Wednesday, September 17, 2014

Confidence vote won, absolute majority lost: not the best start for the new French government

The new French government, led by Prime Minister Manuel Valls, yesterday won its first vote of confidence in the National Assembly. That was expected, but the big news is that Valls and his government have fallen well short of winning an absolute majority.

269 MPs voted in favour, 244 against, and 53 abstained. The absolute majority is set at 289 votes.

Most importantly, the voting records reveal that 31 MPs from the Prime Minister's Socialist Party chose to abstain. Back in April, when Valls sought the confidence for his first government, he got 306 votes in favour. Hence, yesterday marked a substantial step backwards.

The outcome of the confidence vote seems to confirm that the 'left wing' of the French Socialist Party remains opposed to the economic policies being pursued by Valls - which in substance means remaining critical of the approach defended by the European Commission, Germany and other northern eurozone countries.

Incidentally, these divergences forced a cabinet reshuffle at the end of August - which saw the ousting of the three most left-leaning ministers, notably including Economy Minister Arnaud Montebourg.

French history shows that it is possible to govern without an absolute majority in parliament. Another Socialist Prime Minister, Michel Rocard (widely seen as one of the political mentors of Valls), did it between 1988 and 1991.

However, it remains to be seen to what extent Valls will be able to push through the wide-reaching reforms and sizeable spending cuts demanded by the EU if he fails to win back the full support of his own party. As an alternative, he may try and strike deals with the smaller centrist parties in parliament - but the success of such a move would be far from guaranteed.

Indeed, this is hardly great news at a time when the French economic situation is not encouraging, making it essential to move forward quickly with the necessary measures.
The road to recovery may have just become longer and bumpier for France.

Tuesday, September 16, 2014

German fingerprints on Juncker's Digital Agenda?

The 'digital agenda' was a key plank of Jean-Claude Juncker's 'campaign' to become European Commission President and will be one of the top priorities for the next five years. Indeed, his new look Commission has its own dedicated 'digital single market' cluster, which incorporates a large number of the Commission departments:

The Vice-President overseeing all this is Estonia's Andrus Ansip, a former Prime Minister of the country which styles itself as a 'digital society', with e-elections and online tax returns completed in five minutes. Former Energy Commissioner, Germany's Günther Oettinger, will take on a new role as Commissioner for Digital Economy and Society, which much of the German press saw as an embarrassment, particularly given the high-profile roles secured by France and the UK.

However, with online privacy and data protection such big issues in Germany, particularly following the NSA scandal, his appointment could be significant - not least because he is likely to have very different priorities to Ansip. Oettinger, along with the Czech Justice Commissioner Vĕra Jourová, will be responsible for ensuring passage of new data protection regulations and a revamp of the EU's e-Privacy Directive. He will also work on copyright. In turn, many of these issues will be integral to the US-EU free trade (TTIP) talks currently under way, another area of intense debate in Germany.

It has been noted by some that the CEO of Axel Springer, the owner of German tabloid Bild, publicly backed Juncker's candidacy (heaping pressure on Chancellor Merkel to do the same) and has a long-running beef with US internet giant Google. Whether this was a purely altruistic move we will leave up to you to decide...although we would note that one of Oettinger's first moves after the announcement of his appointment was to warn Google over its market power - a stark change in tone and approach from the previous administration, whatever the motivation.

In short, while Oettinger's appointment may not have been greeted by spontaneous cheers on the streets of Berlin, those in the corridors of power are likely to be quietly pleased. How 'German' the European Commission will be in this area will be interesting to watch.

Monday, September 15, 2014

The AfD bandwagon rolls on - what are the implications?

Germany's anti-euro AfD party has hit a rich vein of electoral form building on its success in Saxony two weeks ago (where it scored 9.7% and won its first seats in one of Germany's 16 regional parliaments) to win 12.2% in Brandenburg and 10.6% in Thuringia; a considerable improvement on pre-election polls.

As the graphic below shows, AfD won votes across the political spectrum, In net terms, its success came at the expense of the left - Die Linke in Brandenburg and the SPD in Thuringia - although in gross terms it also won a lot of votes from the CDU and FDP.

Where did the AfD's votes come from in Brandenburg and Thuringia?
This reflects the nature of the AfD campaign in these areas which combined an explicit pitch to Die Linke voters emphasising Ostalgie (nostalgia for East Germany), AfD's opposition to TTIP and to the sanctions on Russia with more traditional 'small c' conservative messages on crime and immigration (for example, AfD wants to re-impose border checks). On the whole, the question of Europe and the euro barely featured.

While AfD's recent successes should not be over-interpreted, inflated as they are by higher rates of disaffected voters in East Germany and low turnouts, it does nonetheless pose difficult questions for the established parties. This is particularly true for the CDU/CSU for whom, as we've noted, AfD is too big to ignore, yet too controversial to team up with. In the longer term however this might change if it becomes evident that the AfD is the only alternative to permanent 'grand coalitions' at the regional and federal level, a scenario which would arguably strengthen AfD even more.

We expect that this will be hot debate within the CDU in the coming months and years. Meanwhile, the AfD itself faces a big test; 12 months on from narrowly missed out on winning Bundestag seats the party has performed well in European and regional elections, however, with next year's Hamburg regional elections the only significant entry in the electoral calendar over the next year and a half, can the party sustain its recent momentum? If it stalls, could we see deeper splits between the economic liberals and protectionists/social conservatives who make up the party's uneasy internal coalition?

The Swedish election results may be a net neutral for Cameron’s EU renegotiation plans

The Swedish election results were a mess. The Social Democrats and two other opposition parties, the Greens and Left, garnered 43.7% of the vote, against 39.1% for the sitting centre-right Coalition. The anti-immigration Sweden Democrats won 13% of the vote, up from 5.7% in 2010. The leader of the Social Democrats as well as two minor centre-right parties have ruled out a grand coalition, meaning that the most likely outcome is a fragile, minority centre-left government.

There’s a lot one can say about the result. Without a doubt, the big story is the rise of the Sweden Democrats. It’s fair to say that Swedish media and politicians are this morning pretty much panicking, at the prospect of SD holding the balance of power – despite an absolutely massive media campaign against the party leading up to the elections. As expected, all seven mainstream parties have declared that they won’t deal with the Sweden Democrats but, with the party now controlling 49 out of 349 seats in the Riksdag, is this sustainable? And will it hurt or help SD in future? The metropolitan elite ganging up on SD hasn’t worked well so far. In several Councils in southern Sweden, SD won around 30% of the vote, which is concerning.

