Lisbon Treaty's new voting weights kick in - Eurozone gains a majority

It has been coming down the road for some time but what we once called the "Lisbon Treaty's ticking time bomb" has finally gone off. The eurozone will now have a 'Qualified Majority' in the EU Council, meaning that any UK attempts at forming last minute blocking minorities will now be that bit harder.

Eurozone gains a majority in the Council (old rules left, new rules right)

What are the new rules? 
There are two key differences (contained within Article 16 (4) here) whose effect can be seen on the diagram above:

• The first is the lowering of the winning vote threshold to 65% as seen by the red arrow. 
• The second major change is that the voting weights will now be recalculated each year according to a state's population, as calculated by Eurostat, giving greater weight to larger states (the majority of which are in the eurozone).
• There is one important caveat - as a concession to Poland, at any point until 31 March 2017 a state can request a specific vote is done by the old rules (on the left above) even though the new rules are now the norm.

How damaging could this voting change potentially be?
It goes without saying that the eurozone is not a cohesive block, and interests within the EU cut across the eurozone / non eurozone divide. However, that being said, given increased coordination within the eurozone due to the crisis there is a real danger that, where the eurozone has a collective interest, pre-meetings between eurozone states will become the final decision making body in the EU and could allow a eurozone 'caucus' to emerge. If that happened the UK would be placed in an invidious position.

The danger is real but not all is lost, on some issues the UK could still remain within a 'Qualified Majority'. For example, a block of economically liberal net contributors - dubbed the Northern Alliance - of Germany, The UK, The Netherlands, Sweden, Finland and Denmark would still (just) have a blocking minority of 36%. This alliance could use its influence on issues such as the EU Budget (as it has done before) and the US/EU free trade negotiations (and could well play an important role in helping to keep the TTIP alive).

There is also a positive sign that the non-Euro state's legitimate interests are being recognised. Open Europe has long proposed a system of "Double majority Voting" whereby EU laws have to gain a majority of 'Ins' as well as 'Outs', in order to prevent eurozone caucusing. Such a mechanism was recently adopted by the European Banking Authority. Furthermore, there is a wider acceptance of the need to offer those outside the eurozone, such as the UK, safeguards on certain issues - as demonstrated by the recent article by the British and German finance ministers in the FT.

The change in the voting weights and procedure is a subtle but important shift. It certainly opens the door for eurozone caucusing and makes it harder to get over the already high hurdle of forming a blocking minority on issues which do not sit well with certain member states. That said, awareness of the threat has grown along with acceptance that a new balance needs to be found between eurozone ins and outs. This should help mitigate the impact but it will still be important to watch how this develops.

EU budget surcharge: how much support does the UK have around Europe?

David Cameron has taken a very tough position on the EU budget surcharge, claiming that he "won't pay" the £1.7bn the Commission has demanded from the UK by December 1 after concluding the UK had been underpaying into the budget relative to the size of its economy. Other countries have also been hit - so how much support does Cameron have around Europe?

These changes which again are due to recalibration in the way the size of economies are calculated (more on this later) are being tagged on to the annual "adjustment" to the EU budget, which is basically normal procedure.

However, this also means that EU leaders will have to agree to an "amending budget" via a decision taken by Qualified Majority Voting. This also means that the UK might have some chance of "blocking" the change if it can get other allies on board.

Below is the voting balance, if all "net losers" are clubbed together under QMV. 

EU member states' voting weights: 93 votes needed for a blocking minority

However, not all the other member states affected have been as firm as Cameron. The Dutch have appeared to soften their stance with Dutch Finance Minister Jeroen Dijsselbloem stating on Dutch TV yesterday that the Netherlands would pay its €642m surcharge "if the facts and figures are correct". Irish Taoiseach Enda Kenny said his Government will pay the additional bill, adding that “we have always abided by the rules”, while Maltese Prime Minister Joseph Muscat claimed that:

“Malta is not surprised that the EU has asked for this top-up… but we are still seeking clarifications on how the [Commission] calculated this figure”. 

Italian Europe Minister Sandro Gozi said that:

“An in-depth examination is needed… we will see whether it will be really necessary to apply the new method to calculate [national] contributions. In any case, this doesn’t imply an immediate payment.”

So hardly an endorsement of the UK's tough position, but there may be enough support for a delay or some alternative arrangement such as paying the surcharges in installments. Meanwhile, Cameron did at least get some support from an unexpected source... France (which has received a €1bn rebate). The Telegraph cites former French Europe Minister Pierre Lellouche as saying that:

"I think it's ludicrous to actually go and punish the one country that has suffered the reform. The results are showing up now - the unemployment rate has gone down to half what it is in France. The growth rate is four times what it is in France - and we go and punish the British? It's madness". 

Sadly for Cameron, Lellouche won't have a vote.

The battle for a blocking minority: How do you stop a careering Junckernaut?

Not reflective of all EU opinion?

David Cameron is not without allies in his battle to stop Jean-Claude Juncker becoming President of the European Commission but are there enough votes to block him?

Well firstly, although the European parliament has a veto - it is the European Council (the member states) that first need to propose a candidate. David Cameron's best bet to block Juncker is therefore to form a blocking minority under so-called Qualified majority Voting (QMV) in the European Council. Here is how the votes stack up.

