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Monday, April 30, 2012

Marshalling growth in Europe

If talking about growth could create economic growth then the eurozone would be flying right about now.

The latest in a long line of 'pro-growth' proposals for the eurozone looks to be the creation of a new ‘Marshall Plan’ to provide funding for investment projects in Europe. The plan, according to El Pais, is to attract €200bn in investment from the private sector to fund projects geared towards creating growth particularly in infrastructure, green energy and high technology.

Currently, there are few details on the plan available but the main mechanisms for achieving the funding seems to be:

-          Increase the European Investment Bank capital by €10bn, which it is claimed would boost the lending capacity by €60bn and overall investments by €180bn (we assume by some sort of match funding with the private sector or other public funding)
-          Use the remaining €11.5bn in the European Financial Stability Mechanism (EFSM) as initial capital to be leveraged in the private sector (again in a similar way to above)

Clearly, this would be an EU scheme rather than just a eurozone one with proportionate access and funding. This also means that as a contributor to the EIB and EFSM, the UK would be involved, effectively underwriting a chunk of the financing - which could potentially be controversial in Westminster. Remember that the provision and Treaty change designed to put the permanent euro bailout fund (European Stability Mechanism) on a legally sounder footing while simultaneously giving the UK guarantees that it will not be implicated in euro bailouts in future, is still to be ratified in the UK parliament.

This would of course not be a "bailout" though, but something quite different. We hesitate to pass judgement on such an undefined plan, but here are some of our initial thoughts:

-          In principle this could be a positive idea for Europe - we like the focus of the investment and if it is conducted in the right way, it could be worth the UK participating. However, it's hard not to be slightly sceptical about how Europe tends to go about these kinds of schemes, which could instantly undermine that case.
-         The EU's new found infatuation with leverage seems to continue with this idea (which is strange given its views on financial regulation and the causes of the financial crisis). The lack of detail aside, the numbers in the plan seem stretched, at best.
-          Given the fairly limited contribution of European funds we wonder why the private sector would suddenly be so keen to invest in these projects. The project assumes that there is a glut of unfunded investment projects in Europe but it’s not clear why this new fund would massive ramp up investment over its currently depressed levels – if the private sector isn’t funding these projects now, why or how would the fund change this? 
-          The massive injection of money into the banking sector through ECB lending has failed to stir bank lending to such projects and some have cited a lack of viable, risk-appropriate demand for these types of loans. It is possible that the glut of unfunded programmes is not as large as the Commission believes, so this fund would not be addressing the correct problem. 
-          The EU already provides a huge amount of funding, through mechanisms such as the structural funds, which go to similar aims of development and investment. As we recently pointed out these could be spent much more efficiently and have a larger impact. The EU should focus on improving and reforming its current spending plans before trying to create new huge funds with grand aims. 
-          If this fund does come into place there needs to be a rigorous and clearly defined criteria for providing funding, which should be based solely around the ‘growth’ potential or economic benefits of the plan. The EU has fallen short on this front in many other areas of spending.
-          The areas mentioned for providing growth (infrastructure, green energy and high technology) all sound very promising and beneficial but need a carefully differentiated approach (which isn't happening in the structural funds). For example, in many areas (see Spain and Portugal) infrastructure spending has been high for some time but delivered few growth benefits and little more is needed. As the CAP and structural funds show, mixing in scientific and environmental goals with economic objectives can become very messy. Although green energy and promoting new technologies are laudable aims they may not provide the best returns and may not be the most cost effective investments. The singular aim of growth should dictate investments rather than a convoluted over-arching strategy to attack many problems in Europe.

Unless these issues are addressed, we may just end up with another pot of European money being poorly targeted and failing to address a key problem.

Guess who?

Here's a game for you. Guess who said the following: 

11 March (part one)
"We can't leave the management of migratory flows only to the technocrats and the courts. We need a common discipline for border controls. It must be possible to sanction, suspend or expel from [the EU's border-free area] a non-compliant country."
11 March (part two)
"Only firms which produce in Europe will benefit from Europe's public money."
23 April
"[We] don't want a 'colander Europe' anymore. This is the message I've heard. A Europe that doesn't control migratory flows is finished."
27 April
“I propose that, if we have not obtained reciprocity with our biggest [trade] partners at the European level within one year, we apply the following rule unilaterally: We will reserve all our public markets.”
29 April
"Europe has let the nation state weaken too much. Nowadays, the countries that believe in national spirit are the countries that make gains...Without borders, there's no nation, no state, no republic, no civilisation."
Pretty tough stuff. So who is it? Someone from the UK Independence Party? An activist form the (True) Finns? An MEP from Lega Nord? A eurosceptic socialist?

All wrong. It's Nicolas Sarkozy (in his efforts to fish in Le Pen waters).

But no one would dare call him 'anti-European' of course...

Friday, April 27, 2012

S&P compounds a bad week for Spain all round

It's been a tough week in Madrid and Barcelona with the economic problems rivalling even the footballing troubles for coverage.

At the start of the month we highlighted the significant risks still in play in the Spanish banking sector and some of the wider policy issues in Spain. Echoing the conclusions in our briefing, over the past few weeks the calls for Spain to address these issues have grown louder while markets have grown increasingly jittery.

However, the pressure has noticeably picked up this week. The obvious example is last night’s decision by S&P to downgrade Spain to BBB+. This hasn’t had a huge impact on the markets, given that it was mostly expected and priced in, but the reasons behind the downgrade are nonetheless interesting and align with some similar points which we highlighted in our briefing:
- The on-going problems in the banking sector mean that a new injection of public money may well be needed at some point – which would significantly worsen Spanish debt sustainability and the ability of the government to meet deficit targets
- The continuing growth challenges and competitiveness problems in Spain
- Although encouraging the structural reforms will take some time before they boost economic growth
- In the short term these structural reforms could actually increase unemployment (supported by today’s figures which show unemployment increase by 1.5% over the past three months) 
S&P also went on to criticise the wider handling of the crisis at the eurozone level and the continued failure of eurozone leaders to address the true cause of the crisis (something which we’ve mentioned countless times throughout the crisis).

On top of this move, the IMF also warned earlier this week that some of the smaller Spanish banks could need public money to boost their capital ratios and/or provisions against losses on exposure to the bust real estate and construction sectors. In our report we suggested that, given deteriorating economic conditions and falling house prices, the banking sector as a whole may need to double its provisions against souring loans. Goldman Sachs recently made a similar estimate, suggesting that a further €58bn may be needed on top of the current provisions of €54bn.

If this does happen, the question remains over whether it will be done with Spanish or European funds. Despite the clear limits on the amounts available to the Spanish government the stigma attached to asking for even a precautionary loan from the EFSF/ESM will make it a last resort. Not to mention the fact that, since it has to go through the state, any loan would increase the debt levels further.

