The Farage allowances episode is primarily a sign of a fundamentally broken allowances system

The Times today uses the news that Nigel Farage is to be investigated by the EU’s anti-fraud office OLAF, following a complaint from an ex-Ukip official that £60,000 of EU allowances paid into his personal bank account have gone “missing”, to attack the “fraudulent prospectus” that he is “the politician who is not a politician”.

The chief allegation is that:

"The Ukip leader has received £15,500 a year from the EU since at least 2009 to pay for the upkeep of his constituency office, a small converted grain store near Bognor Regis, according to transparency reports filed on the party’s website.  

However, the grain store was given rent-free to Mr Farage by Ukip supporters 15 years ago. Utilities and other non-rental costs amount to no more than £3,000 a year, according to the former office manager, leaving about £12,000 a year unexplained."

The paper also notes that Mr Farage “also revealed that he used a proportion of his [General Expenditure Allowance] to pay more than £1,000 a month towards a controversial second EU pension scheme of which he was a member between 1999 and 2009.”

We looked at this additional pension scheme back in 2009, when it closed to new members, and it was controversial for two reasons. Firstly, it was two-thirds funded by taxpayers and, second, the system relied on MEPs being honest enough to fund the shortfall in their allowances out of their own salary. Credit to Farage for leaving the scheme - but being part of it in the first place doesn't reflect well on him (though he's one of many, many MEPs from all parties who were or still are).

Whatever the rights or wrongs of Farage's actions, this illustrates that the EP's allowances and expenses system is still miles away from what taxpayers should accept. The General Expenditure Allowance is notoriously vulnerable to abuse because it is generous, has a wide list of potential uses and does not require MEPs to produce receipts. The Times' leader itself admits that "It is probable, even if these allegations prove to be true, that Mr Farage has done nothing illegal".

Predictably Farage's response casts him as the victim of a "politically motivated attack from what is the establishment newspaper." The general expenditure allowance, he said, "is given to every MEP and we can spend it how we want to," adding:

"We have used the money to promote the cause of Britain leaving the European Union and we have done that unashamedly"

It is right that Nigel Farage is subject to proper scrutiny and that investigations are carried out if he has a case to answer, but there's still no proof he has done anything illegal. And whether singling out Farage will actually help or hurt his cause remains to be seen. However, what's clear is that the EP's allowance system must urgently be reformed.

The EP allowances system is something that we'll most definitely return to.

Debt problems in Europe extend beyond the headline figures

On Monday, Eurostat released its latest figures on public debt to GDP, which soared to a record of 92.2% in the eurozone in the first quarter of this year. Of all the eurozone members, only Germany and Estonia were able to reduce their debt levels in the first three months of 2013, while in total five eurozone members had debt-to-GDP over 100%.

High government debt is obviously a well-covered issue and a well-known problem in the eurozone. However, the debt problems extend well beyond this simple figure - we've touched on this previously, when looking at the level of financial sector debt and the need for a eurozone banking union. Another potentially interesting aspect of the debt problems relates to what is known as 'implicit debt'. This is an estimate of the future debt which states will accrue including contingent liabilities such as pension payments and welfare payments (many of which are, at this point, unfunded). 

In that vein, we thought it would be worth looking back at an interesting study produced by German think tank Stiftung Marktwirtschaft in coordination with academics at the University of Freiburg at the end of 2012. They've had a go at calculating the level of 'implicit debt' in the EU and what it means for debt sustainability. The results are laid out in the table below.

('Implicit debt' is calculated using data on future GDP growth as well as on the long-run change in age-dependent expenditure, using the European Commission’s reports on ageing, all done assuming no policy changes and put into 'present value' terms).

As with any such calculations, there are numerous assumptions and we must be wary of drawing grand conclusions, but the results provide some interesting points nonetheless. At the bottom of the debt sustainability ladder, we see the usual suspects such as Greece, Cyprus, Spain and Ireland (raising some questions about how effectively it is really recovering from its crisis). Slovenia, a country which we warned may be in line for a bailout, also finds itself in trouble by this metric. Surprisingly, Luxembourg fares very badly; the authors suggest this is down to its "generous" pension system which has not been overhauled to deal with future demographic developments.