Under the current rules each of the 28 EU members is assigned a number of votes (the UK has 29). A smallest blocking minority weighs in at 93 votes. The European Council has its own calculator here allowing you to simulate the votes.

At the moment there are three states certain to attempt to block Juncker. The UK (29 votes), Sweden (10 votes) and Hungary (12 votes). They therefore have only 51 votes - 42 votes short.

There area a number of ways the remaining votes could be made up - the Netherlands (13 votes) is reportedly wary of Juncker, but it is increasingly clear that another big state needs to join the UK. Italy's Matteo Renzi isn't overly keen and France might try to play poker to get its own candidate in a key position, at Juncker's expense. Both Italy and France have 29 votes - one of them would be enough to muster a blocking minority.

Composition of possible blocking minorities under QMV

While there is a small club of avowed Juncker enthusiasts including Poland, Spain, Austria and Ireland, the majority of member states are likely hedging their bets and will go with the prevailing wind. The key point to remember is that the debate over the post of Commission President is part of a wider debate about the make-up of the next Commission so individual member states' positions on Juncker will also be largely determined by their prospects for other key portfolios.

Also, it's very rare that EU leaders actually vote - the prevailing form of decision-making in the European Council (formally and informally) is unanimity. Merkel will want to give the impression of consensus. Having Cameron outvoted - and publicly humiliated - would rank as one of the most dramatic events in the EU in recent memory. 

This remains anyone's game.   

EU approval process for GM requires better balance between innovation and democratic accountability

Yesterday saw a debate between the EU's Europe ministers regarding the approval of Pioneer 1507 - a strain of genetically modified maize which has been developed by US firm DuPont to be pest-resistant. This is a fascinating case which sees the clash between EU legal procedures and scientific evidence on one hand, and public opinion and green lobbying on the other.

Unbelievably, DuPont first applied for EU approval back in 2001, but due to the political resistance to GM in the EU, this application was deliberately kicked into the long grass despite six separate positive opinions from the EU's food quango, the European Food Safety Agency. The wider context is a climate of political hostility which has resulted in Europe falling far behind the rest of the world when it comes to biotechnology - aside from Pioneer 1507 only one other GM crop has been approved in the past 15 years. The result is that biotech companies such as BASF and Monsanto have already left the EU and others could follow suit, with the loss of jobs, investment and trading opportunities.

Following a legal challenge by DuPont, the EU's General Court ruled that the EU was breaching its own rules by not taking a decision. Opinion among member states was divided, with five states including the UK minded to vote in favour, four including Germany minded to abstain and the remaining 19 minded to vote against (a formal vote was not actually held). Despite the large number of member states opposing the approval, no qualified majority was reached either way.

Under the EU's comitology process, when the result is indecisive, the Commission can chose to push ahead with its original proposal, and its looks set to do so (in fact during the debate the Council's legal service indicated it would be legally obliged to).

This is undoubtedly a problematic situation. On one hand, it is good that the Commission is heeding the independent scientific recommendation issued by EFSA. As EU Health Commissioner Tonio Borg argued during the debate, member states should not pick and chose when to follow such advice and when to disregard it. On the other hand it is bad from a democratic perspective when the Commission forces through something opposed by a majority of member states and public opinion - the EU was rightly slammed for proposing to ban jugs of olive oil from restaurant tables following a similarly inconclusive vote.

The case therefore illustrates the need for more flexibility in the EU on issues where member states cannot agree and where public sensitivities need to be taken into account. As UK Europe Minister David Lidington argued during the debate:

"I've no wish to force any country that doesn't want to cultivate this variety of maize to do so... in the longer term the answer surely has to be some agreement under which we agree that those member states that want to have GM crops in cultivation are free to do it while those maintain a ban are free to do so as well."

Greater flexibility for member states to ‘go it alone’ in designing appropriate regulatory frameworks for GM was also one of the recommended in the recent Fresh Start report on the EU's impact on UK Life Sciences. This would be a good compromise - that way it would be down to national governments and parliaments to decide whether to allow cultivation of GM crops - and it would be down to national politicians in favour of this to show the requisite leadership to win over public opinion.

Finally a deal on the EU long-term budget?

On Wednesday, European Parliament President Martin Schulz wrote to Irish Deputy Prime Minister Eamon  Gilmore warning him that the latest compromise on the long term EU budget agreed by EU leaders in February would be rejected. Yesterday morning, however, a deal was struck between the two negotiating teams. So had member states suddenly given in to all MEPs’ demands?

Although not all the details are fully clear, it looks as though MEPs have not secured anything substantial above and beyond the compromise they rejected last week.

Retaining unspent funds and ‘flexibility’ – A decent win for MEPs; member states have agreed that rather than taking back unspent funds as before, these can be rolled over to next year’s budget – although a) in recent years there has not been much of a surplus and b) while unlimited unspent funds can be rolled over at the start of the seven year period, this is capped towards the end. There is also scope for moving some cash around between budgetary headings.

