Malmström impresses in her hearing, but is she on the same page as Juncker on TTIP?

Cecilia Malmström during her hearing today

The European Parliament kicked off its hearings of Commission nominees today, with most of the attention focused on Sweden's Cecilia Malmström, the current Home Affairs Commissioner who has been handed the hugely important Trade portfolio. The hearing was eagerly anticipated due to the controversy around certain aspects of the EU-Canada (CETA) and EU-US (TTIP) free trade deals; specifically around investor safeguard clauses (ISDS).

Indeed, the hearing managed to make waves in Germany (where the issue is particularly sensitive), after Malmström's written response to initial questions from MEPs suggested that she rejected the need for ISDS in TTIP. German Green MEP Sven Giegold posted the relevant section on his website:

As the President-elect Juncker has committed himself to in his Political Guidelines..."no limitation of the jurisdiction of courts in the EU Member States will be accepted in [TTIP]; this clearly means that no Investor-State Dispute Settlement mechanism will be part of that agreement."

However, this version - sent out to MEPs on Friday - was subsequently re-called, and the new version published on the Commission's website now reads:

As the President-elect Juncker has committed himself to in his Political Guidelines... he will "not accept that the jurisdiction of courts in the EU Member States is limited by special regimes for investor disputes."

In other words, a clear change from ruling out ISDS altogether to a much more qualified acceptance. This change was subject to much speculation on Twitter, and Malmström herself claimed it was "simply the wrong version".

However, at today's hearing, Dutch MEP Marietje Schaake claimed that the Microsoft Word version sent out on Friday contained 'track changes' made by none other than Martin Selmayr, Jean-Claude Juncker's chief of staff (seemingly confirming rumours in Brussels about Selmayr's "Rasputin-like qualities"). Malmström replied that she had agreed to Juncker's office inserting a quote from Juncker and tried to brush off the affair as a "misunderstanding" and an "over-interpretation", basically denying that she and Juncker were at odds over the ISDS question.

In her opening remarks and in answers to questions, Malmström strongly endorsed the principle of free trade and TTIP specifically, which rather dominated the debate, while also defending European social and environmental standards (there is always something for everyone in the European Parliament). On ISDS, she defended the principle, while clarifying that she was committed to transparency and qualifications - such as protections for national parliaments to legislate in the national interest. She claimed that there was no need to renegotiate ISDS in CETA, as without it the deal could fall apart, that the EU itself would want to include ISDS in future agreements with other parties, but added that possibly it could be excluded altogether from TTIP - so far from a coherent line overall.

Malmström put in a solid performance - with the right mixture of assertiveness and reassurance - and it is certainly good to have a pro-trade voice in that role. However, as the shenanigans over her written answers demonstrate, there are questions over whether Malmström and Juncker are on the same page on TTIP.

Is Germany emerging as the biggest obstacle to a liberal EU-US trade deal?

If you read our press summary, you will have noticed that the debate around the US-EU free trade deal (TTIP) is really picking up in Germany, with even the euro-critical AfD coming out against key elements of the deal ahead of the European elections.

Of all the mainstream newspapers in Europe, Süddeutsche Zeitung is the one that has devoted the most time and effort into covering the on-going negotiations over TTIP, and it has also published a number of comment pieces - both for and against.

In an opinion piece today, the paper's Economics correspondent Alexander Hagelücken argues that the debate around the EU-US free trade agreement (TTIP) has become “schizophrenic” amid mounting public opposition (as highlighted by the cartoon above). However, he argues that:

"European governments can escape the impasse by making it clear that they want to expand free trade via the TTIP principle while at the same time meeting the legitimate concerns of their citizens who do not want increased prosperity at the cost of losing environmental and health standards. GM foods? Only after passing the European approval procedure and with clear labeling. Investor lawsuits against environmental legislation such as Vattenfall’s legal challenge against the nuclear phase-out? Not before secret tribunals, but only in the ordinary courts."

He concludes that:

"Yes, such a path would not lead to unfettered capitalism with a neoliberal flavour but free trade with constraints. In other words, it would be the kind of social market economy which has given the [German] Federal Republic decades of prosperity after World War II, while tensions decreasing rather than increasing tensions between the social classes.” 

German public opinion will be a crucial factor in determining the success or failure of the TTIP negotiations. As with everything else these days, we suspect, on TTIP, as goes Germany, so goes Europe. 

Could a different type of EU have avoided the Crimean crisis?