Separately, in a move that doesn't inspire confidence the Spanish Foreign Minister Jose Manuel Garcia-Margallo today warned that the country faced a crisis of “massive proportions” and that “if it goes badly for us, it’ll go badly for others too”. Even worse, in a warning to Germany, he compared the eurozone to the Titanic, stating that when it went down the 1st class passengers went down with it before issuing the usual rallying cry for more growth. 

Despite increasing concerns a bailout for Spain is, as we have said before, not yet a foregone conclusion. But the government needs to begin making headway convincing the market of its commitment to cleaning up the banking sector and promoting growth, but obviously both are easier said than done. With election season seemingly upon us in Europe it could be a long few months in Spain which could make or break the eurozone.

Fact-checking the Commission's EU budget claims (it ain't pretty)

The European Commission has its own dedicated "myth buster" which aims to explain to the masses and media how terrific the EU budget is, and that all claims to the contrary are "euro myths". Despite making some fair points, overall the list is generally silly and counterproductive. For example, it claims that an EU subsidy to a dog fitness centre in Hungary (that never was built) is a "myth", as the money was since paid back.  However, it fails to acknowledge that the dog centre was only forced to pay back the EU subsidies once Open Europe and others brought the sorry episode to the attention of international media. The Commission was blissfully unaware at the time we highlighted the example, and showed little interest in investigating the case (even claiming that the finding wasn't "serious"). To then come back and present it as a "myth" is laughable (for exactly how laughable, see here).

It illustrates how the Commission likes to take the moral high ground on facts and figures, but often itself engages in spinning exercises that would make Malcolm Tucker proud.

Its presentation for its proposal for the 2013 EU budget, which includes a 6.8% increase in spending, is a case in point. In fact, it was so full of dodgy figures that we felt it was in need of a serious fact-check. So this morning we published one. Here goes (the full fact-check note is available here):



The claim: “[The Commission is] cutting its staff by 1%, the first step towards the goal of a 5% reduction of staff in 5 years”.

The reality: The EU will only cut 6 jobs net out of 41,000 jobs in 2013 while the Commission will reduce its workforce by 0.5%.


The claim: “[The budget] also freezes the Commission's administrative budget at well below inflation level…The vast majority of people across the EU feel the daily pain of the crisis as their national, regional and local governments have to make cuts, therefore a ‘business as usual’ attitude from the EU institutions is simply not acceptable.”

The reality: Overall EU administration spending to increase by 3.2%.


The claim: “[The draft budget] includes a strong emphasis on savings and cost efficiency…pressure was exerted on every EU institution and agency to seek savings wherever possible. Most EU agencies will actually see a real cut in their annual budget.”

The reality: Apart from the Commission, many of the EU’s other institutions, committees, quangos and agencies have seen their budgets go up despite adding no discernible value or duplicating tasks, although it is welcome that many of the EU’s decentralised agencies have indeed had their budgets frozen or cut in absolute terms.


The claim: “€62.5 billion in payments are devoted to job friendly growth in Europe”.

The reality: As several studies have concluded, the EU’s jobs and growth programmes are inefficient and their overall impact is inconclusive, while too much money is still wasted on farm subsidies to landowners with no link to any meaningful economic activity.


The claim: “The EU budget must meet its contractual obligations of current and previous years vis-à-vis the Member States and other recipients.”

The reality: Yes the Commission is legally obliged to make certain payments based on previous years’ commitments. However, both national governments and households also have to pay bills at the end of the month or year. The Commission must likewise learn how to prioritise and find savings if there is not enough money in the pot (the last two years have produced surpluses in the EU budget).

 So as austerity sweeps Europe, is this a serious budget proposal? You decide....

The EU and the NHS: the long arm of Brussels

Yesterday we had two reminders of how far the EU's power reaches into the workings of member states. In this case, we're talking about the National Health Service.

MPs debated the impact of the Working Time Directive on the NHS - an issue we looked at here.

Charlotte Leslie MP, who organised the debate, sums up the problems in an article in the Times this morning:
"Doctors warn that the European Working Time Directive, which limits medics to working a 48-hour week, is having a devastating effect on patients’ treatment, doctors’ training and the expertise of future consultants. It was brought in to stop people working 100-hour weeks. But combined with the last Government’s complicated New Deal contract, the directive has put a straitjacket on doctors’ ability to train and to care for patients.
It imposes a 'clock-on-and-off' shift system that means junior doctors no longer get enough quality training with a consultant and patients become products on a conveyor belt. The lack of continuity means things go wrong.
Matters have been made worse by two European Court of Justice rulings. First, on-call time is counted in working hours even if the doctor is asleep in hospital accommodation. Second, if doctors have to go beyond their allotted shift time, they must take compensatory time off immediately. This all costs."  
During the debate, Ms Leslie said that the UK had to look at radical steps to deal with the issue and recognising the depth of reform needed added, "we must ask why we are in this situation, and we must look at the treaties." She cited our recent research on EU social policy, which includes the WTD, saying:
"Open Europe has suggested an interesting double-lock mechanism for negotiating our way out of what was the social chapter and creating a situation in which we are not bound by the rulings of the European Court of Justice. Those are big, radical steps and will take time, but it is something that we should look at.”
Unsurprisingly, the minister present at the debate ruled out the UK taking unilateral action to protect the NHS from the directive. 

Meanwhile, on the same day, we had the European Commission calling on the UK to drop an allegedly unlawful restriction stopping unemployed EU citizens who want to reside in Britain from claiming the NHS as their “sickness insurance”. Such insurance is a condition to reside in other member states under EU free movement rules. UK officials argue that the NHS cannot be seen as an insurance policy to EU citizens without health insurance and that the controls are essential to ensure the NHS is not overburdened with bills for treating non-UK citizens who are not working or economically active. The Commission has threatened the UK with legal action at the ECJ if the rules are not changed.

To put it simply, Article 7 of the EU’s Free Movement Directive states that for EU nationals to have a right of residence in the UK for more than three months and if they are not working they must:
"have sufficient resources for themselves and their family members not to become a burden on the social assistance system of the host Member State during their period of residence and have comprehensive sickness insurance cover in the host Member State;"
The Commission’s complaint is that the UK doesn’t consider access to the NHS to be sufficient to meet this requirement.

From the UK’s point of view, the concern is that EU nationals would have the right to treatment on the NHS but with no means for the NHS to be reimbursed for the care. If the EU national does not have his/her own health insurance or a European Health Insurance Card (EHIC), the NHS would be left with no one to invoice for the treatment.