Topping up the 2013 annual budget by €11.2bn – A big win for MEPs who demanded payment in full of the additional €11.2bn requested by the Commission to retroactively top-up the 2013 budget (although this is less down to MEPs themselves and more down to the fact that annual budgets are decided under majority voting). So far €7.3bn has been committed despite the UK voting against. This leaves €3.9bn outstanding and Martin Schulz has already warned that if member states renege on this, after MEPs have approved the budget, they will hold hostage the 70 or so individual pieces of implementing legislation for the EU's long-term budget.

A mid-term review: It looks as though MEPs have secured their demand for a compulsory review mid-way through the seven year budget but crucially it seems all but certain that this will take place under unanimity, not majority voting as MEPs had demanded, a scenario which could potentially have seen the spending limits increased. Intriguingly, this could coincide with a UK referendum should David Cameron still be in Downing Street.

Direct EU budget taxes – A big defeat for MEPs who pushed for a complete overhaul of the “own resources” system which would have seen the introduction of direct EU taxes and the scrapping of the UK and other rebates. This issue is completely left off the Commission’s press release and at a press conference following the agreement, the parliament’s negotiator only mentioned further “debate” on this issue. This was a clear red line for member states.

Extra help for youth unemployment – MEPs have also secured an additional €2.5bn to help combat youth unemployment, although this will be reallocated from existing funds, so it is not new money. Member states will also be able to voluntary commit additional funds in this area if they chose to.

So, despite a huge amount of posturing, overall the threat to veto the agreement proved to be an empty one and many of the MEPs' key demands were unmet - as we predicted at the time. They will now get two votes on the long term budget – a non-binding one next week and then a binding one come September or October. A lot could still happen between now and then, especially if MEPs decide they want another stab at obtaining further concessions or if member states refuse to pay more money into this year’s budget.

Even though the UK would not have been in a bad position had the parliament vetoed the agreement, politically it is better for David Cameron to be able to point to a concrete cut (as has already been proposed for the 2014 budget) as this adds credibility to his argument that he is able to secure a better deal for the UK in Europe.

Did MEPs really vote to reject the EU budget deal?

There is a fair amount of confusion surrounding the vote that took place in the European Parliament earlier today on the long term 2014-2020 EU budget deal (MFF) struck by EU leaders last month. MEPs voted by a large margin (506 vs 161 with 23 abstentions) on a motion to “reject the agreement in its current form”. So what does this mean?

Firstly, it is important to stress that MEPs have not rejected the budget itself. Unlike other areas of EU legislation, the EP cannot amend the MFF, it can only accept or reject the entire thing. So, what we have now is the EP positioning itself to 'negotiate' with government ministers on some of the details before taking a final decision on the package, expected at some point in the summer.

The figures

Although the motion did not state that the Parliament has accepted the headline spending figures negotiated by member states, it appears most MEPs have come to accept, however reluctantly, that these will not be up for re-negotiation, as evidenced by the Freudian slip in this press release. Instead, they will demand concessions on the structure of the deal.

Settling all outstanding claims for the current MFF

EP jargon: “The European Parliament… Strongly opposes the current accumulation and rollover of outstanding payment claims in the EU budget… Is therefore determined to prevent any further shifts of payments from 2013 to the next MFF… emphasises that it will not start negotiations on the MFF until the Commission comes forward with an Amending Budget corresponding to [all unpaid payment claims for 2012].” 

Translation: MEPs may have to accept lower spending ceilings for 2014 – 2020 but they want to make sure that any funding shortfalls in 2012 and 2013 are paid for with new cash and not money from the 2014-2020 budget. It is rumoured that up to €16bn could be requested to cover spending commitments made for 2012. This is set to be a huge flash point with member states.

"Maximum overall flexibility"

EP jargon: “Agreed MFF ceilings for commitment and payment appropriations be used to the fullest extent when establishing the annual EU budgets; [The European Parliament] considers, therefore, that the maximum overall flexibility between and within headings, as well as between financial years, needs to be ensured in the next MFF and decided by qualified majority in the Council… [and supports] recycling of the surplus of the EU budget.”

Translation:  Essentially the EP wants to be able to adjust the areas where money is spent at some point during the seven year MFF. This is a reasonable demand given that a seven year budget clearly struggles to take account of changing economic circumstances - MEPs may get some joy with national ministers on this.

"Recycling the surplus" refers to the EP's desire to roll back any unspent funds back into the budget rather than seeing them returned to member states as they are now. This is likely to face resistance from member states but could be less of an issue than thought since the surplus is expected to be squeezed under the new MFF anyway.

Compulsory mid-term revision under QMV

EP jargon: “The next European Parliament and Commission – that will come into office following the 2014 European elections – should be in a position to reconfirm the Union’s budgetary priorities and carry out a revision of the MFF 2014-2020; [The European Parliament] underlines, therefore, its position in favour of a compulsory and comprehensive revision of the MFF… considers that the revision should be legally binding, enshrined in the MFF Regulation and decided by qualified majority in the Council.”

Translation:  Same as the demands for "flexibility" above. However, the big target is to introduce majority voting to the MFF, which unlike annual budget is always conducted under unanimity. This idea will hit a brick wall when proposed to national governments.