Some UK media has gone with the headline “Cameron has lost a key EU ally”. Others have argued that the leftist shift in Sweden has further undermined Cameron’s prospects for renegotiation. This is not quite telling the full story. As a whole, a centre-left government including the Greens, drawing on support from the Far Left – two parties that up until recently opposed Swedish EU membership – may in fact become more Eurosceptic. Swedish unions, at least on a membership level, are a hotbed for euroscepticism. On the euro, the Left is much more sceptical than the right. Though the euro debate is dead, this matters politically as the less Sweden perceives itself as a “pre-in” (remember, Sweden doesn’t have a legal opt-out from the euro), the more sympathetic it might be to UK objectives to define the EU as a club beyond the euro. Remember, Moderaterna still had people like Carl Bildt who recently said that Sweden should and will join the euro. On issues like the EU budget, democracy and transparency a centre-left government will be just as helpful as the Reindfeldt government.

Still, a centre-left government might be less keen on free trade and dynamic financial markets, though in truth, any Swedish minority government would and will have to work hard to get through an ambitious services directive for example. And by simply belonging to a political family, the willingness to strike deals may be tempered. Also, Reinfeldt and Cameron did get along on a personal level, though that relationship was strained recently (as it became between Anders Borg and George Osborne).

Instead. the significance of the Swedish elections was the fragmentation of the centre, and the rise of an anti-establishment party, that the mainstream still has no convincing answers to. In that sense, Sweden just became a bit more European – and we don’t mean that in a good way in this instance.

Friday, September 12, 2014

What impact could this round of Russian retaliatory sanctions have on Europe?

In our continuing effort to bring increased transparency to the murky issue of sanctions we’ve compiled some initial thoughts on the likely Russian retaliatory response to the EU’s latest sanctions – published in full here and which we already analysed in detail here.

There are a few key measures which Russia is said to be considering:
  1. Banning or limiting the import of cars (and possibly all automobiles) from Europe.
  2. Banning or limiting the import of certain manufactured goods.
  3. Banning or limiting the import of certain types of clothing manufactured in Europe.
  4. Restricting the access of European flights to Russia airspace, probably over Siberia.
With the previous round of Russian retaliation we saw uproar from the industries involved and some questionable claims for compensation – a process which now looks to have been halted. The response also seemed to weigh on the minds of certain countries, such as Finland and Czech Republic, which in turn played a role in delaying the latest round of sanctions.

With that in mind its worth delving into what impact these mooted measures could have.

In terms of exports of cars, Russia remains quite an important destination for European exports as the graph above from the European Automobile Manufacturers Association shows. In 2012 Russia accounted for 8.1% of EU exports in this sector in terms of value – around €8.7bn. Ultimately, the impact will depend on exactly how the sanctions are structured – we doubt Russia would ban all exports of cars, it could be focused on only used cars or certain types or price brackets. In terms of countries which would be hit the obvious answer is Germany, but other countries such as the UK, France, Belgium and Spain could feel the pinch (albeit on a much smaller scale). Its also important to remember that, even without any sanctions we are already seeing a sharp fall in the level of cars being exported to Russia.

The story for clothing is similar. Russia remains quite an important export market for EU members, with exports to Russia totalling €3.185bn in 2013, making it the second largest destination for exports of EU clothing (graph above from European Fashion and Textiles Export Council). Meanwhile, as the graph below shows, the main countries exposed are Italy and Germany. This area could be particularly sensitive since we have already seen companies such as Adidas warning that the ongoing hostilities between the EU and Russia could severely hamper its business.

Comparing this to the previous round of retaliation, the figures do look a magnitude larger, although it does ultimately depend how broad the sanctions are and how long they last for. The potential sanctions on manufactured goods remains too vague to really assess, however, we can look a bit deeper into the airspace issue.

As the data to the left from FlightRadar24 (compiled by Bloomberg) shows there are lots of flights which use Russian airspace. This map from the Times, highlights that having to fly around Russia would be no small inconvenience and would certainly increase fuel costs and flying times.

So how likely are all these sanctions?

The feeling in Russia seems quite hostile this time around, compared to previously when they have more or less shrugged off the sanctions. This could be because Russia had hoped the ceasefire process would appease the EU, not least after the delay. Furthermore, the EU’s decision to target Rosneft, a key player in the energy market, may be seen as crossing a rubicon, since large energy firms had been largely off limits.

That being said, in the longer term, Russia probably has more to lose out from economic sanctions. Take for example the airspace ban – European firms pay around $185m per year for access to this airspace. Russia would also have to spend additional funds to enforce and police its airspace. Furthermore, the number of Russian flights which use European airspace is far higher, meaning a tit-for-tat sanction in this area would be particularly painful.

Some retaliation seems inevitable but Russia will still need to be cautious of further escalating the growing economic divide with Europe.

Thursday, September 11, 2014

What to expect from the Commission's new economics team

Will France's Moscovici (left) be effectively shackled by
Finland's Katainen (centre) and Latvia's Dombrovskis (right)?
The new European Commission (EC) also sees the overhaul of its approach to the Eurozone. While Pierre Moscovici holds the Economic and Financial Affairs post (essentially Olli Rehn’s successor), he will be overseen by the Vice Presidents (VPs) for Jobs, Growth, Investment and Competitiveness and the Euro and Social Dialogue – Jyrki Katainen and Valdis Dombrovskis respectively.

An edge has been added to all this with quick German criticism of the decision to give former French Finance Minister Moscovici such a prominent economic post.

We have already pointed out in our full response to the new Commission that, contrary to popular belief (at least in some quarters in Germany), this does not necessarily change much – a lot of Eurozone rules are already set in stone. However, it is important to delve a bit more into who has what powers or controls which areas?

