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Saturday, August 30, 2014

Tusk and Mogherini: Europe's new 'dream team'? Our initial thoughts

Europe's new 'dream team'?
As we noted in our previous post, Cypriot President Nicos Anastasiades had sort of spoiled the surprise. Anyway, now it's official: Polish Prime Minister Donald Tusk has been appointed new European Council President, and Italian Foreign Minister Federica Mogherini will succeed Baroness Ashton as the EU's foreign policy chief (aka High Representative for Foreign Affairs).

A couple of initial thoughts:
Donald Tusk 

Tusk has economically liberal and pro-free trade instincts. Most importantly from the UK's point of view, he comes from outside the euro area - and will therefore be sensitive to the concerns of non-euro countries when it comes to safeguarding the integrity of the single market, a point he made during his press conference:
Tusk also explicitly committed himself to ensuring the UK stays in the EU and endorsing (some) EU reforms:
That said, Tusk is also likely to oppose fundamental changes to EU rules on free movement; although he did say that so-called 'welfare abuse' can be addressed, as we've noted, for many the debate has moved on from the issue of 'fairness' to that of 'volume', something Cameron will be under huge pressure to place at the centre of his potential renegotiation. In the more immediate future, Cameron's early support for Tusk as new European Council President could increase the UK's chances of securing a big portfolio in the new European Commission.

Significantly, it has been confirmed that Tusk will also chair the summits of eurozone leaders - despite coming from a non-euro country. This looks like a big concession made, in particular, by French President François Hollande - who was reportedly sceptical of such an arrangement. Perhaps Hollande hopes that giving ground on this point can help him secure the key post of European Commissioner for Economic and Monetary Affairs for his former Finance Minister Pierre Moscovici.

Federica Mogherini

The resistance to Mogherini, put up by Eastern EU member states over the past few weeks, has clearly been appeased by Tusk's appointment as new European Council President. It was noteworthy that Herman Van Rompuy stressed that Tusk and Mogherini would "work closely together to secure Europe's interests and values".  

Italian Prime Minister Matteo Renzi, who has invested a great deal of political capital on Mogherini, seems to have achieved what he was looking for: a diplomatic victory in Brussels to sell to the electorate once back in Italy - where the big reforms are not going forward as fast as announcements, and the economic situation shows no signs of improvement. With the country in recession and deflation, it remains to be seen how much Italian voters will be impressed.
As we noted in our recent flash analysis, the role of High Representative is less crucial from the UK's point of view - as foreign policy remains primarily a national competence, with every EU member state having a veto. However, in light of the various geopolitical challenges facing the EU (and its neighbourhood), it is possible that Mogherini will play a greater - or at least more visible - role than her predecessor.

"I understand that Tusk it's OK": Has the Cypriot President just spoiled it all?

As we wrote in our round-up of EU leaders' doorsteps, Polish Prime Minister Donald Tusk is the favourite for the European Council President post but it was not yet a done deal. However, have we just inadvertently had confirmation that Tusk has landed the job?

Watch this video from around 16:30 in:

Cypriot President Nicos Anastasiades tells outgoing European Council President Herman Van Rompuy:
"We have news, I understand that Donald [Tusk] it's okay."
And Van Rompuy replies:
"Yes, but keep it."
That sounds like a bit of a spoiler, but we will keep following the summit and provide you with real-time updates on Twitter just in case there are any last minute surprises.

EU top jobs summit has kicked off: here is a round-up of doorstep declarations

EU leaders have all arrived in Brussels for today's summit. There are two big issues on the table: the appointments of the next European Council President and High Representative for Foreign Affairs; and the worsening situation in Ukraine (although the situation in the Middle East is also bound to come up).

Here's a round-up of what EU leaders said upon arrival. Let's start with the assignment of the remaining EU top jobs. Italian Foreign Minister Federica Mogherini and Polish Prime Minister Donald Tusk are the frontrunners for the posts of High Representative and European Council President respectively. However, Mogherini's appointment looks more like a done deal than Tusk's - at least from EU leaders' doorstep declarations:

Mogherini has travelled to Brussels herself, and has met European Commission President-elect Jean-Claude Juncker - possibly a further sign her appointment is drawing closer. Tusk walked into the European Council building without saying a word, although reportedly with a smile on his face.

Meanwhile, it seems no decision will be made on the name of the next President of the Eurogroup of eurozone finance ministers:

As regards Ukraine, a few EU leaders stressed the need for a reaction if Russia does nothing to de-escalate the situation. However, the emphasis has significantly differed from one leader to another: 

And that's all for the moment. The summit is under way, and we will continue monitoring it. Follow us on Twitter @OpenEurope, @pswidlicki and @LondonerVince for real-time updates and analysis.

Friday, August 29, 2014

EU top jobs: will Matteo Renzi and Mrs. Tusk get their way?

Herman waves goodbye to the European
Council Presidency - who will succeed him?
As we laid out in our flash analysis yesterday, the outcome of tomorrow's EU 'top jobs' summit is looking increasingly predictable. Italian Prime Minister Matteo Renzi's efforts to force his Foreign Minister Federica Mogherini into the High Representative post look set to pay off (with Merkel deciding to keep her powder dry for the almighty scrap over the Economic and Monetary Affairs portfolio). Spanish Europe Minister Íñigo Méndez de Vigo this morning tweeted that Mogherini is the "clear favourite" to take over from Baroness Ashton.

Hence, the flip side of the High Representative post going to the relatively dovish Italy seems to be the European Council President post going to a Central and Eastern European member state, with Poland's Donald Tusk (who has been officially endorsed by David Cameron), Latvia's Valdis Dombrovskis and Estonia's Andrus Ansip all in the mix. Tusk himself is staying tight-lipped, with the Polish government's spokeswoman this morning claiming that he had not yet made up his mind - a notable change of emphasis from Tusk's previous outright denials. Somewhat amusingly, Gazeta Wyborcza reports that the person responsible for potentially changing the Polish Prime Minister's mind is...his wife. Mrs Tusk allegedly thinks the post will mean "[more] prestige, [more] money and less pressure."

Of course, with it being the EU, a last minute surprise cannot be completely ruled out, and as in 2009 we could end up with some completely unexpected names that had not been on the radar. However, given the severity of developments in Ukraine - and also in the Middle East - there will be pressure on EU leaders to take concrete measures instead of wrangling about personalities.

