The EU in 2011

For those of you who can't wait to see what 2011 has in store for European politics, Open Europe has published a briefing looking at the issues facing the EU - and most importantly the eurozone - next year. Read it here.

Let's put it like this: EU leaders better be ready to hit the New Year running...

Four scenarios for the euro

FT Deutschland last week outlined what it considered the four possible scenarios for the eurozone in 2015, in a thought-provoking piece.

Here are the scenarios, slightly paraphrased from the original article.

Business as usual, punctured by crises:

The EU continues to fight the symptoms, rather than the causes. Attempts at improving coordination of economic policies amongst member states fail, as EU leaders cannot agree on a single approach. In the summer of 2011, France tables a proposal for a centralised economic government. The German Chancellor, who has suffered a very heavy defeat in regional elections in Baden-Württemberg in March 2011, declares to the German Parliament that such a government won't include Germany.

In early 2013, Greece is again shut off from the markets. The EU and IMF extends the loan guarantees, fearing that a debt restructuring would be too dangerous.

Subsequently, the eurozone aid package is multiplied by 10, which calms the markets - but only until autumn 2015, at which point the Spanish government collapses because reform of the country's pension system is blocked by the Parliament. The euro falls 5 percent in one day.

Barroso makes an emergency call to Merkel...

Probability: 50 percent

A stronger economic union:

At an EU summit in February 2011, Chancellor Merkel declares that "we need to become a real economic and political union, at least within the eurozone". Everybody understands that the UK will not take part in this. Measures include joint decisions by the German and French government on their national budgets, and more harmonisation of fiscal policies in the eurozone, including on taxes.

Portugal needs to be bailed out, but Spain only needs a one-off loan in May 2011 in
order to fight off speculation. The ECB buys more government debt and waits as long as it possibly can to increase interest rates.

By 2015, there's a de facto two-speed Europe, with some of the EU's by now 29 member states opting out of the economic union. The European Stability Mechanism (ESM) has evolved into a mix between a European Monetary Fund and a Eurozone Finance Ministry. The European Commission, which now has new economic powers, continues to suffer from a lack of democratic checks.

Interestingly, FTD claims that this arrangement would benefit the German economy as EMU and the internal market would remain intact. Eurozone growth would increase overall, as struggling countries overcome austerity shocks. We see it as unlikely that overall eurozone growth would receive a boost in this scenario, since even with austerity and/or even competitiveness reforms, the periphery economies will still be stuck with an overvalued currency and inappropriate interest rate policy, undermining their efforts to gain competitiveness.

Probability: 50 percent

‘Mild’ break-up of the eurozone in two separate blocks:

Rome, December 2015. With a huge smile, Italian PM Silvio Berlusconi gets out of his Lancia limousine, stopping for a brief moment to pose for the cameras. He has just had a visit from his counterparts from Slovakia, Spain, Portugal, Greece and Slovenia in his villa in Sardinia. He announces that their common southern currency "Seuro" will be renamed "Silvio". At the same time, he announces, the currency will be devalued yet again - which has been a frequent occurence since the eurozone split up in 2011.

The break-up took place after growing spreads in bond yields made it impossible to save the euro. The event was dubbed "Lehmann II" by the media.

The continuing devaluations of the Seuro anger German Chancellor Merkel and French President Strauss-Kahn, as exports from Northern Europe are hurt and European banks face persistent problems. Axel Weber, President of the Central European Central Bank, raises the issue with his Southern European colleague Mario Draghi.

Probability: 5 percent

The assessment of this solution for the eurozone seems to ignore some important factors. In particular, the assumption that revaluation would inevitably be a bad thing for Germany is something that can't be accepted at face value. As Frankfurter Allgemeine Zeitung has put it : “Already before the introduction of the euro, Germany was a strong exporting nation. Continuing revaluations of the D-Mark stimulated German companies to become even more productive. For citizens every revaluation brought welfare gains, as imports and travelling became cheaper."

Collapse of monetary union:

All countries return to their national currency. An unemployed Dutch person, who used to work for an import-export firm in Rotterdam, drives to Greece, passing by 11 currency zones: the Dutch Guilder, the Flemish Guilder, the Walloon-Luxembourgish Franc, the German-Austrian D-Mark, the Italian Lira, the Slovenian Tolar, the Croatian Kuna, the D-Mark pegged currencies in Bosnia, Montenegro and Macedonia, and the Nea Drachma.

The break-up happened in 2012, following an ultimatum by Greek PM Giorgos Papandreou to Chancellor Merkel on lowering interest payments on the bailout - or his country would leave the currency union. Merkel's reply: "well, then go".

However, the Chancellor was not aware that China had just opened a €20bn credit line to Greece, while Nea Drachma notes were being printed in China. In July 2012, Greece starts negotiations for its debt restructuring, forcing the ECB and German government bank KfW to write off billions.

Panic on the markets lead to CDU leaders demanding that all struggling countries leave the euro. German Finance Minister Schäuble resigns. Merkel, who makes an attempt at keeping a Northern Eurozone, sets out hard terms for France. New French President Strauss-Kahn refuses, deciding that his country will keep the name euro for its currency, with Southern-Belgium and Luxembourg pegging their new Franc to it.

Chaos breaks out, with investors seeking refuge in hard currencies, while banks and the provision of cash are under threat. Devaluations in the south of Europe lead to an increased debt burden for the region - a debt that is still denominated in euros. Living standards of Europe's population in the south sinks. In Germany, the export sector is hit, though imports become cheaper and inflation is low.

Probability: 10 percent

This is a useful and quite interesting exercise, which should, of course, be taken with a pinch of salt. The FTD depicts the political union alternative with rose-tinted spectacles, but these do seem like the four possible scenarios for the future of the euro. One thing is clear: none of them will be painless. Apart from blaming the politicians who speculated with Europe's future by setting up a monetary union with clear flaws and without thinking through all the implications, the least expensive long-term solution to the ongoing euro crisis should prevail. As we've argued before, it's hard to see how this will not involve an adjustment to the membership of the euro.

UK Parliament left out in the cold

In a Commons debate on Monday about last week’s European Council meeting, Labour MP Gisela Stuart raised an important point:

“This seems to have been a pretty significant Council [meeting], as a result of which we will have treaty changes that will involve legislation here. Treaties cannot be amended, so we will have a debate but not be able to amend them.”

She continues,

“Is the Prime Minister aware that, for this Council [meeting], the House did not have a pre-Council debate in the Chamber, on the basis that the Leader of the House said…that it is Back-Bench business? If the Prime Minister takes Europe seriously, how on earth can he defend a discussion on something as significant as that being Back-Bench business?”

We couldn't agree more.

Start with the man in the mirror

In an opinion piece in the FT published the other day, Klaus Regling (see photo), the chief executive of the eurozone's temporary bailout fund attempts to counter critics of the common currency.

The unelected official, who looks after €440 billion in loan guarantees, argues that "EMU’s critics will eat their words again", explaining how the euro will be saved through more budget discipline and sounder economic policies in member states.

He gives the example of Latvia, writing:

Latvia which has a currency pegged to the euro, testifies to the success of this policy. Contrary to commentators who predicted disaster for Latvia early last year unless it gave up its hard peg – in line with advice from the commission – it did not devalue its exchange rate. A real effective devaluation was achieved through severe cuts in nominal income. Today its economy is growing again. Those outside “experts”, who always seem to know what is good for Europe, should take note.

He is right that "internal devaluation" can indeed restore competitiveness, although it's questionable whether politicians in countries such as Greece are willing to follow in Latvia's footsteps on this one. Of course Regling omits to mention that, in the case of Latvia, the country's reduced competitiveness was driven by a bust in the real estate market, in turn partly brought about by Latvia's euro peg.