It may also surprise many that Italy ends up top of the table. The authors suggest that this is due to the fact that the country "expects only a small rise in age-dependent expenditures as a proportion of GDP." Italy admittedly made quite an effort already in reforming its pension system (in the 1990s and more recently under Mario Monti's technocratic government) but this outcome does seem fairly optimistic, not least because it is reliant on Italy maintaining a long term growth level of close to 2% per year.

All that said, another study, by Société Générale, on the topic of "unfunded liabilities" relating to pension and welfare costs, places Italy's at 364% debt of GDP suggesting it is better off than France (549%) or Germany (418%). Similarly, by the SocGen method, Spain would only have a burden of 244% to GDP, showing that a lot depends on the precise calculation and what is included. Perhaps a bit worryingly, the UK is doing worse than most eurozone countries in both calculations.

According to Johan Van Overtveldt, the editor-in-chief of Belgian magazine Trends who flagged up these results, "These figures are taken very seriously by the ECB". With regards to Italy, he warns that "an increased interest rate or a continuing recession (or a combination of the two) can quickly and drastically overturn this positive image".

In any case, these figures provide some added depth to the on-going debt issues in Europe and debatedly provide a slightly more complete picture than the simple headline debt to GDP figures. As we have noted before, though, this is simply one aspect of the varied and complex eurozone crisis which extends beyond just government debt to the banking sector and international competitiveness (to name but a few areas).

Initial thoughts on Spain's latest austerity budget

We’re still waiting for the full breakdown and figures behind the Spanish budget (which we will analyse and post in due course) but in the meantime here are our initial thoughts:

• The decision to tap the pension/social security reserve fund for €3bn was surprising. Generally this is a fairly last resort approach, but why Spain felt the need to do this to get its hands on only €3bn isn’t clear, especially with short term borrowing costs still low. Could Spain’s liquidity problems be greater than thought?
•  The interest Spain will have to pay on its debt will go up by €9.7bn, compared to a total package of cuts of €40bn (undoing almost a quarter of them). For a country the size of Spain even seemingly substantial cuts can easily be offset by the massive debt burden.
• The majority of the savings (58%) will come from spending cuts rather than tax increases – there is an on-going debate over which is more effective but in the short term spending cuts are likely to harm economic growth (especially given the reliance on the state as an economic driver in Spain).
• Tax revenue is expected to go up by 3.8% - given that growth is likely to falter this seems incredibly optimistic, even with some tax increases.
• The basic macroeconomic forecasts for the budget haven’t changed – this suggests that the overly optimistic growth forecasts are likely still in place, despite most investors and international agencies reducing their forecasts.
• Unemployment is predicted to have topped out this year – again this seems hopelessly optimistic given that structural labour market reforms are yet to take full effect (and there are still more to come) while internal devaluation will need to continue at a rapid pace (see our recent briefing here for more info on this).

So, plenty of issues already, with what seems to be a fairly unconvincing budget given the state of the Spanish economy. 

One final point to note is that Spanish Economy Minister Luis De Guindos kept insisting that the measures were all in line with recommendations from the EU/IMF/ECB troika or in some cases even went further. This looks to be leading into a Spanish reform programme as part of a bailout/bond buying scheme, hinting that Spain may be preparing that request after all.

Eurozone crisis meets German pensions

It was just a matter of time: The front page of today's Bild warns about the effect the crisis will have on millions of Germans’ pensions.

Under the headline “Euro crisis shrinks pensions”, Bild reports that the occupational pensions of 17 million Germans are threatened by a combination of the low interest rates on the government bonds of the remaining creditworthy nations – which pension funds heavily invest in – and by the low rate of interest (0.75%) set by the ECB in an attempt to stimulate the economy, which it is feared will lead to inflation in the longer term.

In turn, the paper claims, this will erode the value of pension payments, citing calculations by Professor Stefan Homburg from the University of Hannover which show that given an inflation rate of 5%, a €1,000 pension payment would only be worth €614 in ten years’ time (although at OE we think that, given current policies, such an inflation rate is someway off).

