Belgium's general election: Will we see another 541 days without a government?

This Sunday, on the same day as the European Parliament elections, Belgium will hold a general election, electing both new federal and regional assemblies to govern 11 million people. The key question is how strong the Flemish nationalist N-VA, which is already the biggest political party, will perform this time around.

Background

The N-VA, a "eurorealist"  formation, wants to reform the country, a mini-EU/Eurozone composed of Flemish and Francophones, into a confederation (although it favours splitting it up in the very long term). It became the biggest party in 2010, but was ultimately excluded from a federal government because it appeared impossible to wrap up a coalition deal with Francophone parties, resulting in 541 days without a federal government.

A coalition of six parties led by Francophone socialist Elio Di Rupo eventually emerged. One big issue was that the coalition did not enjoy support among the majority of Flemish MPs in the federal Parliament. European Council President Herman Van Rompuy, who has been Belgian PM himself, once warned that if such a government would ever be formed, this would be “dangerous for the existence of the state”. His party, the Flemish Christian-Democrats, have now pledged not to enter such a coalition again.  This Sunday, it will become clear how voters have judged this.  For more background on the complexities, we refer you to this comment piece by our resident Belgian expert. 

Post-election scenarios

Scenario 1: Business as usual (most likely)

Opinion polls are notoriously unreliable in Belgium, but suggest that, in the Flemish districts, the N-VA will improve on their 2010 showing, while the three traditional parties will remain broadly at the same level. If they again fail to command a majority of Flemish seats but, nevertheless, prefer to avoid complicated talks with the N-VA, the Flemish Christian-Democrats will need to break their promise, something which they may do if one of them becomes PM and the incumbent Elio Di Rupo is offered a job in the European Commission, for example. Di Rupo's Socialist Party is expected to suffer considerable losses, but would easily remain the biggest party in the Francophone part of the country.

Scenario 2: A federal government which includes the N-VA

Bart De Wever, the N-VA's leader, has himself indicated he's willing to enter a federal government and not make new demands to decentralise powers, if centre-right policies are implemented. The N-VA hopes this pressure may drive the Francophone socialists to return to their historic demands for more decentralisation (in his maiden speech to the Belgian Parliament in 1988, PM Di Rupo himself proclaimed that "there are no Belgians", while demanding "a confederal Belgium").

Such a federal government without Francophone socialists (who have been in power since 1988) but with Francophone liberals and Christian-Democrats is an unlikely scenario, also because this time around it would probably not command a majority of the Francophone seats in Parliament. However, if the N-VA does better than expected, this scenario could materialise.

Scenario 3: Prolonged stalemate 

Last but not least, there is the scenario of another one and a half years of stalemate, prolonged to an indefinite period without a federal government, which could result in negotiations on an eventual divorce. We rate this as very unlikely.

As you can see, it's complicated.

MEPs endorse EU renegotiation (as long as it is on their terms)

This afternoon EU Council President Herman Van Rompuy appeared in front of MEPs to give his account of the deal struck by national leaders on the EU's next long-term budget. MEPs, many of whom have strongly resisted any budgetary discipline at the EU level were far from happy. Below are some reactions from the speakers on behalf of the four largest groups in the parliament.

Joseph Daul - European People's Party

#EPP Group Chairman Joseph #Daul tells Presidents #Barroso & van #Rompuy that this #EUBudget is not acceptable. @eppgroup @ep_budgets
— Siegfried Muresan (@SMuresan) February 18, 2013

Treaty law is 'supreme' says #epp Daul. #MFF deal lacks 'respect' for MEPs, 'not my vision,' he laments zzzz #EUbudget
— Bruno Waterfield (@BrunoBrussels) February 18, 2013

Hannes Swoboda - Socialists and Democrats

Socialist & Democrats Group Chairman Hannes Swoboda: This EU budget deal is unacceptable there will be no majority for it in this chamber
— Open Europe (@OpenEurope) February 18, 2013

Guy Verhofstadt - Alliance of Liberals and Democrats

Verhofstadt: This MFF cannot be accepted by Parliament, it must be renegotiated
— Open Europe (@OpenEurope) February 18, 2013

Isabelle Durant - Greens

MEP Isabelled Durant (Greens, Belgium) wants annual budgets for 2013, 14, and after EU election new budget to be negotiated #mff #euco
— Georgi Gotev (@GeorgiGotev) February 18, 2013

So a pretty united front - so much for pluralism and diversity in the EP (although Martin Callanan of the ECR - the fifth largest group - did broadly welcome the deal). We can only imagine what MEPs from Angela Merkel's CDU/CSU, Fredrik Reinfeld's Moderaterna, Helle Thorning-Schmidt's Social Democrats (and even Ed Miliband's Labour party which backed a cut in the HoC vote) or Mark Rutte's VVD must have made of their group leaders' speeches.