As we've said before, EU free movement comes with benefits to Britain but it needs to be managed with extreme care and, in order for it not to lose all support from the public, the UK and other member states need some discretion in protecting their welfare and public health systems from abuse and/or being overburdened.

Given the UK public's attachment to the NHS, the EU's interference in this area could lead to powerful forces being unleashed.

Thursday, April 26, 2012

How real is Hollande's veto threat?

As has been widely reported, Francois Hollande - the socialist contender for the French Presidency - gave a major speech yesterday. Unsurprisingly, there were a few points thrown in that won't go down particularly well in Berlin or Frankfurt. Perhaps most interestingly, in reply to a journalist’s question on the EU fiscal treaty, Hollande answered,
“Ireland is about to have a referendum on the treaty, we are not sure what the result will be. We are all aware that Ireland is capable of saying no. So there will be some form of renegotiation. Will the treaty be modified? I hope so. Will another treaty be drafted? That’s part of negotiation. But the treaty in its current state will not be ratified by France”.
 So Hollande's veto-threat still stands. He also reiterated,
"[I am] not in favour of a constitutional golden rule. I’ve been saying it for months. So there will not be any changes to the French Constitution on this issue. However, if I am the next President, and the Parliament is in favour of this, there will be an organic law which will enable our budget to be rebalanced by 2017." 
In addition he tried to claim that the calls from ECB President Mario Draghi for a "growth pact" were in support of his own policy:
“The President of the ECB …has just said that the fiscal compact should be complemented by a growth pact. He even added that it would be useful to go back and prioritise education, research and big infrastructure. The ECB president will be useful to support growth through an interest rate policy. But he also adds support to… my announcement”
This is hardly how the matter was viewed in Berlin, where, in a veiled criticism of Hollande, Merkel said that "We need growth in the form of sustainable initiatives, not simply economic stimulus programmes that just increase government debt." This morning, Hollande also acknowledged on France Info that he didn't share the same "conception of growth" as Draghi, noting, "he calls for greater competitiveness, liberalisation and privatisation".

Yesterday, Hollande also laid out the content of his growth clause:
“The day after the second round, I will address a memorandum to all the European leaders and their governments on the renegotiation of the treaty. The letter will include four points. First, the creation of Eurobonds, not to mutualise debt, but to finance industrial infrastructure projects the size of which will be determined by the states. The second point will be to further liberalise the European Investment Bank’s financing opportunities, to enable a certain number of big projects already known to the bank to be financed. The third point will be the creation of a financial transactions tax, which will be determined by the states, and which will be set at a level to enable Europe to finance further development projects. Finally the fourth point will be to mobilise all the European structure fund leftovers, which are currently not being used, to finance States’ projects and help businesses." 
Of these four points, the creation of "eurobonds", which seems to build on the Commission's idea of 'project bonds' is by far the most interesting. The FTT proposal appears to be a rehash of Sarkozy's idea. It currently remains unclear whether Hollande would introduce it unilaterally, as Sarkozy is, when he encounters inevitable opposition from some EU member states. Nor is it clear at what rate he would set the tax, and which sectors he would target. Sarkozy's own version has been watered down since he made his pledge in December. Hollande's proposal for the use of unspent structural funds is hardly groundbreaking or exciting policy making. Nor does it necessarily help EU growth, as we have shown before.

The question now is whether Hollande will make agreement on these four policies a prerequisite for French ratification of the fiscal treaty. Of these four policies, eurobonds or 'project bonds' are supported by the Commission but could be difficult to get through national capitals, the FTT just won't happen at the EU-level while the two others are insufficiently interesting to warrant the renegotiation of a treaty (use of structural funds and EIB financing).  Our guess is that Hollande knows that his pledge to renegotiate the treaty comes at too great a political cost, and that he will settle for some mild language on these four areas in return for ratifying it.

Regardless, what France and Europe need now is to reassure the markets, and proceed with long-term reforms, rather than stillborn policies or palliatives to pre-existing problems.

Wednesday, April 25, 2012

What next for the Netherlands?

The political situation in the Netherlands continues to look uncertain, following the fall of the Dutch government, largely due to EU-imposed austerity targets.

Yesterday the Dutch Parliament debated the crisis (which we live-tweeted) with at times heated exchanges. So what has come out of it and where are we at?
  • Outgoing PM Mark Rutte announced that he would propose 12 September as the election date, despite many parties calling for a June election to allow the new government to get on with business. 
  • There is still disagreement over an absolutely vital issue: how to deal with EU austerity rules. The Dutch government has to present its 2013 budget to the Commission before 30 April, which needs to comply with the EU's 3% deficit limit or, says Rutte, the Netherlands could face a fine of up to €1.2bn (though it would take a lot for that to actually come to pass).
  • Diederik Samsom, the leader of the social democrat PVDA, remains opposed to sticking to the the 3% rules, saying that going beyond that limit (his proposal is 3.6%) is allowed in "exceptional circumstances" - which was immediately denied by PM Rutte.
To put the Dutch economic problems into context, we are talking about a country with a deficit of 4.7% and debt to GDP of 65% (2011 figures), although high household debt and falling house prices are creating some trouble right now. Many countries would love to have this problem (the UK, for one). The problem, of course, is that these figures do not conform to the eurozone orthodoxy of austerity - of which the Dutch have been major cheerleaders, and in many ways the Dutch have made a rod for their own backs here.

In any case, talks are ongoing and a new debate is scheduled for Thursday. Our bet is on the political parties reaching an agreement to send to Brussels before the deadline and that will serve to appease the Commission.

But this runs far deeper than whether the Dutch can pass this year's budget, it raises fundamental questions about whether the country will be able to prodcue stable government in the longer term. Political fragmentation in the Netherlands has been a feature of the last decade. In 2003 the three 'mainstream parties' (PvdA, CDA, VVD) held 114 (76%) of the 150 seats in parliament. In 2010, this was down to 82 (54%). In 2012, who knows?

The one to watch is clearly Geert Wilders and his populist PVV party - if they gain, passing the EU fiscal treaty will be far more difficult in the Netherlands, as will eurozone politics in general. However, interestingly, Wilders is currently polling at the lowest level in two years, at 12.6%. What's also interesting is that the left-wing Socialist Party (SP), which has also been quite critical of the EU in the past, is polling close to 20% (governing VVD at 22% and centre-left PVDA at 16%).

But as we've noted before, the Dutch crisis is an indication of how unsustainable the current eurozone path is, and the tension involved in having key decisions on spending and taxation subject to supranational rules rather than votes in national parliaments.

Yesterday, Bild presented a list of eurozone countries where governments have already collapsed over the euro: the Netherlands, Ireland, Portugal, Italy, Greece, Spain, Slovakia and Slovenia.

