Dutch PM and FM reiterate the Netherlands' desire for flexible Europe

The concept of a 'flexible Europe' seems to translate across borders. In a joint letter to the Dutch Parliament, Prime Minister Mark Rutte and Finance Minister Jeroen Dijsselbloem have reiterated the government's position that it wants countries to have the right to opt out of individual EU policies, such as the Schengen zone and the eurozone, or from the EU altogether.

Here are the relevant bits from the letter:

"Following the request by member Schouten to the Finance Minister and the Prime Minister (issue number 2013Z01025) for a letter about the exit from the eurozone, we report as following.  

The cabinet introduced in its coalition agreement that it should be possible under mutual consideration to exit from the community arrangements (Schengen, eurozone, European Union). This requires in the case of the eurozone and Schengen a treaty change as the current EU treaty does not foresee this possibility."

The Karlsruhe factor, Part IV

Throughout the eurozone crisis, we have often highlighted the gap between the kind of ‘shock and awe’ decisions expected by financial markets, and what national democracies are able to deliver. Nowhere has this been more evident than in the on-going constitutional tug-of-war between the German government and the country’s Constitutional Court (see here, here and here for background). The latest chapter concerns a series of legal challenges against the ESM and fiscal treaty, on the basis that they violate the sovereign budgetary rights of the German Parliament.

The stakes are very high given that the Court could, in theory, strike down the best part of Merkel and Schäuble’s efforts over the past year. It is unlikely that the Court will do so given the ramifications, but at Tuesday’s public hearing, the judges (pictured in their traditional red robes) indicated that they would take their time before issuing a ruling; up to three months to decide on whether to issue a temporary injunction pending a full decision on constitutional compatibility early next year.

This delay is most unwelcome news for Merkel who is desperate to reassure financial markets and other political leaders that Germany is serious about the eurozone rescue, which is why she expended a lot of political capital in pushing the two treaties as a package measure through the German parliament in record quick time, and was angry that after all that German President Joachim Gauck refused to give his assent after the Court asked him to allow them time to consider their legality.

The problem is that the Court was specifically designed – by the British and the Americans no less - to counteract the concentration of power and rash decision making by other federal institutions, a sort of systemic circuit breaker. It is for this reason it is tucked away in sleepy Karlsruhe, the opposite end of the country to Berlin and previously Bonn.

The question of urgency vs caution has led to deep divisions not only within the German government but also the wider political and constitutional establishment. Ahead of the proceedings, Justice Minister Sabine Leutheusser-Schnarrenberger (FDP) said that:

“Government and politicians should stay out of this completely. The Constitutional Court does not need any advice... Judges are also aware of the importance that their decision will have on the economy.”

However, addressing the Court directly, Finance Minister Wolfgang Schäuble warned that:

“A considerable postponement of the ESM… could cause considerable further uncertainty on markets beyond Germany and a substantial loss of trust in the eurozone's ability to make necessary decisions in an appropriate timeframe”.

Meanwhile the Guardian reports that Chancellor Angela Merkel allegedly told a private meeting of her CDU party that the Court was “pushing the limits” of her patience, while Martin Schulz, the President of the European Parliament complained that some of the Court’s verdicts are "characterized by great ignorance”. Conversely, Bundesbank President Jens Wiedmann, also giving evidence, warned that “a quick ratification is no guarantee that the crisis will not escalate further".

The graphic below shows how Germany’s major political figures have found themselves at odds over the Court ruling, with figures from all parties adopting a range of positions on the issue:

The German media on the other hand have presented a broadly united front, with Die Welt noting that the Court’s eventual ruling will determine “How far European integration can go without damaging the democratic substance of Germany”. A leader in German tabloid Bild argues that “It is totally right that the constitutional judges take more time – after all, the question is whether Germany is overburdening itself financially. That would be a lot worse than short term turbulences on the financial markets”, while in centre-left broadsheet Süddeutsche Zeitung, Heribert Prantl argues that:

“Karlsruhe has to find the ways and means by which Europe can continue to be built without breaking the foundations of the constitutional settlement. The success of this search is existentially vital for Germany and the EU. It is more important than the fleeting applause of the so-called markets in return for a quick decision.”

While the Court, even in the opinion of some of the litigants, is not expected to torpedo the eurozone rescue at this stage (although they take a slightly more pessimistic view over on FT Alphaville), the red lines of the existing constitutional settlement are looming ahead, with most forms of debt pooling that many have called for - such as Eurobonds or a banking union - lying on the opposite side. As the debate over the future of the eurozone will continue to rumble on, expect further tension in the broadly consensual model of German politics between further European integration on one hand and preserving the current constitutional settlement on the other.

