Balance of Competences round-up: Part II

Further to our previous post on the Government's Balance of Competences report on free movement, below we pick out some of the key points from the other reports published today:

The report on the services stated that:

“Incomplete and ineffective implementation of existing services legislation has hindered the development of the free movement of services, but full implementation of existing legislation within the current level of EU competence may have implications for Member States’ ability to make decisions in this area.”

The report also echoes Open Europe's recommendation that if further liberalisation cannot be achieved at the EU28 level, a group of like-minded member states should push ahead using the so-called 'enchanced co-operation' mechanism.

“There is scope to go further on services liberalisation, extending the application of the country of origin principle, either within specific sectors or across the piece, and either at EU-level or within a smaller group of Member States through enhanced co-operation. Further liberalisation could also be achieved through a sectoral approach, focusing firstly on those sectors of greatest economic importance.”

The report on financial services noted the risks to non-euro member states from deeper eurozone integration - something Open Europe warned about back in December 2011 in our Continental Shift report:

“There were significant concerns that the advent of the banking union could have an unfair or damaging effect on Member States outside the euro area [such as] EU-wide regulation that is appropriate for the euro area but is not suitable for all Member States; the practice of caucusing and the development of a common euro area position on financial services issues which are at odds with a single market that is open internationally, dynamic, innovative and globally competitive; the fragmentation of the Single Market with barriers erected between its euro area and non-euro area constituents; the undermining of economic benefits associated with liberalised capital markets; and the marginalisation of non-euro area interests.”

The report warned that:

“The risk of discrimination against non-euro area Member States has already crystallised with the ECB location policy that euro-denominated financial instruments should be cleared only by a clearing house physically located in a euro area Member State.”

And recommended that:

“The creation of the banking union underlines the fact that the EU has become so large and diverse that ‘variable geometry’ is necessary.”

The report on the EU budget noted that:

"The value of expenditure in the budget, where in particular... on research and innovation, was seen as a priority for a greater share of the budget, although views were also heard in support of structural and cohesion funds, particularly in poorer Member States. The value for money of the Common Agricultural Policy (CAP) was questioned by a large proportion of respondents, with particular concerns about the value of Pillar One of the CAP."

The report on cohesion (regional) policy picked up on many of the points raised by Open Europe's seminal 'Off Target' report - which recommended limiting the structural funds to less developed member states - arguing that:

"support for the general principles of cohesion policy and the need to provide support particularly for poorer Member States, was shared by many respondents... The evidence as a whole is inconclusive but where significant positive impacts have been identified, they tend to have been in the poorer regions or Member States."

But adding that:

"A key question is whether structural funds should be used in richer regions of Member States, given the alternative sources of funding available, the more limited additionality and the goal of reducing disparities. This was sometimes expressed in terms of concerns about paying money into the EU only to get it back with conditions attached. Many respondents recognised that the UK might be better off financially if it did not contribute to cohesion policy in rich Member States or regions."

"Finally, it is important that funds available for cohesion policy are well managed. However, the complexity of rules and the perceived burdens of applying for, reporting on and auditing projects are potential barriers to the effectiveness of the structural and cohesion funds."

The report on agriculture also picked up on Open Europe's criticisms of the CAP, noting that:

“respondents put forward evidence that, notwithstanding the reforms, the CAP’s objectives remained unclear and that the criteria for allocation of funding were irrational and disconnected from what the policy should be aiming to achieve. The majority of respondents argued that the CAP remains misdirected, cumbersome, costly and bureaucratic.”

The report on fundamental rights noted that:

"There was mixed evidence on the case law of the ECJ; while some considered that the ECJ has simply upheld fundamental rights, others considered that some of its judgments have undermined national sovereignty and the EU’s legislative institutions... in comparison to other human rights protections in domestic law, fundamental rights can have a wider scope and can result in the disapplication of primary legislation. Therefore, with an increasing domestic awareness of EU fundamental rights, the evidence suggests that their impact will increase."

