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.

Are MPs actually being given a vote on the European Arrest Warrant?

Today it is widely reported that MPs will vote on the Government's plans to opt back into the European Arrest Warrant. In fact reading the Home Secretary in the Sunday Telegraph you would think that she believed that as well.

However a close reading of the actual motion leaves her contention in some doubt. Here it is:
Secretary Theresa May That the draft Criminal Justice and Data Protection (Protocol No. 36) Regulations 2014, which were laid before this House on 3 November, be approved.

Well the Government's Explanatory memo  to the regulations mentions only 11 out of the 35 measures the Government proposes to opt into actually require legislation - the warrant not being one of them.

This will undoubtedly be brought up in the debate and why exactly it has been omitted is unclear (perhaps because motions on legislation are unamendable). However, many MPs will argue that it contradicts assurances given to them over a long period and sets a bad precedent.

Catalonia's symbolic independence referendum: What it means and why it would be wrong to ignore it

UPDATE (1:00pm) - As promised, here's an update on the results of Catalonia's symbolic independence referendum now that all votes have been counted.

Turnout: 2,305,290 people (around 37% of those eligible to vote)
Votes in favour of independence: 1,861,753 (80.76%)



Catalonia's symbolic independence referendum eventually went ahead yesterday. With 88.4% of votes counted, the Catalan government puts turnout at over two million people. Nearly 1.7 million of them (80.7%) voted in favour of Catalonia's independence from Spain. We will update the blog with the final results as soon as they come in.

This infographic from El País compares yesterday's turnout (far right column) with the 2012 Catalan regional elections and the 2006 (binding) referendum on the amended Statute of Autonomy of Catalonia:

In other words, less than a third (32.8%) of those eligible to vote cast their ballot yesterday. However, this is still quite impressive considering that Catalan voters knew yesterday's vote was purely symbolic. Furthermore, the percentage is calculated on a broader electoral base - since young Catalans aged 16 were allowed to vote in yesterday's referendum, unlike in regional elections where the voting age is 18.

On the other hand, the outcome of yesterday's vote is probably not a great indication of where the majority of Catalans stand on independence. Due to the non-binding nature of the referendum, there is likely to be a significant amount of self-selection bias. Many Catalans who felt strongly about independence thought it was worth queuing at polling stations to cast a non-binding vote and show defiance of the Spanish government, while many of those who would vote against independence in a real referendum, or were undecided, stayed home since they knew the result would have no legal validity. 

This certainly helped push up the pro-independence vote to nearly 81%. As a reference, the four pro-independence parties currently holding seats in the Catalan parliament won a total 2,093,709 votes in the 2012 regional elections

Recent opinion polls clearly show that the split is much more even than that. For example, a Metroscopia poll published by El País two weeks ago found that 44% of Catalans would vote for independence in a referendum and 42% would vote against. Interestingly, when offered a third option involving "new and bulletproof exclusive competences" for Catalonia, 46% of respondents said they would choose this option, while 29% would vote for independence and 17% would opt for the status quo.

So where does yesterday's vote leave the debate on Catalan independence?  

Pep Guardiola was one of over 2m Catalans who cast their vote
As we argued in our previous blog posts (see here, here and here), the situation in Catalonia has got to a point where the status quo is looking increasingly untenable. The issue has so far been handled quite poorly by both the Spanish and the Catalan governments, who have failed to engage in any meaningful negotiations.

Unsurprisingly, Spanish Prime Minister Mariano Rajoy has talked down the significance of yesterday's vote and stressed that, if anything, it makes future talks between him and Catalan President Artur Mas more difficult. However, Rajoy's unwillingness to engage in any real discussions with Mas so far makes this position look somewhat strange.

Furthermore, this approach sort of misses the point. The Spanish government continues to use a legal argument (the Spanish Constitution forbids regions from organising binding referenda without the authorisation of Madrid) to address a political problem. In this regard, the fact that the next Spanish general election is due next year is clearly an incentive for Rajoy to show even more inflexibility vis-à-vis Catalan demands.

That said, Madrid and Barcelona can't just keep talking past each other indefinitely. Constitutional reform giving Catalonia (and, why not, other Spanish regions) more powers to set and collect taxes, for instance, would probably go a long way to address Catalan voters' concerns that the wealthy region is paying too much towards the national coffers and getting too little out of it - although it would be simplistic to boil the Catalan question down to money only.

Incidentally, constitutional reform is being openly backed by the new Spanish Socialist leader Pedro Sánchez, the Matteo Renzi of Spain. Going forward, as we already argued no less than two years ago, a reform of the Spanish Constitution envisaging further devolution of powers may well impose itself as the most sensible solution for everyone.

Friday, November 07, 2014

The £1.7bn question (Part II) - What are other EU finance ministers saying?

Here's a round-up of comments from other EU finance ministers about the UK's £1.7bn EU budget surcharge and the deal struck at today's meeting. This being EU budget negotiations, everyone is claiming either 'nothing to see here' or victory. Apart from the Dutch, who are getting a pretty raw deal.

We've given our take on the deal in this blog post: when all is said and done, the UK will pay £850 million. The question is whether the rebate the UK gets from the EU budget always applied to the £1.7 billion, and whether, therefore, George Osborne is basically engaging in accounting manoeuvres.

Remember, due to the way the UK's rebate from the EU budget is structured, everyone is basically paying for it, so it's not in anyone else's interest to ever talk it up.