An article on Global Property Guide makes clear that the damage was inflicted by the EU's pressure for a euro-peg on the Baltic country, which isn't eager to go against EU guidance, given that its EU membership is also a matter of geostrategic security.

From 2004 to 2007, property prices doubled, tripled or even quadrupled, just to fall in December 2008 by a crazy 41% in real terms from a year earlier. The euro peg had first pushed mortgage rates disproportionately low, boosting excessive demand for real estate. The following adjustment through increased rates bankrupted many Latvian citizens who saw the value of their investments drop.

In his defence of the monetary union, Dr Regling doesn't mention any cure to the eurozone's most fundamental problem - its one-size-fits-all interest rate policy - which has a tendency to facilitate booms and busts (though not the only factor ). Even the Celtic Tiger, Europe's champion of competitiveness, was floored by these mechanics, as low interest rates created a real estate boom and bust, poisoning systemic banks and bringing the country to the edge of the abyss (despite the fact they passed the EU's stress tests only last summer).

As the German economy continues to boom, there will soon be calls in Germany for the ECB to jack up interest rates in order to prevent inflation. But this, in turn, will seriously undermine Spanish and Irish efforts to get their economies back on track - and potentially off set many of the hard-fought reforms that the two countries are pushing through at the moment.

No matter how much of taxpayers' money EU leaders will put on the table, as long as there really isn't a European economy, Dr Regling should continue to expect criticism of EMU's flawed construct.

And in terms of lashing out at the "outside experts" who know what's "good for Europe", we suggest Mr. Regling starts with the man in the mirror. As Ambrose noted in yesterday's Telegraph,

Perhaps it is unkind to point out that Dr Regling was the European Commission's director-general of economic affairs from 2001 to 2008, more or less spanning the incubation period of the catastrophe now at hand. To borrow the immortal line from Watergate: what did you know and when did you know it?

Not restrictive enough...

We see it as a bit ambiguous and from a Swedish point of view, not restrictive enough when it comes to the budget...our position is that even the possibility of an increase to the budget, which the signatory countries are open to, is too far-reaching...First we want to discuss the content in the budget, what we should spend the money on. When that is done, we can see what it costs.

- Swedish PM Fredrik Reinfeldt explains why he didn't sign the Cameron-Merkel-Sarkozy letter at last week's EU summit, which called for a cash freeze to the EU's long-term budget.

What should Cameron be pushing for at the EU summit?

We answer that question over on the Spectator's Coffee House blog - read it here.

Double up

The European Central Bank has just announced that it will almost double its 'subscribed capital' over the next three years, from €5.76 billion to €10.76 billion. 'Subscribed capital' is the amount that countries pay into the ECB when they become fully paid up members of the eurozone.

The real figure will actually be less than €10.76bn because countries like the UK, which aren't eurozone members, will not pay in their designated full amount unless they join. However, Germany for example, will have to contribute nearly €1bn more to the ECB over the next three years, bringing its total share to €2.04bn.

Although these amounts are relatively tiny compared to the figures banded around, running into the hundreds of billions, that may be needed to rescue the likes of Portugal and Spain, this is sill a significant move.

The "volatility" of credit risk is cited as one of the reasons for the first increase in the ECB's capital in its twelve year existence, and given the bank's exposure to various potential 'bad' loans this isn't surprising. The ECB's purchase of government bonds from struggling eurozone countries is running at €72bn, not to mention its funding for the eurozone's ailing banks in Spain, Portugal and Ireland, has left the eurozone's central bank increasingly vulnerable.

Today's news will certainly do little to reassure those German politicians and taxpayers who still believe in strict central bank independence.

Merkel's last chance, to save the hard euro

Another great comment piece from Die Welt editor Dorothea Siems - under the headline "Merkel's last chance, to save the hard euro":

The German negotiating position is weak because both [German Chancellor Angela] Merkel and [German Finance Minister Wolfgang] Schäuble categorically reject every alternative to the unconditional defence of the common currency, and even brand those thinking about it as traitors of the European idea.

The Chancellor must use her chance to make it clear to her European friends that she is not ready to ask the Germans – for whom orderly state finances are an invaluable quality – to make way for a 'soft-currency union'. If the EU partners do not accept this last warning signal, then they are the ones who are not showing solidarity. The question for alternatives will then be inevitable.

Lib Dems abstained on Lisbon Treaty referendum because they thought it "would fail"

One of the latest leaked US diplomatic cables has confirmed what many of us had suspected all along. The Lib Dems' U-turn on their pledge to hold a referendum on the Lisbon Treaty was not motivated by a principled preference for an 'in or out' referendum on EU membership but by a belief that a referendum on Lisbon would be lost.

Here's the relevant passage:

A Very Bad Day: The Lib Dems and The EU Reform Treaty

--------------------------------------------- ---------

2. (SBU) March 5 marked the worst day for the Lib Dems since one infamous week in January 2006, when the party became the laughing stock of Britain after sex scandals involving two of the four candidates to succeed leader Charles Kennedy emerged one right after the other. This time around, the party imploded in the House of Commons over a Conservative Party motion to hold a nationwide referendum on the Lisbon Treaty. The Lib Dems' convoluted official position on the referendum was part of the problem. As Clegg sought to explain it to the public, the real issue for his intensely pro-Europe rank-and-file was not the Lisbon Treaty itself, but confirming UK membership in the EU once and for all. The Lib Dem official position therefore was to propose an alternate "in or out" referendum on whether the UK should remain in the EU, and abstain on the competing Conservative motion to hold a referendum on just the Treaty itself.

3. (C/NF) This position left both the pundits and the public scratching their heads: why would the UK's most pro-Europe party, whose new leader actually worked for the EU from 1994 to 1999, abstain on a vote on the Treaty? The answer, senior Lib Dems have confessed to us, is that the party leadership believes a referendum on the Lisbon Treaty would fail.

Hmmm, we kind of suspected that was the motive. Or, actually, it was blatantly obvious as the Lib Dems flip-flopped like crazy on the Lisbon Treaty.

All of this brings back some horrible memories...

If it weren't for those pesky EU rules...

Last week’s vote on student fees saw thousands of angry protestors descend on Westminster, to no avail as the proposal has now passed both houses. This is obviously a very thorny issue for the Coalition - and the Lib Dems in particular.

But what's interesting is that the main counter proposal to hiking student fees was a proposed graduate tax. Only thing, it isn't really an option, due to two rather large glitches - foreign students and EU law.

A tax would only cover those residing and earning money in the UK, thereby allowing foreign students to circumvent paying. Considering that the UK is home to some of the best universities in Europe, and there are currently about 120,000 students from other member states at British universities, this could potentially mean substantial financial losses to the UK university system; losses that would have to be paid back by graduates staying in the UK.

A solution to this dilemma would be to have a two-tier system whereby a graduate tax would apply only to UK students, and university fees would apply to the rest. However, this is contrary to rules enshrined in the Maastrict Treaty - which determine that EU citizens studying in another EU member state must be treated under the same conditions.

To be fair, British students are allowed to go abroad and enjoy European universities under the same rules as all other EU students - which does count for something (which more UK students could take advantage of - language and grammar would be two particularly good areas to focus on). But it's amazing how EU rules seem to creep into everything these days - no matter how domestic of a matter it would appear.

Quite irrespective of the merits or drawbacks stemming from freedom of movement that is.

Many questions - no answers

Open Europe has today published a briefing looking ahead to the EU summit this week, identifying the crucial, inevitable questions on the future of the eurozone that EU leaders have to find the answers to. The small problem that EU leaders are facing is: there aren't really any good answers and any that there are, in turn, throw up a series of new questions.