Direct EU taxes

EP jargon: "The European Parliament… Stresses the importance of reaching an agreement on an in-depth reform of the own resources system… [and supports] phasing out all existing rebates and correction mechanisms… insists that revenues from the Financial Transaction Tax should be allocated at least partly to the EU budget as a genuine own resource.” 

Translation:  The EP wants to see the budget part-funded directly by EU taxes (the Commission proposed the FTT and a new system of EU VAT) and also limit the number of rebates that countries get. Demands for EU taxes will be met with the same derision by national ministers as calls for QMV. Even those countries that eventually went down the FTT road aren't planning on handing the revenue to the EU.

Ultimately today’s vote is a case of the EP trying to flex its muscles by standing up to member states. However, today would suggest that Martin Schulz, who marched his fellow MEPs up the top of hill in the immediate aftermath of the summit by threatening to veto the entire budget, will have to march them back down again, albeit with a couple of minor concessions. Most of the EP's demands will be thrown out immediately.

The triple challenge behind EU move to cap banker bonuses

In a comment piece in yesterday's Sunday Telegraph - trailing today's meeting of EU finance ministers that can seal the deal on capping banker bonuses - Mats Persson looks at the three challenges that form the backdrop of this discussion: 

• The mis-match between the relative importance of financial services to the UK and its limited voting weight in the EU's decision-making machine
• The tendency of EU politicians to engage in displacement activities and avoid tackling the root causes of the banking (and eurozone) crisis
• The "out of the euro but run by the euro" risk created by the creation of an EU banking union

Here's the article:

With this week’s well-publicised European Union move to cap bank bonuses, the UK now faces the prospect of being outvoted on a major piece of EU financial law for the first time. This may only be the beginning.

Fundamentally, the EU’s voting system – where almost all financial laws are decided by majority voting – leaves the UK vulnerable. While the UK accounts for 36pc of the EU’s financial wholesale market and 61pc of the EU’s net exports in financial services, it has only 73 out of 754 seats in the European Parliament and 8.3pc of votes in the Council of finance ministers. That trade-off is acceptable as long as the UK wields significant influence over EU rules – with the City serving as a global entry point to the single market, which is still does. In the 1990s and 2000s, this model served the UK well, with most EU laws aimed at facilitating trade.

Unsurprisingly, the focus of EU regulation started to change in 2008 with the financial crash. Of the 50 or so EU financial measures currently floating around, only a handful are aimed at boosting trade, most are about limiting or controlling financial activity in different ways – some of them fully justified. For many EU politicians and governments it is convenient to see the financial crash – and by extension “Anglo-Saxon capitalism” – as the fundamental cause of the eurozone crisis. Bank bonuses and the financial transaction tax, they say, help tackle excessive risk-taking and, therefore, the eurozone crisis.

This is ironic, since the same governments have simultaneously resisted many measures that would address systemic threats – such as sufficiently robust capital requirements and liquidity rules and enforcing losses on creditors. The EU has supported and approved €4.6 trillion (£4 trillion) in taxpayer-backed aid to banks over the course of the financial crisis. To think that capping bonuses will address moral hazard against trillions of state aid, borders on the bizarre.

What lies behind this self-delusion? A deliberate attempt to kill the City and drive business to Frankfurt and Paris? To some extent, but much of the motivation is, in fact, displacement activity. The tough sweeping reforms really needed to stabilise Europe’s financial sector – such as recapitalising or restructuring regional banks – often clash with regional or local politics or economics. But as politicians cannot be seen to do nothing, they take the easy route: we may not be able to create a mechanism to wind down banks but we can tell voters that we have limited the bonuses of greedy bankers. This invariably puts the City in the firing line, as that is where most of the bankers are.

This is exacerbated by a third problem – the City is a trading hub for a single currency of which the UK is not a member. The emerging union of EU banking, designed to align a supra-national currency with an interconnected banking system, creates incentives for euro states to collude in writing common financial rules that risk the City gradually being pushed “offshore”. The European Central Bank has already demanded that transactions cleared in euros move to the eurozone, which the UK has challenged in court. If we lose, it would lead to a two-tier single market, with a protectionist eurozone bloc – and trillions of euros worth of transactions could leave London.

The UK Government has taken steps to ensure a competitive financial services sector against the backdrop of an EU banking union. But the City and the finance sector are on the front line of the EU debate. If this hub of economic activity becomes a casualty, how could a UK government still defend EU membership? 

The FT today needs two separate comment pieces (behind pay wall) to make the same points - but worth a read nonetheless.

EU caps on bankers' bonuses: the perfect regulatory storm?

The discussion over bank bonuses has been heating up inrecent days. Discussions between EU ministers, the European Parliament and the Commission (so-called trialogues) are restarting today as the three try to reach an agreement on the rules for bank bonuses to be included in CRD IV (the EU’s legislation implementing the Basel III rules and more).

The parliament is pushing for a stringent cap on bank bonuses of 1:1 ratio with fixed salaries, which could be increased to 2:1 with approval from a majority of shareholders.