EU leaders will also debate the allocation of key posts within the Commission, and Cameron will be pushing for the UK nominee Lord Hill to get an important economic post like internal market or competition, although these are not set to be announced at least until September 8th.

To follow tomorrow's developments live make sure to stay tuned to @OpenEurope, @LondonerVince and @pswidlicki.

Thursday, August 28, 2014

Douglas Carswell defects to UKIP: A Clacton by election could change the general election result

Douglas Carswell was until this morning the Conservative MP for Clacton on the Essex coast. He has now resigned from the Conservative party, joined UKIP, and says he will resign his seat in order to contest it as a UKIP candidate in the resulting by-election.

His resignation is not a total surprise as it follows a long period as a critic of the Conservative Party's direction and of David Cameron in particular. Carswell's criticisms are not limited to the Conservatives and not limited to Europe - he has developed a critique of British politics generally -  but Europe is among his key complaints.

In his resignation speech Carswell questioned David Cameron's commitment to EU reform accusing him of aiming to do the bear minimum necessary in order to secure an 'in' vote, while Carswell's view of a satisfactory renegotiation seems more akin to associate membership. He says this is a classic example the political class not being straight with the electorate and his reason to quit. The Conservative leadership for their part will feel aggrieved that having set out a 2017 referendum on EU membership they are rewarded with Carswell's 'ingratitude' - recriminations will run and run.

Carswell prides himself on having a large following locally and Clacton itself, it has been argued, is  the "number one most demographically favourable seat in the country for UKIP" according to Goodwin and Ford's Revolt on the Right. He therefore has a fighting chance of winning the seat. So what could happen?

Firstly, it is unclear whether the Conservatives will allow the by election to go ahead - they have to approve the writ being moved and could argue that with an election already scheduled the people of Clacton can wait until May 2015. However, if it is called, the stakes could not be higher.

For the Conservatives to hope to win the 2015 general election they need to minimise the UKIP vote. The best way to do this is the classic 'squeeze'. In a first past the post election they will say there is no point voting for a third placed party - i.e UKIP. This will be very effective. However Carswell's by-election could change voter's calculations - and set a hugely important electoral precedent one way or another:
  • If Carswell wins, UKIP can then tell voters everywhere that voting UKIP gives a genuine change of producing an MP. This could be catastrophic for the Conservatives and may deprive them of a number of seats, to other parties mostly, but conceivably to UKIP as well.
  • If Carswell loses, the result will be equally disastrous for UKIP. The Conservatives can use it to show that even in one of UKIP's best constituencies with one of their biggest names they can not win a seat - so why waste your vote in May 2015 will be the refrain.
UKIP does not just take votes from the Conservatives, they also gain a lot of their support from Labour, non-voters and even the Lib Dems. However, Carswell by taking on his former party will polarise the debate again into Conservatives/UKIP, something perhaps both parties may wish to avoid. This could be a foretaste of 2015.

In any case, a Labour victory would most likely mean that the In/Out EU referendum Cameron has promised won't happen, as Ed Miliband looks determined to stick to his promise not to offer a straight vote. It would be a tremendous irony if Carswell's defection - Carswell, remember, having campaigned tirelessly for an EU referendum and more direct democracy - would in the end deny the UK public an EU referendum and more direct democracy.

Latest UK migration statistics likely to further turn up political heat on EU migration

The ONS has this morning released its latest long-term UK migration statistics and they are likely to increase the intensity of the spotlight on EU migration - if that was possible. The headline statistics are:
  • 560,000 people immigrated to the UK in the year ending March 2014, a statistically significant increase from 492,000 in the previous 12 months. Two-thirds of the increase is accounted for by immigration of EU citizens (up 44,000 to 214,000).
  • 28,000 Romanian and Bulgarian citizens immigrated to the UK in the year ending March 2014, a significant increase from 12,000 in the previous 12 months.
  • This contributed to overall net migration rising to 243,000 from 175,000 the previous year, way over the totemic 100,000 figure targeted by Conservative ministers.
  • It is also interesting to note that the decline in non-EU migration (the part the Government can control) seems to have stopped. The latest estimates for the year ending suggest that 265,000 non-EU citizens immigrating to the UK, a slight increase but not a statistically significant change, from 246,000 in the previous year. Net migration of non-EU citizens increased from an estimated 145,000 in the year ending March 2013 to 162,000 in the year ending March 2014.
Source: ONS
These estimates show that 54%, 30% and 14% of total EU immigration was accounted for by citizens of the EU15 (the 'old' EU member states), EU8 (central and eastern member states that joined in 2004) and EU2 (Bulgaria and Romania) respectively. Overall net migration of EU citizens was 131,000, a statistically significant increase compared to 95,000 in the previous year.

This highlights, once again, that a large part of the recent increase in EU migration is being driven by migration from the more established EU member states, presumably a large number of them looking for an alternative to the high levels of unemployment in the countries worst affected by the eurozone crisis.

In contrast, migration from the 2004 accession states has been relatively stable. Net migration from these countries was 41,000, not a statistically significant increase compared to the 34,000 in the previous year. For Bulgaria and Romania, it looks as though the ending of transitional controls on access to the UK labour market in January 2014 could have had some impact with a 12,000 increase in migration on the previous year (although we should be careful since this data mostly reflects 2013), and almost 80% of EU2 citizens arriving for work-related reasons.

Yesterday saw the German government announce tough new domestic rules on EU migrants' access to benefits, which closely mirror those announced by David Cameron late last month. Downing Street has welcomed the German proposals and added, "Clearly there is now a case for looking at other things we want to do where we may need to change the [EU] rules". The question now is whether Cameron can muster enough European support to change the EU rules in this area sufficiently to satisfy public and political opinion in Britain.

It says it won’t accept a “gentlemen’s club” but how gender-balanced is the European Parliament itself?

Jean-Claude Juncker and his people have rightly expressed concern over the lack of female European Commission candidates put forward by member states. It’s raining men in Brussels as we put it recently.

Never slow to jump on a bandwagon, certain MEPs are now digging in as well, threatening a veto (remember the European Parliament has to approve the new Commission) should Juncker’s Commission not include enough women.