Katainen’s key responsibilities:
  • Helping bring together an investment package to mobilise €300bn in additional public and private investment via the European Investment Bank within the next three months – expected to be discussed at tomorrow’s eurogroup meeting and unveiled soon.
  • Coordinating the mid-term review of Europe 2020 strategy and long-term EU budget.
  • Pushing economic policy coordination in line with view of “social market economy” while also pursuing a strong structural reform agenda.
  • Steering the ongoing reform of the Economic and Monetary Union and, importantly, in charge of pursuing the work of the four Presidents' report on creating a 'deep and genuine' EMU. This suggests he will play a significant role in the bid to create a sounder eurozone and finding a way to marry the existing currency union with greater political union. It's important to note that this will bring him into regular contact with Lord Hill who is responsible for banking union in the new Commission - exactly how the financial stability aspect and the eurozone prosperity aspect will fit together here will be interesting to watch.
  • Formal oversight of the European semester – the mechanism through which budget rules are enforced in the eurozone. Also tasked with reviewing the mechanisms for achieving structural reform.
  • As might be expected there is significant overlap with those above. He has also been tasked with handling the European semester. It is expected he will handle the day to day evaluation and, in cooperation with others, will sign off on national budgets and reform plans.
  • The language around the Stability and Growth Pact is also in line with previous thinking, tasking Moscovici with making “best possible use of the flexibility that is built into” the rules.
  • The focus of this role seems to be on the macroeconomics and fiscal coordination of the eurozone. With that in mind, its expected Moscovici will attend eurogroup meetings on behalf of the Commission.
Overall then, while France may have got what it wished for, Moscovici looks firmly shackled to two fiscal conservatives. None of his tasks relating to the Eurozone are separated from these two VPs. More broadly, as the FT has pointed out, Moscovici (a French socialist) is also severely ideologically outnumbered not only within the broader Commission but specifically in the economic and financial posts.

Furthermore, the language used in the text of the letters remains quite Germanic and in line with the thinking of the current Commission:
“Combining growth-friendly fiscal consolidation, structural reforms and targeted support to investment will be key to a sustainable and strong recovery.”

“Sustainable growth cannot be built on ever-growing mountains of debt. We also know well that it is mainly companies that create jobs, not governments or EU institutions.”
There are also numerous mentions of “sound public finances” and the “social market economy” both core elements of the prevailing German economic thinking.

What to expect from the new Commission in terms of eurozone economic policy?

Finally, there are a couple of hints of what key proposals may be coming in the future. We have already mentioned the reference to a new investment package and the desire to push ahead with reviewing the current surveillance system. A further development seems to be for all those involved to try to engage a “broader range of actors at national level”, make the measures taken to improve the Eurozone more “socially legitimate” and find a more democratic alternative to the EU/IMF/ECB Troika. This suggests fostering national support for the likely continuation of significant structural reform and fiscal consolidation will be a key task for these Commissioners.

With that in mind, there is one final interesting line which is found in both Moscovici’s and Dombrovskis’ letter, they are tasked with forming:
“Proposals to encourage further structural reforms, possibly supported by financial incentives and a targeted fiscal capacity at Euro zone level”
This sounds eerily like a revival of the reform contracts, which Germany has been pushing for some time. The idea has been gaining ground once again after ECB President Mario Draghi suggested that structural reform should have similar oversight to that currently seen for national budgets. The latter part is also interesting, albeit very cryptic and vague. It could refer to the creation of a eurozone budget, possibly focused on tackling unemployment and related costs. Equally, it could refer to something along the lines of a wider assessment of the eurozone’s fiscal capacity and using it where there is scope to do so – meaning some kind of fiscal expansion in Germany (and other strong states) to offset fiscal contraction elsewhere.

Expect movement on these issues in coming months.

Wednesday, September 10, 2014

Lord Hill is the EU's new financial services Commissioner - but what is his remit and who does he report to?

With the future of the UK seemingly hanging by a thread it is understandable that events north of the border are dominating attention, but today's announcement of the new European Commission also has far-reaching consequences for the future of the UK's EU membership and the EU itself.

As we set out in our flash analysis, the appointment of Lord Hill to the key financial services portfolio (pending approval by MEPs) is a win for the UK, and the general reformist outlook of the Commission, with other crucial posts (Internal Market and Competition) held by liberal, pro-free trade, non-eurozone countries, provides grounds for cautious optimism.

What will Lord Hill's portfolio include?
  • Overseeing the creation of the banking union – a crucial policy for the eurozone but also one which threatens to split the EU into euro-ins and outs. In his new role, Lord Hill can ensure this does not happen. That being said, this is a very tricky role to manage (with numerous competing interests), especially for a non-eurozone country.
  • Power to review the role of the European supervisory authorities, institutions which have been controversial in the UK since their creation.
  • Responsibility for a 'Capital Markets Union'. While this remains vague it could be a good initiative for the UK since London is already the centre of European capital markets. Lord Hill can base the union around the single market rather than the eurozone.
As the charts below show, the Commission has also been re-organised with a series of policy clusters, with the UK being at the heart of all the major decisions relating to the single market, jobs and growth and the Eurozone. Each 'cluster' will be headed by a Vice-President, previously a largely meaningless role but now with additional agenda setting powers and the ability to stop legislative proposals from other Commissioners.

Lord Hill will 'report' to two Vice Presidents who will "steer and co-ordinate" depending on the issue at hand - the new "Jobs, Growth, Investment and Competitiveness" VP Jyrki Katainen and the "Euro and Social Dialogue" VP Valdis Dombrovskis (both of whom are former PMs). In terms of the two VPs, Dombrovskis is likely to supervise the banking union aspects of Lord Hill's post while Katainen will oversee the more single market aspects, although even here, there is plenty of scope for overlap.

Lord Hill's portfolio also has some overlap (and therefore potential conflict) with France's new Economic and Monetary Affairs Commissioner Pierre Moscovici .The potential for Anglo-French clashes within the Commission is relatively limited since Moscovici will be primarily tasked with macroeconomic eurozone policies rather than financial markets, but one potentially fraught area could the be Financial Transaction Tax or a Common Consolidated Corporate Tax Base. Juncker has asked Moscovici to finalise negotiations over both.

It remains to be seen how the relationship between VPs and different clusters will work in practice, especially as Juncker himself has insisted that "In the new Commission, there are no first or second-class Commissioners", and since decisions in the College of Commissioners have traditionally been taken by a majority of all Commissioners in a secret vote. However, Juncker also made clear that the Vice-Presidents “can stop any initiative, including legislative initiatives” of other commissioners – effectively acting as “a filter”.

Time will tell how potential disputes play out or are resolved and to what extent the VPs can truly veto proposals. What is clear is that the relationship between these four men could be crucially important.

Tuesday, September 09, 2014

Braveheart: Aspiration or reality? Alex Salmond claims Scotland could join the EU in 18 months

Aspiration or reality?
Alex Salmond has today claimed that an independent Scotland's (iScotland) EU membership terms could "be finalised in 18 months" i.e by March 2016. There is an obvious political reason for wishing to play down the disruption caused by Scotland leaving the United Kingdom - Alex would not want to scare the Scottish horses - but even by the standards of political rhetoric this is quite a claim. Here is how it might or might not work.