One of the big questions is whether the current euro bail-out package will need to be increased to ensure market stability in the New Year, when eurozone governments and banks will face record targets of refinancing.

A very simple calculation shows that the current bail-out package looks worryingly insufficient to deal with Greece, Ireland, Portugal and then - the nightmare - Spain all at once. A conservative estimate from Goldman Sachs puts the cost of taking Spain, Ireland and Portugal off the debt markets for two years at up to €450 billion (other estimates put the cost of bailing out Spain alone closer to €500 billion).

And as has been widely documented by now, while the size of the EU/IMF bail-out package on paper is €750 billion, in reality, it's far lower than that.

First, the contributions from Greece and Ireland have to be subtracted (€19bn between them), as they themselves are receiving aid and are therefore exempt from contributing. Secondly, to ensure a ‘triple A’ credit rating – and therefore low borrowing costs – eurozone governments are guaranteeing 120 percent of each bond raised (allowing for a reserve that can never be used). In addition, as the credit rating agencies like to point out, the share of eurozone governments without a triple A rating must also be discounted, if the triple A rating of the EFSF is to be
guaranteed.

When adding up the figures then - and there are a few estimates flying around - the real size of the European Financial Stability Facility becomes more like €213 billion, with another €60 billion added through the European Stabilisation Fund. The final twist is that under the agreement struck in May, the IMF would only add 50 percent of the sum the EU provides, meaning €136 billion as opposed to the original €250 billion.

This leaves a total of €409 billion - as opposed to the official €750 billion.

Pew! Not very helpful, we know, but this amount is cutting it worryingly close. Although no one is saying it out loud, there will probably be plenty of whispers in the corridors of Justus Lipsius this week (where the Council meeting is held) on how to increase the package should the smelly stuff hit the fan in the New Year.

There are, of course, steps that eurozone leaders could take to ease the pain, including restructuring the debts of Greece, Ireland and Portugal in some way (though that would not deal with the underlying competitiveness problem these countries are facing). In addition, banks, not least Spanish ones, should come clean on their loan losses, so that we can flush out Europe's over-leveraged banking system once and for all (here real, rigorous stress tests could help). And, subsequently, the ECB must stop acting as a rubbish dump for bad government and bank debt and become a solid, independent central bank again - its current role is simply unsustainable.

So many questions, so little time...

"Slovakia needs a plan B: going back to the Koruna"

The Open Europe team must confess to have developed a certain fascination with Slovakia of late - a small country which hides a core of tenacity and strength, not least when bullied by outsiders.

You certainly can't accuse the political class in the country of being conformist. Slovakia joined the euro in 2009. Less than two years on, doubts are apperantly mounting over that decision. In an op-ed for Slovakian economic daily Hospodarske Noviny, Speaker of the Slovakian Parliament Richard Sulik (see picture) writes:

"We need to stop trusting eurozone leaders blindly and draw up a plan B: going back to the Slovakian Koruna."

Sulik argues that Slovakia made great efforts to join the euro because it was promised "a stable currency and solid rules". However, he notes, "two years later, it is sad to see that the rules are not the same for everyone, not to say that they do not exist at all."

Sad but true and credit to Sulik for speaking truth to power.

Slovakia was the only eurozone country which refused to contribute to the Greek bailout a couple of months ago, following a vote in its Parliament. On that occasion, the newly elected Prime Minister Iveta Radičová said:

Yes, we were the only ones who said 'no' loudly. But I'm sure that 'no' was in the heads of all representatives of the EU countries [...] What should I tell our citizens, that we should help those who aren't willing to help themselves?

Hard to argue with that, eh?

That's an argument in favour, not against Mr. Foreign Secretary

Tuesday night saw the Coalition government's EU Bill sailing through a second reading in Parliament, without a vote. In truth, it wasn't all plain sailing as several MPs - from across the aisle - fired at the Bill with various degrees of ferociousness. "Legislative PR", "flawed", "smoke and mirrors" and "missing the point" were some of the comments.

Valid points were raised - though as we've argued before, the referendum lock is a meaningful measure that will make it more difficult for ministers to transfer power to Brussels in future (true, it doesn't deal with the mission creep of the ECJ, or with cases when EU law is blatantly broken i.e. the eurozone bail-out, or with the existing balance of power between the UK and the EU, which many feel is unacceptable).

The Foreign Secretary did disappoint on one point, however. Conservative MP James Clappison asked whether the Foreign Secretary would give "serious consideration" to the question of requiring a vote in Parliament before the Government opts in to new EU laws in the Justice and Home Affairs area - which Open Europe has argued strongly in favour of, as it would in effect roll back some of the powers given away to EU judges and MEPs under the Lisbon Treaty.

However, the Foreign Secretary answered that the decision to opt-in belongs to a "different category" and argued that

given the strict time limits which apply to the UK's decision to exercise an opt-in - which is within three months of the receipt of a proposal - and the fact that there are 30 to 40 proposals per annum, it is not possible to place a primary legislative lock or parliamentary resolution requirement on the exercise of the opt in.

This isn't a strong justification at all for leaving out such a provision. William Hague seems to argue that ‘there is so much being agreed in the EU and as a government we need time to consider it all’. But this isn't an argument against giving Parliament ex ante control over this area - on the contrary, it's a strong argument in favour of it! Precisely because that is the case, we need more democratic control.

Also, a resolution of approval is not a time-consuming measure in Parliament. Motions can be agreed after a relatively short, single debate. In fact, the Irish Parliament must pass a resolution before its Government can opt in to anything, so it seems strange that this wouldn't be possible in the UK.

What puzzles us is why not more MPs aren't passionately pushing this line?

Don't Touch My Eurobonds

A couple of weeks ago, Eurogroup Chairman Jean-Claude Juncker politely suggested that "in Germany, the federal and local authorities are slowly losing sight of the European common good." But after Berlin mercilessly slammed his beloved idea for a common eurozone bond, Juncker has decided to step up his rethoric another notch.

In an interview with German weekly Die Zeit, published today, he says that Germany's thinking on Eurobonds is "a bit simplistic", and argues:

They [the Germans] are rejecting an idea before studying it [...] This way of creating taboo areas in Europe and not dealing with others' ideas is a very un-European way of dealing with European matters.

A sharp reaction to Juncker's comments arrives from FAZ, the solid German conservative daily. A leader in today's paper argues:

Apparently, it is un-European to raise taboos. Is it, however, European to bend EU treaties and break the ban on bail-outs? When a Eurobond is issued [...] countries with a bad name can enjoy lower interest rates, countries with better solvency are paying the price for that. These mathematical financial facts are real, whatever else Juncker may state.

An article in Der Spiegel further unpicks Juncker's silly definition of what constitutes a good European. According to a German government official, eurobonds would increase interest by one percent for Germany - which would add an extra €480m for every €48bn the country borrowed. Luxembourg would not have that problem, since it doesn't really have to borrow.

As the government official said, "Is this what being a good European means?"

A great idea

The new government in Slovakia has come up with a great idea to avoid budget deficits.

As AFP reports:
"The more public money Slovak lawmakers spend, the less they will earn as of next year, under draft legislation adopted by the government on Wednesday binding MPs' salaries to the public deficit".

If the law is passed by parliament, they will earn 15.6% less in 2011, representing twice the size of the 2010 public deficit, projected to reach 7.8% of GDP.

Similarly, if next year's deficit drops to 4.9% of GDP as projected, MPs' pay will be cut by 9.8% in 2012.

Ondrej Dostal, a lawmaker from the ruling coalition's Most-Hid party, told AFP.