The eurozone crisis used to be perceived as the the core versus the indebted periphery. What happened this week in the Netherlands has bent these assumptions.  But the common theme is that voters feel powerless to change the status quo. Whichever mainstream party they vote for, the answer is the same. For as long as this persists, no one should be surprised by the alternatives that people might seek.

What have the EU quangos ever done for you?

Today’s expected announcement by the Commission that it has proposed a 6.8% increase in the EU budget comes as are finalising a detailed report looking at the EU’s bloated and inefficient spending, and how we feel the budget should be reformed. As a warm-up ahead of this report, we published a short updated briefing looking at the cost and effectiveness of the EU’s assortment of quangos and committees, the total cost to European taxpayers of which now stands at €2.64bn (£2.17bn), up 3.4% from last year and a massive 33.2% compared with 2010. Here are a few key points from the report:

• There are currently 52 EU quangos, double the number in 2004. Prior to 1990, there were only three as the graph shows:
Rise of the EU quangos - 1990 - 2012

• Over 90% of the €2.64bn comes from EU member states with the rest from non-EU member states such as Norway. A huge chunk of this is borne by three member states with the UK paying around €362m (£298m) this year, Germany paying €490m and France paying €386m.

• Some agencies, such as the European Chemicals Agency, help to facilitate trade in the single market or pool expertise. However, many agencies add little or no value while duplicating the work of each other, of the core EU institutions as well as of member states' organisations and civil society. For example, there are currently two EU agencies specifically dedicated to human rights in addition to similar bodies in member states, the Council of Europe, the ECtHR, a specific EU Commissioner for “fundamental rights” and a range of NGOs.

• Others have no impact on policy whatsoever. For example there is no evidence that the €129m a year Economic and Social Committee, an “advisory” body that has existed since the 1950s, has actually altered the outcome of an EU proposal in recent years, and yet it remains in place. The equally redundant Committee of the Regions has an annual budget of €86.5m, a 3% increase from 2011.

• As an evaluation for the European Commission concluded, the system of EU agencies also “creates an indirect but powerful incentive for spending” taxpayers’ cash. For example:
  • The European Environment Agency (EEA) has set a financial ceiling of €250,000 over a four year contract in order to assess its own media coverage.
  • The EEA also spent €300,000 on a ‘living map’ of Europe, created from 5,000 plants affixed to the outside wall of its headquarters in Copenhagen, in order to promote biodiversity. The facade stayed up for around 5 months in 2010. On its website, the EEA said it wanted to “illustrate the significance of vertical gardens.”
  • Each board meeting of the European Food Safety Authority (EFSA) – whose mandate already overlaps with that of another EU agency, and whose board only consists of 15 people – costs €92,630 on average, working out at €6,175 per member. 
• Open Europe has identified at least ten agencies that serve no unique purpose and ought to be abolished. Most of the remaining agencies should but cut by 30%, saving EU member states just over €668m (£566.4m) every year, with the UK saving €100.4m (£82.6m), France saving €107.3m and Germany saving €136m. In parallel, all agencies should be given strict performance targets and funding should then be dependent on whether these are met.

The briefing was covered widely in the UK press and also by a couple of international outlets. A spokesman for the Commission responded, saying that:
"Each EU member state wants a European agency on its own ground so, of course, that means member states have pushed up costs."
In fairness this is a real problem which we have acknowledged in the report, i.e. that member states are often very protective over specific areas of EU spending, meaning they can be just as responsible for spiralling costs overall as the EU institutions. Ultimately member states cannot have it both ways – an efficient value adding EU budget and preservation of specific special interests such as many of the EU agencies or more generally the CAP. Hopefully the prevailing economic climate will focus member states’, EU officials’ and MEPs’ minds in upcoming negotiations on both next year’s budget and more importantly on the upcoming seven year financial framework (the EU’s long term budget) on the former at the expense of the latter.

Tuesday, April 24, 2012

Race to the Elysee: How the French voted and what this means for Europe and the UK

Francois Hollande’s victory in the first round French presidential election was overshadowed by two historic events. Front National candidate Marine Le Pen gained 17.9% of the vote, the party’s highest ever share, while Nicolas Sarkozy became the first incumbent President in 50 years to lose the first round vote. Neither result should have come as much of a surprise. Surveys have consistently ranked Le Pen in third position since January, and her poll ratings have reached the dizzy heights of 21% several times since. Meanwhile, Sarkozy performed better than polls predicted. The last IPSOS survey published Friday gave Hollande a 3.5% lead in the first round, which eventually narrowed to just over 1% on Sunday.

Le Pen’s share of the vote is shocking when considered in conjunction with the support expressed for other minority or extremist candidates. In total, just under a third of voters picked one of the six candidates who proposed either an exit from the euro (Le Pen), France’s withdrawal from the Lisbon treaty (Jean-Luc Melenchon) or the introduction of a 100% tax rate on incomes above €360 500 (Nathalie Arthaud, Melenchon).  These extremist, protectionist or hard-left manifestos offered a clear rejection of current European German-inspired programmes of austerity. The pressing need to reduce France’s crippling public debt was either ignored, or addressed by flippant policies such as a eurozone exit (Le Pen), a refusal to contribute to the EU budget (Le Pen), or punitive politicised taxes on the finance industry (Melenchon, Arthaud and Poutou).

This support for extremist candidates with little sense of reality does not appear to form part of a protest vote. An Ipsos exit poll reveals that 64% of Le Pen voters picked her because they believed that her policies addressed their concerns, much higher than the equivalent level for frontrunner Hollande.

Why does this matter? 

Angela Merkel’s spokesman commented yesterday that Le Pen’s “high score is preoccupying” but that fears of a rise of far-right fervour would be checked by a second round contested by two mainstream candidates, both committed to balanced budgets and a strong relationship with Germany.

Yet Merkel’s good faith may be ill-founded. For Sarkozy to win the second round (he currently lags 8 percentage points behind Hollande in polls) he must be able to court the FN electorate. Yesterday, the incumbent insisted he was ready to take on the challenge, stating that “the Front National voters ought to be respected”, and stressed, “I’d like to tell them: I heard you”.

 This is bad news for Merkel. Sarkozy’s 2012 flirtation with the hard right has pushed him to endorse a series of proposals which contravene the German vision for Europe and threaten the Paris-Berlin alliance. These include a Buy European Act, an insistence on renegotiation of the ECB’s role and a re-evaluation of the Schengen treaty. Merkel has agreed to introduce a mild reform to the Schengen area, but she has made clear she will not yield on any economic policies or institutions.Over the next two weeks, Sarkozy has promised to introduce further manifesto pledges, which are likely to be geared towards a far-right electorate. This is likely to jeopardise his relationship with Merkel.