Gordon Brown's is the only 
Scottish signature on the EU Treaties

We have explained before that an independent Scotland would have to rejoin the EU. For although Scotland is within the EU it is the UK that is the signatory to the Treaties - above the most recent UK signatory (Gordon Brown's) it clearly states "United Kingdom". (If in doubt see the definitive legal opinion supplied to the Scottish Government by Former EU legal Counsel Jean-Claude Piris here). So it is clear that an iScotland would have to join  (not even re-join) the EU. So how long would that take?

Well a lot more than 18 months if history is a guide. We have set it out before here but in brief Scotland would need to apply for EU membership, be independent to apply and then complete 35 chapters of accession negotiations. Once the Commission has cleared Scotland through that phase, Scotland would still need the unanimous approval of all 28 EU states (inc rUK) and the European Parliament's approval. This leaves a lot of unanswered questions. We have set some of them out here and again here but here is a recap of the more serious problems:

All in 18 Months?
  1. Gain an opt-out from the Euro + Schengen border controls: All EU accession negotiations are based on accepting the full treaties. In iScotland's case Alex Salmond will come to the table asking for a UK-style opt-out from the euro, justice and policing laws and Schengen and the a share of the current UK rebate. These are all in the main body of the treaties. Without them iScotland would have passport controls on the English border, have to comply with rules governing the eurozone and be signed up to a growing body of EU criminal laws. Some EU members will object or want something in return.
  2. Avoid a Spanish veto: Spain (and a number of other states listed in our table here) have an 'in principle' objection to secession. As Scotland would require their agreement to join this is a real problem, while not unsolvable has the potential to complicate matters. 
  3. End negotiations with rUK: If Scotland were to opt to become independent it would enter into a long and fraught negotiation with rUK over the mountain of UK debt, assets, oil, currency, defence, passports and a whole range of other complicated issues. While this is going on the rUK will have want and be entitled to ensure that its negotiations with Scotland take precedence over iScotland's negotiations with the EU.
So could this all be done in 18 months of the referendum? Well as with so much of the independence debate, the reality is that all we have at this point are lots of 'known unknowns' and it is fair to say that if Scotland does vote for independence there will be a large item in Alex Salmond's inbox labelled EU membership...

#EUpriorities: Ensure the EU steers clear of decisions better taken nationally

As promised, here is the first of the cartoons accompanying our reform mandate for the new European Commission:

We believe that the EU must do more than merely pay lip service to the principle of subsidiarity, i.e. that the EU should not meddle in areas that can better be handled nationally (or locally).

The EU needs a dedicated Commissioner for subsidiarity (although we are open to a more catchy name, like "Common Sense Commissioner") who would be explicitly charged with reviewing both new and existing EU laws to ensure they are proportionate, add value, and could not be better handled at the national or local level. Any laws that do not meet these criteria should be scrapped.

Dutch Foreign Minister Frans Timmermans, who has been nominated to the new Commission and who  looks set to land an important post has strong reformist credentials to fill such a role and helped coin the maxim 'national where possible, European where necessary'.  

Our mandate (published in partnership with Open Europe Berlin) received some good media coverage in Germany today, with Die Welt featuring it on the front page of their economics section, along with our calculation that German taxpayers could save €32bn from the package of reforms that we propose:

With Juncker's full Commission line-up expected to be announced tomorrow or Thursday, stay tuned for more of our ideas in the days to come.

EU divisions delay sanctions on Russia, likely to focus on Rosneft

The EU last night finally reached an agreement on the latest round of sanctions on Russia, although the members agreed to delay implementation for a "few days" to allow time for the ceasefire to take hold and to reconsider the sanctions on the basis of whether the ceasefire holds or not.

This is despite the fact that by almost all accounts fighting has continued in Eastern Ukraine over the weekend and into today. However, for now, all those involved seem keen to maintain the ‘ceasefire’ and suggest the deal agreed on Friday remains in place.

First a couple of thoughts on why both sides are so keen to keep the deal in place, despite seemingly flagrant violations:
Ukrainian government: Kiev is keen to push for stability for a couple of reasons. The upcoming election is weighing on thinking and if it is ever to be seen as viable and legitimate it must take place during a calm environment. Kiev may see the ceasefire as first steps towards this. Furthermore, it seems unlikely to be a coincidence that Ukraine found a renewed vigour for the ceasefire just as the IMF warned that the prolonged fighting could lead to another $19bn bailout for the country next year. Lastly, Ukrainian forces had been suffering heavy losses as Russian forces became more involved and bolstered the rebels – this ceasefire allows Kiev to regroup and plan how to deal with this new resistance.

Russia and the pro-Russian rebels: The ceasefire came at a perfect time for Russian President Vladimir Putin – right in the middle of EU sanctions negotiations and NATO meetings – and played on divisions within the two groups. It turned attention away from what was happening on the ground in Ukraine and the potential Russian influence. It allowed the rebels to regroup and prepare to take back some more of the land they had lost in previous weeks. There also seems to have been an increasing shift towards Mariupol which looks to be a new strategic objective for the rebels.
From the EU perspective, while the official line is that they want to give the ceasefire time, the more likely influence is the concern around the economic impact of sanctions and the potential Russia retaliation. The talks over the past week have reportedly seen the reemergence of significant divisions within the EU over sanctions (although they never really went away).

While the official details are yet to be released, the sanctions have been widely reported. We discussed the options in detail here, but the key points are:
  • Ban European financing with a maturity of over 30 days to Russian state-owned oil and defence firms. This will include Rosneft, Gazprom Neft and Transneft (the main oil pipeline operator). A large number of Russian defence firms are state-owned but few, if any, look externally for funding.
  • Ban European companies from providing services to Russian firms which are associated with oil exploration and production (be it deep water, Arctic or shale).
  • Expand the list of banned high-tech energy and dual use goods which cannot be exported by European firms to Russia.
  • Reduce the allowed level of financing to Russian state-owned banks from 60 to 30 days.
  • One option which is not entirely clear is a potential limit to the syndicated loans to Russian state-owned entities. This would essentially limit loans given by groups of banks (a fairly common practice used to spread the risk of lending over many parties).
Our initial feeling is that this will be a modest increase in the current sanctions. They remain very specific and targeted on a few state-owned firms, and particularly their access to European capital markets. They also remain only forward looking. Below are a few stats to give a feeling of the impact.

Above we have updated a graph we produced previously, which now shows which Russian state-owned banks, defence and oil firms have issued shares on the London Stock Exchange. In this instance, there is only one issuance to be added – the $10.65bn listing by Rosneft in 2006. Let's not forget that Europe gets around 35% of its oil from Russia, and while the global oil market remains much more fungible and varied than the gas sector, hitting Rosneft is probably the main story of these sanctions.

