Lord Hill is the EU's new financial services Commissioner - but what is his remit and who does he report to?

With the future of the UK seemingly hanging by a thread it is understandable that events north of the border are dominating attention, but today's announcement of the new European Commission also has far-reaching consequences for the future of the UK's EU membership and the EU itself.

As we set out in our flash analysis, the appointment of Lord Hill to the key financial services portfolio (pending approval by MEPs) is a win for the UK, and the general reformist outlook of the Commission, with other crucial posts (Internal Market and Competition) held by liberal, pro-free trade, non-eurozone countries, provides grounds for cautious optimism.

What will Lord Hill's portfolio include?

• Overseeing the creation of the banking union – a crucial policy for the eurozone but also one which threatens to split the EU into euro-ins and outs. In his new role, Lord Hill can ensure this does not happen. That being said, this is a very tricky role to manage (with numerous competing interests), especially for a non-eurozone country.
• Power to review the role of the European supervisory authorities, institutions which have been controversial in the UK since their creation.
• Responsibility for a 'Capital Markets Union'. While this remains vague it could be a good initiative for the UK since London is already the centre of European capital markets. Lord Hill can base the union around the single market rather than the eurozone.

As the charts below show, the Commission has also been re-organised with a series of policy clusters, with the UK being at the heart of all the major decisions relating to the single market, jobs and growth and the Eurozone. Each 'cluster' will be headed by a Vice-President, previously a largely meaningless role but now with additional agenda setting powers and the ability to stop legislative proposals from other Commissioners.

Lord Hill will 'report' to two Vice Presidents who will "steer and co-ordinate" depending on the issue at hand - the new "Jobs, Growth, Investment and Competitiveness" VP Jyrki Katainen and the "Euro and Social Dialogue" VP Valdis Dombrovskis (both of whom are former PMs). In terms of the two VPs, Dombrovskis is likely to supervise the banking union aspects of Lord Hill's post while Katainen will oversee the more single market aspects, although even here, there is plenty of scope for overlap.

Lord Hill's portfolio also has some overlap (and therefore potential conflict) with France's new Economic and Monetary Affairs Commissioner Pierre Moscovici .The potential for Anglo-French clashes within the Commission is relatively limited since Moscovici will be primarily tasked with macroeconomic eurozone policies rather than financial markets, but one potentially fraught area could the be Financial Transaction Tax or a Common Consolidated Corporate Tax Base. Juncker has asked Moscovici to finalise negotiations over both.

It remains to be seen how the relationship between VPs and different clusters will work in practice, especially as Juncker himself has insisted that "In the new Commission, there are no first or second-class Commissioners", and since decisions in the College of Commissioners have traditionally been taken by a majority of all Commissioners in a secret vote. However, Juncker also made clear that the Vice-Presidents “can stop any initiative, including legislative initiatives” of other commissioners – effectively acting as “a filter”.

Time will tell how potential disputes play out or are resolved and to what extent the VPs can truly veto proposals. What is clear is that the relationship between these four men could be crucially important.

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.

Poland has nothing to gain from rushing to join EU banking union

As we pointed out last week, the number of eurozone outs remaining outside the EU banking union is critically important for a number of different reasons. As the second largest non-euro member, Poland's decision will be an important one, not least because it will also affect the choices made by its neighbours. On our new blog platform at Rzeczpospolita - Poland's second most widely read daily - Open Europe's Pawel Swidlicki takes a closer look at the choices facing the government:

"What does this mean for Poland? Well, since 2008, EU states have in total offered around €4.7 trillion in guarantees, capital, liquidity and asset relief measures to the European banking sector. Under an illustrative scenario, were a joint resolution fund been in place during the crisis (we assume the bailed out countries would have been unable to participate) the Polish state would have had to stump up over €200bn – 74% of its GDP – whereas in reality it only had to put up €9bn. These figures are clearly purely illustrative but they highlight that such a burden sharing arrangement – based roughly on each state’s GDP and population size – would be hugely iniquitous given that Polish banks only hold 0.73% of EU wide bank assets. It should not be forgotten that this is the clear and stated, but also necessary (if it is to offer any solution to the crisis), end goal of the banking union." 

"Likewise, for similar reasons, Poland and other EU member states should be hugely pleased that the UK, with its €10.2tr of bank assets – four times the size of the German economy – is staying out of the EU banking union, and that Polish taxpayers will in no way be exposed to any of their associated risks. Fortunately, there is no realistic prospect of Poland joining the euro within the next couple of years, and the government is absolutely right not to jump the gun on declaring whether it will join the banking union or not, especially with the additional safeguards detailed above. Poland’s interests will best be served by staying out in the immediate future and seeing how the later stages, such as the joint resolution scheme, develop."

