UK looking down and out on banker’s bonus cap challenge

It’s a bad start to what looks as if it could be a very challenging day for the UK government with UKIP looking likely to win the by-election in Rochester and Strood.

This morning the European Court of Justice (ECJ) Advocate General Niilo Jaaskinen issued his opinion on the UK’s challenge against the EU’s banker’s bonus cap and it does not make good reading for the UK. Jaaskinen suggested that “all the UK’s pleas should be rejected and that the Court of Justice dismiss the action”. The key points of his reasoning are:

• The legal basis of the legislation cannot be challenged since remuneration in this sector “impacts directly on the risk profile of financial institutions”, since these operate freely across the EU this can have impacts on markets across the EU.
• Jaaskinen “accepts that the determination of the level of pay is unquestionably a matter for the Member States”, but since the law is just a stipulation of the ratio and not a direct cap on pay, there is still flexibility to set pay levels.
• The delegation of power to the European Banking Authority (EBA) is “valid” since it is “merely empowered to elaborate non-binding draft measures” – i.e. create technical standards.
• There has been sufficient notice of the legislation to allow firms time to adjust to the new rules.

A fairly comprehensive rejection, but there are a few points which we believe have been overlooked or under discussed, laid out below.

• One of the UK’s main arguments is that this law will result in higher fixed pay which makes remuneration less flexible and raises fixed costs for banks, thereby undermining any attempt to improve financial stability. This issue is not addressed at all in the opinion. Furthermore, while the opinion addresses the issues of remuneration impacting risk and the fact that fixed pay can still vary it does not look at how the two can interact. It is clear that as a result of this fixed pay will increase substantially but there is no question of how this impacts stability. This may be more an economic/financial point but given the issues are discussed separately their interaction should also be examined.

• The ruling could also have interesting implications for EU jurisdiction when it comes to the rate of pay. Variable pay is very loosely defined. For example, standard overtime paid at double the hourly rate could theoretically fall under EU jurisdiction by the definition used here. This highlights the importance of this ruling as a step into an area which the EU has previously largely steered clear of and the potential precedence it creates. This could develop in many unknown ways in the future.

• There is no mention of the UK’s claim that this violates international law or is extraterritorial since it applies to all employees of EU banks no matter where they are based. We noted this may not be entirely a legal issue for the ECJ but it deserves some attention. Related to this, it remains unclear whether third countries firms operating in the EU will be forced to institute similar caps if there are to be deemed ‘equivalent’ under rules coming in under MiFID II in 2016.

• One of the weakest points seems to be on the powers transferred to the EBA. Control over technical standards, particularly here, should not be dismissed lightly. The regulation deals in very broad strokes and leaves significant interpretation for the technical rules – including the exact level of the cap and who it will apply to. This power is being borne out right now with the EBA passing judgement on the way in which the rules are being implemented and whether ‘allowances’ count as variable pay. The EBA retains significant power to judge how the rules are being implemented and adjust the technical standards if it think the spirit of the rule is not being followed.

• In general, the combination of the ECJ and EBA seem overly focused on the UK (accepted the UK has been pushing the issue as well). But looking at the legislation which Germany has passed on this issue, there are serious questions over how it has implemented the rules. Germany has exempted anyone covered by collective bargaining from all the remuneration requirements of CRD IV, including the bonus cap. This is because collective bargaining is a constitutional right in Germany and cannot be overridden. While it’s not clear how many people this applies to, the principle is concerning and it is a significant exemption. Why this does not merit examination while the use of allowances as a de facto exemption does is not clear.

What happens now?

• The full ECJ ruling will come early next year and is likely to be in line with the opinion – although the ECJ did previously ignore Jääskinen’s opinion on short selling where to leant towards siding with the UK.
• The EBA will publish updated guidelines and technical standards in the new year which will incorporate its concerns about allowances. At this point the UK will likely find itself squeezed by both the EBA and ECJ and could face punishment if it is not seen to be implementing the rules properly. The UK could of course refuse, but given the high profile nature of the issue it could escalate the situation. One option for the UK would be to point to other infringements such as the German example above.
• In terms of the bigger picture, though not a huge issue on its own, this will be another ruling which plays into the hands of those who wish to see the UK exit the EU. It also continues to add to concerns over the role of the ECJ and its ability to be an impartial arbiter, particularly on financial services – an aspect which will likely be crucial if the UK is to remain an EU member both in the short and long term.

What are the implications of today's ECJ ruling on EU migrants' access to benefits?

As we've said on many occasions, it is not only the UK that is having problems reconciling EU free movement with maintaining control over national welfare systems; Germany has recently tightened up its own domestic rules recently and the country also faced a legal challenge from a Romanian woman living in the country who claimed the right to receive German unemployment benefits - a case which was referred all the way up to the ECJ.

Essentially, the Dano case concerns the interpretation of existing rules around EU free movement and the extent to which EU migrants have a right to equal treatment with nationals of the host member state with regards to access to benefits,

The Court has finally issued its verdict today, ruling that:

"The [2004 free movement] directive thus seeks to prevent economically inactive Union citizens from using the host Member State’s welfare system to fund their means of subsistence. A Member State must therefore have the possibility of refusing to grant social benefits to economically inactive Union citizens who exercise their right to freedom of movement solely in order to obtain another Member State’s social assistance although they do not have sufficient resources to claim a right of residence." 

It is also interesting that the Court has confirmed that certain non-contributory benefits are outside the scope of EU rules which guarantee equal treatment and non-discrimination. The UK and other national governments can therefore use this precedent to defend their restrictions on EU migrants’ access to non-contributory benefits (i.e. the ‘right to reside’ test which could be subject to an ECJ legal challenge).

