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.

Double majority: the way to avoid the EU becoming a political extension of the euro?

In our 2011 report Continental Shift, we came up with the idea of "double majority", requiring a majority both amongst eurozone members and non-eurozone ones for a proposal to pass. We developed the idea further in a briefing last year.

We were told at the time that the idea was dead in the water since, as one Brussels-based journalist put it, it looked like "a straightforward veto” for the UK. We disagreed at the time, as a) there are plenty of ways to organise the double majority principle to make it easier to swallow for eurozone countries and b) the political case for safeguards against eurozone caucusing is strong - Berlin and others know that they are the ones changing the rules of the game, not the UK. Britain has the right to respond.

And sure enough, in December 2012, EU leaders did agree to introduce a double majority principle in the European Banking Authority. A reminder that those who bang on about the UK being permanently isolated or that change in the EU is impossible aren't always 100% right...

Next week, the UK government will publish its first six reports in its "balance of competence" series, one of which will be the single market. A key question which we hope will be addressed is how do you safeguard the single market in light of further eurozone integration.

As we have said repeatedly, the crisis has led (or is potentially leading) to greater integration within the Single Currency, in financial market regulation and supervision in particular. This phenomenon has raised concerns, by us and others, about the potential for the eurozone to ‘caucus’ and impose eurozone solutions on the rest of the EU-28, which could both undermine the single market and/or simply disenfranchise non-euro countries entirely. The exact extent of that risk is unknown - euro countries have their own internal disagreements and there's no clear cut example to date of euro countries caucusing against the UK (bankers' bonus caps, a fight which the UK lost, was more a European Parliament-driven issue). However, even with some eurozone integration, not least with the banking union, the risk is real enough to start thinking about how to be safe, rather than sorry. The ECB, after all, has already demanded that certain transactions cleared in euros must take place within the eurozone, rather than through the City of London.

The agreement reached by finance ministers to introduce double majority voting  was a good deal for the UK and, again, evidence that reform is possible when pitched as a means of protecting something for all – in this case, the integrity of the single market.

It is time to consider whether this principle of double majority voting might be applied more widely, not simply in one EU regulator which interprets and enforces regulation but in the much more powerful Council of Ministers which decides regulation. One way to organise this would be to expand double majority to all laws. If a given proposal going through the Council is seen as either undermining the single market - for example by pushing euro-denominated business inside the eurozone - or discriminating against a country on the basis of euro membership, the double majority principle would kick in.

A majority amongst both the "ins" and "outs" would be required for a proposal to pass.

How it would work organisation-wise would need to be worked out. For example, who triggers the vote - is it enough for one country to object and trigger the double majority vote?

What's clear is that this would be a very effective way to avoid a "not in the euro but run by the euro type scenario" - and again, there may be support for this on both sides of the eurozone divide.

We fear that the BoC reports, whilst highlighting the risk, will stay well away from exploring this type of measure (in fact, there won't be any firm policy recommendations).

However, we'd be surprised if something along these lines isn't a priority in a future government's renegotiation package.

Foreign Affairs Select Committee welcomes "Double Majority" voting at the EBA as concrete example of UK influence in Europe

Double majority lock voting at the EBA was a
significant and valuable use of UK influence

In a report published today the influential cross-party House of Commons Foreign Select Affairs Committee commended David Cameron "for launching an ambitious agenda for EU reform". The full report, including evidence presented by Open Europe, also makes a number of sensible observations such as:

"the point of a Member State having influence in the EU is to achieve EU policy outcomes that realise its interests and objectives."

We agree - too often the EU is described by politicians in terms of "influence" and being "at the table" something that looks (and often is) of more benefit to politicians than those they serve - something we pointed out in our evidence:

"Open Europe contended that 'influence’ is a term too often used in a rather lazy and undefined way”. Open Europe argued that the debate on UK influence in the EU should focus on identifying the concrete cases where the UK should exercise influence and had or had not done so."

One case made of very tough concrete we brought to the MPs attention is the tricky issue of EU voting weights:

"Open Europe reminded us that from 2014 the Eurozone states will command sufficient weighted votes in the Council of the EU to muster the qualified majority required to take Single Market decisions alone."

For this reason we have argued consistently that the UK needs a new safeguard to protect itself from Eurozone caucusing. The test case for this was the adoption of "Double majority" voting in the EBA - originally proposed by Open Europe.

The achievement of this new "double majority" was therefore a genuine success for UK diplomacy and has a significance well beyond that of the EBA. We are therefore glad the Committee picked up on it. As they conclude:

"The agreement on the Single Supervisory Mechanism (SSM) which was struck among EU Finance Ministers in December 2012 was significant on several grounds. It shows what the UK can achieve, in terms of protecting its position in the Single Market, through close and constructive engagement and innovative policy solutions."

"We note that the deal went some way towards entrenching the kind of safeguard against discrimination in the Single Market that the Government failed to secure in the December 2011 negotiations on the ‘fiscal compact’. We also note that the arrangements that were agreed to protect non-Eurozone states—on this occasion, for ‘double majority’ voting in the European Banking Authority—responded directly to a concrete proposal (in this case, one which gave rise directly to a risk of caucusing)."

They could not have put it better.

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.

Banking union and the EBA: where do we stand?

Yesterday, EU finance ministers failed to reach an agreement on a single eurozone banking supervisor. Ahead of the meeting, the Cypriot Presidency put forward a new compromise proposal aimed at concluding a deal before the next EU summit on 13-14 December.

We have had a look at the latest drafts. Starting with the new voting rules within the EU-27 banking watchdog, the European Banking Authority, these are the most interesting changes proposed by the Presidency:

Voting on technical standards/end of restrictions on financial activities/EBA budget

European Commission proposal: QMV - meaning that countries outside the eurozone which do not want to join the new ECB-led Single Supervisory Mechanism (SSM) risk being in permanent minority

Cypriot Presidency proposal: QMV stays, but it must include at least a simple majority of countries participating in the SSM (say at least nine, assuming that only eurozone countries join the SSM) and a simple majority of countries not participating in the SSM (say at least six, assuming that none of the non-eurozone countries joins the SSM)

This goes in the right direction, although we proposed going one step further and having all decisions in this group adopted by 'double QMV' - i.e. a qualified majority of participating countries and a qualified majority of non-participating countries.

Voting on breaches of EU law/dispute settlement

European Commission proposal: An independent panel (composed of three people) takes a decision. The decision is considered as automatically adopted unless it is rejected by a simple majority of member states - including at least three countries participating in the SSM and three countries not participating in the SSM

Cypriot Presidency proposal: A larger independent panel (composed of seven people) takes a decision. The decision is considered as automatically adopted unless it is rejected by a simple majority of member states participating in the SSM and a simple majority of member states not participating in the SSM

And here is where the main problems with the Presidency's proposal lie, according to us:

•  A larger panel is good in principle. However, the proposal fails to specify how many of the seven members should be from countries not participating in the SSM;

•  Even assuming a three 'ins' + three 'outs' + the Chairperson composition of the panel, decisions would still be taken by simple majority - i.e. four of seven members;

• Overturning a decision taken by the panel becomes even more difficult under the Presidency's proposal, given that a simple majority of 'ins' and a simple majority of 'outs' are both needed to do so. Therefore, the proposal would end up giving the independent panel (and the EBA) more power. This is why we proposed that, instead of this 'reverse majority' system, decisions taken by the independent panel should be confirmed by both a qualified majority of countries participating in the SSM and a qualified majority of countries not participating in the SSM.

Enough technicalities for now - we will look at the ECB Regulation in a separate blog post.