Over on Conservative Home Open Europe's Christopher Howarth wrote the following article:

Firstly, a disclaimer: Russia is 100 per cent responsible for its invasion of the Crimea, just as Germany a hundred years ago was for responsible for invading Belgium. Nothing dilutes these facts. However, just as historians disagree as to whether the First World War could have been avoided, it is legitimate to look at whether a better handling of the Ukraine crisis by the “West” generally – and the EU specifically – could have led to a different conclusion.

We need to understand what Russia wants. It has two aims – safeguarding its Black Sea Fleet base in Sevastopol (for emotional as well as strategic reasons) and maintaining a friendly compliant government in Ukraine willing to keep the border open to Russian trade and people. Under both Timoshenko and Yanukovych, this is exactly what Russia had.

So what has caused the current crisis? Russia’s naval base is on a lease, so for now it is protected, but Russia fears that a pro-western Ukrainian Government, joining NATO and the EU, could jeopardise its operation. These fears maybe overdone, but a more potentially serious threat comes to Russia’s trade in the form of Ukraine’s potential EU membership.

The EU is a customs union, which means that its external trade is decided collectively around an external customs wall – the crucial difference between it and a Free Trade area. But as well as being a customs union, the EU has become a political construction with a defence element including a mutual defence guarantee mirroring that of NATO – inserted via the Lisbon Treaty. So from a Russian point of view the EU no longer an economic club, but more a political and defence power block synonymous with NATO. Indeed, Russia is so impressed by the EU as a power block it has sought to imitate it in its own Eurasian Customs Union – which it had hoped Ukraine would join.

EU and candidates and Eurasia and its candidates

Looked at from the inside, the EU eliminates borders, creating an area free of customs, visas and – within Schengen – all border controls. This however comes at a price, and the price is often paid by the EU’s neighbours. We have seen this before in Moldova. Prior to Romanian EU accession, Moldovans could freely travel to Romania but after Romania joined this came to an end – Moldova was on the wrong side of the EU’s external frontier. Unsurprisingly, Russia would not wish for the same on its border with Ukraine.

Ukraine is therefore caught between two opposing power blocks. For many years, Ukraine managed to balance the competing interests and different aspirations of both its Russian and Ukrainian speakers. From Moscow’s point of view, it was working: Ukraine had leaders who accepted Russian largess in exchange for influence, renewed their lease on Sevastopol, kept trade moving and allowed Russians and Ukrainians to travel visa free – something that Ukrainian EU membership could put in danger.

It should therefore have been possible to predict that Russia would react badly to further moves by Ukraine towards the EU. Despite this, no effort seems to have been made either to dampen Russian influence by shoring up Ukraine’s finances, thus enabling them to make the jump, or alternatively to mollify and reassure Russia. We were left to watch as an EU deal with no immediate cash offering was outbid by hard Russian cash with a bankrupt Ukrainian President taking his country swerving to the east. The reaction in western Ukraine was predictable, as was the Russian reaction when protesters hostile to the Russia seemed to take control.

Even at that point, not all was lost for Russia. Ruslan Pukov, a graduate of the Russian Ministry of Foreign Affairs, points out in the New York Times that Tymoshenko was originally Russia’s favoured candidate, that her re-election in an early poll would for Russia have been a reasonable outcome – and for that pro-Russian electors from Crimea within a united Ukraine would help. Speeding up the signing of the EU’s Ukrainian Association Agreement and the pronouncements of some EU foreign ministers about Ukraine’s EU membership potential (however genuine or not) have, however, fanned the fears of those in Russia who feel that Ukraine is on route to being “lost” into an opposing and not necessarily friendly power block. Russia’s preferred option would be a pro-Russian Ukraine. If Russia annexes Crimea, it may look like a Russian victory but in reality would be an admittance of a wider failure.

It is for Ukraine to decide whether it should join the EU. If that is their settled wish, we should not shut the door just to appease Russian sensibilities. Nor should we confuse justifiable anger at corruption (often linked to Russia) with a genuine love of EU integration shared by all Ukrainians. For now, we should help Ukraine improve its standard of government, help it strengthen its economic independence (one way could be through shale gas development) and do what we can, through sanctions, to dissuade Russian aggression. But we should be aware that the makeup of the EU, the nature of its integration and enlargement, combined with ‘all or nothing’ decisions being forced on the Ukraine by both the EU and Russia, have polarised Ukrainian politics and are having consequences.