A quick peak at Rosneft’s latest financial statement also hints at why they are so concerned by potential sanctions that they have asked the Russian state for a loan of $42bn (around RUB 1,550bn). Out of RUB 2,179bn ($58.8bn) in loans and borrowings, around RUB 1,536bn ($41.5bn) is in the form of long term bank loans in dollars and/or euros. A significant portion of this is likely to have been provided from foreign banks, meaning Rosneft could face issues rolling over these loans. Furthermore, the amount they have requested almost exactly corresponds to their net debt levels (show in the chart below) with Rosneft even admitting that the main motivation for asking for assistance from the Russia state is to help finance its net debt amid the US and EU restrictions on its market access.

One final point to note here is that the sanctions on syndicated loans could be particularly important for a company such as Rosneft, not least because it is an instrument it has used previously, for example to help finance its purchase of TNK-BP.

As with all these sanctions while the direct impact could be limited it will further add to the indirect freezing of business between the West and Russia. Furthermore, Russia looks set to retaliate once again – with the idea of banning commercial flights from the West from Russian airspace being reheated. All of this could of course be offset by positivity if the ceasefire holds – but that remains a big if at the moment.

Monday, September 08, 2014

Attention new European Commission! This is how to save £200bn, kick-start growth and re-connect the EU with voters

This morning, Open Europe published a 'mandate' for the new European Commission - in short a series of proposals setting out what the Commission should - and shouldn't - be doing over its five year term of office. Our mandate idea was inspired by the reformist Dutch Foreign Minister Frans Timmermans, who last year proposed a 'European Governance Manifesto' in which national governments would identify a series of priorities for the Commission.

Our mandate, which we call on David Cameron and other EU leaders to adopt, contains a number of detailed proposals spanning a wide range of policy areas - from reforming the EU budget, increasing transparency and accountability to liberalising the single market in services - but its overarching theme is boosting the EU's capacity to create jobs and generate economic growth while ensuring the EU stays well clear of areas better handled nationally or locally. Our mandate would:
  • Save European taxpayers £200bn (€252bn) over a seven-year EU budget period by re-targeting and slimming down flawed spending programmes,
  • Cut the wages and perks of EU officials and scrap a number of EU quangos that add no value, saving taxpayers a total of £819m (€1bn) per year,
  • Boost the EU economy by £236bn (€294bn) by making it easier to export services to other EU member states,
  • Introduce a series of new checks on EU laws to ensure they boost jobs and growth whilst ending unnecessary EU meddling. 
With David Cameron's EU reform agenda often being accused of vagueness, having the Commission adopt such a mandate would be a big win. Of course this is not the limit of the reforms the UK ought to push for - our priorities relate to what falls within the Commission’s remit; many key issues will be debated between national governments with a limited role for the Commission. Although in the longer term we think EU Treaty change will be needed, all our proposals can be accommodated within the existing EU Treaties, so there is no excuse for foot-dragging.

We have commissioned George Roberts – an independent illustrator and animator – to draw a series of cartoons to accompany some of our key proposals. Over the next couple of days, we will be posting these cartoons on our blog along with a more detailed description of what the policy proposal entails and a discussion of why it is important.

In the meantime, you can read the press release here, the full mandate here and join the conversation on Twitter by using the hashtag #EUpriorities.

Friday, September 05, 2014

ECB surprises markets with interest rate cut and purchases of private assets: Round-up of reactions from around Europe

As we predicted might happen, the ECB surprised markets yesterday with the announcement of an interest rate cut and the purchases of private assets.

Open Europe’s Raoul Ruparel has a full analysis on his Forbes blog, where he concludes:
“In summation, Draghi surprised the markets with some bullish action. That said, I remain unconvinced that these programmes will do much to boost inflation, growth or even credit supply in the Eurozone. Importantly, the ECB is nearing the end of the actions it can take, and it is very aware of this. The onus has now once again been shifted to governments, with the expectations rising for action. For the first time since 2012, pressure is now really increasing for Eurozone governments to reassess the Eurozone’s institutional structures and take action to pool further sovereignty. Draghi may have come bearing gifts for markets but he came with further warning for governments.”
Needless to say, the fallout from the ECB's announcements has been widespread and varied. Below are some of the best reactions from papers across Europe. As one might expect, the German press was less than impressed with the policies unveiled by Draghi:
Die Welt’s Economics Editor Sebastian Jost describes the announcement as “Draghi’s last roll of the dice”, and claims that the ECB has demonstrated “an unusual passion for experimentation”. He also argues that “the ECB has now done pretty much everything which appears to be economically justifiable. Whoever wants a stable monetary union should hope that it does not go any further.”

Süddeutsche Zeitung’s Economics Editor Ulrich Schäfer describes the ABS as a “highly dubious innovation”, claiming that it resembles many of the financial products that contributed to the initial financial crash “when no-one could ultimately identify who had lent whom how much, and therefore who had assumed what risk.” He concludes that it is “ironic” that the ECB wants to give such products “renewed respectability”.

FAZ’s Economics Editor Holger Steltzner criticises Italy and France for delaying structural reforms in order to get more help from the ECB. He also argues, “Does the purchase of securities, which banks are struggling under the burden of, even come under monetary policy?...How can the ECB eventually return to normal? As soon as it increases interest rates, it will threaten itself with losses.”
Again as many would have predicted, the Mediterranean press took a more sympathetic view of Draghi’s decisions.
An editorial in Spanish daily El País argues that “the ECB hasn’t disappointed…[but] it’s equally necessary that the governments with sound public finances – and notably the German government – intensify investment and temporarily back greater flexibility in the necessary requests for public finances adjustment in the eurozone as a whole.”
The deputy editor of Spanish daily El Mundo, John Müller, makes an interesting point, “The enormous debt – both private and public – that has been amassed, is such a huge burden that it is surprising that no-one is addressing the problem seriously...Yesterday, Draghi only asked for help [from eurozone governments] in the form of fiscal measures and reforms, but not [in the form] of debt restructuring. In short, we don’t know if the monetary sorcerer has correctly identified the reason why we have lost the favour of the gods of growth.”
Columnist Jean-Marc Vittori writes in French business daily Les Echos that “the currency won’t be enough to save Europe”, and argues, “[There’s] no tenable monetary union without budgetary union. In a continent where the temptation to withdraw is growing, this appears to be a challenge. Nonetheless, it’s the condition for the survival of the euro.”

