funding from certain state owned firms, no matter what the maturity or the type of loan (there are probably a few incremental steps or variations between this and where we are now).
  • Remove Russia from the SWIFT system – This remains very unlikely and for some very practical reasons. SWIFT is independent and private. Removing Russian financial firms from this system would mean having heavy direct sanctions on them which forces SWIFT (in acts of compliance) to shut them off from the system. This is one of the key reasons it has never really been discussed at the top level as a realistic option so far.
For his part Putin continues to demand a removal of sanctions but if they were ramped up it is likely he would be willing to retaliate with his own sanctions, some of which we looked at here.

In terms of the broader picture it’s clear that sanctions, combined with the falling oil price, are hurting the Russian economy. However, they do not yet look to have impacted Putin’s approach or course of action. As we warned before, the lack of a clear goal or strategy for the sanctions as well as in terms of what Europe actually wants in terms of a future relationship with Ukraine and Russia could well hamper the approach. The EU would do well to discuss this, not least because the continuing downward spiral of the Ukrainian economy will likely (as we warned some months ago) lead to further bailout requests.

Thursday, November 13, 2014

IDS sets out broad strokes of reforms to EU free movement

The Telegraph has an interesting transcript of an Iain Duncan Smith interview with LBC Radio, which outlines the Government's current thinking on EU migration and which might signal the types of reforms that David Cameron is weighing up before delivering his promised speech on immigration in the aftermath of the Rochester and Strood by-election.

Here's what the Work and Pensions Secretary said, following this week's European Court of Justice ruling on access to benefits:
"This is about people who want to enter a country and have no prospects of work and are not intending to work, so that is stopping and shutting the door to them as we have done." 
Essentially, IDS says that the ECJ's ruling runs with the grain of the domestic changes the UK has already made to restrict access to out-of-work benefits. But he is clear that he wants to go further:
"The next problem is people who come to work, and then can claim full tax credits even though they have made no contribution. And that is the point I am making... countries shouldn’t have to do that. They shouldn’t have to support people who are coming over here, who have made no contribution." 
This is very much along the lines of what our Research Director Stephen Booth and Professor Damian Chalmers proposed in their pamphlet on EU migration and national welfare systems - a re-write of EU legislation to enable national governments to restrict access to non-contributory benefits for up to three years.

And, thirdly, IDS suggests that:
"And the third area which you talked about…is that the issue around freedom of movement isn’t that you don’t want to stop freedom of movement, but what you want to be able to say is: ‘sometimes there are limits that communities can absorb people and the pressure on public services and housing and stuff like that’." 
"European rules need to take recognition of the pressure that puts on local communities, and that’s really part of the negotiation."
This last point is perhaps the most interesting as it suggests that the option of some form of 'emergency brake' on EU migration is still under consideration.

As we have said before, there are many ways in which such a mechanism could operate, and it might just be negotiable, although this would be a much taller ask than reforming the rules around access to welfare.

Wednesday, November 12, 2014

Juncker responds to Luxleaks tax scandal

So Margrethe, about these Luxembourgian tax schemes...
European Commission President Jean-Claude Juncker has just made an impromptu appearance at the midday press briefing to make a statement and answer a few questions on the furore surrounding the leaked documents showing the significant number of favourable tax deals given to corporations by the Luxembourg government during his tenure as Prime Minister and/or Finance Minister (1989 - 2013).

Here are the key points from his response:
  • The Commission has previously reviewed the tax arrangements and stated that they are in line with national and international (EU) law.
  • However, due to different national rules, the interaction between EU member states can lead to non-taxation and results which are not in line with moral/ethical standards. Therefore, there is a need for greater tax harmonisation in the EU.
  • The Commission is committed to fighting tax avoidance and will do so under his tenure. There is no conflict of interest since Competition Commissioner Margrethe Vestager has a significant amount of autonomy and Juncker will not discuss the Luxembourg cases with her.
  • Luxembourg has always supported EU tax harmonisation. As Commission President, he will push this idea again. He will also introduce a new mechanism for automatic transparency of tax deals so each member state knows what others are doing.
Quite a staunch defence by Juncker then but needless to say many of the journalists at the briefing (not to mention his critics in the European Parliament) seemed unsatisfied. A few key issues which continue to concern us are listed below.