In the longer term, it is time for the EU to rethink how it deals with its neighbouring states. Those that have chosen not to join the EU or border the EU but will never join deserve better than the imposition of a hard frontier dividing them from historic partners. If the price of EU integration within is division without, someone will pay the price. If the EU was not so rigid, did not require conformity with everything and offered a genuine partnership status that could work for Ukraine without antagonising its other neighbours, it might be a form of membership that others could take up – including, someday, even Russia.

Why France can hold up EU-US free trade talks

David Cameron wants to use the gathering of G8 leaders in Northern Ireland next week to launch formal negotiations on the planned EU-US free trade agreement. But progress depends on breaking the deadlock in talks today over France's insistence that any agreement must include protections for its film and TV industries against American imports. These talks are to give the European Commission a mandate to start negotiations.

The French, though, have a pretty strong bargaining position. The EU Treaties (Art 207) set out the procedures for opening and concluding free trade agreements under the so-called Common Commercial Policy.

The Commission makes recommendations to national governments, which authorise it to open negotiations. The Commission then conducts the negotiations in consultation with a special committee appointed by ministers.

In principle, trade agreements are negotiated and concluded by qualified majority voting. However, there are a number of exceptions where unanimity (and therefore national veto) still applies, including “in the field of trade in cultural and audiovisual services, where these agreements risk prejudicing the Union's cultural and linguistic diversity.”

In a bid to break the deadlock, the European Commission and the Irish EU Presidency have proposed asking EU member states to give unanimous approval to any parts of the draft agreement affecting the audio-visual industry once the negotiations on that specific sector are concluded. However, Le Figaro quotes a source from the office of French Trade Minister Nicole Bricq as saying, “We already have a veto on the conclusion of the agreement, so [the offer] doesn’t change anything for us.”
 
In a world where trade agreements are increasingly all-encompassing affairs, ranging across the entire economy, this gives France in particular a great deal of leverage.

The China-EU trade war begins, China adopts divide and conquer approach

As expected, China did not take the new tariffs on its exports of solar panels to the EU lying down, nor did it see it simply as an ‘opportunity to negotiate’ as the Commission suggested.

China has announced that it is investigating illegal EU subsidies to the EU wine industry. The rational is, as the Chinese Commerce Ministry put it, because, "Wine imports from the EU enter our market via dumping, subsidies and other unfair trade practices, and have hit our wine production."

Our headline is of course exaggerated for effect but the main point stands. This dispute has escalated significantly with the retaliation now raising the prospect of a tit-for-tat trade dispute.

It’s also been well documented that the EU is divided on this issue, with quite a few countries (led by Germany) openly expressing their opposition to the Commission’s tariffs. Other more traditionally protectionist countries have been decidedly less vocal. With this in mind, it’s interesting that China has launched an investigation which focuses on a sector heavily located in France and the Mediterranean rather than one in Germany. This could be a mere coincidence, but then it could not.

AFP reports that French President Francois Hollande has called for an EU-27 meeting to be convened to discuss the issue and create a united EU position on it (possibly to counter such a divide and conquer approach).

There are a few other interesting points to note with this investigation:

• The Chinese do have a case given the influence of the CAP, which still provides significant subsidies to farms including vineyards.
• It’s hard to say exactly how large the subsidies are. Under the reformed CAP programme in 2008, National Support Programmes for wine growers totalled €2.8bn.
• As with much Chinese data it’s hard to pin down the exact size of the market. The Commission notes that in 2011 China and Hong Kong together accounted for €1.47bn in wine exports from the EU. This has certainly increased since then as China represents one of the largest growth markets for wine. Reuters suggests that Chinese imports of wine amount to €1bn from France alone.
• Whatever the size, this market is smaller than the solar panel one. EU imports of solar panels from China amount to around €21bn.

EU offers China “window of opportunity” to settle solar-panel row but proceeds with watered down tariffs

Soon to be more expensive?

The EU-China trade row over cheap Chinese solar panels flooding the European market has been raging on for several weeks now and is threatening to escalate into a full blown trade dispute. 

On one side, the EU has firmly maintained that it will impose anti-dumping tariffs. On the other, China has postured that any such move will lead to economic retaliation.

Meanwhile, somewhere in between, a number of EU member-states (led by Germany) have come out supporting China, fearful the row could hamper national trade-interests with the Asian monolith.

Against this increasingly tense background, EU Trade Commissioner Karel De Gucht today presented the Commission’s provisional findings in the anti-dumping case on solar panel imports from China, key points from his press conference below.