The European Parliament’s President Martin Schulz – the guy, remember, who lost to Juncker – said
"The European Parliament is very concerned that at present virtually all the potential candidates whose names are circulating are men. The European Parliament will not accept a gentlemen’s club." 
The head of the liberal ALDE group, Guy Verhofstadt – a man known for his strong views – added
"As liberals, we cannot support a commission with too few women."
Meanwhile, the head of the Socialists in the EP, an Italian gentleman named Gianni Pittella, said
"We will not support a European Commission with fewer women than today." 
Fine, these three men have a point. But let’s throw back the question: how gender-balanced is the European Parliament itself? Well, a rather mixed bag it turns out – with some depressing stats in particular:

  • 20% of members in the Conference of Presidents – EP group leaders plus the EP President, i.e. the top dogs – are female 
  • 22% of the leaders of the EP’s political groups are female 
  • 37% of MEPs are female 
  • 45% of the EP’s committee chairs are female (encouragingly up from 36% in the last Parliament) 
So whilst not exactly Whites or the East India Club – hardly a great beacon of gender balance either. As that old saying goes, start with the man (errr) in the mirror.

Wednesday, August 27, 2014

Sweden set for a lurch to the left - and further gains for anti-immigration party

The Swedish elections take place on 14 September. As polls stand, the sitting centre-right coalition government, "Alliansen" - the Moderates, Centre Party, People's Party and Christian Democrats - look set to lose to a leftist coalition of some sort. The big question might be who the Social Democrats - the biggest party in the polls - decide to rule with: the Green Party is the most likely partner, but the Left Party could be in the mix too.

There's even talk of the Social Democrats reaching across the aisle to form some sort of 'grand coalition' - which would break with tradition. It may not be that easy for the Social Democrats to agree economic policy with the Greens and Far Left, both of which are, well, pretty far to the left. In the latest Ipsos poll, the three left parties together muster 50.4%, whilst Alliansen is on only on 35.6%.

A poll of polls for daily Expressen has a slightly stronger showing for the centre-right but the broad picture remains the same: absent an upset, Sweden looks set for a centre-left government following eight years of centre-right rule.

At the same time, the anti-immigration Sweden Democrats have gained steadily in the polls, and it is now the fourth most popular party in the country on 10.3% (it made the Parliament for the first time in 2010, on 5.7%) according to the poll of polls - breathing down the neck of the Greens, on 10.8%. This despite Swedish media really having turned up the heat on the party over the last few years - often deserved but at times hysterically and counter-productively (the Swedish establishment hasn't quite yet grasped the 'metropolitan elite is ganging up on us' narrative that is doing so much for anti-establishment parties across Europe).

That's worrying news for those of us who want Sweden to remain a liberal and outward-looking country.

Tuesday, August 26, 2014

'Erm...Brussels we have a problem' (Or "If EU did satellites..." Part III)

This week has seen the latest farcical episode in the EU's foray into space. The independent European Space Agency (ESA), which is based in Paris and is building the so-called Galileo satellite navigation system for the EU, was left with egg on its face after the two latest satellites for the system were launched into the 'wrong' orbit. In total, the project has now launched six satellites - two are in the wrong orbit and one, it emerged previously this year, isn't working.

Bad in its own right, but forgivable. We're dealing with some pretty advanced technology after all. Except, as we have chronicled before, this project has been absolutely bedeviled by unfortunate incidents, delays, infighting, poor planning and all sorts of other problems.

To re-cap:

Massive cost-overruns: The cost of completing the project and running it for 20 years (including maintenance) was under the original estimates (from 2000) €7.7 billion, of which only €2.6 billion was to be borne by taxpayers and the rest by private investors. In 2007, following the collapse of the private-public partnership, this cost had risen to € 11.8 billion, all of which was to be borne by taxpayers. In the autumn 2010, leaked information suggested that the cost had risen to a staggering €22.2 billion – again with the entire bill footed by taxpayers. But, it didn't end there…

The Commission all over the place on numbers: In 2010, Industry Commissioner Antonio Tajani denied new cost over-runs, saying “I don't know where these figures come from.” He insisted that the deployment budget (which is only part of the cost) remained at €3.4 billion (not €5 billion as the leaked info suggested). Only a few months later, in January 2011, however, Mr. Tajani and the Commission admitted that Galileo needed not just another €1.5-1.7 billion as was thought in 2010, but an extra €1.9 billion of taxpayers’ cash to cover the booming deployment cost – taking the deployment cost above €5 billion. At the same time, the Commission put the annual operation cost at €800 million (not €750 million as assumed in the 2010 estimate). This means that even €22.2 billion for deployments and running cost was an under-estimate.

Tajani has since announced what he calls “savings” of some €500 million on the huge cost overrun, but frankly, at this point we simply don’t trust any of the numbers coming out of the Commission on this one.

Taxpayers getting hammered: The cost for taxpayers for deployment plus 20 years’ worth of running cost may well have increased by some 750% - from €2.6 billion to somewhere in the region of €20 billion+. Shocking.

Delays: Originally Galileo was to be finished by 2008 – a date that was subsequently pushed back several times due to a series of delays, disruptions and other embarrassments. Between July 2005 and December 2005, the project came to a complete halt as member states and the private investors argued. According to the European Court of Auditors, these six months of doing absolutely nothing added an extra €103 million to the cost of the project. Encouragingly, the project managed to make up some time and the satellites were launched this year. However, with only three of the four previously launched working and this latest setback, the performance of this project leaves a lot to be desired to say the least.

Public-private partnership flawed from the very start: As the European Court of Auditors concluded in a damning investigation, the original public-private partnership proposal was “unrealistic” and “inadequately prepared and conceived.” Symptomatically, the private investors withdrew due to fears over the cost of the project spiralling “out of control” and that they wouldn't outweigh the benefits.

The original estimated benefits delusional: In 2006, the Commission estimated the market for Galileo as potentially consisting of 3 billion receivers and revenues of some €275 billion per year by 2020 worldwide – in addition to potentially leading to the creation of more than 150,000 high qualified jobs in Europe alone. The European Space Agency and others have estimated 3.6 billion users by 2020. These are such delusional assessments that it’s hard to know where to start. Indeed, a 2010 report from the German government admitted that "All in all, it is assumed, based on the currently available estimates, that the operating costs will exceed direct revenues, even in the long term.” And according to American diplomatic cables, released by WikiLeaks, Berry Smutny, the CEO of OHB Technology, a company that has a £475 million contract to build 14 Galileo satellites, is claimed to have said: “I think Galileo is a stupid idea that primarily serves French interests.”