  • This should not be an excuse to push tax harmonisation at the EU level: Tax is a national issue and should remain so. Juncker’s use of this as an excuse seems to be mostly an attempt at deflection. There are key reasons why proposals on this have never gained traction. Juncker’s insistence that Luxembourg always supported such harmonisation is also an easy defence to make to an extent, since it is clear many other members do not – as such under unanimity there was little hope of it passing. Furthermore, Luxembourg (along with Austria) was the key holdout in delaying the recent deal on tax secrecy.
  • Serious questions need to be asked about the level of scrutiny applied in Juncker’s nomination process: As we have long pointed out, the Spitzenkandidaten process which lead to Juncker’s appointment is a bad idea for a number of reasons (lack of scrutiny being just one of them). Juncker gained the nomination of the European Peoples Party through the support of 382 delegates (less than half the total). In the elections only 10.2% of the potential electorate supported this party (and they only voted for national parties which are part of the EPP), while polls showed that only 8.2% were able to name Juncker as a lead candidate. Furthermore, only a third of people knew the candidate of the lead party would likely become head of the Commission. Overall, there was little scrutiny of Juncker and little discussion of his policy proposals or his past.
  • In general, tax competition is a good thing and should be maintained in the EU: That said, greater transparency is also good for having good functioning markets, promoting competition and helping spread best practice. Proposals for transparency therefore can be welcomed but should also include making information public, of course taking account of companies privacy and sensitive information concerns.
  • All this though should not deflect from valid questions about Juncker’s role in the numerous tax deals struck under his watch: The key questions remains to what extent he was aware that such deals were undermining the tax collection of other member states. The basic premise of Juncker’s defence, to look forward at remedies, should also not detract from necessary scrutiny of these deals and what has happened previously. 
This story has plenty of way to run yet.

Tuesday, November 11, 2014

What are the implications of today's ECJ ruling on EU migrants' access to benefits?

As we've said on many occasions, it is not only the UK that is having problems reconciling EU free movement with maintaining control over national welfare systems; Germany has recently tightened up its own domestic rules recently and the country also faced a legal challenge from a Romanian woman living in the country who claimed the right to receive German unemployment benefits - a case which was referred all the way up to the ECJ.

Essentially, the Dano case concerns the interpretation of existing rules around EU free movement and the extent to which EU migrants have a right to equal treatment with nationals of the host member state with regards to access to benefits,

The Court has finally issued its verdict today, ruling that:
"The [2004 free movement] directive thus seeks to prevent economically inactive Union citizens from using the host Member State’s welfare system to fund their means of subsistence. A Member State must therefore have the possibility of refusing to grant social benefits to economically inactive Union citizens who exercise their right to freedom of movement solely in order to obtain another Member State’s social assistance although they do not have sufficient resources to claim a right of residence.
It is also interesting that the Court has confirmed that certain non-contributory benefits are outside the scope of EU rules which guarantee equal treatment and non-discrimination. The UK and other national governments can therefore use this precedent to defend their restrictions on EU migrants’ access to non-contributory benefits (i.e. the ‘right to reside’ test which could be subject to an ECJ legal challenge).

It also states clearly that ‘special non-contributory benefits’ are a national competence – much of the dispute between the UK and Commission over the ‘right to reside’ test relates to the categorisation of certain UK benefits. This could be useful to the government but it is also true that the UK's case still rests on how the benefits they restrict are defined (i.e. do they fall under the label of 'special non-contributory benefits'), and whether the Commission and the ECJ agree, which we still don’t know yet.

In short – this is likely to be a helpful precedent for the UK and potentially a sign that the Commission/ECJ are prepared to back down over the ‘right to reside’ issue. But more fundamental changes on in-work benefits, which are increasingly important issues in this debate and particularly for the UK, will require changes to EU law - here we set out how this could be done while keeping the principle of free movement itself intact.

Has the Conservative party dropped its commitment to renegotiate ECJ jurisdiction over crime and policing?

Has Conservative policy towards ECJ 
power over crime and policing changed?
The chaos of yesterday's 'vote' or 'non vote' on the European Arrest Warrant has obscured a number of things. Not only have the 10 actual measures been waved through, without discussion and scrutiny, but the Home Secretary has avoided having to make a statement on future Conservative policy towards renegotiating the European Court of Justice's (ECJ) power over crime and policing.

Firstly, here are some of the measures 'adopted' last night without debate and without much publicity.
  • Confiscation Orders 
  • Mutual recognition of sentences 
  • Trials in absentia 
  • Mutual recognition of financial penalties
They are substantial in their own right and on 1 December all will be subject to the ECJ's jurisdiction.

Will a future Conservative Government renegotiate this area?

Removing the UK justice system from the remit of EU judges has been a Conservative policy for a number of years and one we agree with. When it became clear that the Conservatives could not block the Lisbon Treaty David Cameron stated:
“The third area where we will negotiate for a return of powers is criminal justice. We must be sure that the measures included in the Lisbon Treaty will not bring creeping control over our criminal justice system by EU judges. We will want to prevent EU judges gaining steadily greater control over our criminal justice system by negotiating an arrangement which would protect it" [4 November 2009]
This was followed up in the 2010 Conservative Manifesto:
“Conservative government will negotiate for three specific guarantees – on the Charter of fundamental rights, on criminal justice, and on social and employment legislation – with our European partners to return powers that we believe should reside with the UK, not the EU. We seek a mandate to negotiate the return of these powers from the EU to the UK.”
Clearly, the Coalition Agreement overtook these previous texts, but Theresa May and Chris Grayling have both stated during this Parliament that the ECJ's role would likely feature in any future EU renegotiation. On 16 July 2013, as we set out here, Theresa May was quite explicit:
"Undoubtedly the jurisdiction of the European Court of Justice will need to be considered when, after the election, a future Conservative Government renegotiate Britain’s relationship with the European Union"
So it was a surprise that Theresa May writing in the Sunday Telegraph on 9 November did not restate this position. The question is whether we should read anything into this, but as the smoke clears it remains to be seen whether a majority Conservative Government would 'let matters rest'.