• There will be temporary tariffs imposed, which will play out in two phases: 11.8% from 6 June, and 47.6% from 6 August.
• De Gucht maintained that this was a “reasonable” decision that had nothing to do with protectionism. He said that Chinese “overproduction” of solar panels had allowed it to flood the European market with a cut-price product, which, he estimated, should cost 88% more.
• So in the short term, the Commission sees the tariffs on China, in De Gucht’s words as an "emergency measure to give life-saving oxygen" to a threatened EU solar industry. In the long term, the Commission says it is upholding to the principles of fair trade.

Open Europe’s take on the decision:

Although De Gucht is probably correct to say he is simply applying the rules as written, we ultimately believe applying the tariffs at such a high level is the wrong decision for a number of reasons:

• Firstly, solar (and renewable energy generally) is subsidised everywhere to some extent. If it didn’t need to be it would be the obvious energy resource for the whole world. This makes it very difficult to judge what the ‘fair’ level of subsidy is or how the market would look without them.
• In this vein, the whole EU market arose due to significant subsidies and would be unlikely to continue without them in some form (see our previous post for more detail). This makes the claim of protecting jobs and the EU solar industry a bit of a misnomer.
• Consumers will lose out as prices could well rise from this. At the very least they will be presented with less choice.
• Many producers and services built around the wider solar industry could struggle as they have become reliant on the cheap Chinese imports.
• These nuances could show that some competition laws (and not just in the EU) need to be reassessed to account for complex and global markets.
• The potential for retaliation remains concerning. This could cause harm to the EU's significant trading relationship with China at a time when Europe can least afford it.
• As De Gucht himself seemed to note, no decision is made in isolation and the political implications of such a decision should be taken on board. There is also an inherent tension here given that, although the power to judge Competition Policy has be passed onto the EU, Foreign Policy and international relations remain very much in national hands (as they should). Policies which cross this boundary must take account of national preferences in this area.

Where do we go from here?

All that said, the Commission has thankfully left itself with an ‘out’ and rowed back significantly on its original hard line position. Using the staggered tariff rate and the two month period for negotiation eases the impact of the decision. Although, relations will likely be tense in the immediate aftermath.

The Commission insistence that the ‘onus’ is now on China will probably not go down well. Whether China will play ball and reach an ‘amicable’ agreement as the EU wishes remains to be seen. It will certainly make for an interesting summer of negotiations.

Unintended consequences: could tariffs on Chinese imports actually harm the EU's solar panel industry?

The past few weeks have seen a marked increase in hostilities between China and the EU over the ongoing trade dispute, centred on the solar industry. Given that it’s between two of the largest economies in the world, this dispute is not to be sniffed at.

As the WSJ noted last week, the Chinese government has increased its rhetoric against the recent EU trade investigation in illegal subsidies to solar panels imported to the EU from China, while the threat of similar action on telecommunications is deepening the divide. Tensions peaked over the weekend with the Chinese delegation to the EU putting out a press release containing a veiled threat of retaliation if the EU pushes ahead with tariffs and other protectionist measures.

Below we lay out some background and key points on the solar panel case which is driving the dispute.

So what's going on here?

• To recap, last September, DG Trade at the European Commission launched an anti-dumping investigation into whether imports of Chinese solar panels and their components were being given unfair subsidies by the Chinese government. The investigation was launched after a complaint by EU ProSun, a collective of European solar firms. This group is led by the EU’s largest solar firm Solar World. Solar World was instrumental in pushing similar action in the US (which also instituted tariffs).
• DG Trade has announced that imports of Chinese solar panels will face tariffs of between 37.3% to 67.9% from 6 June 2013, although the exact amount will vary from firm to firm (until that date the ruling can of course be altered). This ruling is temporary and the duties are provisional since the investigation (and other similar ones) are still on-going. Once the investigation is complete the findings are presented and the issue is put to the Council of Ministers for a vote on whether to impose permanent duties.

There are a lot of different legal, economic and political points to consider here.  It is clear that the Chinese firms are receiving significant subsidies and by the letter of the law there should probably be some tariffs.

However, this episode obscures a much more fundamental point: the EU’s solar panel market is to a large extent unsustainable. In the early 2000’s Solar firms were given significant subsidies, especially in Germany, and were able to expand rapidly despite being barely commercially viable. Once the eurozone crisis hit, and governments had to start cutting spending, the subsidies dried up.