If Hollande is elected, Merkel will have to work with the unknown. Hollande has expressed his commitment to several pet projects, including the introduction of a growth clause in the fiscal treaty, the creation of Eurobonds, direct ECB loans to embattled governments, and a budget which relies on unrealistic 3% French growth predictions, but it is unclear how willing he is to negotiate on the implementation of these policies. In the last month, for instance, he has wavered in his commitment to the growth clause, alternating between a largely cosmetic addendum, and a full re-write.

 An Hollande victory in the second round would also have serious repercussions in the legislative elections in June. Sarkozy has vowed to permanently retire from politics if he fails to renew his mandate on May 6th. Lacking a clear heir, the UMP is unlikely to be able to reorganise itself and  perform convincingly by June. This is exactly what Marine Le Pen seeks. Yesterday, she made clear that she hoped to use her result to launch herself as a major figure in French opposition politics. The FN currently lacks a seat in the Assemblee Nationale, but 2012 could prove a turning point. If so, Merkel would find it considerably more difficult to enforce the ratification of the fiscal treaty, due to pass through French parliament post-election.

The French election is likely to dent the Berlin-Paris relationship, regardless of the result. France’s shaky economy and volatile -at times populist- politics make it an unreliable partner in European policy-making. Other states, notably the UK, which shares Germany’s commitment to fiscal restraint and a balanced budget, should/could seek to use this opportunity to forge a new power relationship with Germany. It may well be the UK’s chance to assert itself on the European stage.

Monday, April 23, 2012

German Media Looks For Meaning in French Presidential Election Result

The first round of the French presidential elections took place yesterday. As expected, the contest for the keys to the Elysée will  be between Socialist candidate François Hollande and Nicolas Sarkozy in the final run-off on 6 May (when, incidentally, the Greek elections are also taking place).

The key question now is what decision the almost 45% of French voters who didn't vote for Hollande or Sarkozy yesterday will make in two weeks' time. We will look at the significance of the result for the future of France, the eurozone and the EU as a whole in a separate post. For the moment, allow us to deploy our various language skills to round up how the media across Europe have responded to the results of the first round.

For all manner of reasons, particularly the future handling of the eurozone crisis, the reaction from Germany is particularly interesting. A leader in FAZ argues,
“[France] reveals a scary political landscape…A third of voters have voted for candidates with a completely alien view of the world, but who have in common one thing: explicitly nationalist, anti-European beliefs.”
Benjamin Reuter, Paris correspondent for German economic weekly Wirtschaftswoche, notes,
“The core concern should be that none of the candidates have discussed the hard reforms the country is facing...If France slides further into the direction of the abyss, the future of the euro will also be in danger - with or without Le Pen.”
An opinion piece in Deutsche Mittelstands Nachrichten sees yesterday's results as a “painful defeat” for Merkel’s vision of Europe, going on to note,
“The brutal rejection of the euro by the French, with 20% of the vote for [far-right leader Marine] Le Pen, can be described as an earthquake, whose tremors will above all else be felt in Brussels.”
A similar line is taken by Marco Zatterin - Brussels correspondent for Italian daily La Stampa. On his blog, he argues that Hollande is not, and should not, be seen as a threat in Brussels, but stresses,
“The pitfall is elsewhere. It's in the 20% of Le Pen-ists confirming that one in five voters in Europe are tempted by euroscepticism. This is a reality that the EU must stop underestimating.”
In Greek daily To Vima, columnist Giorgos Malouhos notes, perhaps hopefully, that Sarkozy began to lose popular support since he chose to “faithfully” support Germany's austerity-focused vision of the future of the eurozone, and argues,
“Sarkozy's defeat is not just his own: It's also the defeat of German policy.”
Spanish business daily Expansión is already looking at the final showdown. It argues,
“The victory of one or another candidate would also change the scenario in Spain. Hollande’s victory – and a Europe with ‘Merkhollande’ – would allow Spain to take it easier on its deficit reduction targets. On the contrary, five more years with Nicolas Sarkozy at the Elysée – and ‘Merkozy’ in Europe – would mean further tightening the rope around Spain’s neck.”
Johan van Overtveldt, Editor in Chief of Belgian magazine Knack, writes,
“Hollande's victory doesn't promise much good, neither for France nor for the euro...If Hollande pushes through his policy intentions, there will be guaranteed panic.”
Van Overtveldt draws an interesting comparison between Hollande and France's former Socialist President François Mitterrand, noting that, in the early 1980s, the latter “conducted a policy based on higher social charges, more taxes, limiting free entreprise, more government employment and nationalisation of various companies. This policy quickly resulted in a social-economic and financial catastrophe.”

But what about the French papers?

In French business daily Les Echos, Editorialist Jean-François Pécresse sees the glass half full, as he argues,
“Almost two-thirds of the electorate have voted for some form of economic realism, either on the right or on the left. The French are now offered these and no other options. The first one, championed by Nicolas Sarkozy, advocates a tested policy of quick deficit reduction via public spending cuts and support for competitiveness. The second one, embodied by François Hollande, contents itself with a slower path, which privileges taxes, especially on enterprises, and safeguards our old habituation to the welfare state. One [option] has yet to convince the French, the other one has yet to convince the markets.”
In La Tribune, François Roche sees Sarkozy moving further to the right on the road to the second round, as he argues,
“By dint of ploughing Front National’s land, Nicolas Sarkozy has made Marine Le Pen the big winner of the first round of the presidential election. He is now in a trap: if he wants to win the election, the only thing he can do is to try and attract people who voted for Front National in the first round…His only chance is to present himself as the champion of Front National’s own values.”
While the Le Pen phenomenon has understandably gained a large share of the column inches across Europe, it is perhaps some of the German media's reaction to the results that is the most revealing and significant in terms of the future. A Merkozy divorce would undoubtedly make things interesting and the fact that such a large share of the French electorate is clearly dissatisfied with the major parties has certainly caught the eye in Berlin - where many could begin to fear that France may not have the stomach to stay the course with Merkel's eurozone rescue strategy.

Friday, April 20, 2012

The ECB loads up on PIIGS exposure

Reuters MacroScope blog covers some of our updated figures on the exposure of the ECB to the struggling peripheral countries. Following the ECB’s Long Term Refinancing Operations (LTRO) the ECB’s exposure to these countries has increased significantly, without their situations showing any sign of improvement – in fact many of them are now in a worse position.