Although there is clearly an element of scaremongering here, this is the kind of stuff that brings the crisis to life for people, and angry retirees are not a constituency that any government is advised to take lightly. It also highlights the ever-present tensions between different interest rate needs of the 17 euro economies. Sooner or later, there will be significant pressure from within Germany on the ECB to raise rates, possibly leading to a political tug of war between member states' representatives - this seems inevitable at some point if Germany continues to outgrow other parts of the eurozone so significantly. It also shows that perversely, the record low interest rates on German sovereign debt are not wholly a positive factor for German citizens.

At the end of the day, the outcome of this crisis may be decided in large parts by its impact – be it tangible or perceived – felt by German citizens in their everyday lives.

Securing Portugal's deficit

The EU/IMF/ECB troika released a statement on its second review of the Portuguese bailout this afternoon. It was more or less what was expected, with a deeper recession forecast for next year (GDP contracting by 3%) and fears over some over-spending, particularly regionally, which could result in the country missing this year’s deficit targets. Other than that it was light on detail and heavy on the platitudes as with most EU statements these days. (We’ll bring you a full analysis of the report once it is released).

But there was one interesting point which caught our eye:

“The government is seeking to negotiate a voluntary agreement with the major banks to transfer part of the assets and liabilities of these banks’ pension funds to the social security system, so as to allow meeting the 2011 fiscal deficit target of 5.9% of GDP.”

This brought some memories rushing back from our investigation into Portugal for our report earlier this year. Portugal did something similar to this in 2010, where they transferred assets from the formerly state owned Portugal Telecom onto government books but failed to add the liabilities in a timely fashion, as we noted in the paper:

Three pension plans of Portugal Telecom (PT) were taken over into the public social security system. These pension funds are for employees that used to be civil servants at the formerly state-owned firm. The agreement between PT and the government was signed in December and in addition to the assets of the pension funds, PT will transfer a total of €2.8 billion to the government. This amount (around 1.6% of GDP) will be counted in this year’s general government revenues, while there is no change in the official debt figures.

So, the assets transferred boosted the government revenue figures but we suspect that since the long term unfunded liabilities don’t fall into general annual expenditure calculations, they went unnoticed allowing a reduction in the deficit.

Clearly, the statement above suggests that something similar may be done this year. In its statement the Troika does claim that the liabilities will be added as well, but if they are unfunded and merged into the broader pension liabilities of the state, then they may not fall into general government debt and deficit calculations, allowing Portugal to meet its deficit targets through an accounting trick for the second year running...

The big three and the eurozone crisis

On Friday, the FT revealed that France is leading a majority group of eurozone governments in opposition to German demands that the permanent eurozone bailout mechanism include clear language providing for the inclusion of private bondholders in negotiations on any restructuring of government debt post-2013. This seems like a pretty dangerous game on France's part, but it also goes to show that the removal of Britain from the eurozone equation doesn't equal spontaneous Franco-German agreement.

If France isn't careful it could find itself as the only somewhat functioning economy representing and leading the Eurozone South, finding itself pitted against Germany and the Hawkish North more often than it might feel comfortable with.

But what does this mean for the wider political dynamics within the EU and for Britain?

While the huge financial implications the eurozone crisis has for Britain - not just its liabilities through the bailouts but also via the exposure of its banks to interconnected European financial markets - are beginning to sink in, the potential political outcomes for the UK's role in Europe are rarely considered with as much rigour.

With EU leaders no nearer a credible plan to fix the eurozone's economic mess, the political dynamics of the EU are in flux. It's clear that things can't remain the same, whatever happens over the next five to ten years in the eurozone.

Much of the analysis so far has been rather lazy, with commentators reaching for the "this is the beginning of a two-speed Europe" line, with the UK outside the 'eurozone core' and therefore in the 'slow lane'. However, while there may be an element of truth, these analyses seem unwilling to face up to the fact that the logical extension of this particular argument is that the UK should join the euro in order to maintain its influence in the EU - which no right-minded soul is prepared to even contemplate.

Even more importantly, it's clear for everyone to see that the "slow" and "fast" lanes in Europe are now defined by economics - that is by debt and deficits and by levels of competitiveness - rather than Treaty opt-outs or domestic constitutional measures, such as the UK's EU Bill. (Faced with numbers that are hard to ignore, people are being forced to re-define what they mean by a two-speed Europe - the more-often-than-not sound Economist, for example, which seems to have quietly dropped its narrative that institutional arrangements rather than economic fundamentals are the main fault lines in Europe).