"Lawmakers are responsible for passing the state budget in parliament, therefore responsible for the deficit level."

Ain't that the truth. Perhaps this is something for Westminster to consider?

With a bit of a twist, this also seems like a brilliant idea to implement at the EU level. MEPs, as you know, still live in a different solar system when it comes to spending public money, the one thing they really know how to do. The initial demand from both the European Commission and the European Parliament to increase the EU budget by 6.2% at a time of Europe-wide austerity speaks for itself.

If tweaking the Slovak proposal slightly to include increases to overall spending, a 6.2% rise of the EU budget would mean a 12.4% cut in MEPs' salaries.

Under such an arrangement, we wonder if MEPs would still be "offended" if somebody tried to prevent the EU budget from growing?

Lib Dem voters on EU membership: 31% want to stay - 42% want to leave

Here are some results from a fresh poll from Angus Reid on the attitude of British citizens to the EU (an online survey of a representative national sample of 2,002 British adults):

• In the event of a referendum on the UK’s EU membership, nearly half of Britons (48%) would vote in favour of pulling out, while 27% would vote to stay.

• Interestingly, 42% of Lib Dem voters would vote for the UK to leave the EU in a referendum (65% of Tories, 36% of Labour) against only 31% who said they want Britain to stay.
  

• 59% say EU membership has been moderately negative or very negative for the UK (30% and 29% respectively).

• Since June, the proportion of Britons who say the EU has been very positive for the UK has dropped from 7% to 4%. Back then, 31% regarded it as moderately positive, versus only 25% now.

• 80% would vote in favour of the UK maintaining the pound.
  

• 34% of 18 to 34 year olds feel the EU’s effect on the UK has been negative. 37% of them would vote to stay, while 32% would vote for the UK to leave.

See the full poll here. As with other poll results, it's clear that the EU's popularity continues to drop.

But the most interesting result is that Lib Dem voters - whose party often is presented as the UK's last europhile outpost - would come out against EU membership in such great numbers if faced with a referendum.

It just goes to show, in regards to the EU, there is a disconnect between the grassroots and the party leadership, and splits within the party on the issue might not only be a Tory phenomenon...

Message to the Commission: Denial won't reduce waste

You remember the non-existing Hungarian dog fitness centre which received €400,000 in EU subsidies? We highlighted the project at the top of our list of 50 examples of EU waste.

Well, from the Hungarian press we now learn that the Hungarian Development Agency - the national body responsible for the distribution of the EU's regional development funds - has asked the company Gyrotech Ltd (which, bizarrely enough is an IT company) to pay back the money it received in 2007 for the project to the European Regional Development Fund. The original grant was aimed at "improving the lifestyle and living standard of dogs."

Hungarian economic magazine HVG credits Open Europe for bringing the case to the attention of the international press.

If the money will in fact be paid back, this is good news and shows that it’s possible to fight EU waste. As a result of efforts to shed some light on these funds (by Open Europe and others), EU waste was detected and the money which was misused is now being reclaimed. Everyone happy?

Not the European Commission, it appears, which didn't quite seem to appreciate Open Europe's efforts to ensure that the EU budget constitutes good value for taxpayers' money and contributes to growth and jobs in Europe.

Note the differing responses:

The Hungarian National Development Agency – which admittedly should have been more prudent when giving grants to the project in the first place - investigated what went wrong and claimed back the money.

The European Commission:

“We don’t consider this to be credible research”. Our list, with the dog fitness centre at the top, was apparently “based on a loose collection of unverified secondary sources”, according to the Commission.

And, “It is regrettable that Open Europe did not even approach the commission to verify any of their so-called facts…it is very easy to pull out a few of the less orthodox projects from thousands funded by the EU and present them in a onedimensional manner for ridicule.”

The Commission does indeed look pretty ridiculous when it makes statements like this, and it turns out that the number one item on the list, the dog fitness centre in question, was a clear case of undisputable EU waste and that the project is now forced to refund the cash.

It’s not that hard to verify actually. The first-hand source (the Hungarian Regional Development Agency), detailing the grant, is right there in the footnotes of our report – all you have to do is to click on the link and voila!

The same goes for almost all the other projects we’ve highlighted, apart from a handful, such as the case of the two fishermen who received a €500,000 grant from the EU and the Swedish government to scrap their boat under a scheme to reduce over-fishing. It then used the grant to buy a new boat, under a separate set of rules, and carried on with their fishing business. In this case, the fishermen themselves were widely documented to have admitted that this was exactly what had happened.

Instead of going on its counterproductive rant, the Commission should thank anyone who tries to identify waste and who proposes reforms to stamp it out.

We’re not holding our breathes though.

Meanwhile, the Financial Times and the Bureau of Investigative Journalists have made European taxpayers and transparency campaigners a great service this weak by shedding some additional, and much needed light, on the EU's structural funds. See here, here, here, here, here, here, here, here, here, and here for example.

Some of the findings have included:

• Only 10% of the earmarked funds for 2007-2013 have actually been paid out to date, due to difficulties in many member states to find money for co-financing projects at a time of austerity in Europe (showing how poorly equipped the structural funds are to respond to changing economic circumstances in Europe, in turn undermining their ability to foster "convergence")
  

• €12mn of EU funds have been spent on a port which lays idle in Gran Canaria.

• More than €3mn of public funds – including an estimated €1.5m from EU structural funds – have been allocated to tobacco companies in Europe. The funds have gone to help equip cigarette factories and to fund training projects. Under the Framework Convention this is in breach of WHO guidelines on tobacco control. Paradoxically, the EU also spends more than €16mn a year on antismoking campaigns.

• Some big beneficiaries of the structural funds include McDonald's, which received funds to train staff in an affluent region of Sweden, in addition to IBM, Coca-Cola, and Japan Tobacco International. This is despite the fact that the funds are specifically meant to help small and medium sized companies, particularly in poorer regions.

• Structural funds have been allocated to companies relocating factories from west to east Europe, despite this contravening EU rules.

The Commission has resorted to its trade mark 'nothing-to-see-here' and 'it’s-all-only-a-misunderstanding' response. Indeed, denial remains the most predictable of the Commission's responses.

To be fair, the Commission has at least one sensible proposal for improving the targetting of the structural funds - linking more of the funds to actual performance and achieved targets (as outlined by Commissioner Hahn).

More stuff like this and fewer defensive rants, would serve to improve both the effectiveness of the funds as well as the image of the Commission itself.

In case you missed it...

In case you missed them, here are a few of Open Europe's appearances from this week - on three very topical issues:

On Tuesday, Open Europe discussed the problems with the EU's structural funds on BBC Radio 4's File on 4 programme. Listen to it here (worth a listen, particularly the part looking at the ongoing problems with fraudulent use of the funds).

On Wednesday, we debated the EU's External Action Service on Radio France Internationale, arguing that it's far from clear that the EU's diplomatic body adds value at the moment - and that the EU should be focussing on policy rather than institutions. Listen here (in French)

We also appeared on the BBC Radio 4's The World Tonight, discussing the future of the euro.

Clueless Politicians - Part II

As fears of the sovereign debt crisis continues to haunt Europe, our series looking at reckless or clueless statements from politicians goes on. Today we turn to Spanish Prime Minister José Luis Rodríguez Zapatero. In an interview with the Wall Street Journal back in September, he said:

"I believe that the debt crisis affecting Spain, and the eurozone in general, has passed."

Two months later: Zapatero has announced a new package of privatisations to reduce Spain's sovereign debt issuance for next year by one third, amid fears of escalating borrowing costs for the country. This package includes selling a 30% stake in the cherished Loterías y Apuestas del Estado - one of the world's oldest and most lucrative lottery groups....