Banking union: are you in or out?

Ask what is the ideal outcome for the UK from the talks on EU banking union and - much like when the super-computer in the Hitchhikers' Guide to the Galaxy is asked about the meaning of life, the universe and everything - you'll get a number: in this case 5 as opposed to 42.

This is the number of countries that should stay outside of the banking union for the UK to have the greatest leverage at the European Banking Authority. Anything less and, as we've noted, there may be a risk that the very beneficial "double majority" voting rules will be re-written, with Qualified Majority Voting amongst ministers and a simple majority in the European parliament (though there's a political agreement to solve the matter through unanimity in the European Council). Any more wouldn't be a disaster, but would proportionally dilute the UK's influence.

That's of course only one of many reasons why the exact membership of the banking union matters for everyone. So, who's in and who's out? This is the current state of play:

Definitely Out

The UK: As we've noted, even if the "referendum lock" and virtually every Tory backbencher weren't  enough to keep the UK out, add €10.2 trillion worth of UK bank assets, and there's no chance that the eurozone would ever allow Britain to join. The UK could not be more out.

Out "for now"

Czech Republic - Czech Prime Minister Petr Necas wrote an op-ed for Lidove Noviny arguing that Czech taxpayers can’t be asked to save troubled European banks. The government has said the country is out "for now", and requested guarantees that its domestic banking supervisor, the central bank, will have a decisive say if a foreign bank seeks to turn its operations into a branch from a subsidiary, which is subject to stricter local regulation.

Sweden – Swedish Finance Minister Anders Borg said that "These were tough negotiations. Sweden will remain outside the banking union, but we believe this is a good compromise." However, the Swedish Government has also left the door open for joining at a later stage.

"Wait and see"

Denmark – Both the centre-left coalition government and the main opposition party, Venstre, have said they have not yet decided whether Denmark should join the banking union. Two other opposition parties, the People’s Party and Enhedslisten, have called for a referendum on whether the country should join, saying it’s required under the country's constitution. Other than the UK, Denmark is the only EU member state with a legal opt-out from joining the euro. 

Hungary – Having been very strongly critical of the original proposals, Hungary's position is  somewhat ambiguous. PM Victor Orban is playing his cards close to his chest: "In view of the proposals, we are in a much better position than anticipated... The non-Eurozone countries are now free to decide whether or not they wish to join the European banking supervisory system. Sometimes even we can be lucky”. 

Poland – Polish Europe Minister Piotr Serafin said that Poland had not yet decided whether to join, and will not declare a position at this week’s EU summit. He argued that “Our job over the course of the last few months was to create a better balance between the rights and obligations of non-eurozone countries. I think a lot has been achieved, although there is still room for improvement in some areas”. Polish PM Donald Tusk announced he will be consulting the finance ministry, central bank and the national regulator prior to making a decision. Polish daily Gazeta Wyborcza suggests the government will wait for further details on the second part of the banking union proposals to emerge, in particular concerning the common resolution fund.

Latvia – Latvian Finance Minister Andris Vilks tweeted yesterday that Latvia’s three biggest banks may fall under European Central Bank supervision, but without giving additional details. Latvia hopes to join the currency bloc in 2014, the year the new supervisory mechanism should be fully ready, so looks likely to join.

Lithuania – No official position has yet emerged from Vilnius, but like neighbouring Latvia the country wants to join the single currency by 2014 so we would expect it to opt in.  

Romania - We are still waiting for official confirmation to emerge either way, but we hear rumours from Romanian officials that "the vibe is positive". Romania could therefore well opt in.

Bulgaria – According to Bulgarian National Radio, Prime Minister Boyko Borisov seemed to suggest ahead of the EU summit that his country would definitely join the system of single supervision. However, following a number of conflicting reports, we were able to clarify that the official position is that Bulgaria is ready to join, but it has not committed to a timetable for doing so.

So the UK remains the only one that is out - indefinitely - while the Swedes and Czechs are unlikely to join any time soon. On the other side, Latvia, Lithuania are the most likely to join while Hungary, Poland and in particular Denmark are very difficult to call at the moment.

So on current count - though this is an exceptionally moving target - two probably in, three out and five uncertain.

NB This blog post was updated at 11.21 on December 18 to reflect that Bulgaria was in the "wait and see" camp rather than being definitely in.