Last year we showed that the ECB exposure to the PIIGS totalled €444bn. Just a year later this has increased by a whopping 106%, to €918bn. The exposures are detailed below:

Total exposure - €917.61bn 

Exposure through lending programmes - €703.61bn 
Greece - €73.4bn
Ireland - €85.07bn 
Italy - €270bn 
Portugal - €47.54bn 
Spain - €227.6bn 
Exposure through the Securities Markets Programme - €214bn 

This gives the ECB a massive leverage ratio 38.4:1. This in itself is not the issue, more concerning is the fact that a third of the ECB’s balance sheet now resides in the PIIGS.

On top of this, while the ECB’s exposure has been rising the quality of collateral supporting this exposure has been deteriorating quickly. There are a few factors underlying this:
 - The value of the huge amount of PIIGS sovereign bonds which PIIGS banks hold has fallen while the default risk involved with them has risen quickly.
- The sovereign guarantee which backs up many of these banks (both explicit and implicit) has also become less solid as the states’ finances worsen and public outrage against bank bailouts increases.
- The risks and losses held on the balance sheets of these banks is yet to be fully acknowledged or fully realised in many cases. (For example, see our recent briefing on the massive problems in Spanish banks relating to their exposure to the bust real estate and construction sectors).
- The ECB has widened its collateral scope allowing even more opaque and harder to value collateral to be used to bank up its unlimited liquidity provision. 
That is to name but a few of the issues in play (we'll have a fuller discussion of the implications of this next week).

The real question which should be asked in all this is: how has the eurozone crisis continued to worsen despite the ECB more than doubling the money it has poured into these states?

Patently, the current approach to the eurozone crisis has failed. Even the ECB’s massive interventions only bought a short amount of time (and a lot less than many may have expected). The eurozone continues to fiddle at the edges of the crisis. All the talk of ECB lending, eurozone firewalls, IMF resources and austerity programmes fails to accept some of the fundamental flaws which underpin this crisis.

The eurozone needs to accept that there are a few structural flaws underpinning the eurozone crisis and move to correct them, not least: an endemic lack of competitiveness in the peripheral states, a structural bias towards low growth, a massively undercapitalised banking sector, mismatched monetary policy and a currency which remains grossly overvalued for many of its members. Until these issues are tackled, with both widespread political and economic will even further sprays of ECB liquidity will do little more than buy time, while further raising the cost of the potential break-up.


The figures on exposure through lending programmes were obtained from the websites of the national central banks of:


Should the UK contribute to the IMF?

George Osborne is in Washington DC today for an IMF meeting. In another one of those ‘domestic politics meet financial crisis’, Osborne is under pressure from his MPs not to contribute any more cash to the IMF unless there are guarantees that the money won’t be used, as the popular phrase is in Westminster goes, to “bail out a currency” (and no, we’re not talking about the Yen). There are a whole range of confusions surrounding this entire debate, so here’s an effort to clear them up:

Where are we at?

The UK can provide £10bn without a vote in Parliament, as this cash goes back to a previous commitment. For anything more, it needs approval from its MPs, which could be sticky (see below). Osborne has so far refused to contribute the £10bn, let alone even more, until certain conditions have been met.

Is contributing to the IMF the same as giving to, say, the EFSF (the euro bailout fund)?

Certainly not. The IMF is (a) a serious organisation that has saved many countries including the UK (b) its loans rank senior to other debts and so are always repaid (c) nobody has ever lost a cent on the IMF and (d) this would actually be an opportunity to modernise a 1948 organisation by giving the BRICs a more proportionate say in return for fresh capital (if you want to keep the IMF relevant, this is inevitable).

Are Tory MPs really that opposed?

There’s been a lot of shouting to the press over this issue, but the feeling is that most Tory MPs realise that contributing to the IMF could be a sensible move provided that certain conditions are fulfilled.

So what conditions need to be fulfilled for the UK to contribute?

The UK government has set out two: the top-up needs to be global (all countries contributing not only EU ones) and the money can’t be used specifically to bail out the euro.

We would add that there also needs to be a change in tact. As we told BBC five live this morning, “The main problem is that the eurozone’s approach to the crisis hasn’t changed, despite widespread criticism including from the IMF, it still fails to address the underlying problems: the lack of growth, the lack of competitiveness in the peripheral countries and the massive risks still held by the under capitalised European banking sector. Any further contributions should be conditional on a change in tack and some acceptance that this bailout and austerity policy has failed.”

What is likely to happen?

At the moment it looks as if the IMF will reach its target of $400bn, possibly even without funds from the UK, US and Canada. The two latter countries look unlikely to contribute additional funds, so the prospect for additional contributions from the full membership looks dim.

The question is, what will the IMF need to give in return? A rebalancing of power towards emerging market members is inevitable and the BRICs are pushing for it to start in exchange for funds this time around. That means there are plenty of complex negotiations still to take place. A broad political agreement may be in place by the end of the weekend, but there will be plenty of legal and technical details to be fleshed out.

Will the increase change anything?

Not really. Ultimately dispersal of IMF funds in the eurozone crisis is reliant on similar provisions from the eurozone bailout funds. So far the format has been 2/3 eurozone and 1/3 IMF. As we have previously noted, despite EU claims, the lending capacity of the eurozone bailout funds remains €500bn. This means the maximum which will likely be able to be tapped from the IMF is €250bn (although it is incredibly doubtful the IMF would ever put up that much unless the eurozone were teetering on the brink). As is often the case, the issue of IMF funds is tinkering at the edges of the crisis, eurozone leaders still fail to address the underlying problems of the crisis or even put up a sizeable bailout fund of their own.

Should the UK contribute then?

Well, first the government should wait and see if the $400bn target can be met without a UK contribution. If that is the case all the better. If not, and if all the BRICs have contributed, the UK may need to put up its £10bn (which has already been approved by Parliament). Obviously, as we have noted the usual caveats and conditions should apply and the UK along with the IMF should continue to push for a reformed approach to the crisis.

Thursday, April 19, 2012

Commission's efforts to reform EU budget actually make things worse

As you may be aware, the Commission last year tabled its proposal for how the EU's budget should look like over the next long-term budget period (set to run between 2014 and 2020). With the exception of some modestly positive elements - such as a "performance reserve" for regional funding (albeit very small) to provide incentives for regions to actually deliver results and a bit more cash on R&D - the Commission's proposal is in many ways making an already irrational, wasteful and unresponsive budget even worse.

For example, through the "greening" of the so-called Pillar I of the CAP (involving 7% of farmland to be set aside to provide ‘ecological focus areas’, a requirement to rotate crops and some other elements, more here), the Commission has opted for an almighty fudge that further undermines effective production while not delivering any significant green benefits in return. Also, despite one of the claimed objectives of the Commission's proposal being to "simplify" the budget, the exact opposite has happened. And remember, direct CAP subsidies under Pillar I are already rather bizarre things. As they're based on land ownership or historical entitlement, these are subsidies to a random group of people rather than directed at any specific outcome. This is of course what the Commission is trying to correct through the "greening" proposals, but, alas, it has failed miserably.