Parliament needs to get a grip on EU justice and home affairs laws

At a time when MEPs are trying to grasp every possible opportunity to extend their own powers (and give themselves more cash), it’s about time that national parliamentarians showed some assertiveness over EU decision-making – or they risk becoming even more marginalised in EU affairs. The Lisbon Treaty shifted substantial control away from national parliaments to MEPs (hardly credible protectors of democracy in Europe), the Commission and EU judges. As a result, the UK Parliament was weakened (and the Lisbon Treaty’s yellow card procedure did not make up for this, as now is becoming increasingly clear).

But MPs now have a chance to claim some of these powers back.

How? In a new briefing published today, we argue that by a series of simple amendments to the Government's proposed EU 'referendum lock', the UK Parliament could turn itself into one of the most powerful chambers in Europe, insofar as EU policy is concerned. These amendments would require Ministers to seek the approval of Parliament before signing up to any EU laws in justice and home affairs. If the answer is No, the government can’t opt in.

This may seem like a boring detail, but on the contrary – it’s absolutely vital.

For the first time, this would give Parliament, and voters, a real democratic check on the extension of the EU's powers – although it would still fall far short of repairing all the damage caused by the erosion of democracy through successive EU Treaties.

Policing, crime, immigration and asylum are issues are hugely politically sensitive and any decisions to sign up to new EU laws in these areas need to be thoroughly debated and democratically accountable. This should be Parliament's job. As the German Constitutional Court argued in its ruling on the Lisbon Treaty:

Due to the fact that democratic self-determination is affected in an especially sensitive manner by provisions of criminal law and criminal procedure, the corresponding basic powers in the treaties must be interpreted strictly - on no account extensively -, and their use requires particular justification.

As it currently stands, the Government's proposed Bill, although a significant step forward, fails to address the day-to-day transfer of crime, policing and immigration powers from the UK to the EU. So any decision to opt in to a proposal like the controversial European Arrest Warrant will not be covered by the lock.

And the thing is, justice and home affairs is the area in which the EU gains the most new powers under the Lisbon Treaty. The EU now has two Commissioners rather than one, 17 databases and a rapidly expanding budget to fulfil its ambitions here.

Most importantly, European judges will have the final say over any law that the UK Government decides to opt in to. By definition, this is a transfer of powers.

In other words, it's a zero-sum game: every new justice or policing law the Government signs up to gives more power to the EU institutions at the expense of MPs, Parliament and the British courts. This is a big decision, which currently rests solely on Government Ministers' discretion.

The EU's growing ambitions in justice and home affairs deserve Parliament's undivided attention. It is perfectly reasonable for MPs to demand the power to vote on these crucial decisions that the Government makes in the name of their constituents. In fact, it would be a dereliction of duty not to.

Prepare for departure

In a comment piece for Die Welt, Jörg Eigendorf has some well chosen words for Chancellor Angela Merkel.

With regards to the “What happens now?” question being thrown around the Euro countries, Eigendorf deems both the idea of an enlarged rescue package and common Euro-bonds as “madness”. He argues that Germany would then be responsible for other European countries in the eyes of the law, “thus undermining both the Maastricht Treaty and the German Federal Constitutional Court”.

Eigendorf notes that possible moves would also “collectivise responsibility for wrongdoings, and probably only postpone the bitter end and worsen the final fiscal fiasco.” He adds that

German politicians must be aware that the solvency of their own state is finite. At the latest, if Spain is rescued, the imbalances in Italy, and probably also France, will be calculated.

These, he argues, are burdens already borne by the German taxpayer, and

the more the federal government gets involved in the collective liability, the larger and more transparent the costs to the general public are. From a political point of view, it won’t be endured for long.

Finally, he comments:

The Merkel government can hope that the current crisis management works, that the markets calm down and countries see reason on fiscal policy. That is possible but it is not probable. Instead, there is the alternative of deeper political union, which doesn't look realistic, or an orderly unwinding of the euro zone to fewer, relatively economically solid countries. Even if a government leader should not speak loudly about it, that is exactly what Chancellor Merkel should now prepare for.

Strong stuff...

European solidarity has a limit, even if your name is Adenauer

Adenauer is a name synonymous with the European project, owing to Konrad Adenauer, the German Chancellor from 1949 to 1963, one of the founding fathers of the European integration.

However, in a sign of the changing attitudes in Germany to the euro in particular, his grandson, Patrick, is sponsoring a lawsuit against the €85bn loan for Ireland agreed yesterday by EU finance ministers. He is one of the 50 supporters of a legal challenge to be submitted this week by Professor Markus Kerber - the renowned academic and constitutional expert who will also be speaking at our event in Brussels on 9 December.

European solidarity clearly has a limit in Germany, even if your name is Adenauer.

Changes

On the popular German TV show with Maybrit Illner on ZDF, Hans-Olaf Henkel, the former head of leading German Industry Federation Bundesverbandes der Deutschen Industrie (BDI) said that although he used to be a fan of the euro, he has now drawn the conclusion that introducing the euro was "a big mistake".

Mr Henkel added that as a solution, the monetary union would need to be split up into a northern bloc and a southern bloc. The northern currency union would then stick to strong budgetary discipline while staying well clear of inflation. The southern part could then improve its competitiveness through currency devaluation.

Interestingly, he suggested that France should be a member of the 'southern euro'.

You can view the episode here (in German), and an interview with Mr. Henkel in English can be found here.

A 'mea culpa' which could serve as an example to follow for politicians around Europe, including certain people in the UK...

"If Spain falls, the Euro falls"

Things are getting really scary in Euroland.

Fears of contagion are spreading like a rash, replicating the patterns preceding the bail-out of Greece. An article in Der Spiegel has a very useful break-down of the challenges facing the key euro countries feeling the heat at the moment - Greece, Portugal, Ireland, Spain with a place also reserved for Italy.

The article notes that "Spain is 'the litmus test' of Europe":

"Hundreds of thousands of Spaniards lost their houses and 1.2m their jobs [after the housing bubble burst]. Today, bad loans amounting to €180bn burden the institutions, half of which are related to retail banks."

The unemployment rate in Spain is 20%, with youth unemployment being twice as high, at a crazy 40%.

Next year Spain must raise €65bn in order to refinance old debt. Problem is that this could turn out to be hugely expensive. The rates on Spanish ten-year government bonds rose to more than 5% yesterday for the first time since 2002, amid fears on the markets that Spain is only one jitter away from meeting the fate of Ireland. The country's multi-billion euro exposure to bad debt in Portugal isn't helping either.

As Der Spiegel notes:

"There is a lot at stake – for Germany. Firstly, because German banks have lent approximately €134bn to Spanish banks and companies. Secondly, because the European rescue package, equipped with €750bn, was not designed for the bankruptcy of a large country like Spain. In other words: if Spain falls, the Euro falls."

Meanwhile, a piece on Reuters is "Thinking the unthinkable - a euro zone breakup", quoting some people arguing that we'll be fine because it's only "bond spreads" - and the political will is too strong for the euro to sink.

True, the political force behind the euro is powerful, and some politicians will see hell freeze over before giving up on their flagship project.

But seriously, all these people who got the euro wrong in the first place must now begin to realise that political will alone cannot stamp out economic laws and economic reality?

Whose Common good?

I am neither worried about the survival of the euro nor about the survival of the European Union. I am however concerned that in Germany, the federal (government) and local authorities are slowly losing sight of the European common good.

-Eurogroup chairman Jean-Claude Juncker in Germany's Rheinischer Merkur newspaper, adding that he was nonetheless concerned about the future development of the EU.