The Indian, Chinese, Russian, Japanese, American markets already crowded: One of the reasons why the idea of “3 billion users” is so ridiculous is that all major players already have, or are in the process of acquiring, their own satellite navigation systems. The newly-redeveloped Russian “GLONASS” system has already been launched, and the Chinese are developing their own Compass/Beidou system (not a global endeavour, but set to deprive Galileo of revenue in China). India’s equivalent technology, IRNSS, will be operational within the next two years. Japan has one too and the US is soon to boast a new generation GPS System (though to be fair, that too seems to be delayed) – GPS being what most people happily use in Europe anyway. Where in the world is Galileo going to get its 3 billion users? Is there a better of example of how the EU is falling behind in the 'global race'?

The Chinese have nicked the frequency: In 2003, China agreed to invest €230 million in the project but pulled out after disagreements. Lo and behold, the Europeans noted that the Chinese government was a little too interested in the security related aspects of the project, and got cold feet. But only after Beijing got its hands on some very useful information. So while Galileo was falling behind schedule, the Chinese were developing Compass/Beidou. Chinese officials told the International Telecommunications Union, the United Nations agency that allocates radio spectrum frequencies for satellite use, that China plans to transmit signals on the wavelength that the EU wants to use for Galileo. In other words, the EU is now in the absurd position of having to ask China's permission to run its secure 'encrypted' signal on Chinese frequencies.

All in all, Galileo has had a sorry history right from the very start. And we suspect we haven't heard the end of it yet...

Friday, August 22, 2014

Handelsblatt: France is the new sick man of Europe

The front page of Germany financial daily Handelsblatt today depicts France as the sick man of Europe, warning that "a once proud nation faces economic decline." Of course warnings of French decline have been made before - notably the famous ticking baguette bomb on the front page of the Economist a couple of years ago - but it is striking that the German press is increasingly reflecting these concerns.

The front page trails a detailed eight page feature which the paper introduces by arguing that:
"Our most important neighbour is mired in crisis. France risks falling behind when it comes to its budget, its labour market and its industry. However, the country could be successful if only it stops making itself smaller."
The timing might be slightly ironic given that the French economy 'outperformed' the German economy in the last quarter - albeit by staying flat as Germany contracted by 0.2%. Handelsblatt has itself warned that Germany was "no longer a champion" but the German economy is still pretty robust, and should bounce back quickly, while France's problems are much more deeply entrenched.

Wednesday, August 20, 2014

The SNP embraces EU reform - but is it trying to have it both ways on treaty change?

Ahead of next month's crucial Scottish independence referendum, the Scottish government has put out its own paper on EU reform, designed to position the SNP on the pro-reform as opposed to the status quo side of the debate. The report has generated very little coverage (our daily press summary being the exception). It's a mixed bag but contains some worthy ideas - we look at the key points below:

Reconnecting European citizens with the EU

The paper notes that "it is important that the EU institutions and the Member States recognise and respond to the challenges to the EU’s wider legitimacy". Its suggestions include:
"the Scottish Government considers that greater observance of the principle of subsidiarity, is one of the key means of maintaining the democratic legitimacy of the EU… it is essential that the procedure for monitoring subsidiarity by national parliaments is extended further to give an enhanced role for both sub-national and local parliaments."
Cutting red tape and EU "competence creep"

The paper notes that warns that “much more remains to be done” to alleviate concerns about EU “competence creep” and excessive “red tape”, and to “restore a balance between the burden of EU legislation and the benefits expected to derive from its implementation.” It adds that:
"the volume and complexity of the EU regulation affecting businesses in Scotland can pose a significant administrative and financial burden on them (particularly SMEs) and is threatening their ability to recover from the economic and financial crisis."
Its recommendations include:
  • Consistent regulation - greater adherence to the framework set by the EU Treaties with less ‘competence creep’ without formal amendment of the Treaties,
  • Increased flexibility to the member States when incorporating EU law into domestic legal systems and greater use of exemption schemes, in particular for SMEs,
  • Further developing the impact assessment tool and applying it at each stage of the EU legislative process where prospective legislation is subject to significant amendment by the Council and/or European Parliament,
  • Focusing on overall principles rather than detailed prescriptive measures,
  • An increased review of legislation which is no longer appropriate for today’s climate.
The above are good suggestions - indeed ones which Open Europe has been advocating for a while now (see our 2011 report on European localism and our 2010 report on EU over-regulation for example) but as always, the question is how to translate this into practice. 

Still, the report has some pretty big gaps - for example, it barely mentions the EU budget despite this being in radical need of reform (for example, contrary to common perceptions, Scotland would benefit from devolving regional subsidies back to the national level). Likewise beyond some general praise for EU free movement, the report does not discuss whether changes are needed to rules around EU migrants' access to benefits. In some places, the report calls for more protectionist measures at the EU level, such as amending procurement laws to ensure that contractors to pay the living as opposed to the minimum wage. 

The SNP is also keen to distance itself from David Cameron's EU policies and says that changing the EU Treaties is "neither necessary nor desirable". The party claims that its reforms can be accommodated within the existing Treaties. Whatever the rights and wrongs, this is slightly ironic given that Scotland's potential accession to the EU as an independent country rests squarely on the EU Treaties being opened and changed: not only the accession itself (to which all other member states would have to agree) but also to get the opt-outs from the euro and Schengen that the SNP says it wants.

It's also ironic since if SNP has its way, it could deliver the kind of opening of the Treaties that the Tories are hoping for. 

Tuesday, August 19, 2014

Fairness vs Volume: EU free movement debate hotting up in upper echelons of the Tory party

The Times yesterday noted that pressure among some senior Tories is building on David Cameron to prioritise the negotiation of 'curbs' on the free movement of persons. The word 'curb' is used often in this debate, but it is not always clear what it is that people are demanding be 'curbed'.

There are essentially two issues here: one about fairness - fair, sound and transparent rules around who can access what benefits and when. And one about the level of EU migration - volume. The first is what David Cameron and Downing Street have been trying to address by tightening EU migrants' access to out of work benefits. As we've noted before, more could certainly be achieved through amending legislation at the EU level.