This was yesterday echoed by the EU's own Court of Auditors, which noted in an evaluation of the proposal,
"The Court considers that the legislative framework of this policy remains too complex. For example, six distinct layers of rules govern rural development expenditure. With respect to cross compliance, the Court considers that, in spite of the proposed reorganisation, the complexity of this policy continues to make it difficult for paying agencies and beneficiaries to administer.

In spite of the claim that it focuses on results, the policy remains fundamentally focussed on spending and controlling expenditure and therefore oriented more towards compliance than performance."
Pretty damning.

Another example of how the Commission's new proposal is making matters worse is the new 'intermediate' funding category proposed for distributing the EU's structural funds, for regions with a GDP between 75% and 90% of the EU average. Without reiterating all the flaws of the structural funds, this proposal would actually be a blow to focussing the funds on the genuinely poor regions, where they can have the largest comparative impact (see p. 17-18 here for a more detailed discussion). As the Swedish Europe Minister Birgitta Ohlsson has pointed out, this will mean that potentially more cash will go to the EU's richest countries, which will continue to send each other money via Brussels. "We're totally against introducing this category", Ohlsson has said. We certainly agree.

Incidentally, EU Budgetary Commissioner Janusz Lewandowski announced on Monday that there was a €1.49bn surplus left over from last year’s EU budget, which will be credited against member states’ planned contributions for next year’s budget. In other words, despite the "go for broke" nature of the EU budget (if you know of that board game - you need to spend your money as quickly as possible in order to win), member states still don't manage to fully spend all their allocated funds. And yet, next week, the Commission is expected to propose a 5% increase to the EU's 2013 budget. This links to the lack of absorption critera and performance controls in the EU budget, although its a long discussion that is worth saving for another entry.

What's clear is that there's something fundamentally wrong with the EU budget. Come to think of it, it's actually quite fascinating that this anomaly is allowed continue to exist at the heart of Europe.

PS. If you want to know how to make sense out of the CAP and the structural funds - making them help rather than hinder jobs, growth and the environment in Europe - check out our recent reports on the topic, here and here.

Wednesday, April 18, 2012

The battle for the heart and soul of the ECB continues

*Update 15:30* - It seems after a quiet morning, the predictable fightback has begun in the battle over the ECB, and its a double whammy. First of all, although not addressing the French election campaign specifically, Bundesbank president Jens Wiedmann has entered the fray, ruling out any ECB participation (large-scale bond buying) in an eventual Spanish rescue, arguing that:
"We shouldn't always ring the doomsday bell when long term interest rate of a country temporarily exceeds 6%"
Secondly, Focus magazine reports that tomorrow's FAZ will carry a joint article from a number of major economic institutions criticising the eurozone crisis management strategy and warning that the ECB's independence is at risk.


If any German happened to be tuning into French radio station RMC this morning, we're sure they must have choked on their semmel - at least if they have any cash stashed away. This is what French President Nicolas Sarkozy had to say about the role of the ECB:
"What is the good value of the euro against the [US] dollar? If the euro rises too much, our exporters can’t sell anymore. They lose money because they’re not competitive, but also because the value of the euro is too high. This is a discussion that we need to have with the President of the ECB.”
He made similar remarks over the weekend, but the explicit call for an ongoing dialogue between governments and the ECB over the strength of the euro goes against everything Germany believes in.

In other words, the battle for the heart and soul of the ECB - which we have looked at extensively - rages on. On the dramatic side, a leader La Tribune argues that the “Merkozy” couple committed suicide on Sunday, after Sarkozy suggested revising the role of the ECB:
“In calling for a revision of the role of the ECBSarkozy has declared war on Germany for domestic political reasons”.
Yes, it's all part of election politics, but still, this tension at the heart of the Franco-German alliance won't go away as the eurozone continues to grapple with how, precisely, the euro should be backstopped. As a reminder of the battles ahead, yesterday we learnt that the according to Unicredit, the perceived inflation in Germany is now at 3.7%, compared official 2.1% figure.

Meanwhile, on the topic of the ECB promoting inflation 'growth', over on the Telegraph blog, we argue that:
"Economically, ECB-induced inflation would not present a long-term solution to the eurozone’s ills by any means. Although the initial effect would be make adjustment in the struggling countries easier, the eurozone would remain split into at least two parts running at very different speeds. What happens after the initial boost in demand, as the transfer is, per definition, time limited? Sure, there’s a chance that struggling eurozone countries use the time bought effectively to really reform their economies. However, on current evidence, a more likely outcome is some reform, but that the imbalances remain. Would the ECB then continue to spray money on the Continent to keep the party going?
In addition, such massive ECB intervention also sets the scene for further boom and busts in Europe, which again threatens confidence in the system. Fears of a housing bubble are already doing the rounds in Germany. In reality, maintaining a 4% – 5% target could actually turn out to be substantially more difficult than a 2% one, as people would naturally expect inflation to increase even further (managing inflation expectations is an absolutely vital task of central banks). Even if a higher average level of eurozone inflation were achievable the level needed in Germany to balance this out would likely be too high to be economically acceptable. Furthermore, the transition would be incredibly tricky as people’s expectations take time to adjust to the new "normal", possibly increasing volatility or even feeding through to wage pressure (and other second round inflationary effects).
Politically, such a change is very unlikely as long as the ghost of Weimar looms large over Germany. But if ever the Bundesbank is outvoted, beware what you wish for. If the perception is that the ECB is really turning into a “bad bank” that actively pursues inflation, that would be one of the few scenarios under which German support for the entire euro project really could evaporate."

Full piece here.

Tuesday, April 17, 2012

If he wants to maintain EU allies, David Cameron needs to set out a clear vision for Britain’s place in Europe

Open Europe's Christopher Howarth has an article on Conservative Home where he argues that the Coalition needs to set out a new European vision.

The Conservative's 'European Vision'.
"Ah.. God, it's a barren,
featureless desert out there, isn't it."
If you find it difficult to predict the twists and turns of the Coalition’s EU policy spare a thought for Britain’s potential European allies.

Yes Britain has potential allies, and far more than it realises. We have never been “isolated” (a favourite expression for the EU status quo lobby), there are and have always been a number of states that share some or all of Britain’s basic
focus on liberal economics and decentralisation, and in the other states the political elites’ centralising mantra conflicts with electorates who are universally more sceptical.

There is fertile ground for those wishing to see a different type of EU, but it will not come about on its own. Europe needs a new vision, and the UK is its most credible potential champion. Unfortunately, the lack of a coherent UK vision is beginning to worry not only supporters of reform in Britain, but potential allies on the Continent.