He started strong but ran out of steam...

As you're aware, "the EU" has a range of different Presidents - a frequent source of confusion for both citizens in Europe and partners from abroad. Socialist MEP Martin Schulz is one of them, being the President of the European Parliament. While Schultz has somewhat of a marmite personality, he does have some interesting to say - unlike many of his predecessors. Yesterday's interview with FAZ is a good example.

He starts off strongly:

“People do not agree with the EU in its present form… people feel that the idea has become a bureaucracy and they reject it…As a young man I've always fought for the United States of Europe. Today I know that this is not possible. We will not turn Germany and France into California and Florida.”

He continues even stronger:

“The EU must focus on the essentials and the leave the labelling of Hessian apple wine to the Hessians.”

Hear hear.

He also proposes a move towards a free trade area in the Mediterranean - which we also have argued for:

“In the 21st century the population of North Africa will exceed 300 million people who need infrastructure, education, hospitals and sustainable agriculture...Why do not we create an economic area in the Mediterranean? Instead, we'd rather bicker about what fertilizer for farmers to deploy.”

But from there he starts to go downhill, and fast and steep at that:

“The euro is one of the greatest icons [of an integrated Europe] which expresses the economic strength of the still richest continent through a common currency… .”

Right...

Continuing downhill he argues that thr EU budget ought to be spared the kind of austerity that member states are having to implement, saying:

“when it comes to growth, the [structural and cohesion funds] are the most successful project of the EU. There are certainly some highways built incorrectly, but the cohesion policy has recently led to enormous economic growth in Eastern Europe and before that in the South.”

It seems that Schulz must have mislaid his copy of our recent report on the effectiveness (or lack thereof) of the structural funds. He's right that the funds should be focussed on the EU's new memebr states, but totally wrong that the funds have categorically have had a positive impact in Europe's south - there's no conclusive evidence for that.

Schulz also includes a tongue in cheek defence of Chancellor Angela Merkel - showing that despite presiding over a rather dull institution, he can afford a joke or two:

“I must acknowledge [Merkel’s crisis management] without envy, it's a great achievement. It's like in football. The game lasts ninety minutes and the end Germany always wins, as they say in England, even if this is not true. In the European Council, it is usually 26 against one. In the end, however everyone agrees with Mrs. Merkel.”

Polarised Poles unite in fear of Franco-German run EU

Yesterday witnessed a heated and fractious debate (a former Foreign Minister walked out in protest) in the Polish Sejm concerning the conclusion of the Polish Presidency of the EU and last week’s EU summit. Polish PM Donald Tusk kicked off the proceedings by stating that there is still a long way before the future of the euro, and consequently the EU, will be any clearer:

"I would be a happy person if I know the answer to the following question: What is the future of the European Union?"

Tusk added:

“The attempted steps taken in Europe reveal not only the dysfunctionality of certain institutions and European principles, but how strong the disintegrative tendencies in Europe are…Poland can not become a part of the second or third ring… The biggest risk for Poland is the silent division of Europe…that the eurozone fixes itself and turns inward forgetting about the 27, soon to be 28."

Tusk also emphasised that the decision about the new shape of the Union must not be a result forced through by three European capitals (he said it was not necessary to specify the capitals concerned, because everyone knew which ones he had in mind), but a decision made by the community as a whole.

The Law and Justice and Solidarity Poland parties accused the government, and in particular Foreign Minister Radoslaw Sikorski (following his controversial speech calling on Germany to play a more active role in Europe) of betraying Polish interests and sovereignty. They were also very critical about the possibility of Poland offering financial assistance via the IMF to countries with a higher standard of living than that enjoyed by Poland.

The clash of approaches was perfectly captured by the fact that Law and Justice MPs wore badges with the Polish flag, while MPs from the pro-integrationist Palikot’s Movement wore badges with the EU flag (pictured). Janusz Palikot, the flamboyant leader of Palikot’s Movement (yes he really did name his party after himself) well known in Poland for his use of props to illustrate his political arguments, want as far as to present Sikorski with the pen used by late President Kaczynski to sign the Lisbon Treaty in order to keep him on the path towards European Integration.