There is a lot going on here, beyond the actual proposal, including:

• The UK is in a clear minority in categorically rejecting a cap, but unable to block a rule with disproportionate impact on the UK - courtesy of QMV and co-decision.
• Germany being the swing state - no surprises there - having first supported the UK's position, it has shifted as part of a wider political push to get tough on bankers, which strikes a chord with German voters. The revelation in December that Deutsche Bank hid $12bn worth of losses during the crisis and the growing Libor and Euribor rates scandals, haven't exactly helped...
• The European Parliament flexing its muscles, successfully managing to tap into the public mood, breaking the Council common position, which is unusual. (Don't worry, any favour EP thinks it wins with the electorate, would be ruined if it voted down Ministers' proposal for a reduced long-term EU budget).
• "Anglo-Saxon capitalism" in the docks - perception is one of a continental attack on British bankers (ironic since a large part of the talks have focused on making CRD4 more flexible to allow the UK and others pursuing tougher capital rules for banks). This will not make the City any more EU-enthusiastic.
• No one wants to be publicly seen to back bankers - even the UK government itself is keeping a low profile.
• Changing incentives as part of the eurozone banking union, with the club within a club dynamic again coming to the fore (see our December 2011 report to see what we mean). Looking forward, the question is, if a country decides to remain outside the banking union - therefore signalling that it will stand behind its own banks, come what may - should it not also have more discretion in getting the incentive structure in the banking sector right?

So what does the UK want?

On Friday the UK submitted a paper to its EU partners to put forward it’s case. We've seen the paper, and here are some thoughts / points - which also have been largely reported in the media:

• The UK argues against a firm cap. Any extended remuneration should be determined by shareholders (although the UK proposal does water down the size of the majority needed to approve remuneration slightly).
• The UK is pushing for a focus on non-cash deferred bonuses. This is included in the current proposal to some extent but the UK fears (with some grounding) that the current proposal will encourage an increase in fixed salaries and a focus on upfront cash bonuses - and reduce firms' ability to cut costs during a downturn, potentially leading to more lay-offs and less lending (on a bit less solid ground here, we think).
• It also argues that deferred non-cash bonuses (over three years) should not fall under any cap, while also rejecting the proposal that all employee benefits, above those mandated by law, should be categorised as a ‘bonus’.
• The government is also keen to see that subsidiaries of EU banks located in the rest of the world should not have to adhere to the rules. Furthermore, EU subsidiaries of banks headquartered outside the EU should not have to implement the rules (although their bonus plans will still need to be judged ‘prudential’ by the relevant financial supervisor).

So is this special pleading? Well, to some people in the City, the world will end if this comes into force - which is not quite the case. In fact, there's no surprise that politicians seize the opportunity to strike down on bankers' pay, given that many banks have been forced to seek taxpayer-backed bailouts and the rest of it. So the first message to the financial sector is: if you don't want to be subject to tougher regulations, stop screwing up.

But it could still be damaging and there are questions over how much difference a cap would really make on incentives and the distorting effects this could have across the board. Ultimately, the risk taken on and the decisions made by banks are dictated by much more than just bonuses - it is just a small part of a wider culture which needs to be reassessed. Targeting and correcting perverse behaviour still seems to be better done through more effective supervision and tighter regulation - the irony should not be lost that many of those pushing for a cap are also the ones advocating a maximum limit to capital levels and supporting watering down the Basel III liquidity requirements (see here for details). And there should be no doubt that this could make talent less likely to choose the EU over other part of the world, which clearly isn't in anyone's interest.

In the end, bank bonuses are also only a small part of the much larger CRD IV legislation. There is unlikely to be a formal vote on bank bonuses itself - and Ministers rarely vote in the Council - but the UK seems to be heading for a defeat on a pretty symbolic issue at a sensitive time.

On the other hand, if the UK government can pull this one off, it should be given a lot of credit. Ultimately, the final outcome of CRD IV as a whole will be the more important bellwether by which to judge UK success or failure.

A big leap towards banking union - and a victory for the UK?

Leaving aside whether David Cameron actually is right to actively back and call for an EU banking union (and our views on that should be well known), Britain did just score a diplomatic victory in Europe, securing safeguards similar to those we have previously proposed. It has also established a very important principle in the battle against "not in the euro but run by the euro" scenario.

In the early hours of this morning, EU finance ministers reached a technical agreement on the plans for a single financial supervisor under the ECB.

This deal is pretty big, as it links to a number of key questions surrounding the future of the eurozone, including whether the permanent bailout fund (the ESM) can directly recapitalise banks. It was always going to have important implications for the UK, given the threat of eurozone caucusing - the 17 writing the rules for the 27 - in the European Banking Authority (EBA) and changes to EU financial regulation (as we discussed here).

The details on the deal are still emerging and we'll look at the ECB-side later (our assessment from last night still stands). But the Chancellor George Osborne stressed that the UK (along with Sweden and the Czech Republic who also decided not to join) got a “very good deal” and that the “single market was protected”. He would, wouldn't he, so what deal did the UK actually secure and how good is it?

Double simple majority within QMV – This means technical rules at the EBA will (as before) need to be approved under QMV. Additionally, within this vote, there must be a simple majority of ‘ins’ and a majority of ‘outs’. So say that no non-eurozone country will join the banking union (which is very unlikely), this means the UK along with 4 other ‘outs’ can block any regulations which they do not support.