Writing in the Mail a week or so ago, Iain Martin offered an alternative to the 'UK in the slow lane' hypothesis, suggesting the eurozone crisis presents "an historic leadership opportunity for David Cameron". The whole "Britain should lead in Europe" thesis has been done to death, but on substance, there is much reason, as well as a practical necessity, to believe that he is right - as we've been arguing for a while now.

Much of the logic that underpins those who have condemned the UK to life in the European slow lane's argument is that, by steering clear of plans for greater economic governance of the eurozone, Britain has pushed Germany into the arms of the French. This, the story runs, will lead to a more protectionist hardcore at the expense of Britain's more liberal economic interest.

Traditionally, Germany, to its advantage, has often been able to play British liberalism off against Gallic mercantilism. But, as we are beginning to see, forcing France and Germany together may start to reveal how many things that the two countries do not agree on.

How long, for example, can the two countries share the same currency while France runs deficits to pay for its generous pension system (plans to raise the retirement age to 62 resulted in mass protests) and Germany saves and raises its retirement age (which since 2007 is being phased in at 67)? The Franco-German alliance remains strong but there are also some deep disagreements between the two countries on economic policy (on the role of central banks, spending and deficits etc) that were pretty much swept under the carpet when the Single Currency was forged. If times get worse, expect more flare-ups.

It is hard to see how remaining 'excluded' from these kinds of rather uncomfortable questions will damage Britain's influence in the wider EU. And with many countries reconsidering a rush into the single currency, which they seemed destined for not so long ago, there is nothing inevitable about Europe's future political make-up. On the contrary, the current uncertainty in Europe has opened up space for those who believe in a better way forward for the EU to make their case.

That being said, the UK cannot make its voice heard if it doesn't say anything.

About to hit the jackpot

The Parliament.com website is taking a welcome new look at the fact that the team of EU Commissioners due to leave office in a few months' time will each walk away with more than £1 million in pensions and perks alone.

This is on top of the more than £1 million each will have earned over each 5-year period in office, which doesn't include the host of other perks, such as residence and entertainment allowances they will also have received from the public purse. All these figures are the EU's own.

The best thing about this story, however, is the telling (and ramshackle) responses this story drew from the Commissioners themselves when it first broke back in April. Well worth another read.

The free ride of your life

Open Europe has today published a list of MEPs who have/are taking part in the controversial Additional Voluntary Pension Scheme, over and above their standard pensions.

Until now, this list has been a closely guarded secret, MEPs having voted in 2007 to prevent publication of which MEPs take advantage of the scheme.

However, the brilliant German investigative journalist Hans-Martin Tillack has provided Open Europe with a list (not exhaustive) of those MEPs which were signed up to the fund as of December 2007.

The list contains the names of 394 MEPs signed up to the scheme, with some reports suggesting that as many as 480 MEPs could have opted in. 79% of British MEPs were signed up to the scheme, including Labour, Conservative, Lib Dem and UKIP MEPs, and 77% of Irish MEPs were signed up.

Under this lucrative (second!) pension scheme, the public contributes £2 for every £1 from the MEP. But wait...it turns out that MEPs' contributions are automatically deducted from their office expenses. They are supposed to reimburse this, but there are no actual checks to ensure that this is the case. This means the scheme is potentially entirely funded by the taxpayer.

Did we mention that MEPs make no contributions to their standard (first) pension scheme either?

However, credit must here go to MEPs such as Caroline Lucas , (and Nick Clegg in his day), for refusing to take part in the scheme "as she regards it as a misuse of EU taxpayers' money."

We couldn't have put it better ourselves.

See here for Bruno Waterfield's take.

Make your mind up

It sometimes seems amazing that the EU Commission can spend so much money on its own special department for Communications, and yet prove so spectacularly terrible at PR.

EU Communications Commissioner Margot Wallstrom has thrown her hat in the ring and responded to Open Europe's recent findings that Commissioners leaving office this year can expect in excess of £1 million in pensions and pay-offs, courtesy of EU taxpayers.