Compared to the first two stages of the BoC which were rather underwhelming, this third tranche of reports has at least been more explicit in identifying some of the most pressing challenges that need to be addressed while - for the most part - steering clear of setting out solutions.

Anglo-German partnership on EU reform could prove crucial at the negotiating table

Die Welt's Economic Editor Tobias Kaiser has an opinion piece in today's paper entitled entitled “Stay with us, Brits”, in which he argues that:

“Berlin needs London as a partner in the fight for fiscal reason [in the EU].” 

Kaiser highlights that:

“Berlin and London have to put their ideas of Europe against the French coined version of European etatism... The openness of the European economy has to be guaranteed and the protectionist regulations and national rules – which still prevent the development of a genuinely free exchange of goods, people, and ideas within Europe – have to be dismantled.”

This is an argument we have been making for a while. In 2012, following the election of Francois Hollande as French President, Open Europe Director Mats Persson argued that:

"Hollande simply rubs the Germans up the wrong way. His spending rhetoric is an outright challenge to German Chancellor Angela Merkel’s vision of a euro firmly grounded in Prussian budget discipline."

"Therefore, though it won’t be easy, the scope for a new bargain between London and Berlin – based on Britain needing new terms of EU engagement if it is to remain inside, and Germany needing the UK’s quiet support for a more economically sustainable euro – is possibly greater than ever."

While Hollande's push against austerity has waned, the process of Anglo-German cooperation has gained pace - exemplified by the recent joint op-ed in the FT where George Osborne and Wolfgang Schäuble agreed on the need for safeguards for the single market in the face of tighter political and economic integration in the eurozone.

Kaiser's call for greater economic openness within the EU also echoes the argument in favour of greater services liberalisation by Die Zeit's London correspondent John F. Jungclausen, who cited Open Europe's report which found that removing barriers to cross-border services trade could alone produce a permanent increase to EU-wide GDP of up to 2.3% or €294bn.

It's good to see the process beginning to bear fruit and gain wider traction in the German media, particularly on the specific areas where reform is necessary. As we pointed out ahead of Chancellor Merkel's recent visit to the UK, there is scope for a wide ranging 'Anglo-German bargain' in areas such as EU migrants' access to benefits, greater powers for national parliaments, and the devolution of some EU back to the national or local level. According to a recent Open Europe/YouGov poll, an EU reform agenda built on these pillars would enjoy significant public support in both countries.

With all this in mind, now would seem the perfect time for the UK government to begin road-testing specific reforms in Germany and other countries. 

UK and Germany present united front in favour of EU reform

In a major coup for David Cameron, Chancellor George Osborne has penned a joint op-ed in the FT with his German opposite number Wolfgang Schäuble. Both argue for the need for EU reform (including services liberalisation) and for safeguards for non-eurozone states in the face of further eurozone integration - all areas of potential consensus we flagged up in our recent 'Anglo-German bargain' briefing.

On the acceptance of the different needs of non-euro and euro members, and therefore the need for safeguards, they say:

“As the euro area continues to integrate, it is important that countries outside the euro area are not at a systematic disadvantage in the EU. So future EU reform and treaty change must include reform of the governance framework to put euro area integration on a sound legal basis, and guarantee fairness for those EU countries inside the single market but outside the single currency.”

Getting explicit German support for this view and providing a united front on this issue is an important step forward for the UK and for Cameron's EU reform agenda. While Germany has previously hinted at willingness to support the UK on this issue, this is certainly a step up. It also brings Cameron closer to ticking off one of the key targets he recently put forward in what was probably the most important article nobody spotted. Open Europe has long argued that safeguards against further eurozone integration are crucial and that they will play a key role in determining the new set up and balance of the EU.