Revised voting rules once there are only four countries left: For the UK, there's one potential weakness, if the number of 'outs' gets below 4 then the rules will need to be reviewed - and could be completely rewritten. Currently only three countries have explicitly said they won't join: the UK, Sweden and the Czech Republic. If all remaining countries decide to join, then these rules could need to be changed almost immediately. Here's a concern: the EBA regulation is decided by QMV, the ECB regulation by unanimity. Once the UK has agreed to the ECB regulation, it loses much of its leverage. The concern is that at a later date, the double majority principle is watered down using QMV, meaning that the UK gets stuffed anyway. Also, remember, MEPs must also approve this deal. Any changes made by the EP would also be subject to QMV approval. However, as a further guarantee, there seems to a provision making clear that the revised voting modalities will need political approval at the European Council (where unanimity applies). This is not a legal protection but a political one, so not completely watertight but clearly a useful addition.

Non-discriminatory clause – The separate proposal giving the ECB supervisory powers (see Article 1 here) also includes a provision meant to commit the ECB to not discriminate within financial regulation against a single or a group of countries. 

 So a big question remains:

Who are the ‘ins’ and who are the ‘outs’? Currently the UK, Sweden and the Czech Republic have said they definitely will not join the single supervisor, while all eurozone countries are obliged to. The other non-euro countries have suggested they will have a ‘close cooperation’ deal with the single supervisor (expect for Denmark) – this basically makes them count as ‘in’. For the UK point of view, 5 non-participants seem the ideal number as it will be much easier to block unwanted regulations, while 4 could trigger the review referred to above.

Will Croatia be an ‘in’ or ‘out’? This could alter the necessary majorities in EBA. 

On current count, this is a pretty good deal for the UK and it does establish that principle that the eurozone cannot run over none-eurozone countries.

Britain is not about to get completely stuffed in Europe

On his Telegraph blog, Mats Persson argues:

Take a deep breath. Britain is not about to get completely stuffed in Europe.

The FT ran a story the other day claiming that the EU could circumvent the UK’s veto over the EU’s next long-term budget (2014 to 2020) , effectively turning David Cameron into a spectator in the talks and forced to accept spending increases. Stories like these fuel speculation that “Brixit” – the UK leaving the EU – is just around the corner.

But how much of this is actually substance as opposed to noise? The FT story was pretty implausible – ‘circumventing’ the UK’s veto will be very difficult. In case of no agreement before the end of 2013, EU officials could move to roll over the 2013 EU spending ceilings adjusted to inflation with up to 55 individual spending items decided by Qualified Majority Voting (QMV). This would be extremely messy. There's no way 26 countries would agree amongst themselves to take a common position against Britain on 50+ spending areas – at least eight countries have already threatened to veto the EU budget for different reasons.

But let’s do some war-gaming around EU events this autumn, to see how bad things really are for Cameron.
EU leaders will discuss the long-term EU budget this week, starting tomorrow. There are effectively three possible outcomes from the Brussels summit: a new veto moment for Cameron, a deal or postponing the decision. Though all options are on the table – and a deal this weekend isn't impossible – the latter remains the most likely.

Following the recent vote in British Parliament, in which a majority of MPs voted for a cut to EU spending rather than a freeze, Cameron can hardly accept the proposals for an increase that are floating around.
But forcing Cameron to veto the EU budget this week could trigger a “perfect” storm not only for Britain, but also the EU as a whole, in which everyone would lose. A new veto would really sour relations between the UK and Europe, and any attempt to try to press ahead without the UK would be met with fury in Westminster as it would effectively involve taxation without representation. Agreement on an EU “banking union” – the far bigger fish to fry as it links with the stability of the euro – would then be much more difficult to reach at the EU December summit, when leaders will hammer out those details.

The UK also has a veto over the banking union. Though it’s currently broadly supportive, should the UK be singled out in EU budget talks, the banking union will be far more difficult to manage in Westminster as every front page in the land will be splashed with “EU stitch-up” headlines. Cameron will come under pressure to pull a second veto over banking union to take back control over events.

EU officials say they have a familiar back-up plan should this happen: ignore Britain. The EU, they say, could press ahead with banking union under so-called “enhanced cooperation”, allowing a limited number of member states to pursue more integration, if not possible at the level of all 27.  But this would trigger a massive crisis as the UK would, for all practical purposes, find itself “not in the euro but run by the euro” – London’s worst nightmare. Legal challenges and massive uncertainty for the eurozone would follow. Britain would also be half-way through the exit door.

Far-fetched? Most certainly. It could happen. But Berlin and Brussels will get cold feet long before it gets to that. The legal foundations of trying to rewrite the role of the ECB, turning it into a bank supervisor, using enhanced cooperation would be so weak that Angela Merkel’s lawyers could well suffer a nervous break-down.

And this also shows that beyond the huffing and puffing – and the indulgence of “isolation” stories – it’s in everyone’s interest to reach a deal. But that’s only with regards to events this autumn of course. There will be plenty more fraught moments to come.

The long queue of potential 'EU budget vetoes': Who will join next?

Update 21 November, 16:15

Portugal has stepped up its rhetoric by a notch, and has now joined the group of countries that have explicitly threatened to use their veto. Portuguese Prime Minister Pedro Passos Coelho told MPs, "The proposal that has been tabled [by European Council President Herman Van Rompuy] is completely unacceptable for Portugal. By saying this, I mean that I would block a decision [by EU heads of state and government] that had this proposal as its final result."