Ironically, cheap imports from China are likely to have played a significant role in supporting this market as public subsidies in Europe wound down (by helping to bring down production cost). Similarly, given the variety of cheaper options available, solar cannot yet be commercially competitive without some form of government support – be this directly from Europe (which cannot afford it at the moment) or indirectly from China. So, again, ironically, there's a risk that the tariffs contribute to killing off Europe's own solar market - raising questions about the Commission's claim that the tariffs are needed to protect 25,000 European jobs.

This is also a classic example of large firms using their market position to lobby the EU to take action to lock in the status quo. Larger firms such as Solar World are keen on the tariffs and/or other protectionist measures while smaller firms (that are looking to partner up with and import cheap components from Chinese firms) are reluctant.

Finally, whilst the Chinese government isn't exactly whiter than snow, the EU must be very careful not to trigger a trade war - not only would it be economically damaging, but the EU's trade image would also be seriously damaged.

Finding a compromise should be the short term goal, but over the longer term it poses an interesting question over how national policies impact other countries (see also the prospects for currency wars) and what can be done to manage this. This dispute should also force the EU to consider its position on heavily subsidised markets which are very rarely viable over the medium and long term.

So, what next? The dispute is likely to continue, although a statement last night by EU Trade Commissioner Karel De Gucht did show some signs of conciliation. A decision on whether to impose the temporary tariffs will be needed by the 5 June - if they are imposed then the dispute could escalate quickly. These would run until December when the investigation is complete at which point the findings and prospect of permanent tariffs would be put to the Council of Ministers.

Is Lord Lawson's intervention likely to be a game-changer?

The big political news of the day happens to be strongly EU related – former Chancellor Lord Lawson’s piece in the Times (£) in which he argues in favour of a UK exit from the EU. So what to make of the piece – is it a game-changer or just a Westminster village story?

Lord Lawson rightly sets out many of the flaws inherent in the status quo - which we have looked at in detail numerous times,  from the democratic deficit through to the economic cost of over-regulation and the wasteful EU budget. He also draws particular attention to the threat of onerous and disproportionate costs from impending EU financial services regulation, with particular focus on eurozone-tailored rules imposed through an inbuilt majority in the EU's decision-making process. Familiar stuff. The key question is whether the UK is better off fighting to address these issues from within the EU or leaving altogether? Lord Lawson argues that:

“The changes that Wilson was able to negotiate were so trivial that I doubt if anyone today can remember what they were… I have no doubt that any changes that Mr Cameron — or, for that matter, Ed Miliband — is able to secure will be equally inconsequential… That is why, while I voted “in” in 1975, I shall be voting “out” in 2017.” 

The media have really gone to town on this story - it’s an otherwise slow news day and everyone loves a good ‘Tory splits on Europe’ narrative. No doubt, it has further heated up an already hot debate - and if there's one consequence, it's that the intervention has made 'better off out' a slightly more respectable position. Lord Lawson remains a respectable figure.

But a game-changer, it is not. The responses to the article have conformed with already well marked-out positions: UKIP says its delighted, Dan Hannan tweeted that "we can really win this guys" while those who usually object to this kind of proposition, have objected.

Leaving aside his pessimism about a new EU deal (which we take major issues with), Lord Lawson - whose eurosceptic views are hardly a secret - actually doesn't really tell us anything new. In particular, like most others who say the UK should leave the EU, he completely dodges the most important question of all: what's the alternative? This is the weaker part of his piece:

“Over the past decade, UK exports to the EU have risen in cash terms by some 40 per cent. Over the same period, exports to the EU from those outside it have risen by 75 per cent. The heart of the matter is that the relevant economic context nowadays is not Europe but globalisation, including global free trade, with the World Trade Organisation as its monitor.”

“Today too much of British business and industry feels similarly secure in the warm embrace of the European single market and is failing to recognise that today’s great export opportunities lie in the developing world, particularly in Asia.” 

While Lord Lawson makes a fair point about British business not making the most of global opportunities, he creates a false choice between one or the other (we've been through this before). The point is not the global market place versus the European market, the point is to maximise the total volume of trade - this is what the Germans do very effectively.

While claims about 3 million jobs being at risk in the event of the UK leaving the single market are way overblown, the truth is, as we've pointed out numerous times, all the existing alternatives, from the Swiss and Norwegian models to the WTO-only model, suffer from major flaws. It is unclear which of these Lord Lawson proposes but, judging from the second paragraph above, he seems to suggest we fall back on the WTO regime. So he is arguing for a raft of extra costs slapped on UK exports, including a 10% tariff on car exports to the EU, in addition to barriers to market access for all UK financial firms (absent new deals, which Lord Lawson, again, doesn't mention)?