Other issues that arguably fall into this category are access to the UK's system in-work benefits, such as working tax credits, which are meant help to boost incomes at the lower end of the labour market and ease the transition from out of work benefits. However, the UK is currently unable to regulate EU migrants' access to these under the EU's current non-discrimination rules and the definitions of an 'EU worker' set down by EU courts. This is another area that could potentially be addressed to some degree by amending secondary legislation.

But what is clear is that an increasing number of Tory 'big beasts' - Iain Duncan Smith, Theresa May and Boris Johnson - are looking to address the second issue: public concerns about the volume of EU migrants (the latest stats showed a marked increase in the number of central and eastern EU workers). This is a much taller ask and would almost certainly require treaty change and therefore unanimity. This does not make it entirely impossible but certainly more difficult than addressing concerns about fairness. Remember, this involves amending one for the most fundamental principles of the EU treaties.

Another massive question is how, exactly, strengthened control over the volume of EU migration could work in practice.  There have already been suggestions that the Home Office is considering options that fall under this category. In May 2012, at the height of the Greek social and economic crisis, it was reported that Theresa May was looking at whether emergency immigration controls could be applied if required by exceptional circumstances. Another proposal, put forward by David Goodhart, is that governments should be able to introduce qualifications or restrictions on free movement "if the EU inflow breaches a cap of, say, 75,000 in a single year".

In any case, this will be a key debate within Tory ranks leading up to the potential 2017 EU referendum.

Friday, August 15, 2014

Fact check: Can we take Danny Alexander's "3 million jobs" threat seriously?

In June, Liberal Democrat Chief Secretary to the Treasury Danny Alexander said that, according to Treasury analysis, more than three million British jobs would be at risk if Britain left the European Union. This is what he said:
“Indeed, the latest Treasury analysis shows that 3.3 million British jobs are connected to Britain’s place in Europe. That is the measure of the risk that isolationists would have us take.”
What new analysis could this be? So we asked the Treasury. You can read the full response here, but this is perhaps the key part:
“As set out by the Chief Secretary to the Treasury, the Treasury estimate that 3.3 million jobs in the UK may be related to exports to other European Union countries. This figure is based on the assumption that the share of UK employment associated with UK exports to the EU is equal to the share of output that is exported to the EU, making allowance for the composition of the UK economy. It is not an estimate of the impact of EU membership on employment.”
The Times also reported on the FOI response today. Now, there are at least three things that are problematic with Mr Alexander's claims:

1. First of all, this is not in fact 'new' analysis. As the response to our FOI makes clear, Mr Alexander's remarks were based on the following methodology, which has been used and cited countless times before. In 2003, Ruth Kelly told Parliament that:
"The Treasury estimates that 3 million jobs in the UK are linked, directly and indirectly, to the export of goods and services to the European Union. This figure is based on the assumption that the share of total UK employment associated with UK exports to the EU is equal to the share of total UK value added (GVA) generated by UK exports to the EU. The information necessary to apply the same method to derive comparable estimates for England, Scotland, Wales and Northern Ireland is not available."
In February 2014, Lord Livingston again confirmed this methodology as follows:
"The estimate of 3.5 million jobs linked to trade with the European Union is based on the assumption that the share of UK employment linked to trade with the EU is equal to the share of total UK value added (GDP) generated in the production of goods and services exported to the EU." 
"The calculation uses data from UK Input-Output tables to estimate the proportion of UK value-added content generated in exports of goods and services and applies this to the values of UK exports to the EU. This is then divided by total UK GDP and the resultant proportion then applied to the total UK labour force to estimate the proportion of the labour force linked to EU exports on a value-added basis."
In short, the methodology dates back more than ten years and does not seem to have been updated at all.

2. Perhaps most crucially, as the Treasury's response makes clear, this study "is not an estimate of the impact of EU membership on employment." So it is rather misleading, to say the least, of Mr Alexander to suggest that these jobs are at "risk". To say that X number of jobs are linked (directly or indirectly) to exports to the EU is clearly not the same thing as suggesting that they are dependent on EU membership. To be fair to Mr Alexander the Treasury's position on this is somewhat confused itself - it claims that this is not an estimate of the impact of EU membership on employment, however, that is exactly what the simplistic calculation and, importantly, its flawed counterfactual seem to suggest (see below). 

3. Thirdly,  is immediately apparent, it is a very simple approximation, not detailed analysis which one might have expected from HMT on such an important question. The methodology used is very simplistic, for a number of reasons:
  • A flawed counter-factual: We have always stressed the importance of the counter-factual when assessing the future of the EU/UK relationship. The counter-factual here is essentially that these jobs would not exist without the EU.  This is odd for at least two reasons: first, it effectively assumes an end to all exports to Europe should the UK withdraw from the EU. We can argue about the level of market access a post-Brexit UK may be granted (we've done a lot of work on this) but one thing is clear: there will be exports from the UK to the EU under any scenario. Secondly, by definition the analysis assumes that all value added by jobs related to EU exports would not exist without the EU membership. A simple common sense check suggests that, actually many of these jobs may still produce some value even if the goods did not find their way to the EU and that the resources could be alternatively employed.
  • Assumes productivity is the same across the UK economy: While it is claimed that the calculation "takes account of the composition of the UK economy" it is not clear exactly how this is done. On the surface the calculation also seems to implicitly assume that labour productivity (broadly output per worker or per hour) is the same across the entire economy (by saying the basic proportion of output corresponds to the same proportion of employment). Fundamentally we know this is not true - on the most basic level, we know that skilled and unskilled jobs will have different productivity levels. A quick glance at the most recent ONS labour productivity statistics confirms this and highlights that over the decade since this methodology was created, different sectors' and regions' productivity rates have grown in different ways. Unless this is accounted for in a detailed way in the methodology it is likely to distort the figure.
The final point above suggests that there is either some continuing lack of transparency with regards to the calculation or it really is just overly simplistic (if not both). This is all quite ironic given that UKIP and Better Off Outers in general are often criticised - and often justifiably so - for not establishing a credible counter-factual whilst relying on heroic assumptions.

Mr Alexander should know better.