Looking at the bigger picture, it is clear that, on both sides of the debate, Poland sees the main challenge as one of avoiding Franco-German dominance of the EU, which circumvents the EU institutions and crowds out smaller member states. Polish daily Rzeczpospolita featured an analysis of the Polish Presidency which concluded it had been a “façade”, given that:

“as a result of the crisis, not only was the EU’s centre of leadership not in the country holding the Presidency, but not even in the EU Council, the European Commission or the European Parliament, but in two capitals – Berlin and Paris.”

The unease about the future direction of Europe is spreading fast.

Is a new "Ioannina" compromise the answer?

Today's Telegraph quotes EU diplomatic sources saying that Britain is fighting France and Germany in order to resurrect the "Ioannina compromise." This would not only have the effect of resurrecting an obscure piece of EU legal history, but it could also be an encouraging sign that the UK government is starting to think creatively about how to protect itself against potentially shifting power dynamics in the EU, should a more integrated eurozone bloc start to vote as a caucus.

So what could a new EU voting"compromise" look like?

By way of background - the Ioannina compromise was an European Council decision of 29 March 1994 concerning qualified majority voting (QMV) in what was soon to be an enlarged 15-member Community. The compromise laid down was that if states representing between 23 votes (the old blocking minority threshold) and 26 votes (the new threshold) expressed their intention of opposing the taking of a decision by the Council by QMV, the Council would do 'everything within its power' to reach a satisfactory solution that could be adopted by at least 68 votes out of 87. The compromise disappeared when Tony Blair agreed to the Nice treaty.

In our recent report we explained that in 2014 (or possibly 2017) new voting rules buried within the Lisbon Treaty will come into force, which will result a permanent majority for the eurozone block on the Council, meaning they could outvote non-members even if they all combined in order to block the law.

Clearly, this is a pretty big gamble for non-eurozone countries to take. So could Cameron seek to to resurrect the old Ioannina compromise?

It's not a bad idea but does come with two drawbacks:

Problem 1: Under the current rules (as shown below) the eurozone are already close to having a majority. These rules expire in 2014/17 when the new Lisbon Treaty rules come in giving the eurozone a permenant majority. If the concession the UK is potentially requesting is to allow the current rules to continue permenantly (even after 2017) if requested - it would not make it any easier than at present to form a blocking minority and so would not decisivly deal with the problem of eurozone caucusing.

Problem 2: But the Ioannina compromise was never legally binding (it was a political declaration) meaning that there is no guarantee that it'll actually be invoked (also making the threat of it less effective). Given the unhappy EU history of political declarations, this may not be a watertight solution - far from it. For the UK this problem is compounded by the fact that of the 10 states not in the euro most are legally obliged or even want to join. So the compromise will need to be set at a higher level, so that those states that are not obliged to join (Denmark and the UK) can have some sort of way to block proposals that stem from caucusing.

The idea of a new voting safeguard is certainly worth exploring but the UK government must set the bar higher than a mere political declaration. Spending a lot of political capital on something that won't be effective would be the worst of both worlds.

Bolkestein vs. Verhofstadt

Frits Bolkestein, the former Commissioner for the Internal Market and former leader of the Dutch liberals, isn't shying away from frank talk. Earlier this year he penned a dynamite article together with Roman Herzog, former German President and Luder Gerken, Director of German think-tank CEP, warning that the EU was at the risk of "completely breaking down" if it did not win back the support of its citizens.

Bolkestein has now taken aim at arch-federalist Guy Verhofstadt, the Belgian leader of the liberal group in the European Parliament. In name, the two veterans are fellow "liberals", on policy, however (at least on EU policy), they're poles apart.

In an interview with Belgian magazine Knack on Friday (not online), Bolkestein takes the gloves off, calling Verhofstadt’s proposals for EU taxes and EU bonds “ridiculous”, saying “if they do that, then we don’t know where it will end”.

He goes on to say

Verhofstadt should shut up. I have told Hans Van Baalen, who leads the Dutch liberals in the EP, that he needs to resist [Verhofstadt’s proposals]. They should bring that up in the group, they should not let that happen. They need to tell Verhofstadt: you speak in the name of who? Then he will have to acknowledge that he is only speaking for himself.

On Greece and the Euro, Bolkestein says:

How is it possible that Greece has become member of the Eurozone? Who has been sleeping? I have done my best to keep the Italians out. I have pressed [former Dutch Finance Minister] Gerrit Zalm, although that didn’t take much. In Italy he was known as Il Duro, as Il Perfido. Ah, it hasn’t gone the right way.