Until those who advocate the mythical "UK option" actually flesh this concept out into a concrete and sell-able policy proposal, interventions like Lord Lawson's will primarily be something that the Westminster chattering classes can have some fun with.

Ten areas where the UK and Germany could agree on Europe

Ahead of last week's meeting between David Cameron and German Chancellor Angela Merkel, Open Europe's Director Mats Persson wrote on his Telegraph blog:

About now David Cameron will sit down with his German counterpart Angela Merkel, with the discussion likely to be dominated by Europe. The issues are complex, but come down to a simple trade-off: Cameron wants Merkel’s support on his vision for a reformed and flexible Europe. Merkel – fearing being left alone in a Mediterranean-dominated EU – wants to find ways to keep Britain on board. So is a new Anglo-German bargain at some point down the line possible? There are those in both the status quo and better off out camps who would answer categorically: “no way – It’s all or nothing for Britain”.

I strongly disagree. As Michael Meister, Deputy Parliamentary Chairman of Merkel's CDU party, told the BBC Today Programme this morning, “I think we are open to arguments…to move something back [to member states].” For example:

Strengthening national parliaments: Multi-billion euro bailouts have been seen the Bundestag getting more involved in EU affairs, as recently demonstrated by the Cypriot bailout. At the same time, Germany’s traditional support for the European Parliament – seen as pushing an unrepresentative agenda (including Eurobonds) – is starting to wane. Many Germans – including the country’s constitutional court – would fully echo David Cameron’s assertion that national parliaments “are, and will remain, the true source of real democratic legitimacy and accountability in the EU”.

Cutting the cost of EU bureaucracy: Germans are just as critical of excessive EU bureaucracy as the British. Following a story in Die Welt am Sonntag that 4,365 EU officials earned more than Angela Merkel, even Germany’s Europhile Foreign Minister Guido Westerwelle said that “The salary structure in Brussels is worth taking a critical look at”. Berlin has already backed Cameron’s demand for a pay cut for EU officials.

Ending recycling of EU regeneration cash: Westerwelle – alongside a host of German politicians and commentators – has strongly criticised the EU’s so-called “structural funds” for leading to “aberrations such as EU money going to day spas and romantic hotels.” Cutting down on these funds, for example by limiting them to only the genuinely poor regions in Europe, would save both the UK and Germany billions. (The German federal government would have to find a way of buying off the Easter Länder, but that’s fully possible).

Phasing out farm subsidies: As in the UK, there’s strong appetite for ending the EU’s totally irrational direct farm subsidies – the German Social Democrats recently came out in favour of spending more of this cash on research and development.

Cutting the EU budget: Merkel already backed Cameron over a historic cut to the EU’s long-term budget – despite many at the time saying this was “impossible”.

Less intrusive EU environmental law: Given its industrial base, Germany could find its economy even more hamstrung by burdensome EU green laws than the UK’s, especially as the country has given up completely on nuclear power. While the country broadly backs switching to renewable energy, it most definitely wants to maintain as much control as possible over its energy mix (overall targets rather than micromanaging EU green laws could be one compromise).

Devolving powers over fisheries: The UK and Germany have both been the driving forces behind current efforts to devolve powers over the EU’s fisheries policy to member states, having groups of countries deciding quotas rather that this being micromanaged in Brussels. These are very important and long overdue reforms.

Migrants’ access to benefits: Whilst both countries, rightly, remain supportive of EU free movement of workers, they also recognise the need for safeguards to make sure people come to work rather than claim benefits. As Germany’s Interior Minister Hans-Pieter Friedrich put it, “If people in Germany feel that their solidarity and openness is being abused and our welfare system is looted then there will be legitimate anger. The message for the EU Commission is clear: Brussels has to take stronger account of situation of the local population in its decision making process.”

Free trade: At times, Germany can slip into a protectionist mood, but generally, it’s very keen that the EU upholds a rule-based order that allows for free trade. The UK and Germany are currently blocking proposals for “reciprocity” to be included as a tenet of EU trade policy – which could seriously hurt both UK and German exports.