Italian Economics Professor Donato Masciandaro writes in Il Sole 24 Ore, “Draghi couldn’t have been clearer: the later the necessary fiscal and structural policies come, the less effective monetary policy will be…Such a decisive statement should make everyone reflect. The [European] Union is like a bogged-down machine. It has at least four traction wheels – currency, taxation, competition and labour – but only one of them is working. In such a situation, the machine risks going under.”
Italian journalist Danilo Taino writes in Corriere della Sera, “[Italian Prime Minister Matteo] Renzi is a lucky guy, since no [Italian] Prime Minister ever got this sort of help from the ECB. This means, however, that [Renzi] won’t be able to ask for anything else from Draghi. The ECB President has reached the extreme limit – except for a difficult, potential government bond-buying programme. From now on, everything is in the hands of governments.”
One interesting take away, particularly from the articles from around the eurozone periphery, is that there seems to be a renewed push for measures such as further budgetary union and debt-pooling. It looks as though there is a growing acceptance of the limitations of ECB action, and the continued flaws in the Eurozone architecture – something which we have long warned of.

Thursday, September 04, 2014

ECB preview - Dovish Draghi to double down on easing?

The European Central Bank (ECB) holds its monthly meeting in Frankfurt today - the day after ECB President Mario Draghi's 67th birthday.

As usual, Open Europe's Head of Economic Research Raoul Ruparel has published a preview on his Forbes blog, explaining what we may expect from today's meeting.

Here goes:
Following ECB President Mario Draghi’s dovish speech at Jackson Hole last month this week’s ECB meeting has taken on new importance. This has been further enhanced by the recent Eurozone inflation data which put annual CPI at 0.3% in August. The headline figure hides some of the story with core inflation actually rising to 0.9% (from 0.8%) but the ECB’s previous inflation forecasts have begun to look increasingly out of line with reality.

However, those expecting a big move are likely to be a bit disappointed. As I pointed out last month, it is almost nonsensical for Draghi to unveil new measures before his previous policies have been implemented. I am thinking specifically of the TLTROs (targeted long term lending operations) the first of which will only be conducted on 18 September. Any big announcement now could undermine the predicted take up of these measures – which clearly remain the ECB’s preferred approach for injecting further liquidity.

That being said, these measures are unlikely to make much difference since the conditions for passing liquidity on to the real economy remain very loose. They are also very unlikely to appease investors and markets which have now come to expect some significant new easing. The two key options which are on the table for this meeting are:
  1. A further interest rate cut: Many will validly ask, what is the point in a further cut now? Of course it would have little to no economic impact, however, it would once again signal the dovish bias of the ECB. It would also signal a clear shift in the ECB’s position given that Draghi has previously said rates are unlikely to get any lower than current levels. It becomes another mechanism to express his commitment to further easing. There also remains scope to make the negative deposit rate more negative, although there is a cap on this since, at some point, it will be cheaper for banks to simply hold cash than deposits with the ECB.
  2. Purchases of private sector assets – specifically Asset Backed Securities (ABS): The ECB has long telegraphed such action and it is the next obvious tool at its disposal. Whether or not it will be announced this month or in the coming months is a bit of a toss-up. It seems the ECB is not quite ready to implement it yet and has made a big song and dance about the need to adjust regulations and definitions of ABS, which are yet to fully take place. Whenever it is announced, implementation is likely to be later this year to allow the negative deposit rate and TLTROs to have time to work. I remain sceptical on the effectiveness of this policy, which I have analysed in detail on the Open Europe blog. Ultimately, the market for the transparent ABS related to SME loans remains very small in Europe and focused in the core countries rather than the periphery (where this money really needs to flow to). For example, in Q1 2014, of the €18.5bn in ABS issued, only €1.6bn used SME loans as collateral. The ECB maintains that it can and will help create the market in this area, yet with this measure having been forecast for some time, you would expect there to have been some market response already.
As with many of Draghi’s press conferences, all of this will be weaved into a dovish speech including a few key trigger words for markets – few other central bankers are as adept in their communication. As for full blow Quantitative Easing on sovereign debt, this remains someway off in my mind and hurdles remain high. Its use will ultimately be tied into developments in the fiscal and political sphere, as hinted at in Draghi’s speech (more detail on this coming in a future post). The ECB will be loath to unveil QE, which it fears can only buy time, without further commitment to reforms, a clearer fiscal approach and developments on the structure of the Eurozone which such changes will entail.

Tuesday, September 02, 2014

What further sanctions is the EU considering against Russia?

Given the recent escalation in Eastern Ukraine and the increasingly obvious Russian influence in the rebel forces, the EU looks set to impose further economic and financial sanctions on Russia.

EU ambassadors met yesterday to begin discussing the options and will meet again tomorrow in an attempt to finalise a package to send to EU leaders. They are expected to reach a decision by Friday.

Before we look at the options on the table, we should note that such agreement is not a forgone conclusion. As we have been pointed out repeatedly, there are significant divisions within the EU around sanctions. Slovakian Prime Minister Robert Fico  recently even threatened to veto another round of sanctions if they hurt the Slovakian economy. In short, many EU leaders seem to be becoming increasingly anxious about the economic impact of sanctions and the inevitable Russian retaliation – just see the concern around the Russian ban on EU fruit and veg.

All that being said, with the UK, Germany and France seemingly in favour of further sanctions – and pressure on Italy’s Foreign Minister Federica Mogherini to take a hard line ahead of taking up the role of EU High Representative for Foreign Affairs – the big states seem largely to be backing further action and willing to take on a larger share of the economic burden.

With all that in mind, here are the options that are being touted:
  • Expanding targeted sanctions: This looks a done deal with further entities and persons involved in Crimea and Eastern Ukraine being subject to asset freezes and travel bans. The focus has tended to be on smaller firms and regime members directly involved. The measures would have a larger impact if Europe decided to sanction a higher profile firm (such as a state-owned bank), or a big name oligarch with ties to the regime.
  • Expanding stage three sanctions: This seems the most likely option, with extensions made to the existing sanctions on finance, defence and energy sectors. This could take many forms but the main ones under discussion are – expanding the restrictions on financing for state-owned banks to any maturity above 30 days (currently 90 days), and expanding the list of banned energy tech exports and dual use goods to Russia.

    Other proposals under consideration include, banning a larger number of firms in these sectors from issuing debt in Europe and/or listing on European exchanges – initially this would be focused on state owned firms (of which there are many in Russia). The range in these sanctions remains large, so the impact is hard to judge. For the most part they will be focused on limiting medium to long term financing for state-owned firms. This will have a grinding impact on the economy, but as we have noted before, the Russian state does have resources at its disposal to aid firms hit by these measures.
  • Banning syndicated loans to certain Russian entities: This remains a vague option, but could have a substantial impact since many Russian firms are reliant on external loans. For example, the private sector (excluding financial firms) have $142.5bn in outstanding external loans, a key source of financing for them. Given some European banks large exposure to Russia, any movement into this area of sanctions would likely be tentative and limited to very select entities (state-owned banks perhaps), under very specific terms.