Take the Coalition’s handling of the German-inspired fiscal pact. While Cameron was correct in asking for something in return for his signature to EU treaty changes, the handling of the negotiations was so opaque that two Parliamentary enquiries have still not worked out what the UK sought to achieve. Many non-euro states started off to a greater or lesser extent sceptical or split on whether to sign up to the pact, rightly feeling uncomfortable about signing away more powers over their budgets to the EU. At first, it looked as if the UK had secured a private deal with Germany, which would see the UK sign up in return for British ‘safeguards’ against the eurozone-17 making decisions for all 27 EU members in the future. But this then turned into a ‘veto’. Britain left the smaller states with an awkward decision, to say no, (potentially on their own) at a substantial political cost, or fall into line. One by one they fell into line, leaving the Czech Republic and Britain as the only non-signatories.

Smaller EU states, for obvious practical and diplomatic reasons, will not wish to stand up to France and Germany on their own. To illustrate, despite Cameron clearly having no intention of signing the fiscal pact, senior people in the Czech government still find themselves worrying that he might strike a deal with Merkel, leaving Prague alone as a non-signatory. Cameron is fond of telling the Czechs that his relative Duff Cooper resigned from Chamberlain’s cabinet over the 1938 Munich agreement. This is well remembered but it would be better if the UK, through active diplomacy, sought to alleviate fears among smaller states that their relationship with the UK is one-way, fluid and insubstantial. In the absence of a clear vision, the Government makes it easy for centralisers to peel away potential allies by portraying Britain as unreliable and secretly wishing to leave the EU.

So what has gone wrong? Firstly it is unclear who is in charge. We have a Europe Minister, David Lidington, who is likeable and capable but not in the Cabinet, and not a part of the Number 10 decision-making circle. In Number 10, there is no one person in control of ‘Europe’; William Hague, George Osborne, Oliver Letwin, Nick Clegg and Ed Llewellyn contend with numerous other issues. Europe can fall through the gaps relegated to a news, diary or party management issue (too often the latter). From outside, the UK’s policy looks unpredictable and momentary. Smaller states can end up feeling that the UK only calls when it wants something, such as a signature on a letter before a summit or a vote on legislation affecting the UK financial services – and the call often comes at the very last minute.

Secondly, as ever, there’s a lack of vision. We need a substantial, thought out and well-articulated vision of the UK’s place in the EU, based on the realisation that the UK (along with other states) needs a more flexible relationship, but that the UK cannot stop states such as France and Germany if they wish to integrate further. Open Europe, working with the All Party Parliamentary Group on EU reform, is currently laying out ideas for what this vision might be (see here, here, here and here).

Once we have a vision, we should sell it to other states and their electorates. For this we need someone in overall charge – a cabinet position for a substantial (cross-departmental) Europe Minister, who can explain the policy, manage relations within the party and be a point of contact for potential political allies in the EU. On a practical note, this Minister should have access to the Prime Minister’s diary so EU leaders do not get chewed up by the Number 10 machine (i.e. to ensure the PM meets the right people and that if the Europe Minister promises something the exact opposite does not pop up in a PM speech).

With the right vision, a Cabinet Minister in overall charge and consistency the UK could start to build up relationships and challenge the current vision of “ever closer union”. It will take time to change impressions, but it can work and could be what others in Europe have been waiting for.

Lastly this Cabinet Minister’s first job should be to oversee the drafting a substantial speech on where the UK sees itself in the EU post the eurozone crisis and potential fiscal union. In short, David Cameron should emulate Margaret Thatcher in making his own Bruges speech. After all, the EU is in desperate need of new ideas. Enlargement, successive NO votes in EU-related referenda, and, most importantly, the decisive blow to ‘ever closer union’ landed by the eurozone crisis are changing the way Europe operates. Britain has a huge opportunity if it has the foresight to take it.

Monday, April 16, 2012

From the horse's mouth: How the EU’s Charter of Fundamental Rights WAS to blame for higher insurance prices

Over a year ago now, the ECJ ruled that, from December 2012, insurers can no longer offer different products and prices to men and women based on their sex, since it would constitute discrimination. We estimated that a 17 year old female driver will have to pay an extra £4,300 in insurance premiums by the time she is 26 as a consequence of the ruling.

But, aside from the practical cost and barmy nature of the ruling itself (given that, for example, evidence suggests that, on average, female and male drivers present different degrees of risk), we pointed to a more fundamental issue of democracy.

This concerned the Court's reference to the EU's Charter of Fundamental Rights in its ruling, principally that the insurance industry’s derogation from the Gender Directive was incompatible with both the spirit of the Directive itself AND Articles 21 (non-discrimination) and 23 (equality between men and women) of the Charter.

We noted that this was significant because the UK's protocol on the Charter secured in the Lisbon Treaty negotiations (which the previous government claimed was an opt-out) was one of the reasons cited by the same government for not giving people a referendum on Lisbon (the protocol was later downgraded to a 'clarification').

This led to an exchange of views with the Economist's Bagehot, over whether the ruling had in fact tested the application of the Charter to the UK.

Well, today the European Commission put out this press release on your fundamental rights, safeguarded by said Charter, which states,
"...the Charter increasingly helps to shape decisions by the courts. In 2011, the number of rulings quoting fundamental rights laid down in the Charter rose by 50% at both EU and national level. One such landmark ruling by the EU's Court of Justice stressed the right of asylum seekers to protection from inhuman or degrading treatment when clarifying EU rules for determining which country should deal with an asylum application (MEMO/11/942). The decision effectively banned transfers of asylum seekers to countries where inadequate conditions would compromise their fundamental rights. In March 2011, the Court ruled in the Test-Achats case that different premiums for men and women constitute sex discrimination (MEMO/11/123)..."
This ruling, and the ruling on Greece's treatment of asylum seekers referred to in the above quote, confirm that the ECJ's interpretation of the Charter can have a major impact on the UK and is a reminder of the creeping nature of EU law, which tends to undermine national democratic settlements. Ask the Commission about this, and they will tell you that the Charter doesn’t constitute the "primary" or "most substantive point" in the insurance ruling, so the UK's protocol on the Charter remains untested (if the Commission said otherwise, there would be an almighty legal row with the UK). How ridiculous this line of reasoning is ought to be obvious from reading the Commission's press release, which celebrates the Charter's impact in the same ruling.

P.S. to avoid any confusion, the Charter can only be applied when the UK implements EU law and the Charter has no relevance to purely national law. However, as the insurance ruling made clear, this is often no consolation, since so many areas are now affected by EU legislation.