The full-throated desire of many MEPs to renegotiate what they see as a bad deal is also noteworthy as they tend to be the same people who can be counted upon to strike down any talk of national parliaments and/or governments from trying to get a better deal at the EU level as being not only impossible to achieve but also 'anti-European' by its very nature.

Exclusive: How is the new EU budget shaping up - latest draft!

EU leaders look to be closing in on a deal on the 2014-2020 budget (MFF). We will be updating this blog throughout the day.

UPDATE - 10:58am: Talks set to resume at 12pm GMT. Van Rompuy will table another compromise proposal. It seems Romania, Bulgaria, the Czech Rep and Latvia were unhappy with the proposal circulated this morning, which we have analysed below. Austria's rebate has also been scrapped, which could be another stumbling block.

10:00am: We have obtained the latest draft that is being circulated, and it appears there is tentative agreement on the headline figures, and it's looks very close to what we predicted.

The headline figures are:

€999.56 including off-budget items
€959.96 in commitments
The figure for payments is less clear but the figure €908bn has been widely cited.

As we can see from the graph, this would represent a real terms cut compared to the current 2007-13 MFF - the first time that a cut would have been achieved. So, David Cameron can plausibly claim to have lived up to is promise of coming away "with at best a cut, at worst a freeze."

It's worth noting that the gap between commitments and payments has increased (see here for more details on this). As we have noted before this could potentially mean payments increase in 2020-2026 budget period to cover the amount of money already committed. The scope to potentially increase payments through QMV during the budget period could also be problematic although it would be a unprecedented move. 

On the UK rebate and other 'corrections', the current draft says:

"The existing correction mechanism for the United Kingdom will continue to apply."

So, Cameron remains on solid ground.

The current draft also includes lump sum rebates for the Netherlands, Sweden and a new rebate demanded by Denmark. Germany, the Netherlands and Sweden would benefit from caps to their VAT-based contributions. It appears Austria's rebate would be scrapped. This could still flare up as an issue with Austrian Chancellor Werner Faymann previously stressing his country would not be the only one to give up its rebate.

Policy heading breakdown

This is how the current draft would distribute the cash among the EU's policy areas, compared with the current budget and the November Van Rompuy proposal:

As we can see in the graph, the latest proposal cuts spending on "competitiveness and growth" (Europe 2020) by €27bn - not exactly a positive, as this includes R&D and energy infrastructure, foe example. At the same time spending on the CAP has increased by €9bn while spending on regional and cohesion funds has gone up by €15bn, both compared to the proposal in November (presumably split between new and old member states). As we have said before, this locks in the worst parts of the EU budget in terms of outdated and potentially growth destroying spending.

The UK’s net contribution could still increase 

Despite, securing a real terms cut to the EU budget, the UK’s net contribution (what it pays in to the EU after the cash it gets back and rebate are taken into account) would still go up under this proposal.

This is because the share of the EU budget going to the new EU member states – the ones that have joined the EU since 2004 – will increase. Since this share is not covered by the UK rebate, Britain gets no cash back for its share of the money spent there. This could prove politically sticky for the UK government when explaining the figures to MPs and the opposition – though it’s likely to heap the blame on Tony Blair for giving up part of the rebate in 2005. However, at the same time, more money (though not nearly enough) will be invested in poorer member states, where it can have the most impact, rather than being recycled unnecessarily between rich member states, at a huge administrative and opportunity cost.

It's also worth noting that, due to the payment ceiling being much lower than expected and there being a large gap compared to commitments, it is possible that actual payouts (especially in later years of the budget) go above the payment ceilings. This again could prove problematic for the UK to communicate.

Will the UK's gross contribution go up? 

The UK gross contribution should be falling in real terms since the budget is falling in real terms. However, due to the fact that actual payments may top the payments ceiling (as we explain above), it is hypothetically possible that the UK's actual gross contribution could occasionally top the ones seen under this budget framework - this seems unlikely but is uncertain.