  • Ban on new purchases of Russian sovereign debt: this would see European entities banned from purchasing any newly-issued Russian sovereign debt. It would be quite a bold measure, and fears remain that Russia, a big investor in European sovereign debt, would retaliate in kind, something struggling eurozone countries would not want to see. In terms of impact, as the graphs above and below show, while Russia does have a sizeable amount of government debt to roll over in the coming year, the amount which is held externally is fairly limited. That said, this could well increase borrowing costs and reduce liquidity in Russia’s sovereign-debt market at a time when its economy is struggling and the state is being forced to take on an even larger role.  

One option which doesn’t yet seem to be on the table is one which the UK has reportedly called for – banning Russia from the SWIFT network. This is not surprising, since it would be a big step and could almost amount to freezing out Russia’s financial sector from Europe – a move which the EU is clearly not ready or willing to make. We will analyse this in a future blog post.

One consideration that seems to be glaringly absent from these discussions is the consideration of how effective the sanctions have been so far. To be fair, Dutch Prime Minister Mark Rutte did call for such consideration ahead of last week’s EU summit. There are already reports of them having some economic impact (both on Russia and Europe), but clearly they have not caused a change in course or approach from Russia or in Eastern Ukraine. Europe would do well to consider why this is the case in order to fully judge and best optimise any future sanctions.

Furthermore, as we have noted countless times before, the end goal and medium to long term strategy of such sanctions and the wider approach to Russia and Ukraine remains unclear. Given that this crisis has already been going for 6 months, and shows little sign of abatin,g some longer term thinking would be welcome.

Monday, September 01, 2014

The CDU's 'AfD problem': too big to ignore, too controversial to team up with

Yesterday’s regional elections in Saxony saw Germany's anti-euro Alternative für Deutschland (AfD) score an impressive 9.7%  netting the party its first ever seats in one of Germany’s regional parliaments. The lead candidate of the Green party, Antje Hermenau, described the AfD result as an “earthquake” while AfD leader Bernd Lucke celebrated that they “finally arrived on the German party landscape.”

It is now up to German Chancellor Angela Merkel’s CDU party to find a new coalition partner after Saxony's FDP followed the national party in losing all its seats. The CDU's lead candidate and current Prime Minister of Saxony, Stanislaw Tillich, categorically excluded a potential coalition with the AfD describing it as a protest party that due to its inner turmoil was completely unfit to govern. He only waited until after the election result was announced to make this statement however, following a debate within the CDU which continues.

Commenting on the prospects for a CDU-AfD coalition, Bild columnist Bela Anda writes that if it were to enter into a coalition with the AfD,
“The CDU would saw off the branch on which it itself is sitting." 
A CDU-SPD grand coalition is therefore the most likely option although a CDU-Green coalition could also be on the cards.

So is the AfD 'Gekommen um zu bleiben' (here to stay)?

This is not only the title of a famous German pop song but now the question everyone is asking themselves. Regional elections in Thüringen and Brandenburg are coming up in two weeks and the AfD has a good chance of enter both regional parliaments. However, the party's objective remains winning Bundestag seats in 2017 having narrowly missed the 5% threshold in 2013. There will be another eleven regional elections before 2017 and the challenge for the party will be to keep the momentum going. The AfD leadership will no doubt remember the fate of the Pirate party in 2011 - polled at a spectacular 13% before plummeting into virtual non-existence.

In Saxony a large share of AfD vote came from ‘Sonstige’ (other parties) and ‘Nichtwähler’ (non-voters) which is typical for protest parties. But at the same time there is a considerable spread across most mainstream parties with the largest share coming from the CDU (34,000 votes).

This would be a particular headache for Angela Merkel’s party. The worst case scenario for Merkel is that the AfD becomes to the CDU what Die Linke is to the SPD - and indeed, some would say, UKIP to the Tories in Britain: too big to ignore, too controversial to team up with. This headache will become particularly severe if the liberal FDP's decline is irreversible, dooming the CDU to always have to look to the SDP (or the Greens), in turn making left-right coalitions more or less a permanent feature of German politics.

Headlines are all for AfD and UKIP, but the biggest shocker for traditional parties may come from Spain...

The surge of anti-EU, anti-euro and protest parties across Europe continues. Germany's anti-euro Alternative für Deutschland (AfD) is making headlines after winning 9.7% of votes in yesterday's regional elections in Saxony and securing its first ever seats in one of the country's regional parliaments.

In the UK, a Survation poll for the Mail on Sunday found that, following the defection of Douglas Carswell from the Conservatives to UKIP last week, UKIP is set to win the ensuing Clacton by-election with 64% of the vote - which would grant Nigel Farage's party its first elected MP.

However, the biggest shocker for mainstream parties seems to be coming from Spain. According to a new Sigma Dos poll for El Mundo, the anti-establishment (but not anti-EU) party Podemos would finish third in a general election with 21.2% of votes - only 1.1% less than the opposition Socialist Party. Being neck-and-neck with one of Spain's two traditional parties is an absolutely extraordinary result for Podemos, given that it was founded in March. The poll puts Spanish Prime Minister Mariano Rajoy's centre-right Partido Popular in the lead on 30.1% - a 14.5% fall from the 44.6% the party scored at the November 2011 general election (click on the picture to enlarge).

If you didn't read it at the time, here is a portrait of Podemos and its leader, Pablo Iglesias, that we published in the aftermath of the European Parliament elections in May - when Podemos came from nowhere to win five seats in Strasbourg. We noted:
Call it left-wing, anti-establishment, anti-austerity (but clearly not anti-EU), the rise of Podemos is significant because - similar to what the Five-Star Movement has done in Italy - it can give Spaniards a channel through which they can voice their dissatisfaction with the political establishment (and the current eurozone economic policies), something which has been lacking at the peak of the eurozone crisis.
Indeed, looking at the latest polls, Podemos seems to be following exactly the same trajectory as Beppe Grillo's Five-Star Movement in terms of rocketing (potential) electoral support. And exactly as in Italy, the rise of a strong anti-establishment party may well force the centre-right Partido Popular and the Socialists to consider an unusual (and uncomfortable) 'grand coalition' if none of the two big traditional parties wins a majority in the next general election - due in November 2015.