In practice, this means that one third of EU member states have so far explicitly said that they are ready to veto the next long-term EU budget.  

Update 21 November, 10:40

Another day, another EU budget veto threat - this time from Latvia. Prime Minister Valdis Dombrovskis has said that his country is prepared to veto the 2014-2020 EU budget unless it gets a better deal on agricultural subsidies and cohesion policy.

Update 20 November, 17:00

Italy has today officially moved to the group of countries that have explicitly threatened to veto the 2014-2020 EU budget. Italian Europe Minister Enzo Moavero Milanesi said Italy will be "ready to use its veto" if it considers that the next long-term EU budget is "harmful for the country and burdensome for the Italian taxpayer."

Also, Portugal added its voice to the group of member states that consider Van Rompuy's proposal "unacceptable", but stopped short of threatening a veto. 
 
And here's our original blog post,

You will have read a slew of stories about how the UK is threatening to veto the EU leaders' budget talks later this week and the various terrible consequences that will follow should it do so. The FT has a story today that EU diplomats are working to "circumvent" the UK's veto by moving to annual Qualified Majority Voting, which actually only means that they're working on a scenario for a roll-over, should a deal fail to be struck (we've already looked at that scenario in detail here) so don't get too excited.    
As some European sources have put it, a "miracle" would be needed to strike a deal on the 2014-2020 EU budget when EU leaders meet in Brussels on Thursday and Friday. And the UK is certainly not alone when it comes to putting its veto on the table. In fact, veto threats are flying around all over the place - we count seven veto threats in total. Here is a list of EU member states who have either explicitly threatened to veto the next long-term EU budget or said they are unhappy with the compromise currently on the table - which means they could wield their veto unless something changes.

UK: Has threatened to veto any proposal which does not involve, at worst, a freeze based on 2011 payments.

Denmark: Has warned it will use its veto unless it gets a rebate worth 1 billion DKK (slightly over £100 million) from the 2014-2020 EU budget.

France: Has said the compromise proposal put forward by European Council President Herman Van Rompuy "is not a basis for negotiations". Paris wants EU farm subsidies to be kept at least at 2013 levels, and said it will threaten to veto the talks should CAP spending be radically changed.

Sweden: Has hinted at using the veto in the past and believes Van Rompuy's proposal still does not go far enough. According to Swedish Europe Minister Birgitta Ohlsson, what is missing is "a clear model for reducing agriculture subsidies".

Austria: Has threatened to veto the long-term EU budget unless two conditions are satisfied. Firstly, Austria wants to continue receiving its 'rebate on the UK rebate' over the next seven-year EU budget period. Secondly, the Austrian government is opposed to cutting the rural development component of the CAP.

The Netherlands: Does not want to see the annual or long-term EU budget increase above inflation, and explicitly said it will use its veto if necessary.

Romania: Has warned it could use its veto, calling Van Rompuy's proposed cuts to farm subsidies and regional funds "unacceptable".

Italy: Has not threatened to veto the talks but dismissed Van Rompuy's compromise, saying it is "not a positive contribution" to the negotiations. Italy wants to see its net contribution to the EU budget cut, the reason being that its GDP per capita has now slipped slightly below the EU-27 average. Rome also opposes cuts to farm subsidies and cohesion policy.

Spain: Has rejected Van Rompuy's proposal as "unacceptable". Reports have suggested that, under the proposal, Spain risks losing up to €20 billion in total over seven years in both farm subsidies and cohesion funds. However, Madrid is still to drop the "V" word.

Poland: Has not explicitly threatened to wield its veto, but is clearly not happy with Van Rompuy's proposed cuts to EU regional spending. Poland is trying to muster support from other net recipients from the EU budget, such as Portugal - the so-called 'Friends of cohesion group'.

So, it looks like circumventing a veto on the 2014-2020 EU budget would mean much more than circumventing the UK.

Cameron should veto the EU budget unless he gets a better deal

On the Telegraph blog, we argue:

At a meeting of Europe ministers today, the UK government is set to be outvoted on the size of the EU’s 2013 budget. Having pushed for a freeze without a last-minute deal, Britain will be forced to accept a 2.8 per cent increase. This is a compromise position that gives scant consolation to UK taxpayers who will have to fork out an additional £350 million for no good reason whatsoever. Unbelievably, the Commission and some member states were pushing for a 6.8 per cent increase.

Decisions on the annual budget are decided by so-called qualified majority voting system (QMV) with the European Parliament also having to give its assent. This is the issue on which the UK is set to get stuffed this week. However, each member state has a veto over the EU’s long-term budget – known in Brussels speak as a Multiannual Framework (MFF) – which usually covers a seven-year period.  This underlines how incredibly important it is for the UK government to utilise its veto to get the EU’s long-term budget right.
Unfortunately, in talks over the EU's long-term budget (set to run between 2014 and 2020) – also up for negotiation at the moment – the UK is merely pushing for a freeze to overall spending. While this strategy has some merits, it won’t achieve anything above and beyond what could be achieved by simply vetoing the MFF. This is because under EU rules, if a new deal over the MFF can’t be reached, the previous year’s budget is carried over, adjusted to inflation – exactly the real terms freeze that the government is currently pushing for. This is not a shrewd negotiating strategy.