Interestingly, he said that one of his three main achievements in politics was that “I have given a different turn to opinions on the EU. I was actually the first eurosceptic politician.”

Tough talk. But he's raising the ever so pertinent question - who are the EU federalists (of which there are many in the European Parliament) actually talking for?

We're eagerly awaiting round 2.

Silent revolution

This afternoon Commission President Barroso, speaking at the European University Institute in Florence, sent a reminder to the UK’s Coalition Government and others why the game over the EU’s economic government is far from over. According to Italian media, he said:

The European Council’s conclusions have envisaged small steps, which sometimes are the most important. It is like a silent revolution – stronger economic governance made through small steps.

Silent revolution through small steps? That sounds worryingly familiar.

Eurozone vanity

Latest word is that the eurozone group is holding an emergency video conference this afternoon to discuss Greece's economic situation and possible ways to go ahead with a much anticipated (read: much feared) bailout of the country. This morning's press reports noted that eurozone countries had decided "in principle" to provide financial assistance to Athens, with German Finance Minister Wolfgang Schäuble telling officials in Berlin that there “was no alternative” to a rescue plan.

Ahead of tomorrow's summit of EU leaders, we have published a new briefing looking at 10 different ways in which Greece can be bailed out. At the moment, some sort of eurozone credit facility or an IMF-style 'euro fund' seem to be the frontrunners. However, it's unclear whether these two options are actually legal under the EU Treaties 'no bailout' and 'no credit facility' clauses. (in fact, of the 10 possible bailout scenarios we looked at, only one - early payments of structural funds - is unambiguously legal under the EU treaties).

Obviously lots of issues are on the table at the moment, but at least three consequences of a bailout are worth hammering home.

First, as has been widely documented and argued, watering down the EU's 'no bailout' clause and the 'no credit facility' clause creates moral hazard of unprecedented proportions, and has previously been fiercely resisted by a whole range of EU politicans and central bankers - particularly in Germany. Former Chief Economist at the ECB, Otmar Issing, has said that this would spell an end to "the political stability of the monetary union". He said that, in order for financial discipline to prevail, every member state must be responsible for its own debt and deficits: "without this there would be no end", he said.

Secondly, short term measures will not address the structural lack of competitiveness that affects not only Greece, but also countries such as Spain and Portugal. In order for the differences in competiveness within the eurozone to be addressed, a one-off bailout would need to be followed by continuous financial transfers from the poorer bloc to the richer bloc within the eurozone. Indeed, there would be no end.

Thirdly, there's no public mandate or support for establishing a formal system of fiscal transfers - polling by Open Europe shows that 70% of Germans are against using taxpayers to bail out another member state. This means that eurozone countries are stuck in a very tricky dilemma: either accept continual strains on the eurozone, stemming from the weakness of Greece and others, or pursue a policy of closer economic integration, for which there's no public support.

Some key people in Brussels now seem to be set on the latter alternative. Commission President Jose Manuel Barroso has already said he plans to interfere more in national economic policies, stating that “economic policy isn’t a national, but a European matter. No modern economy is an island. When a member state doesn’t make reforms, others suffer because of that.”

Likewise, EU President Herman Van Rompuy has said, “Whether it is called coordination of policies or economic government” only the European nations working together are “capable of delivering and sustaining a common European strategy for more growth and more jobs…Recent developments in the euro area highlight the urgent need to strengthen our economic governance”.

Former European Commission President Romano Prodi once said that a future crisis could be exploited to radically speed up the pace of economic union: "The euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible now. But some day there will be a crisis and new instruments will be created."

It seems Barroso and Van Rompuy are intent on proving him right.

For the immediate short term purpose of helping out Greece, as we argue in our briefing, the simplest and most sensible option would be to go to the IMF. The Swedes and the UK reportedly both want it but it seems as though the eurozone standard-bearer, Germany, is too proud to contemplate this route.

So integrationist politicians now see in the financial crisis and the introduction of the Lisbon Treaty a chance to take a quantum leap towards a common economic government in the EU and it seems that even Germany - that so far has opposed any movement towards EU fiscal federalism - may be willing to move out of the way.

the economic protectorate

So it has happened that the European Commission - aided by new powers in the Lisbon Treaty (article 121) - has effectively taken control over the Greek economy, demanding pay freezes, tax hikes and reforms of labour markets and the country's healthcare sector in a bid to get Greece's disastrous public finances in order, and avoid various nasty knock-on effects on the rest of the eurozone.