While the speed of the rise of Podemos is certainly surprising, there has undoubtedly been a huge gap in the market for a protest party in Spain over the past few years - as we noted on this blog at the end of May. Despite sky-high unemployment, a struggling economy, a few political scandals and regional discontent, no party or movement had so far managed to shake the solid support for the two mainstream parties. But since Podemos entered stage, things seems to have changed. With a Catalan independence referendum potentially coming up in November and thoughts turning towards next year's general election, these are certainly interesting times in Spanish politics.

The Independent getting excited but do 100 Tory MPs really want to leave the EU no matter what?

The UK media has an insatiable appetite for ‘Tories split’ stories on Europe – mainly we suspect because it makes for an attention-grabbing headline - and Douglas Carswell’s defection is Christmas come early for many. True, the defection is a big deal which could have even bigger implications so fair enough.

However, off the back of his move, there are now far less credible stories cropping up. As OE Director Mats Persson argued on his Telegraph blog back in January:
 “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.” 
A prime example is today’s Independent front-page, celebrating that “Up to 100 MPs will call EU exit regardless of concessions won by PM”. So one third of the Tory Parliamentary Party has already made up its mind on the EU? That’s a big claim. Cameron might as well throw in the towel now. It’s an over-cooked story, of course, as is usually the case, quoting exactly the same Tory MPs who have been quoted in stories like this since Magna Carta. The big headline number comes from “other eurosceptics” (hmmmm) who “predicted” that “between 50 and 100 Conservative MPs would make the same pledge” [out of the EU no matter what]. In other words, the number is plucked straight out of thin air.

There will no doubt be pressure on Tory MPs to clarify their position, but to go for “out no matter what” is a whole matter entirely. Still, this story will make it into embassy press clippings around Europe, and will probably also be re-produced in some foreign papers (100 is an impressive and conveniently round number). And voila, it has taken a life of its own. The Independent prides itself on taking “seriously our responsibility to maintain high editorial standards.” Well, we’re not impressed.

Saturday, August 30, 2014

Tusk and Mogherini: Europe's new 'dream team'? Our initial thoughts

Europe's new 'dream team'?
As we noted in our previous post, Cypriot President Nicos Anastasiades had sort of spoiled the surprise. Anyway, now it's official: Polish Prime Minister Donald Tusk has been appointed new European Council President, and Italian Foreign Minister Federica Mogherini will succeed Baroness Ashton as the EU's foreign policy chief (aka High Representative for Foreign Affairs).

A couple of initial thoughts:
Donald Tusk 

Tusk has economically liberal and pro-free trade instincts. Most importantly from the UK's point of view, he comes from outside the euro area - and will therefore be sensitive to the concerns of non-euro countries when it comes to safeguarding the integrity of the single market, a point he made during his press conference:
Tusk also explicitly committed himself to ensuring the UK stays in the EU and endorsing (some) EU reforms:
That said, Tusk is also likely to oppose fundamental changes to EU rules on free movement; although he did say that so-called 'welfare abuse' can be addressed, as we've noted, for many the debate has moved on from the issue of 'fairness' to that of 'volume', something Cameron will be under huge pressure to place at the centre of his potential renegotiation. In the more immediate future, Cameron's early support for Tusk as new European Council President could increase the UK's chances of securing a big portfolio in the new European Commission.

Significantly, it has been confirmed that Tusk will also chair the summits of eurozone leaders - despite coming from a non-euro country. This looks like a big concession made, in particular, by French President François Hollande - who was reportedly sceptical of such an arrangement. Perhaps Hollande hopes that giving ground on this point can help him secure the key post of European Commissioner for Economic and Monetary Affairs for his former Finance Minister Pierre Moscovici.

Federica Mogherini

The resistance to Mogherini, put up by Eastern EU member states over the past few weeks, has clearly been appeased by Tusk's appointment as new European Council President. It was noteworthy that Herman Van Rompuy stressed that Tusk and Mogherini would "work closely together to secure Europe's interests and values".  

Italian Prime Minister Matteo Renzi, who has invested a great deal of political capital on Mogherini, seems to have achieved what he was looking for: a diplomatic victory in Brussels to sell to the electorate once back in Italy - where the big reforms are not going forward as fast as announcements, and the economic situation shows no signs of improvement. With the country in recession and deflation, it remains to be seen how much Italian voters will be impressed.
As we noted in our recent flash analysis, the role of High Representative is less crucial from the UK's point of view - as foreign policy remains primarily a national competence, with every EU member state having a veto. However, in light of the various geopolitical challenges facing the EU (and its neighbourhood), it is possible that Mogherini will play a greater - or at least more visible - role than her predecessor.

"I understand that Tusk it's OK": Has the Cypriot President just spoiled it all?

As we wrote in our round-up of EU leaders' doorsteps, Polish Prime Minister Donald Tusk is the favourite for the European Council President post but it was not yet a done deal. However, have we just inadvertently had confirmation that Tusk has landed the job?

Watch this video from around 16:30 in:

Cypriot President Nicos Anastasiades tells outgoing European Council President Herman Van Rompuy:
"We have news, I understand that Donald [Tusk] it's okay."
And Van Rompuy replies:
"Yes, but keep it."
That sounds like a bit of a spoiler, but we will keep following the summit and provide you with real-time updates on Twitter just in case there are any last minute surprises.

EU top jobs summit has kicked off: here is a round-up of doorstep declarations

EU leaders have all arrived in Brussels for today's summit. There are two big issues on the table: the appointments of the next European Council President and High Representative for Foreign Affairs; and the worsening situation in Ukraine (although the situation in the Middle East is also bound to come up).

Here's a round-up of what EU leaders said upon arrival. Let's start with the assignment of the remaining EU top jobs. Italian Foreign Minister Federica Mogherini and Polish Prime Minister Donald Tusk are the frontrunners for the posts of High Representative and European Council President respectively. However, Mogherini's appointment looks more like a done deal than Tusk's - at least from EU leaders' doorstep declarations:

Mogherini has travelled to Brussels herself, and has met European Commission President-elect Jean-Claude Juncker - possibly a further sign her appointment is drawing closer. Tusk walked into the European Council building without saying a word, although reportedly with a smile on his face.

Meanwhile, it seems no decision will be made on the name of the next President of the Eurogroup of eurozone finance ministers:

As regards Ukraine, a few EU leaders stressed the need for a reaction if Russia does nothing to de-escalate the situation. However, the emphasis has significantly differed from one leader to another: 

And that's all for the moment. The summit is under way, and we will continue monitoring it. Follow us on Twitter @OpenEurope, @pswidlicki and @LondonerVince for real-time updates and analysis.