Our question: whose common good is he talking about?

Europe turning against the euro?

Well, we're not quite there yet. But those who still think - and there are some - that reservations about the future of the euro is something which exists primarily amongst the we-told-you-so bunch on the Tory backbenches, should try to pick up a European paper once in a while.

While the tone and focus on the criticism differ - depending on the prevalent attitude to Europe in the respective countries - media across Europe is clearly becoming increasingly disillusioned with the entire euro-project. And it would be strange otherwise.

An opinion piece in Expansión - Spain's main financial daily - argued:

"The next foreseeable step is that the other peripheral European countries, whose welfare is in question, will question the legitimacy of a supranational body which holds very little democratic counterweight to impose blood and tears."

An opinion piece from Spanish daily La Razón's Brussels correspondent, Jorge Valero, titled "the sweet decadence of Europe", argued:

"The slow exit from the recession, in comparison to the US and emerging economies, has revealed the shadows, imbalances and contradictions of the jewel in the crown of the European utopia: the euro."

Moving to France, a comment piece in Le Figaro noted:

"The Greek domino fell during last spring. The Irish domino has been wobbling over the last days. The Spanish domino will follow suit, along with the Portuguese domino. This is all very sad for those experts who conceived the eurozone and put it into practice - by pursuing an often absurd monetary policy which led to the 'genocide' of our industry."

In Germany, the front page of yesterday's Handelsblatt carried the headline: "The next Ireland is called Portugal", while an article in the paper noted that the current crisis has "once again revealed the two-tier society of the eurozone." An article in FAZ warned against the EU's "bizarre bailout logic" that because Ireland has been granted a bailout, then "there is no need to worry about Portugal and Spain."

In today's Handelsblatt, a comment piece argues:

"whether we can save the euro, is questionable. It is however sure that we become gravediggers when we push countries in crisis into a straightjacket".

As we note in a previous post, in yesterday's Die Welt, Dorothea Siems expressed some strong views:

"The euro-adventure stands the risk of meeting a terrible end. Germany must make clear where the borders of what it can bear lay. This is because the euro isn't a goal in itself. The EU is a lot more than just Euroland. Not because of national power play, but because of a sense for reality. The future of the EU should not be made dependent on the euro, simply for the reason of not wanting to harm European unity in the long-term."

Further north, an analysis piece in Swedish daily Svenska Dagbladet noted that:

"it took six months for the markets to figure out that the miracle cure against the debt disease which the EU-doctors prescribed this Spring consisted of worthless soda water."

An opinion piece in the Hungarian paper Magyar Nemzet by columnist Anna Szabo argues:

“The eurozone, which most East-Central European states wanted to join, is now marching towards uncertainty […] Until now the requirements for the introduction of the euro could be sidestepped without punishment and now [all eurozone countries] are facing the consequences.”

Meanwhile, Hungarian news magazine HVG reports that the Hungarian Prime Minister Viktor Orban has said that Hungary “is glad that it is not in the eurozone.”

Clueless politicians

We were reminded of this spectacularly inaccurate assessment the other day (from our "How the EU-elite got it wrong on the euro" briefing):

"The euro has been a rock of stability, as illustrated by the contrasting fortunes of Iceland and Ireland. Joining the single currency would be a major step [for the UK]".

- Former MEP Richard Corbett, back in 2009.

Having lost his seat in last year's European elections, Corbett is now working as an adviser to EU President Herman Van Rompuy (hopefully staying well clear of anything to do with monetary policy).

More quotes from clueless politicans to follow...

Will German democracy kill the euro?

Commenting on the Irish bailout, Die Welt editor Dorothea Siems makes some very important points.

She argues:

The euro adventure stands the risk of meeting a terrible end. Germany must make clear where the borders of what it can bear lay. This is because the euro isn't a goal in itself. The EU is a lot more than just Euroland. Not because of national power play, but because of a sense for reality. The future of the EU should not be made dependent of the euro, simply for the reason of not wanting to harm European unity in the long-term.

She goes on to argue that a break-up of the eurozone "is possible".

Anyone who thinks that is nonsense should consider that EU's aid plan forces the Greeks to making savings [to its public finances] worth 15 percent. Such an austerity plan has never taken place in peacetime. Ireland's situation is hardly better.

An online opinion poll in the paper shows that 89 percent of readers want to a return to the D-Mark. Obviously to be taken with a pinch of salt but still an indication of something.

German democracy is more vibrant than what many people think - and selling bail-outs to the German electorates is hard work, to put it mildly, as Angela Merkel knows too well.

On Sunday 10 May 2010, her CDU party dropped by more than 10 points in regional elections in Germany's most populated state, North Rhine-Westphalia, following the announcement of a 110 billion euro bailout program for Greece. She could thank her lucky stars (and some political shrewdness) that the follow-up 500 billion euro aid package to support the euro didn't come a couple of days earlier (it was agreed on the evening of the elections).

Meanwhile, Handelsblatt today reports that various top German economists from most of the important German economic institutes have warned against making the Eurozone aid package permanent, saying it would lock in a permanent debt union, burdening German taxpayers which in turn would endanger the legitimacy of monetary union in Germany.

Therefore, as we've argued for some time, it could be Germany that calls time on an enlarged euro.

This line is today picked by Gideon Rachman in an article with the headline "Germany could come to kill the euro". He argues:

Countries such as Greece and Portugal might be a lot more competitive if they could devalue their currencies. But quitting the euro might feel like a national humiliation for members of the southern periphery. There is also no mechanism for quitting the euro in an orderly fashion. Any obvious preparations to do so might trigger a bank run. So if the euro is to break up, the country that sues for divorce is likely to be a strong economy – with Germany as the likeliest litigant.

The Germans would not take this step quickly or lightly. A commitment to European integration has been a leitmotif of German foreign policy for half a century.

But if the Germans became convinced that their eurozone partners were simply impossible to deal with – and that therefore the whole single currency experiment could not work – they might decide to quit. There are two ways I could imagine this happening.

The first is a successive wave of financial crises across the eurozone, affecting larger countries, which gradually sap German taxpayer confidence that the 'loans' that the EU is extending to its weaker members will ever be repaid. The second is if, as seems quite likely, the treaty changes that the German government is demanding to satisfy its courts fail to be ratified by some of the other 26 EU members. At that point, the Germans might throw up their hands and say, in effect, 'Well, we tried our best, but the other Europeans won’t do what is necessary to save themselves.' Germany might then feel released from its historic obligation to 'build Europe'."

All very interesting. In our most recent briefing we explain why we think that a split-up of the euro into two separate currency blocks looks increasingly likely.

Will an Irish bailout actually solve anything?

Open Europe has today published a briefing asking the simple question: will an Irish bail-out actually solve anything?

A healthy Irish economy is quite clearly in the UK's interest, and to extend loans to a struggling neighbour (to use Osborne's rhetoric) is in itself nothing controversial. Sweden offered cash to Iceland after that country hit the rocks following a banking meltdown (not unlike that of Ireland) for example.

And Ireland is clearly in better shape than Greece, Portugal and Spain, and a rescue package could, at best, buy Ireland some time to get their house in order - courtesy of its open economy.

However, it's also true that euro membership alters the logic - and potential effectiveness - of a bailout. As we argue in the briefing, there are five reasons why a one-off bailout for Ireland will not solve the eurozone's problems:

1. Temporary loans or greater budget discipline across the eurozone will do very little to help countries such as Greece, Ireland or Portugal regain competitiveness, the main problem these countries face.