Wednesday, August 13, 2014

Latest employment stats suggest no new 'wave' of Bulgarian and Romanian migration

The ONS has today released its UK labour market statistics for the period April-June 2014, which include the latest estimates of the number of EU migrants in the workforce. These are the key points:
  • In total, there were around 820,000 more people employed in the UK than a year earlier, of which around 500,000 were UK born and 327,000 were non-UK born. 
  • Of the non-UK born, 187,000 were from the EU and 140,000 from non-EU countries.
  • The number of Bulgarian and Romanian born people employed in the UK stood at 153,000, up by 13,000 from the same period last year (a 9% increase), before transitional labour market controls were lifted.
  • However, the numbers from other central and eastern European countries increased far more dramatically to 861,000, up by 178,000 from last year (a 26% increase).
  • The number of migrants from the ‘old’ EU member states fell by 9,000 (a 1.2% decrease).
This is only one set of data and refer only to employment (not the same as migration figures, the latest batch of which will be released later this month), and it will be interesting to see how the figures match up.

Source: ONS
The chart above breaks down the share of EU born employed and shows that the group responsible for the biggest increase is the central and eastern European countries that joined the EU in 2004. The Romanian and Bulgarian share is up a little but, as we noted before, there has not been a major change since the lifting of transitional controls on 1 January 2014. Interestingly, the number of people employed from the 'old' EU 14 states has dropped slightly - the number of migrants from this group had been increasing as a result of the eurozone crisis. Is this a sign that this trend is slowing or reversing?

Tuesday, August 12, 2014

German 'crackdown' on EU citizens’ access to benefits: what does it involve?

The issue of how to balance EU free movement and the rights of member states to control their welfare systems has been a long running issue, one which several countries (not only the UK) are struggling with. We've previously reported about how the influx of EU migrants has caused problems in Germany, prompting the grand coalition to commission a review into the issue.

In March, we reported on and analysed the key recommendations of the interim version, and now it appears the final version will be adopted by the German cabinet later this month. According to FAZ, here are the key points, which are virtually unchanged from the draft version:
  • Limiting the period in which EU citizens can be registered as jobseekers to six months, after which they are obliged to leave the country if they are still unemployed. This is similar to the UK's current approach, although David Cameron announced last month that this would be toughened.
  • Banning any EU citizens found guilty of “abusing or defrauding” the German welfare system from re-entering Germany for a period of five years. How easy this will be to enforce in the Schengen border-free zone is questionable.
  • Making it harder to export child benefit abroad by demanding additional documentation and changing domestic taxation rules. David Cameron has also made this a priority and it remains unclear whether limiting payments to working migrants' children who live abroad is permissible under EU law.
  • In addition, German municipalities are to get additional financial assistance from the government to cope with the effects of an influx of migrants to help cope with extra pressures on local services.
This 'crackdown' comes at an interesting time for two reasons. Firstly, today's Bild reports, according to new figures from the German Federal Employment Agency, the number of EU citizens from Greece, Spain, Portugal, Italy and the ten Central and Eastern European member states claiming unemployment benefits in Germany has for the first time exceeded 300,000 after going up by 53,216 (21.6%) in April compared with April 2013. Secondly, confidence in the German economy is on the decrease which could add political momentum to those who want to further restrict free movement.

Monday, August 11, 2014

Italy slips again into recession: time for Renzi to re-focus his reform plans?

When Matteo Renzi was widely tipped to take over as Italian Prime Minister back in February, we wrote on this blog
Renzi may be able to muster wider parliamentary support than [his predecessor Enrico] Letta, but he would still be stuck with a diverse coalition with smaller centrist and centre-right parties – meaning that the difficulties in pushing ahead any significant political and/or economic reform would not evaporate.
A few months later, it is fair to say the prediction was broadly correct. In his first keynote speech in the Italian parliament, Renzi pledged to implement one big reform per month. However, not much has been achieved so far:
  • Some of the promised reforms have been passed only in part (such as the reform of the labour market);
  • Others have been proposed by the government but are still awaiting parliamentary approval (such as the reform of the electoral law);
  • Others have been announced but have yet to be turned into an official legislative proposal (such as the reform of the judiciary).
To be fair to Renzi, his reform plans involve changes Italy has failed to make for decades. However, there is little doubt the pressure is slowly mounting on the ambitious Italian Prime Minister - especially in light of the latest daunting economic data. Italy has entered recession again. Its GDP contracted by 0.2% in the second quarter of 2014 - worse than expected. The country's national statistics office ISTAT now expects Italian GDP to shrink by 0.3% this year, unless the trend is reversed. This is nowhere near the 0.8% GDP growth initially predicted by Renzi's government. By contrast, Spain is going to upgrade its growth forecast to +1.5% and +2% for 2014 and 2015 respectively.

Needless to say, the meagre growth prospects are raising questions in Brussels, Berlin and Frankfurt over Italy's ability to keep its deficit below the 'magic' EU threshold of 3% of GDP and start reducing its mountain of public debt. Unless Renzi can show substantial progress on the reform side, he's unlikely to achieve any of the 'flexibility' on the application of EU fiscal rules that he's been demanding - along with French President François Hollande - over the past few weeks, and may find himself left with little wiggle room. This would set the scene for another political stand-off between the core and periphery of the eurozone - a scenario which few emerge from looking good.

Perhaps more worryingly, Renzi seems to be currently focusing too much of his reform efforts on the political-institutional side. The reform of the Italian Senate - which has recently taken the centre stage in Rome - is of great symbolic importance and will help speed up the decision-making process once (and if) passed. But its economic impact is limited, and it involves changing the Constitution, meaning that it may not be finalised until early 2015 and will then also be put to a referendum - whose outcome cannot be taken for granted at this stage. Italy can only benefit from the removal of the institutional blockages stemming from a system where the two chambers of parliament have equal powers. However, Italy's economic situation means Renzi should consider investing his best energy and political capital elsewhere - not least because economic reform is the key area where his EU counterparts wish to see progress.

On the economic front, the main achievement of Renzi's government to date is probably a tax cut worth €80 a month for employees earning less than €25,000 a year. The measure may have played a part in Renzi's Democratic Party winning an outstanding 40.8% of votes at the European Parliament elections in May - but the jury is still out as regards its effectiveness as a means to boost domestic demand.

Furthermore, uncertainty remains over Italy's plans to cut public spending and use the savings to finance tax cuts for workers and businesses. Carlo Cottarelli, the Italian government's special commissioner for public spending reform, has recently warned on his blog that the resources he's expected to raise via spending cuts next year are already being used to fund new spending projects. In practice, this means less money to cut the tax burden on Italian businesses and workers - which is among the highest in the world and has been identified as a key pillar of economic reform.