Irish Finance Minister Michael Noonan said,
“My understanding is that the UK will pay the whole amount but there will be no penalties attached or interest rate on that.”
Spain's Luis de Guindos argued,
“No-one has put into question the [European] Commission’s figures…as perfectly valid. Basically, what we agreed on is the possibility of a delay in payments.” 
Dutch Finance Minister Jeroen Dijsselbloem stressed,
“The UK has...a rebate, which they have had for a very long time and of course this mechanism of rebate will also apply on the new contribution. So it's not as if the British have been given a discount today. The old mechanism of the rebate will also apply on the UK contribution, which will increase.”  
According to Austria's Hans-Jörg Schelling,
“Whether the money is to be paid in instalments or as a lump sum is a discussion we can have. But the amount cannot be put in question.” 
Sweden's Magdalena Andersson stroke a more positive note,
“Compared to a situation where the Commission was not going to table a new proposal, of course this is a victory for the UK…Given the amounts, I can understand that one wants to discuss both transparency and the calculations.”  
As regards German Finance Minister Wolfgang Schäuble, he avoided taking a clear stance despite several attempts from journalists at his post-ECOFIN presser. All he said was,
“We have discussed instalments…but we haven't discussed the British rebate...which doesn't mean that the Brits do not raise these questions…I don’t have opinion on that.”
So all clear then...

The most depressing part of this episode is that an enormous amount of energy has been spent, and the UK has been pitted against natural allies, not least the Dutch. Secondly, absolutely nothing on the substance of the EU's wasteful budget has changed.

The £1.7bn question - who's right: Osborne, Farage or the European Commission?

Below we give a blow by blow breakdown of what George Osborne did or did not secure at today’s EU finance ministers meeting. This basically comes down to the UK’s rebate and how it’s applied - and whether it was always going to apply to the £1.7bn.  Osborne claimed that:

Whilst Ukip leader Nigel Farage has claimed that:

This is what EU Budget Commissioner Georgieva said at a press conference just now:
“As we all know the UK receives a rebate on their contribution, but in years when the UK has to pay additional because of GNI corrections, normally this payment would be on 31 December and it would be in the full amount. With the proposal [under discussion]…in exceptional years this period of time would be stretched into the next year, and when this happens, and it would be in these exceptional circumstances, then the payment and the rebate on the payment could converge. In a normal year, they would not. In a normal year, you have a payment on 31 December and then next year, in the spring, we have the calculation of the rebate on this payment.” 
So who’s right?

Well, Osborne is right that the UK will pay half of the initial £1.7bn demand, since the UK’s rebate will now knock off the difference. So in that sense, Farage is wrong. Britain “will not pay the full £1.7bn”. However, the Government’s position isn’t’ entirely what it seems either, since it’s possible (though still not clear) that the rebate was always going to apply to the £1.7bn.
Confused? Don’t worry. Few people know how the rebate actually works. Below is our attempt to clarify the issue.

What has actually been agreed?
  • The UK secured a delay on its payments and will now have until September 2015 to pay. It will probably pay in July and September 2015.
  • It was also agreed that the UK’s £1.7bn bill will have the UK’s rebate applied to it (in the same way all annual contributions do). The Government claims that it wasn’t ever clear whether the rebate would apply, however, Commissioner Georgieva’s suggest that it always would. Usually  the rebate operates on a one year time lag, but now it will be netted off at the same time when the payment is made. The UK government also claims that the rebate applied to the specific amount is above and beyond that which applies normally, due to the way different facets of the rebate are applied and the time period over which it was calculated (we're still looking into this one). 
  • This accounts for the reduced the bill from £1.7bn to £850m.
So, Osborne has effectively achieved an ‘interest free’ payment plan for the surcharge, which will see it coincide with the rebate on said surcharge.

Would this always have happened?
  • It has been unclear for some time how the rebate would factor in here. Either people were purposefully trying to obscure the question or it was genuinely unclear.
  • However, now that it has been settled that the rebate would be applied, it can be said that this reduction would always have happened. The main change is that the rebate has been moved forwarded allowing the initial payment to be reduced.
  • On net the UK will pay £850m, but this should always have been the case thanks to the rebate.
Does this impact other countries?
  • Since other countries essentially pay for the UK rebate, they will on net be hit.
  • Our understanding is that the countries will still get the full amount expected from the GNI calculations – i.e. France should still get €1bn.
  • That said, since the rebate is being paid and also a year early, it is likely that their annual EU budget contributions will increase in 2015. On net then, the gains for certain countries (such as France) could actually be less than expected.
So are we looking at a cash flow problem for the EU budget?
  • One outstanding question is how this will all work in practical terms. Judging from the European Council conclusions, countries who are getting a pay-out from the GNI calculations can still claim the money on 1 December.
  • However, countries who are paying in large amounts can delay their payments until September 2015. It is not clear whether there is enough spare cash in the budget to smooth over this gap.
  • Furthermore, the UK is using its rebate to offset its payment. This will not be covered until all countries have paid in their (higher) annual EU budget contributions next year. This further worsens the cash flow problem.
A political conspiracy or genuine uncertainty?
  • Questions will now swirl around when all this was known. Surely, if the rebate applies, that was always known to be the case? Logically, since all UK contributions are subject to the rebate, it always was going to be. The only thing that wasn’t entirely clear was when and how it would be factored in. While this is tricky to work out, it’s not clear why the HM Treasury and the European Commission let the dispute run for two weeks. If this was a “set up” by the UK government to claim success, then the Commission was in on it.
  • Maybe the handover in Commission has helped breed uncertainty.
So what’s the verdict? Who’s right, Farage, Osborne and Georgieva? Well, Farage is wrong, Osborne right on the amount but may be exaggerated the extent of the concession. The most right is probably Georgieva - though, we still don't have evidence that the rebate was always going to apply.

And of course, the UK will still pay an additional £850 million.

We will update this as events unfold, but what a mess.