Single market safeguards: The UK and Germany have already agreed a “double majority” principle to apply to some banking rules, to make sure that the Eurozone doesn’t write the rules for the UK and other “outs”. Again, this was seen by some as “impossible” as it would give the UK “too much power” (but was agreed last December). Here, Berlin acknowledges that the UK is within its rights to ask for safeguards, given that it’s the Eurozone – and not the UK – that is changing the rules of the game.

There are other areas as well, for example the German constitutional court has ruled that social policy is an area of particular importance for a country “to democratically shape itself”, while former Bavarian President Edmund Stoiber has been specifically tasked with cutting EU red tape.

The UK government needs to invest a lot of political capital and be far more clever that it has been up until now. But don’t believe the pessimists; although it will be tough, a new Anglo-German bargain for a thoroughly reformed Europe is fully possible.

Is reducing the tax on beer but not wine legal under EU law?

Cheaper beer but is it legal?

Delivering the budget today Chancellor George Osborne announced the reduction in beer duty by 1p per pint. However he did not do the same for wine. We have been wondering if the Treasury has cleared this with their lawyers as this could potentially infringe EU law - a point raised by Geoffrey Clifton-Brown MP in the debate. Hopefully it is legal but we thought we might remind them of an old case.

Under EU law you can not discriminate against another state's products. As the UK does not produce (much) wine the EU could argue that this breaks EU law. They have done it once before.

In the  1983 case "European Communities v United Kingdom of Great Britain and Northern Ireland. - Tax arrangements applying to wine. - Case 170/78." The Court found that:

ON THOSE GROUNDS ,

THE COURT

HEREBY :

1 . DECLARES THAT , BY LEVYING EXCISE DUTY ON STILL LIGHT WINES MADE FROM FRESH GRAPES AT A HIGHER RATE , IN RELATIVE TERMS , THAN ON BEER , THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND HAS FAILED TO FULFIL ITS OBLIGATIONS UNDER THE SECOND PARAGRAPH OF ARTICLE 95 OF THE EEC TREATY .

Before people get their spirits up (pun intended) we just hope the Treasury's lawyers were consulted.... And if it is legal then there is nothing stopping France putting up its tax on beer...

A new angle to UK-EU trade?

The WTO and the OECD yesterday announced the release of a new set of trade data. This data tries to pin down the “value added” from trade rather than just the gross figures. Essentially, this means the data tries to track where the final demand for an exported product/service comes from, thereby netting out trade which simply contributes to the production line of the finished good/service.

The data provides an interesting new contribution to the UK-EU debate on trade. Notably the figures highlight that, under the value added approach, US trade looks more important to the UK than European countries. The Guardian questions whether this could aid the calls for the UK to exit the EU.

Superficially it may, but looking at the data more deeply, we think not. As the WTO/OECD note:

“This suggests that UK exports to other EU countries are at least partly intermediate services and inputs that are then further processed and shipped to other countries (in particular to the US).”

So, although the US is the source for the ‘final demand’ we still have to export our products or services to other countries in the EU for them to take advantage of this demand. Being a member of the EU and the single market plays a big role in allowing us to do this. The real question is, would the UK still be able to access this final demand from the US if it left the EU?

Well, it’s almost impossible to say. One thing that seems certain though, is that, since many of these exports are intermediate ones, there is no guarantee that we would still be able to export them outside the EU even if the final demand remains from the US (this point is hinted at by Ian King in the Times).

A final interesting point is that the increase in value added exports to the US seems to occur for most large EU countries. Why this is, is not entirely clear. To us, it seems that it could be motivated by specialisation within the EU, with EU members producing various component goods and services which are then combined into final exports to the US. If this is the case then this seems a positive result to us, as it surely increases the cost competitiveness of exports from the EU (including the UK).

From the perspective of the UK/EU debate this 'value added' data is another interest metric to add, although at the moment it offers little more conclusive evidence than what we currently have. The bigger benefit comes in broader terms, as the FT notes, providing further support for free trade. With protectionist forces flaring up during the eurozone crisis, countries would do well to keep that in mind as well.

What Cameron should have told the Telegraph

David Cameron is quoted in today’s Telegraph saying that he wants to negotiate a “new settlement” with the EU with powers returned to Britain, but that he would never campaign for an “out” vote in a referendum. “If your vision of Britain was that we should just withdraw and become a sort of greater Switzerland, I think that would be a complete denial of our national interests”, he said.