Ambrose Evans-Pritchard noted today in the Telegraph the move marks a "a step-change in the level of EU intrusion." In fact, it marks an extraordinary step-change and brings both the eurozone and the EU into new, unchartered waters. It was always the risk, of course, that keeping the eurozone together would require continuous moves towards a common economic and political union, as the huge structural differences between eurozone economies require central oversight and corrective mechanisms. And the Commission wasted no time in putting the Lisbon Treaty to good use, by invoking the provisions on 'economic policy' - turning Greece into what the country's sceptical left labels an 'economic protectorate'.

So European voters and taxpayers are suddenly faced with two new realities in the European project: they may have to pay for the mistakes of a government in a foreign country; and they may be forced to put up with the EU dictating their country's economic policies when the going gets tough. We're sure that very few of them feel that's what their governments once signed up to.

German taxpayers and the Greek public aside, perhaps the most revealing comment on the political difficulties involved in the EU pursuing its new tools comes from Denmark, which is currently contemplating whether to join the eurozone. The FOA, a Danish trade union which represents most of the country’s public sector workers, on Monday blasted the Commission’s demands on Greece, warning that such intrusions could force the union to recommend a No vote in a future Danish referendum on euro membership (the union has previously stayed neutral on the issue). “That the EU intervenes in setting [national] wages is completely unacceptable”, Dennis Kristensen, head of the FOA, said.

Getting the Greek public on board is hard enough, but getting European voters in general to accept this quantum leap of EU integration is going to be very difficult indeed.

It concerns the EU’s very existence

An issue facing those who want to constructively question the path of EU integration - the kind of democratic opposition that is desperately lacking from EU politics, most notably in the European Parliament - is that EU enthusiasts automatically portray any criticism as a parochial attack on the entire EU project rather than rationally facing up to the EU's failings (which, ironically, is a hugely counterproductive tactic as seen in most polls).

But it is a lot harder for people to simply put their fingers in their ears when a former German President and a former Dutch EU Commissioner say that the EU is getting things wrong. Last Friday, Roman Herzog and Frits Bolkestein, accompanied by the Director of the German based Centre of European Policy think tank Luder Gerken, made their case in the German press for why the EU needs to change or risk "complete collapse".

Herzog made a similar splash in 2008 when he argued that something had to be done to "Stop the European Court of Justice", calling the EU a "mammoth institution" - an article which recieved widespread attention from all sides of the debate (and served to heat up the debate in Germany).

The latest article, entitled "The EU is harming the European ideal", takes a broader look at the EU and argues that the greatest challenge it faces is existential. And the three luminaries aren't pulling any punches:

"It concerns the EU’s very existence: the EU must win back support for its existence, which it has lost from many citizens and even from many parts of the economy. Without this endorsement there is a risk of permanent damage to the people’s acceptance of the fundamental principle of European integration with immeasurable consequences for the EU, including the possibility of it completely breaking down."

They argue that the loss of public support for the EU is a direct result of over-regulation and the one-size-fits-all nature of EU policies:

"The loss of this endorsement stems from an almost all encompassing impression that Brussels legislates regardless of the people’s wishes and of long established traditions and cultures, constantly introduces rules and regulates things that could be regulated at least as well at the regional or national level."

They note that the EU institutions cannot be relied upon to enforce the subsidiarity principle because they are only interested in extending their powers:

"The European Court of Justice will do nothing to enforce the principle. The Court also has an interest in a constant expansion of its areas of competence. The same is true for the European Parliament."

It is therefore up to national governments, parliaments, the media and the public to be the "guardians" of subsidiarity:

"National governments must finally develop a culture of categorically saying No to the horse trading and alliance brokering in the Council of Ministers, when the suggested legislation contravenes the principle of subsidiarity or goes beyond the EU’s areas of competence."

These are not exactly observations coming from the fringes of society. Concern over the EU's democratic deficit does not mean that one cannot at the same time recognise the need for the EU, in one form or another. Herzog, Bolkestein and Gerken cannot be accused of being "anti-European" - the article demonstrates genuine concern for the EU's continued existence - and it would be dangerous to ignore them.

They are voicing the concern of a huge number of European citizens who feel that EU integration has continually been allowed to breach acceptable limits and, as Herzog et al argue:

"European integration is only feasible if the public is also involved. We are a long way away from this, perhaps further away than ever. And if European citizens ever reject the EU in its entirety, we risk creating a mountain of political rubble of historic proportions."

Exactly. When will the EU establishment start to open its eyes to the problems that citizens all across Europe can see?