So what should the UK government do instead?

There is no shortage of EU spending areas to reform. For example, it’s madness that, as Europe grapples with a solvency, competitiveness and banking crisis – all at once – around one-third of the EU budget still goes towards subsidising landowners, irrespective of whether they’re engaged in any meaningful economic activity.

But the UK government would secure a hugely disproportionate benefit by one simple move: repatriating the EU’s so-called structural funds back to Britain and other wealthy states. The structural funds are meant to help poorer regions catch up with richer ones, but in reality a large portion of the money is merely being recycled between some of Europe’s richer regions and countries, and spent on projects with little, no or negative comparable impact. Of the 37 regions under the EU’s classification system, 35 pay more in to the system than what they get back. This means that many disadvantaged UK regions – such as the West Midlands and Northern Ireland – end up as net contributors.

As argued for by the previous Labour government, and as recommended by the Commons Local Government Select Committee (alas, only from 2020), the UK should push for the repatriation of these funds for member states with a GDP of 90 per cent or above the EU average. This would achieve the following:
UK taxpayers could save almost £13 billion gross, and £4 billion net over seven years and the overall size of the EU budget is reduced by 15 per cent

-23 out of 27 EU member states would pay less into the EU budget, with France gaining the most (around €12 billion over seven years)
-All post-communist member states that joined in 2004 and 2007 would do better from the funds
-By streamlining and slimming down the funds, they could become far better tailored around regions’ individual needs
-The government, and Mr Cameron in particular, would get instant credibility on Europe

Those countries that would lose out – Spain, Italy and Greece –need a different kind of financial support to that currently is offered by the funds anyway. For example, 30 per cent of the funds in Spain still go towards roads and infrastructure – the opposite of what the country with its bust construction sector needs. This would be the best opportunity of putting this right.

In terms of a simple and easy to communicate policy proposal, this is an open goal. In terms of negotiation dynamics, despite it only ever being able to deliver a freeze, as opposed to an end to UK payments, Britain’s veto is still powerful. Not having a new MFF in place would be extremely messy and most member states, including the new ones that want a new deal to benefit from phased-in farm subsidies, have huge incentives to strike a new bargain. The UK will almost certainly get something substantial in return if it sticks to its guns.
Mr Cameron would waste a perfectly good EU veto – and a chance for a massive credibility boost on Europe – by letting this one slide.

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.

The Lisbon Treaty's ticking time bomb

This should send alarm bells ringing in No 10: As the Sunday Telegraph noted, in a forthcoming report this week, we'll be pointing to the concerning fact that, in future, the UK and other non-eurozone members could be left in a permanent minority in the Council of Ministers - the EU's key forum for decision-making.

This time bomb will detonate as early as 2014, potentially allowing the Eurozone to bulldoze over the interests of those outside the Single Currency. This could have a major impact on the UK’s ability to influence, for example, EU rules affecting the City of London or the wider single market.

Here is how it could happen:

The Lisbon Treaty, in addition to expanding qualified majority voting (QMV), substituted the current voting weights in the Council with new ones based on the population sizes of the member states. These new rules are not yet in force – they come into force in November 2014 (with an option for a state to request a vote follows the old rules until April 2017 - which the UK may well want to take). In addition to changing the voting weights, to the benefit of the larger more populous states, the rules also reduce the qualified majority required to pass an EU law from 71% to 65%.

These two measures mean that the UK will no longer be able to muster a blocking minority with the help of smaller non-eurozone states if the 17 eurozone members vote as a 'caucus'.

Under the new rules a group of states needs votes from countries representing 65% of the EU population – the eurozone as a whole already have 66% on their own, giving them a permanent inbuilt majority if they vote together as a caucus (not accounting for Croatia joining the EU, or Greece leaving the euro, for example). Now, it may be that the eurozone will not be able to pull together and vote as one - will the Dutch and Slovaks, for example, agree with the Greeks or Portuguese?

But, given the horse-trading and backroom deals that form an integral part of EU decision-making - and the incentive for the eurozone to reach a common position on a number of issues, as it integrates further to deal with the eurozone crisis - clearly, this is worrying for the UK and other 'outs'. Due to moves towards further fiscal integration in the eurozone, this could prove particularly relevant to eurozone measures relating to financial regulation.

As we've noted before, the status quo is not an option for the UK government.

Eurozone reaches the bar for a permanent majority (click to enlarge):

when bombers meet bureaucrats

Ludicrous comment of the day has to go to Lib Dem Euro MP Sarah Ludford:

"While the Brussels machine is deadlocked by the search for 27-country unanimity, the terrorists and criminals are free to bomb their way across Europe"

Oooooh, I bet Bin Laden is quaking in his boots at the thought of more QMV. This, remember, from the organisation that gave us a "non-emotive lexicon" for discussing terrorism.

International agreements are obviously important - but what exactly is it that the EU can't do because of unanimity? To pretend that anyone who questions giving the EU more powers is the "murderers friend" is a typically ludicrous euro-argument.