Monday, November 10, 2014

The UK government is desperate to strengthen the role of national Parliaments in Europe - but can't get its own house in order

The Government - particularly the Tory wing of it - talks a very good game on the urgent need to strengthen the role of national parliaments in EU decision-making.

The UK Government (rightly) wants to negotiate a "red card" for national parliaments for example, giving them a chance to pull the democratic brake on EU proposals that go too far or aren't proportionate. It has also talked about various other ways to strengthen the role of national parliaments and boosting scrutiny of EU laws in Westminster.

In his Bloomberg speech, David Cameron called for a "bigger and more significant role for national Parliaments" adding:
"It is national parliaments, which are, and will remain, the true source of real democratic legitimacy and accountability in the EU. It is to the Bundestag that Angela Merkel has to answer. It is through the Greek Parliament that Antonis Samaras has to pass his government’s austerity measures. It is to the British Parliament that I must account on the EU...Those are the Parliaments which instil proper respect - even fear - into national leaders."
Well, the Government has just failed by its own standard - and badly.

As we pointed out this morning, despite the controversy surrounding the European Arrest Warrant, it was not explicitly included in the motion MPs will be voting on later tonight concerning the Government's opt-in to 35 EU crime and policing measures. The reason is that the EAW has already been transposed into UK law, unlike 11 of the full list of 35 measures the UK is opting back into which will require secondary legislation - these 11 are the only measures listed in the Government's motion.

This has provoked a storm of protest this afternoon including an extraordinary rebuke from the Speaker and MPs on all sides of the house:



The Government had on several occasions committed itself to holding a vote on the EAW - although it was always likely to  be part of a package, and this is what most people were understandably expecting to take place today.

Following an Open Europe campaign for MPs to have a vote on the original decision to take the block opt-out which they were ultimately granted, in a subsequent letter to the Chairmen of the European Scrutiny, Home Affairs and Justice Committees of the House dated 31 January 2014, Theresa May and Chris Grayling said that:
“The Government will hold a second vote on the final list of measures we will formally apply to rejoin.”
This was seemingly confirmed by David Cameron himself during PMQs a couple of weeks ago when Ed Miliband challenged him on dodging a vote on the EAW due to opposition within his own party, and he responded that:
"There's only one problem with his second question. Which is we are going to have a vote, we're going to have it before the Rochester by-election. His questions have just collapsed."
To which Miliband replied that:
"All I can say is I look forward to us walking through the lobby together to vote for the European Arrest Warrant, two parties working together in the national interest."
It is hard to see why - given it stood to win any vote by a healthy majority given Labour's support - the Government has decided to ensure that the EAW was not mentioned in today's motion - one reason could be that today's motion is not amendable. Had a more wide ranging motion been put forward, MPs might have used this as an opportunity to force a vote on an amendment.

However, the European Arrest Warrant (and many of the other 35 measures) encapsulates the very sensitive balance between civil liberties and democracy, on the one hand, and security, on the other, and it is exactly the type of issue that should be settled by a democratic vote in Parliament. Indeed, as we argued way back in 2010 when the European Union Act was making its way through Parliament:
"Policing, crime, immigration and asylum are issues are hugely politically sensitive and any decisions to sign up to new EU laws in these areas need to be thoroughly debated and democratically accountable. This should be Parliament's job.

As it currently stands, the Government's proposed Bill, although a significant step forward, fails to address the day-to-day transfer of crime, policing and immigration powers from the UK to the EU. So any decision to opt in to a proposal like the controversial European Arrest Warrant will not be covered by the lock.
Most importantly, European judges will have the final say over any law that the UK Government decides to opt in to. By definition, this is a transfer of powers. In other words, it's a zero-sum game: every new justice or policing law the Government signs up to gives more power to the EU institutions at the expense of MPs, Parliament and the British courts. This is a big decision, which currently rests solely on Government Ministers' discretion.
The EU's growing ambitions in justice and home affairs deserve Parliament's undivided attention. It is perfectly reasonable for MPs to demand the power to vote on these crucial decisions that the Government makes in the name of their constituents. In fact, it would be a dereliction of duty not to."
It is hard to comprehend how the Government has contrived to create this problem for itself. And it is a very sorry state affairs indeed if a Government is able to say to Parliament 'whatever this motion says, you are actually voting on X'. This episode will only further undermine public faith in politicians and parliament.

And it does not inspire confidence in the Tories' wider renegotiation agenda.