As we explained here, payments 'trail' commitments. In the context of an ever-increasing budget that didn't present a practical problem, because extra funds would always be pledged to meet previous commitments. Now we have a situation where payments are falling well below the level of commitments that the EU is able to make under the current budget, potentially creating a deficit. As the Commission is always at pains to point out, these bills need to be paid. The obvious answer is to increase payments, which would impact on the UK's gross contribution. How much, remains an uncertain question.

Own resources/revenue

One interesting thing to note is that a commitment to continue working on a direct stream of VAT revenue to the budget, to replace the existing VAT contributions to the budget. There is also a vague commitment to examine using the enhanced cooperation FTT as revenue for the EU budget in the future. However, this would not affect non-participating member states or the UK rebate.

Some potential obstacles to a deal remain, but this seems to be a positive starting point for a deal. The UK can plausibly say it has received a decent deal if something close to this proposal comes into force. Unfortunately, the budget as a whole will remain poorly targeted and outdated.

Could the EU budget be cut for the first time?

The rumours are flying in thick and fast from Brussels regarding the latest EU budget numbers and the likelihood of a deal. The range estimates we laid out in our briefing still stand up, with several suggestions that Herman Van Rompuy's latest proposal will be for €959bn in commitments and as low as €913bn in payments. In terms of figures this would represent a significant victory for the UK and other states that want to see budgetary restraint. Below is how such a deal would compare to Van Rompuy's November proposal, and more importantly, the current long-term EU budget (MFF).

Of course there are still plenty of twists and turns to come in the negotiations, not least how the headline figures above are distributed across the different headings such as the CAP, structural funds, administration etc. Follow us on twitter for the latest developments.

The EU budget veto threat festival kicks off again

Remember our EU budget 'veto team'? Well, the next European Council summit - entirely devoted to negotiations over the 2014-2020 EU budget - is only one week away, and the sequence of veto threats may have just begun all over again.

Guess who fired the starting gun (clue: not David Cameron)? It was Italy's outgoing Prime Minister Mario Monti. He told a conference in Brussels yesterday,

“There would be no coherence between what everyone is saying about the need for growth and the adoption of an inadequate [long-term EU] budget…The orgy of cuts that certain countries want to apply is inconsistent. Therefore, I’m not sure that it would be irresponsible for a country to disagree with a budget proposal which is inadequate.” 

That is, a veto threat, Monti-style. This has just started, so keep following us on Twitter @OpenEurope for real-time updates.

The Four Presidents Report?

Or was it the Van Rompuy report...looking at the report on moving "Towards a genuine economic and monetary union" released earlier today its hard to judge how closely involved the other Presidents were, notably ECB President Mario Draghi and Commission President Jose Manuel Barroso.

So to recap, this was meant to be a report reflecting the views of the EU's four Presidents (in addition to the three already mentioned, also Jean-Claude Juncker, the outgoing head of the Eurogroup).

First, we've spotted a couple of areas of confusion between what European Council President Herman van Rompuy and Draghi have been saying.

The report suggests that,

"The ECB has confirmed that it will establish organisational arrangements guaranteeing a clear separation of its supervisory functions from monetary policy." 

However in his monthly press conference today, when pushed on the ECB's view on the single supervisor Draghi stressed that the ECB is a "passive actor" in all of this and was not involved in designing the legal structure of the new supervisor. Clearly these two views are directly at odds, which fails to fill us with confidence that the new tasks of the ECB will be combined with its current ones in a legally sound and practical way. A concern which has previously been voiced by ourselves and many others.

Draghi was also at pains to stress that the link between sovereigns and banks can only be broken when the banking union is complete, i.e. with a common resolution mechanism. The report argues that the set up of the single supervisory mechanism (SSM) will play an important role in "contributing to breaking the link between sovereigns and banks". Not necessarily directly at odds, but it again peaks concerns that the Council plans for banking union over-estimate the impact of the SSM.

Additionally, as the FT's Brussels Blog notes, Van Rompuy also disagrees with European Commission President Jose Manuel Barroso on the issue of debt mutualisation, with the latter favouring eurobonds.

We at least can't blame Draghi for struggling to find the time to help write the report while also running a giant institution. But if the supposed authors can't agree on the logistics it doesn't bode well for next weeks EU summit...

Open Europe publishes (and analyses) leaked draft of Van Rompuy's new EU budget proposal

We’ve got our hands on a leaked copy of the latest HermanVan Rompuy (HvR) proposal for the EU budget (see here for the full doc). The headline spending figure remains broadly unchanged in the new proposal, standing at €1,014bn (a €4bn increase), but more cash is spent on farm subsidies and structural funds, in a move designed to appease France, Poland, Italy and Spain.