Predictably, Renzi was off to a strong start in terms of trust from both Italian voters and Italy's European partners. However, the time may have come for him to re-focus his priorities and push harder on economic reform. A more efficient parliamentary system and electoral law, while very necessary, will do little to help him win any meaningful concessions in Europe. A thriving economy that grows at an acceptable pace will.

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

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

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

In an opinion piece today, the paper's Economics correspondent Alexander Hagelücken argues that the debate around the EU-US free trade agreement (TTIP) has become “schizophrenic” amid mounting public opposition (as highlighted by the cartoon above). However, he argues that:
"European governments can escape the impasse by making it clear that they want to expand free trade via the TTIP principle while at the same time meeting the legitimate concerns of their citizens who do not want increased prosperity at the cost of losing environmental and health standards. GM foods? Only after passing the European approval procedure and with clear labeling. Investor lawsuits against environmental legislation such as Vattenfall’s legal challenge against the nuclear phase-out? Not before secret tribunals, but only in the ordinary courts."
He concludes that:
"Yes, such a path would not lead to unfettered capitalism with a neoliberal flavour but free trade with constraints. In other words, it would be the kind of social market economy which has given the [German] Federal Republic decades of prosperity after World War II, while tensions decreasing rather than increasing tensions between the social classes.” 
German public opinion will be a crucial factor in determining the success or failure of the TTIP negotiations. As with everything else these days, we suspect, on TTIP, as goes Germany, so goes Europe. 

Friday, August 08, 2014

German public opinion hardens against Putin but business community still reluctant

An Infratest Dimap poll for Welt/ARD published today showed that 70%  of Germans are in favour of the EU's response to the crisis, with 80% thinking that Russia bears the biggest responsibility for the break-down in relations between Russia and the West, and with a slim majority (49% vs 46%) in favour tightening sanctions further, even if it has a negative impact on the German economy and jobs.

Being as ever nervous about meddling too much in world affairs, there's been a considerable shift in the German media and public-opinion regarding Russia. In March, after the annexation of Crimea, only 38% supported economic sanctions. By May this had risen to 50%. Now it's at 70%. The volte-face can be explained in part by some industry bodies publicly announcing that they would be able to weather such sanctions and the public outcry over the MH17 tragedy.

As has been noted by others, Angela Merkel was absolutely instrumental in breaking the deadlock over the sanctions, by showing willingness for Germany to bear a large chunk of the costs. This probably wouldn't have been possible absent the shift in public opinion (incidentally also illustrating how the "as Germany goes, so goes Europe" rule now increasingly also applies to foreign policy).

However, there's still plenty of opposition from within Germany. Business continue to warn against loss of jobs and profits. And today, Gabor Steingart, Editor-in-chief of Germany's financial daily Handelsblatt, laments "The folly of the West," for entering into "the politics of escalation" with Russia, on the front page of his paper today, writing:
"With its politics of escalation, Europe is missing a realistic [end] goal... Even the aim to bring Russia to its knees through economic pressure and political isolation, has not been properly thought through." 
"Even if this were to work: What good will that do? How can one expect to live alongside a demeaned people in the European house, when their elected-leader is treated like pariah, and their citizens may be committed to soup-kitchens in the coming winter?"
As Steingart sees it:  
"German journalism has switched from level-headed to agitated in a matter of weeks. The spectrum of opinions has narrowed to that of a sniper's scope... Headlines betray an aggressive tone that is usually characteristic of football hooligans."
There is clearly a growing gap in the German media, politics and public between those who want to go in harder on Putin, and those who favour Germany's 'Ostpolitik' tradition of bridge-building with the Kremlin. In turn, this reflects that on-going, grinding and drawn-out debate about Germany's role in Europe and the wider world, in which all kinds of German instincts clash.

Boris is right to set out an ambitious EU reform agenda

As we noted in an earlier post, London Mayor Boris Johnson's intervention on the UK's future relationship with the EU set out a list of policy objectives that go well beyond what David Cameron has so far proposed. They noticeably set the bar higher for any successful renegotiation.

Boris also told the Evening Standard this week that the UK had to go into the negotiations prepared to be tough. "You don’t go in hard to the tackle you are never going to come out well. You've got to go in hard and low," he said. Judging by his past form, he means business:

Here are the key reforms that Boris outlined, which embellished on those contained in the report authored for him by his economic advisor Dr Gerard Lyons - a member of our Advisory Council. They are an excellent marker for the direction in which the EU needs to go and most of them are reforms we have ourselves proposed and promoted:
  • Make progress on the single market in services: The report for the Mayor cites Open Europe's research which illustrates that an ambitious liberalisation of cross-border trade in services could boost EU GDP by 2.3%. This is in fact a call for free trade that could boost competitiveness across the EU - the UK should push this policy hard and, if others aren't willing to agree en masse, be prepared to lead a vanguard of countries who are.  
  • Better protection for the City of London from intrusive financial services regulation: A long-standing concern for us. We have noted that, since the eurozone crisis, the EU's regulatory output in this area has become far more trade-restricting and items such as the FTT were outright hostile to the City of London. This ties into the eurozone/non-eurozone point below, and why mechanisms to ensure that the single market cannot be controlled by the eurozone-bloc are essential to the UK's interests.
  • Reform the relationship between euro ins and outs: This is arguably the biggest strategic issue facing the UK in Europe - and the report goes into far more detail on this than Boris did in his speech. The UK will not be able to live within an EU dominated by the eurozone. The ad-hoc solution used in the European Banking Authority of so-called 'double majority voting', which we were the first to propose, illustrates that this can be addressed but how easily this model can be replicated elsewhere is debatable and other solutions will be needed.
  • A 'red card' for national parliaments: Again, a policy we have long championed. This is something that has support in several member states and would if member states and the Commission are serious about respecting it, root EU policy making more firmly in the hands of those with most democratic legitimacy in Europe - national MPs
  • Reform "if not abolition" of the CAP: Abolition of the CAP is clearly a tall order, but we have set out how agricultural policy could be radically reworked which would hugely reduce the budget required and make it more market-orientated. Another budget reform we would through into the mix, which Boris didn't mention, is the repatriation of regional funding to the richer member states
  • A return to intergovernmental cooperation in justice and home affairs, outside the jurisdiction of the EU: We have long argued that the ECJ should not have jurisdiction over crime and policing law as it applies to the UK and that the UK should seek a return to intergovernmental cooperation that does not cede democratic control over such a sensitive area.
  • Reforming social and employment law: Boris talked of minimising "the costs to all EU businesses", but also said that if this meant resurrecting the UK's social policy opt-out, "I don’t think it will be a bad thing." We have calculated that EU social law currently costs UK business and the public sector £8.6bn a year - a figure also cited by Boris in his speech - and while these costs would not magically disappear if this area was left to national governments, there would be far more flexibility to tailor rules to local needs and practises - i.e. the UK's flexible labour market.
  • On free movement of people, Boris called for "managed migration": Here Boris went further than Gerard's report. Boris seems to be calling for the principle of free movement to be revisited. It's not entirely clear what he means but we have long argued that EU migration can provide benefits to the UK and EU economy but that reform is certainly needed to the rules around access benefits for EU migrants. This means far more discretion for national governments over who can access state welfare and public services and on what terms. However, we do think the principle of free movement of workers - as originally intended - should remain. 
  • Halting 'ever closer union': Often dismissed as a symbolic change, in fact this is about changing the culture of the EU and the default position that centralisation is always good. It is about instilling the principle that not all member states want to head in the same direction and that powers should be able to move downwards from Brussels to national capitals.
This is a reform agenda that would indeed radically reform the EU and the UK's relationship with it. As we have noted elsewhere, if there is a referendum in 2017, the British public will be far better placed than in 1975 to decide if the change is enough to vote for and that  is why the stakes are now so high. As we also have noted, however, the big challenge will be the timetable. Will this be possible before 2017?