That being said, the UK government should not be complacent about where it now stands in terms of its reform agenda. While this represents progress, there is some way to go. This provides an important opportunity and a good base for the UK to begin testing specific reform proposals on other EU governments and electorates. After all, while Germany is the largest and possibly the most important partner to get on board, the UK also needs to convince the rest of the EU. While teaming up with Germany should broadly help on this front there is one constraint - not everyone buys into Germany's vision of the new eurozone with significant central oversight and limited share of liabilities. However, as the banking union shows, Germany has so far been adept at influencing the construction of new eurozone structures in its own image.

Possibly a more surprising inclusion is the joint support for services liberalisation, of which they say:

“We must complete the EU’s single market, especially in services, open up to international markets and conclude reforms to the euro area.”

Again, we've been advocating this for some time - we estimate that it could be worth up to €294bn for the EU's economy. Traditionally, Germany has been one of the staunchest obstacles to such service liberalisation, due to its many protected professions. As such gaining its public support is another big coup for Cameron and a positive step for the EU economy.

One final interesting point is noted by the FT:

"Mr Schäuble told Bruges’s College of Europe on Thursday that he wanted negotiations on a revised treaty to start straight after the European Parliament elections in May."

This is equally as important as all of the above for Cameron given that some of the biggest doubts around his push for EU reform and referendum have been on the time-frame of the negotiations. There is clear hope that discussions around treaty changes will begin in earnest after the elections (although in an ideal world they would have been part of an open and transparent debate within the elections). 

Overall the approach isn't perfect - it still speaks of a two-speed Europe, suggesting all member states are heading in the same direction, which is not the case - but it is a big step and an important one for Cameron. It is now vital that he seizes this opportunity to push a wider EU reform agenda.

Lib Dems set to officially endorse in/out referendum and Treaty change to secure single market safeguards

The Lib Dem Autumn Conference Agenda is unlikely to set many pulses racing but motion F35 caught our attention, as it concerns the party's EU policy. Assuming the motion put forward by the party's federal policy committee is approved by party delegates, as seems likely, it will become official party policy and will probably be included in the party's 2015 manifesto. This could prove significant in the event of another hung parliament and subsequent coalition talks with either the Tories or Labour.

The motion contains a number of detailed and specific points covering everything from the single market to the CAP and the EU budget, but two points are particularly significant:

"Guaranteeing full voice in the regulation and application of the four freedoms – of goods, capital, labour and services – of the single market for both euro and non-euro states in the next EU treaty." 

"Requiring that when the EU Act triggers a referendum for the first time, there should be an ‘In or Out’ referendum in which citizens across the UK can have their say on the new Treaty settlement and our relationship with the EU as a whole."

So we have a commitment to push for single market safeguards in any future Treaty negotiations, which is in itself a recognition that the EU is developing in such a way that necessitates different degrees of integration, and that the UK has to assert its interests in order to prevent the eurozone from writing the rules for the whole bloc (the double majority agreement on banking supervision could serve as a model here). For a party that until relatively recently supported the UK joining the euro this is a significant shift.

The referendum commitment is less of a surprise as Clegg and others have been hinting that an in/out referendum would be a matter of when, not if. The big difference between the two coalition parties when it comes to the referendum is therefore one of timing, with the Lib Dems rejecting the Tories' promise of a referendum by 2017 as arbitrary. However, the chance of there being an EU Treaty change transferring more powers from the UK during the lifetime of the next Parliament is very slim. There might be Treaty change but likely for Eurozone-specific measures (which still can have an impact on the UK by changing political dynamics in Europe but which would not trigger the EU Act).

On the face of it though, this would leave Labour as the only major party not explicitly committed to an in/out referendum at some point (although some would argue that the Lib Dems have promised a referendum before and not delivered).

Finally, it is also welcome to see the party explicitly call for "measures to enable national parliaments to contribute more directly to the development of EU policy and legislation", even if the policy document stops short of the 'red card' option outlined by Open Europe and endorsed recently by William Hague.