The ‘never’ part doesn’t seem to be a direct quote so it’s not entirely clear how to interpret it. However, several commentators have already laid in to Cameron over ‘revealing his negotiation hand’. In order to make demands for renegotiation credible, so the argument goes, Cameron must be willing to keep the “out” option open, in order to have a fall-back plan should negotiations fail. Otherwise, other member states have nothing to fear and can just tell the UK to go and stuff itself. A couple of things:

• As the Telegraph’s James Kirkup has pointed out, when he said he wants to stay in the EU, Cameron merely restated what was in the 2010 Tory manifesto, so it’s not as if he’s changed position 
• There’s virtually no clean ‘out’ option to fall back on. Whether EEA, bilateral FTA or Turkey+, all alternative models also require renegotiation with, and approval by, the other 26 member states, meaning that the ‘what happens if they say no’ question still applies also under an ‘out’ scenario. The only way Cameron can get around that is by explicitly stating that he’s willing to fall back on WTO rules – which would not require anything – but which would instantly turn the entire UK business community, amongst others, against him. 

Having said that though, those who criticise Cameron have a point First, demands for Britain to leave are not a negotiation ploy but are real, and will intensify absent new EU membership terms. The UK government cannot be seen as defending EU membership at ‘any cost’. Secondly, as we’ve said before, if the EU becomes a political extension of the Eurozone, i.e. if directly or indirectly greater Eurozone integration spills over to Britain, for example via a banking union, Britain simply cannot remain inside – politically, democratically or economically. Finally, as we argue in our recent report on EU-UK trade, there are scenarios under which the exit door could suddenly look a lot more attractive, including if single market liberalisation stalls and if the Eurozone grows more protectionist internally and externally, preventing UK business from taking advantage of growth opportunities around the world.

Therefore, the smartest thing for Cameron to say would be: As we set out in the Tory manifesto, we remain committed to EU membership and will not seek an “Out” vote. However, we must also acknowledge that  the UK public is understandably growing more restless by the day. Absent new EU membership terms for Britain, while I personally would be against it, there may come a day, when it will no longer be possible to resist pressure for the UK leaving the EU, which would create a hugely unpredictable situation that would be in Berlin’s and Brussels’ interest to avoid.

David Cameron should frame the renegotiation of the UK’s membership terms as a bid to save the UK’s EU membership – that is a far more powerful negotiating tool than any short term threat for him to campaign to leave because, it could potentially gain support from some unexpected quarters, it is true and does not rely on the promise of a politician.

Why Germany just got more nervous about the prospect of the UK leaving the EU

Following last week's EU summit, we were struck by how the ambush by France, Italy and Spain demonstrated in practice how a closely integrated eurozone could work in the future, with Germany internally outnumbered by the 'Club Med' contingent. In a letter to the FT, we argue that:

“At last week’s summit, German Chancellor Angela Merkel may have got a taste of what an EU without Britain would be like. Backed into a corner and with her list of allies growing thin, she was forced to give way to the Mediterranean bloc – Italy, Spain and France – over direct recapitalisation of eurozone banks. Quite aside from the specific item up for negotiation, it illustrates the dangers for Berlin should Britain be pushed out of the EU altogether." 

"As Europe goes through a highly unpredictable – and testing – phase, Germany needs the UK inside the EU tent to balance the more protectionist southern bloc, and to uphold a rules-based system where goods and services can be traded freely across borders. It is therefore in Germany’s interest to support new terms of EU membership for Britain, which will be needed to reconcile British public opinion with continued commitment to the EU."

Over on the Guardian's Comment is Free, we develop this theme a bit further, arguing that: 

"Proportionally, Germany has far fewer friends inside the eurozone than in the EU as a whole, with the bloc's centre of gravity skewed by the more protectionist and high-spending southern states...Therefore, Germany has a very strong interest in keeping as many decisions as possible at the level of 27 member states."

"This means that, if push comes to shove, the Germans may prove more susceptible to UK arguments for revised membership terms than it is willing to admit publicly. A common response from EU-reform sceptics to any suggestion that the UK should seek a more flexible relationship with Europe is that other member states would never allow it, but this has never been credibly tested." 

"It won't be easy, but arguably, the Germans have more to fear from being left isolated within the eurozone than they do from a new bargain with Britain. If the choice is between the UK leaving or getting some EU powers back, Berlin may – after a lot of posturing, negotiation and bickering – go for the latter for fear of being left bowling alone in Europe. That is to say, that Britain has more leverage in Europe than it may think. Germany needs Britain and vice versa. No one likes being without friends."

Mr. Cameron, the ball is in your court...