(The figures here includes off budget items, if they are discounted the second proposal is actuall a decrease, from €973bn to €972bn. This is mostly due to items which weren't off budget in the original proposal, being off budget in the second version).

No figure is given for payments appropriations – the figure that the UK government is targeting – but given that this figure has widely been cited to be €940bn, it’s likely that it’ll have to come down more if acceptable to the UK (with the government's initial proposal at €886bn).

Also, just like with the previous draft, the latest HvR proposal foresees cuts to the UK rebate – which is a non-starter for Britain.  As a refresher (from our recent flash analysis):

“The proposal also includes an adjustment in the way in which the UK rebate is calculated. This could result in the UK rebate falling by as much as 11% or €3.5bn across the next budget period, solely due to this adjustment.

The plan also suggests that ‘corrections’ such as the UK rebate will be “fully financed by all member states”. It’s not entirely clear what this means, but it does suggest that the UK could actually be responsible for funding part of its own rebate. If this were the case then the rebate could be reduced by a further €3.316bn, cutting the rebate by a further 11.5%, and 21% (€6.8bn) from its original amount.”

The increased spending on CAP and Cohesion moves further away from the spending split which many in the UK would like to see (more growth focused) while although the headline figure has not increased it is still probably slightly too high. See table below for the full break down (click to enlarge):

So, despite talk of progress last night, it still seems that, from a UK perspective (but also likely a Swedish, Dutch and German one) there are some significant divisions.
 

The EU budget 'veto count': and then there were ten...

Here's an update of Open Europe's 'veto count': ten EU member states (UK, Denmark, Sweden, Italy, France, Portugal, Latvia, The Netherlands, Austria and Romania) have now explicitly threatened to veto the 2014-2020 EU budget. Several other countries are also unhappy with all or part of Herman Van Rompuy's compromise proposal (see our latest flash analysis for further details).

This is what changed since we made our first 'veto count':

Italy and Portugal have both used the 'V' word for the first time. Interestingly, Italy has also suggested that it could seek a UK-style rebate to avoid its net contribution to the EU budget skyrocketing.

Latvia has also threatened to wield its veto. Latvian Prime Minister Valdis Dombrovskis said his country is not happy with the cuts to agricultural subsidies and cohesion policy proposed by Van Rompuy.

In Romania, incidentally, it looks as if EU budget talks have triggered another row between President Traian Basescu and Prime Minister Victor Ponta. The latter said he was ready to veto the budget, but President Basescu said this morning that "Romania's interest is to negotiate, not to brandish the threat of using its veto right." Given that Ponta is the one who usually attends EU summits, we consider Romania to be in the veto camp.

So over one-third of EU member states has therefore threatened to veto the next long-term EU budget so far. EU leaders could be looking at a long weekend...

The key to understanding the eurozone crisis: sequencing

An EU leader saying that he or she is in favour of “more Europe” in response to the Eurozone crisis means absolutely nothing. Ask Germans whether they’re in favour of more Europe, meaning codification of Bundesbank-style fiscal discipline at the EU level, using the EU institutions to enforce it, and naturally they will nod approvingly. Ask them if they want joint EU borrowing or backstops for banks, and support for “more Europe” evaporates. Shock horror, in countries more prone to tax and spend – and here we include France – the trend is pretty much reversed.

The key to understanding the next step in the Eurozone crisis therefore comes down to one thing: sequencing. The Germans want surveillance before solidarity (code word for more cash on the table). The French the opposite. Which is why it’s not surprising that Angela Merkel and Hollande are clashing over the former’s idea to stick an EU veto on national budgets (her finance minister has proposed a fiscal tsar, sitting in the EU commission, to do the job).  Merkel says she wants “genuine powers to clamp down on national budgets…that we stick up for this won’t change”. Translation: if you want our credit rating, you need to accept our Ordnungspolitik. For his part, Hollande stresses intégration solidaire - ‘integration with solidarity’. Translation: cash first, budget vetoes later (sort of).

We’ve made this point several times before, but it keeps on reasserting itself. The see-you-in-court fiscal controls that the Germans need as political cover (and as a safeguard against moral hazard) to press ahead with transfers are incredibly difficult to achieve politically, as they effectively mean redefining national democracy in debtor states (key decisions on spending and taxation would no longer ultimately be subject to decisions in national parliaments).