Thursday, August 07, 2014

What will the impact of the Russian retaliatory sanctions be?

Russia earlier unveiled the key plank of its retaliation against the ‘stage three’ EU sanctions confirmed last week. It has said that it will now ban all imports of fruit, veg, meat (including fish) and dairy products from the EU (as well as the US, Australia, Canada and Norway).

How will this impact Europe?

This helpful factsheet gives an idea of the overall level of EU agricultural exports to Russia. As the box above shows, agricultural exports are about 7% of total EU exports. Of this, 10% goes to Russia. This means that agricultural exports account for around 0.7% of overall EU exports – it’s important to remember that this figure includes much more than the specific parts targeted in the sanctions.

In terms of specific countries, the chart below highlights that the Baltic countries (Latvia, Lithuania and Estonia) will be hardest hit – in terms of the trade as a share of GDP. In absolute terms, Poland, the Netherlands, Germany and Denmark will also face losses.

How will this impact Russia?
Well, as has already been pointed out, the likely fallout will be higher prices for Russian consumers (driving up inflation more broadly) and reduced consumer choice. As we pointed out previously, Russia does import some agricultural products but only to the tune of around 1.2% GDP per year. This is dwarfed by some of its other imports.

That said, it still accounts for some 13.3% of overall imports. This is a sizeable chunk of imports to replace, but Russia has a few options:
  • Expand domestic production. Not impossible given the natural resources and land at Russia’s disposal as well as the state’s resources (although these could take a hit from the escalating sanctions). In terms of security this has long been on Russia’s list of things to move towards.
  • Expand production with Eurasian partners. As part of its ongoing response to the crisis Russia is deepening links with surrounding states and specifically members of the fledgling Eurasian Union. Some of these states will have significant agricultural sectors, although they will unlikely be quickly able to help supply a country the size of Russia.
  • Look farther afield. Rumours of Russia trying to strike agricultural deals with Latin America abound, while (as is always the case these days) Russia will likely look to China for support. This would obviously undermine any attempt to increase food security, however, would help limit the economic impact.
Does this set the scene for a broader trade war?
Hopefully, not yet. The sanctions on both sides remain quite targeted and specific. That said, it’s hard to see how either side could easily change position. That is feeding into a broader feeling of unease when it comes to the private sectors of both sides doing business together. This indirect or de facto halting of trade is likely to be the largest negative effect from this escalation.

Wednesday, August 06, 2014

Boris: EU reform the best option, but Brexit should not scare us

Boris Johnson today outlined his response to the report by his economic advisor - and Open Europe board member - Dr Gerard Lyons on the future of the UK’s relations with the EU and how they impact on London.

The report entitled 'a win-win situation' outlines four economic scenarios, with the best seen as staying in a reformed EU and the a close second being leaving the EU on good terms with growth-focussed policies towards Europe and the rest of the world:
  • The best scenario is UK membership of a reformed EU, which could see London’s economy grow in size from £350 billion now to £640 billion over the next 20 years.
  • The worst scenario would be where the UK leaves the EU on bad terms and does not produce a growth-focused policy. The report suggests the London economy would only grow to £430 billion by 2034 in this scenario, and see a shedding of about 1.2 million jobs. 
  • If the UK left the EU, maintained good relations with the EU and adopted outward-looking policies, then the London economy would grow to £615 billion and see an additional 900,000 jobs created over the next 20 years. This is despite the near-term uncertainty that would follow from leaving.
  • Being in an unreformed EU, London might see only an extra 200,000 jobs created and growth to £495 billion over two decades.
The key reforms - which draw heavily from Open Europe's work - proposed in the report are: addressing the relationship between euro ins and outs, liberalising the single market in services, safeguards on the single market in financial services and the position of the City of London, EU budget reform, reducing the burden of social and employment law, and halting over-regulation. The reforms go well beyond what David Cameron has set out so far.

If reform is not sufficient, the report concedes that withdrawal would create immediate economic uncertainty but this could be mitigated in the longer term if the right policies are pursued. The report suggests that the terms of a Brexit could be defined by the referendum result itself - a close result could prompt a re-re-negotiation rather than an immediate reach for the Article 50 exit clause - you can read the outcome of our 'wargaming' of Brexit here (which the report also references).

The report notes that financial services and insurance are key London industries, comprising 19.8% of GVA, the single biggest sector measured in these terms – how will this be affected in Brexit? The report notes that London has many attributes other than acting as a springboard for access to EU markets but adds that this market access is valuable and could face some extra barriers following withdrawal.

In summary, the report concludes that reform is the best option, but there is little to fear from Brexit.That last point - in addition, to the various reform proposals set out - will no doubt serve to put additional pressure on David Cameron to be more ambitious in his push.