2. In essence, what was asked of Greece, and soon Ireland, is two-thirds of a traditional IMF package - cuts in expenditure and increased taxes. However, the third, vital ingredient - currency depreciation - isn't permitted within a single currency. Instead, currency devaluation has to be replaced by so-called "internal depreciation", meaning even more squeezes to jobs and wages which aren't politically or socially affordable.

3. The ECB is likely to continue to pursue a German-style monetary policy, leading to an undervalued currency for Germany (fuelling German export-led growth) but an equally overvalued currency for the weaker economies such as Portugal and Spain (although Ireland itself could be helped by a weaker euro). This, in turn, locks in a multi-speed eurozone, with the same type of tensions we've seen over the last year coming to the fore again in future.

4. The politics of a loan bailout and stronger supranational budget rules are unsustainable. The lending countries, most importantly Germany, can only sell a de facto debt union to their electorates if it comes with strict rules and terms. But such terms imposed from the outside seriously undermine the ability of the borrowing countries to democratically govern themselves.

5. The role currently being played by the ECB is untenable, both for political and economic reasons:

• Politically, the ECB's decision back in May to start buying 'junk' government bonds from the secondary market has compromised its independence - which the Germans were promised would never happen. A bailout using loan guarantees from other EU states may allow the ECB to withdraw its emergency funding for now, but without a long-term solution the ECB is likely to be called on again to prop up ailing states.

• Economically, the situation is unsustainable as well. The Eurosystem of eurozone central banks that underpins the ECB is leveraged 24 times, while the average hedge fund is only leveraged 3 to 4 times. A fall in assets of only a few percent would wipe out the ECB's reserves, which could lead to the ECB itself being in need of a "bail-out".

As we conclude,

There are no obvious long-term solutions that do not come with huge political and economic costs. The dilemma facing the eurozone remains whether it is to become a fully fledged United States-style fiscal and therefore political union with huge continuous transfers from the German-led bloc to those on the periphery - which would inflict serious damage on the German economy; or prepare for a messy divorce possibly in the form of a two-tier euro and even some countries exiting altogether.

Giving people the wrong ideas?

Presenters on Hungarian radio station NeoFM's daily morning show, "Bumerang", have joined the long line of people trying to make sense of the bizarre projects that have received EU funding. Listeners have been asked to choose their favourites amongst our list of examples of EU waste and send in any of their own.

Polling highest is the example of €500,000 given to two Swedish fishermen to scrap their fishing vessels, only to find them later applying for further EU subsidies to buy new, smaller boats, which were subject to a different set of EU rules. Other contenders included Hungary's very own €411,000 dog "rehabilitation centre", which never materialised and the €16,000 given to Tyrolean farmers to boost their emotional connection with the landscape.

But the exercise may have produced an unintended side effect. This is what the presenters had to sat at the end of the show, "We are so stupid! Why aren't we also applying for EU funding to raise the popularity of European Radio. We'd only need €100,000."

"Europe is more than a nine year old currency"

Yesterday saw some interesting reactions from the German papers, in response to the increasingly likely Irish bail-out.

A leader in Die Zeit dismisses Herman Van Rompuy's “exaggerations” and “apocalyptic” comments (“if the Euro doesn’t survive, then the EU won’t survive”, he said earlier in the week), and so those of Chancellor Merkel who made a similarly dramatic statement only a few days ago. The leader asserts that “the European idea is more than an almost nine-year-old monetary community", arguing that the EU could function perfectly well without a single currency (hear, hear!).

It argues,

...you can thank the common market that anyone can, Europe-wide, sell their goods and services and be treated as if they were local there. And all of that would be the same without the Euro. A permanent change to a different currency would only make life a little bit more strenuous for your average citizen.

Dirk Heilmann in Handelsblatt captures many of the issues on the table in his piece’s titled: “Yet again we are saving Europe’s banks.” As the powerhouse of the euro zone, the Germans are expected to be picking up a reported third of the rescue package (!).

Now, with the rescue of Ireland, it has been clear from the beginning that it is essentially a bailout…The banking problems are so large that they overwhelm the land. So, again, we rescue banks: the Irish, their foreign creditors and the owners of Irish government bonds.

Yet Heilmann is sympathetic to the Irish plight:

The taxpayers should help Ireland’s credit institutions and their creditors, because Europe's banks are still ailing. Their compulsory rehabilitation is urgently needed.

He's also quick to dismiss Greek comparisons,

We are not talking about a country that has squandered these advantages like the Greeks and frittered away the Euro dividend...we are talking about a country, that, like Iceland, let its financial sector grow unattended for a long time, until the monster turned around and ate its master.

Britain may not be able to avoid bailing out the Irish

Irish central bank governor, Patrick Honohan, said this morning that he expects Ireland to be given a "very substantal loan" from Europe. There's still much to play for, but an Irish bail-out is looking increasingly likely.

Over on the Spectator coffee house blog, we argue:

In the UK, of course, backbench MPs and others have been quick to condemn any move which would force British taxpayers to cough up cash under the EU’s various bail-out arrangements. Only problem is: the UK may not have a choice. The part of the eurozone bail-out package which Britain could be underwriting to the tune of £6-7 billion - the so-called European Financial Stability Mechanism – is not protected by a UK veto. This means that the mechanism can be triggered by a majority vote amongst EU ministers, and that the UK could be outvoted."

We go on to argue:

But let’s not kid ourselves: the UK is hugely exposed should the Irish economy sink, irrespective of how difficult we all find it to prop up a single currency which we knew all along was heading for trouble.

Leaving aside the need for Ireland to clean up its banking system and the accompanying too-big-to-fail discussion – admittedly two big issues to leave aside – the Treasury is therefore right to look at ways to assist Ireland bilaterally. If anything, bilateral rescue arrangements between similar economies have a far better chance to end happily than messy multilateral bail-outs which come with ideologically fuelled demands (i.e. German or European Commission demands for raising the corporate tax rate which would be economic suicide for Ireland). The joint loan given by the Nordic countries to Iceland when that country hit the wall in 2008 could be one model.

In its own strange way, a UK-Irish deal could also serve to strengthen the UK’s position in Europe. But alas, the terms and conditions for UK taxpayer-backed loans to Ireland no longer rest solely with the British government.

Read the full post here.

Finnish reservations

[Financial] aid isn't sufficient if a country's own correcting measures aren't tough enough. That's why Finland wants to introduce guarantees. This would ensure discipline in the borrowing countries. It would also send a strong signal to the citizens that it's not the EU but the country's own measures that are saving them.

Finnish Finance Minister Jyrki Katainen continues to insist that any eurozone loan to Ireland should come with strong guarantees to ensure that the money is paid back. According to Finnish media it's still possible that Finland will oppose loans to Ireland unless such guarantees are attached.

The view from Benelux

Belgian Finance Minister Didier Reynders today said that aid to Ireland is "inevitable", claiming that it's impossible for Ireland to get out of this pickle without some sort of cash injection. He added that for the ECB it would become "difficult" to remain providing liquidity to banks in Ireland and in other countries.

His Dutch counterpart, Jan Kees de Jager, was more cautious and refused to comment on Reynders' assessment, merely saying that "Ireland will ask for help when it's necessary (...) If you're with your back against the wall, you will be forced to ask for help."

Barroso's case of the Budget Blues

After a tumultuous five-plus-months of discussions, EU negotiations over the 2011 budget broke down two days ago, leaving an array of despondent MEPs, Commissioners and eurocrats to lament a 'budgetary crisis'.

Commission President Jose Manuel Barroso launched a not so veiled attack on the terribly obstinate member states who tried to install a little 'pseudo-austerity' into the EU budget (real austerity would mean actually cutting expenditure rather than trying to cap the budget rise at 2.9%). Jose said:

I regret that a small number of member states were not prepared to negotiate in a European spirit Those that think they have won a victory over 'Brussels' have shot themselves in the foot. They should know that they have dealt a blow to people all over Europe and in the developing world.