In response to questions about her own enormous (£1.8m) pay-off in an interview with Focus Information Agency, she said:

"I'd like to thank you for the possibility to respond to the series of 'clever' press releases by 'Open Europe' - a British NGO, advertising itself as a think-tank - which has been regularly publishing articles against the club of 27, containing deliberately twisted and exaggerated data. Stepping in office within the European Commission (EC) does not include talks about salaries, allowances and retirement payments. It's the Council of the European Union that decided in the matter and therefore all changes are up to it. The current rules have been around since 1967 and are open to the public."

Why is the Commissioner responsible for Communications now saying that Open Europe's figures are "deliberately twisted and exaggerated data", when the Commission has already confirmed the truth of the figures?

When the news first broke a couple of weeks ago, Commission Spokesperson Valerie Rampi said, "Open Europe did not discover anything new, it's all public and online".

Then, when confronted with the reports, Development Commissioner Louis Michel exclaimed "if that's true, I'll retire immediately." Belgian daily De Standaard went on to report that, "after consulting an assistant, the message however appeared to be accurate. This was followed by Louis Michel suddenly changing his mind, saying the compensation is completely justified: 'We are being well paid. But every morning getting up at 5 o'clock, lots of travelling, heavy files...This is a parachute but not a golden one.'"

Not only that, but as we have seen, Danish Commissioner Mariann Fischer-Boel responded to the figures saying "I'm worth all the millions."

For an organisation which spends millions of taxpayers' euros a year on its very own PR office, it is surprising how bad it is at putting out a straight line of defence.

The spokesperson was spot on - all we did was to use the publicly available data and estimate how much these people stood to receive. In fact we used the figures pretty conservatively - we reckon they're an underestimate.

The point is there really is no need to "twist" and "exaggerate" the data, because it's devastating enough on its own.

Still, at least Wallstrom didn't do a Fischer-Boel and try a "Because I'm worth it" type argument. Given the clear failure to get people to like the EU and the Lisbon Treaty - her main job - that would have been hilariously difficult to defend.

Louis Michel can't believe his luck

Belgian Daily De Standaard has picked up our research which states that Belgian EU Commissioner Louis Michel is to take home about 1.1 million euros in pension payments and so-called 'transitional' and 'resettlement' allowances after he leaves office.

Louis Michel, the second Commissioner to react to the research, said he couldn't believe it and "if that's true, I'll retire immediately".

However, the article goes on:

After consulting an assisstant, the message seems to be accurate. This was followed by Louis Michel suddenly changing his mind, saying the compensation is completely justified. “We are being well paid, that is. But every morning getting up at 5 o' clock, lots of travelling, heavy files… This is a parachute, but not a golden one”.

We can only add that Louis Michel is European Commissioner for "Development and Humanitarian Aid". Improve the world, start with yourself...

Because I'm worth it

Following wide reports around Europe about the fact that the EU Commissioners will receive millions of taxpayers' cash in pensions and pay-offs when they leave office, EU Agriculture Commissioner Marian Fischer Boel (not pictured) has defended herself, telling Danish newspaper Politiken ... wait for it...

"I'm worth all the millions"

You couldn't make it up.

It's just peanuts to some

Open Europe published some figures over the weekend which found that EU Commissioners retiring this year can expect to walk away with pension pots worth over £1 million each.


According to EUobserver Commission spokesperson Valerie Rampi said that, "Open Europe didn't discover anything new, it's all public and online... Everyone who has worked as a commissioner is entitled to pension rights, like you and me". She then denied that Commissioners received "golden one-off payments".


Well, she is absolutely right about one thing. Commissioners' entitlements are available online, which was how we knew how much they would be receiving. In those entitlements, it states that Commissioners shall be entitled to "a resettlement allowance equal to one month's basic salary on ceasing to hold office."


Perhaps this doesn't seem like much of a "golden" pay-out to well-fed Commission bureaucrats, but it is more 19,900 euros for most Commissioners, and even more for the rest. This is more than some people earn in a year, but the Commission doesn't deem it "golden"?


We might also mention that this is just a fraction of what Commissioners will receive on leaving office - as well as their hefty pensions they will entitled to "transition" payments for three years of at least 90,000 euros a year.

But this probably isn't enough to count as "golden" either.


Next time the Commission wonders why citizens feel the EU institutions are out of touch, maybe this golden little penny will finally drop...