The question is what the absolute minimum level of fiscal control the Germans can accept to press ahead with the next step. This is why Herman Van Rompuy's proposal for a contract-style agreement between an individual country and an EU institution, resting on a paid-in insurance scheme (of sorts), could be an interesting to watch. If sold as "temporary" (which of course it may not be at all) and linked to reforms, that might be easier for Germany to swallow.

But at the moment, we suspect Angela Merkel herself doesn’t know the answer to that question…

A new eurozone parliament?

This morning, Handelsblatt is reporting that EU Council President Herman Van Rompuy, Commission President José Manuel Barroso, Eurogroup chief Jean-Claude Juncker, and ECB President Mario Draghi's plans to redesign the architecture of the economic and monetary union include the prospect of a new 'eurozone parliament'.

The details are understandably vague but, according the German daily's report, the new parliament, in which both MEPs and national parliamentarians would sit, would have powers over eurozone members’ fiscal and economic policy. Whether the EU will need yet another building for this is yet to be addressed...

Nevertheless, the proposal, if it ever sees the light of day, will be hugely controversial with both euro and non-euro members and would of course require Treaty change.

In addition, Van Rompuy and Barroso need reminding that they represent the 27 member EU and not simply the eurozone and that any brief to restructure the eurozone needs to square this with the EU as a whole and the requirements of the single market. Additionally, as we have argued, the UK must ensure that any grand eurozone plans such as these are a quid pro quo for establishing a space in Europe for those countries not intent on joining the single currency, and also for those that may choose to leave.

This might then provide a new form of membership that the UK could live with in the long term.

Merkel comes out swinging against debt pooling

Debt pooling in practice? (h/t Phil's Stock World)

In recent weeks Chancellor Merkel has come under ever-increasing pressure to “do what is necessary” and take the plunge on debt pooling within the eurozone. This pressure has been applied from a wide of actors including the other big eurozone countries (France, Italy and Spain), the EU institutions (Commission President Barroso, Council President van Rompuy, Eurogroup chief Juncker and ECB head Draghi), the IMF and last but not least UK Prime Minister David Cameron and US President Barack Obama.

However, Merkel - who in her time has crossed a fair few ‘red lines’ - has come out swinging ahead of Thursday’s summit of EU leaders, with Handelsblatt reporting that she is has lashed out at discussions ahead of the for focusing "far too much on all kinds of common liability [including] eurobonds, eurobills and a European common deposit guarantee fund with common liability". She described the proposals as "economically false and counterproductive" and asked Van Rompuy, to rework the report he published ahead of the summit to shift the focus from debt pooling to budget discipline.

According to Reuters, at a meeting today with representatives from the FDP, her junior coalition partner, she went even further, claiming that: 

“Europe will not have shared total debt liability as long as I live” 

If accurate, this is strong stuff and - though intended for a very domestic audience - certainly a departure from the measured and stoic tone Merkel usually adopts. Likewise Merkel’s reaction to suggestions that Germans would be getting a referendum on a new constitution allowing for greater EU integration in the immediate future – after Finance Minister Schäuble had suggested this in an interview with Der Spiegel –suggest that she does not anticipate full debt pooling as an immediate possibility, with FT Deutschland citing her spokesman as saying “clearly we are not there yet.”

However, to split some pretty big hairs, the qualification of “shared total liability” hints that Merkel is not ruling out all forms of eurobonds during her lifetime, such as debt redemption fund as favoured by the SPD and Green opposition. Likewise she could offer other concessions, something hinted at by the news that Germany could be prepared to drop the provision that ESM loans are senior to other debt, something which has been perceived to have contributed to rising Spanish debt yields on the assumption private creditors would take the biggest hit.

However, nothing will happen on any form of debt pooling before the German elections in the autumn 2013.

And the most interesting part of yesterday's EU summit was...

Very little came out of yesterday's informal EU summit, but here's what EU leaders had for dinner (courtesy of La Stampa's Brussels correspondent Marco Zatterin):

Lobster with asparagus
Fillet of John Dory (aka St Peter's Fish) with vegetables
Chocolate mousse
Coffee

It's interesting because we always wondered what EU leaders actually eat at these summits. In April, a menu from the last meal on the Titanic went for £76,000. Maybe one day the menu from the final summit before the eurozone sank (well we're not there quite yet) will fetch a tidy sum…