Yes, you read right. Barroso is actually attempting to take the moral high ground here. First of all, if the EU institutions really wanted to help the developing world, why not spend some time taking a long hard look at the existing fat in the EU budget rather than jumping up and down demanding more money.

But, more hypocritical, is the presumption that an increased EU budget is necessarily going to help the developing world. What about the huge amounts spent supporting European farmers at the expense of their competitors in poorer countries and the additional impact this has on increasing food prices?

One can also point to flaws in EU trade agreements that leave poorer countries unable to support domestic producers against floods of cheap, subsidised European imports.

The EU's large aid budget is also less effective at targeting funds at the poorest countries than many of member states' own aid programmes.

All in all, Barrosso's tug at the heart strings looks a lot more like a self-serving attempt to boost the power of the EU institutions rather than a sudden bout of altruism.

Power to the Parliament

Open Europe has just hosted a debate on the Coalition Government's proposed 'referendum lock' with Europe Minister David Lidington. A write-up and recording of the event will be put on our events page shortly. But in the meantime, two thoughts:

A point raised - echoing what was argued in the Economist's Bagehot column last week - is that the referendum lock amounts to an effective "UK Veto Bill" over new EU treaties. This, so the reasoning goes, is de facto locking in a two-speed Europe, with Britain in the 'slow lane', as it would never be able to sign up to new Treaties under the Bill (assuming that any referendum on a new EU Treaty in the UK would result in a No vote).

This logic contains some truth but is also dated. In today's more fluid, interesting but also more perilous, Europe what matters is one thing: the health of your economy.

Europe is already a multi-speed beast, fuelled by the ongoing eurozone crisis. The slow lane is reserved for the countries which don't have enough cash to carry them over until tomorrow - not those which choose to stay out of the European Public Prosecutor (for example). Which lane the UK occupies in the future will depend on its economic fundamentals - not the referendum lock.

Secondly, some commentators really should read the actual Bill before ranting. Philip Stephens, who every week recycles columns in the FT, for instance. Today he argues,

It is likewise curious that a Tory party so wedded to parliamentary sovereignty should be so keen to subordinate its authority to a plebiscite. Margaret Thatcher got it right when she criticised the last popular vote on Europe in 1975. The referendum, the then Tory leader observed, sacrificed parliamentary sovereignty to political expediency.

This is wide of the mark. In fact, the biggest winner from this Bill is not the British people - a referendum is unlikely to be called for a long-time (which Stephens also acknowledges) - but the UK Parliament. Every decision outlined in the referendum lock will ultimately rest with Parliament, including whether a power shift is significant enough to warrant a referendum under the so-called significance criteria in the Bill.

In this sense, the proposal is actually more of a Parliamentary lock, than a referendum lock. What the Bill will do is restore some control to Parliament - which has been handed over to the government (and then onto MEPs, EU judges and eurocrats) through various EU treaties.

Now it's up to Parliament to decide what to do with these powers.

Ps. Stephens also argues that the EU Bill is "a piece of legislation so dense and unintelligible that it makes the Maastricht treaty seem like an easy read." He clearly has limited experience with EU treaties and texts. In fact, the EU Bill is a Stieg Larsson novel compared to much coming out of Brussels, such as the unconsolidated version of the Lisbon Treaty for example (which we were the first to decodify).

Meanwhile in Austria

“It is now becoming clear, that the Greeks cannot sufficiently keep to their plans for revenue, i.e. what comes in from taxes. Therefore, I speak very critically with regards to granting the next instalment in December...From the Austrian point of view, there is no reason to release the contribution in December with the [Greek] numbers as they are at present.”

- Josef Proell, Austria’s Finance Minister, says his country could choose to withhold its contribution to Greece, worth around €190m in December.

"Everything is at stake"

Chancellor Angela Merkel has been speaking at her party's congress and, given the events in Ireland, the euro was a key theme of her speech.

It's fairly stirring stuff:

"Everything is at stake -- if the euro fails, then Europe will fail. The idea of European values and unity will have failed, an idea that gave our continent strength and prosperity after the last century with its wars and destruction. It's up to us. It's our task to create a new anchor for a culture of stability in Europe."

She went on to criticise the decision to admit Greece into the euro:

"In 2000 Schroeder and Eichel couldn't let Greece join the euro fast enough and they ignored all the warnings. It was a political decision...political decisions are important but those which ignore the facts are irresponsible."

Merkel also made a point of defending Germany's export-led model, which many say has contributed to the euro's problems, adding:

"We will not allow ourselves to be punished for something that we do well. We'll not allow ourselves to be whipped because we export good products, made in Germany, all around the world."

Should the UK contribute to an Irish bailout?

The increasingly likely prospect of an Irish bailout is looming and that is also likely to have an impact on the UK.

While the UK was not involved in the Greek bailout, British taxpayers are liable for one of the two bailout funds agreed in its aftermath: the €60bn European Financial Stabilisation Mechanism (EFSM), founded on a very dubious reading of the EU treaties, is a lending facility guaranteed by all EU member states, including the UK, using the EU budget as collateral. The other bailout fund, the €440bn European Financial Stability Facility (EFSF), was agreed outside the EU treaties, and can also issue loans guaranteed by eurozone governments.

According to Downing Street officials, the UK's share of the €60bn fund is 12%, so British taxpayers are potentially liable for between £6bn and £7bn at current exchange rates.

If Ireland asks for help it is up to the European Commission to propose the use of the EFSM with EU finance ministers making the final decision. However, the vote is taken by qualified majority, meaning that the UK has no veto and effectively no choice in whether to contribute to a bailout using the €60bn fund.

A UK Treasury official has already been quoted in the Times saying that the UK will its play its part to help Ireland. “This is not like Greece — they are close trading partners,” the official said. The Mail also quotes an official saying, "There are several ways it can be done, but it looks like EFSM will be used - that's the one we participate in".

It seems likely that the EFSF would be used as well, with additional funding coming from the IMF, to which the UK also contributes.

David Cameron has said today that stability in the Irish economy is "very much in Britain's interests". Shares in RBS reportedly fell 5% this morning over investors' fears of the banks' exposure in the country and Bank of International Settlements' estimates from June highlighted that the UK's exposure to Ireland was greater than Germany's.

But while it's in the UK's interest to see Ireland through, a bailout must come at a price. The eurozone's one-size-fits-all exchange rates contributed significantly to Ireland's fate, with a huge property bubble fuelled by low interest rates. This private debt problem is now becoming a public debt problem as the government struggles to cope with the ailing banking sector.

The question is what will change in the future to ensure that this doesn't happen again? Serious questions need to be asked about whether Ireland's membership of the eurozone is really sustainable.

The unholy alliance of politicians and banks believed the fairytale that Ireland could simply hand sovereignty over monetary policy to the ECB in exchange for growth and German-style stability. It was their poor decisions which also contributed to the economy overheating and a bailout should not be allowed to paper over their role in the crisis.

As Cameron said today,

"I don't want to make life difficult for the Irish at a time when they are trying to take difficult decisions about their own economy but they did have a consumer boom, property boom, badly-regulated banks...

"They added to that the issue of euro membership - I always think the great lesson from the Exchange Rate Mechanism is that the Euro is the Exchange Rate Mechanism without an exit, and that is the problem."

The eurozone's monetary policy was and is going to be unsuitable for Ireland for the foreseeable future and the fate of many Irish citizens' economic futures now lies largely in the hands of others. Maybe it's time to consider the exit?