It also states clearly that ‘special non-contributory benefits’ are a national competence – much of the dispute between the UK and Commission over the ‘right to reside’ test relates to the categorisation of certain UK benefits. This could be useful to the government but it is also true that the UK's case still rests on how the benefits they restrict are defined (i.e. do they fall under the label of 'special non-contributory benefits'), and whether the Commission and the ECJ agree, which we still don’t know yet.

In short – this is likely to be a helpful precedent for the UK and potentially a sign that the Commission/ECJ are prepared to back down over the ‘right to reside’ issue. But more fundamental changes on in-work benefits, which are increasingly important issues in this debate and particularly for the UK, will require changes to EU law - here we set out how this could be done while keeping the principle of free movement itself intact.

Has the Conservative party dropped its commitment to renegotiate ECJ jurisdiction over crime and policing?

Has Conservative policy towards ECJ 
power over crime and policing changed?

The chaos of yesterday's 'vote' or 'non vote' on the European Arrest Warrant has obscured a number of things. Not only have the 10 actual measures been waved through, without discussion and scrutiny, but the Home Secretary has avoided having to make a statement on future Conservative policy towards renegotiating the European Court of Justice's (ECJ) power over crime and policing.

Firstly, here are some of the measures 'adopted' last night without debate and without much publicity.

• Confiscation Orders 
• Mutual recognition of sentences 
• Trials in absentia 
• Mutual recognition of financial penalties

They are substantial in their own right and on 1 December all will be subject to the ECJ's jurisdiction.

Will a future Conservative Government renegotiate this area?

Removing the UK justice system from the remit of EU judges has been a Conservative policy for a number of years and one we agree with. When it became clear that the Conservatives could not block the Lisbon Treaty David Cameron stated:

“The third area where we will negotiate for a return of powers is criminal justice. We must be sure that the measures included in the Lisbon Treaty will not bring creeping control over our criminal justice system by EU judges. We will want to prevent EU judges gaining steadily greater control over our criminal justice system by negotiating an arrangement which would protect it" [4 November 2009]

This was followed up in the 2010 Conservative Manifesto:

“Conservative government will negotiate for three specific guarantees – on the Charter of fundamental rights, on criminal justice, and on social and employment legislation – with our European partners to return powers that we believe should reside with the UK, not the EU. We seek a mandate to negotiate the return of these powers from the EU to the UK.”

Clearly, the Coalition Agreement overtook these previous texts, but Theresa May and Chris Grayling have both stated during this Parliament that the ECJ's role would likely feature in any future EU renegotiation. On 16 July 2013, as we set out here, Theresa May was quite explicit:

"Undoubtedly the jurisdiction of the European Court of Justice will need to be considered when, after the election, a future Conservative Government renegotiate Britain’s relationship with the European Union"

So it was a surprise that Theresa May writing in the Sunday Telegraph on 9 November did not restate this position. The question is whether we should read anything into this, but as the smoke clears it remains to be seen whether a majority Conservative Government would 'let matters rest'.

UK takes another blow over bankers' bonus cap

EBA HQ in London

The European Banking Authority (EBA) on Wednesday released the results of its investigation into whether banks across Europe have been using ‘allowances’ to skirt the EU’s bankers’ bonus cap. This is obviously a hugely contentious issue in the UK and the fact that UK banks have been taking this approach has been well publicised and oft criticised by EU politicians. But it’s interesting to note that the EBA found 39 banks across six EU states had been using such allowances, so clearly it is an issue which extends beyond the UK’s big banks.

Nevertheless, the opinion does not bode well for the UK with the EBA concluding:

“The EBA found that in most cases institutions had topped up the fixed remuneration of their staff and had introduced discretionary ‘role based' allowances which have an impact on the limit of the ratio between variable and fixed remuneration required by the EU Capital Requirements Directive (CRD IV).”

“The report showed that most of the allowances, which were the subject of the EBA investigation, did not fulfil the conditions for being classified as fixed remuneration, namely with respect to their discretionary nature, which allows institutions to adjust or withdraw them unilaterally, without any justification.”

The report is much as expected, with the EBA making the case that the allowances are not permanent pay for a number of reasons: they are revocable with little notice, specific to the staff member not the role, often have forfeit clauses therefore not permanent and are often linked to proxies for the firms performance (such as the economic environment).

The last point in particular clearly chimes with concerns from banks that they will have less control over their costs at times of economic hardship. This is exacerbated by the point (number 37 in the report) below which is frankly just a bit strange:

"Some role-based allowances might only have been introduced to comply with the bonus cap introduced by the CRD IV while retaining some cost flexibility. Cost flexibility is of importance where the performance of the institution or a business unit is no longer considered adequate."

Surely, cost flexibility is always relevant for a business, particularly one in a very competitive environment, and not just when it is failing? We’re not quite sure what the EBA is getting at there.

What happens now?

• The opinion isn’t binding, although the EBA has said it expects national regulators to make sure that all banks are in compliance by the end of the year, however, it has no legal way to enforce this (yet).
• The EBA is currently reviewing its guidelines on the issue and will hold a public consultation before the end of the year with the new official rules being published in the first half of 2015 (at this point they will be legally binding).
• In particular, if banks want to continue using allowances they will have to be “predetermined, transparent to staff and permanent”.
• Ultimately, this throws a bit more uncertainty in the mix with banks uncertain over exactly how and when to adjust their allowances.

What does this mean for the UK?

• Clearly, this is a bit of a blow for the UK. That said, the issue has already to an extent moved out of the EBA’s hands. The UK is challenging the original proposal at the European Court of Justice. Even if this proposal fails it could challenge the updated guidelines/rules which are used to implement the cap. Banks themselves could of course choose to launch legal challenges although this looks unlikely at this stage.
• Banks will ultimately find a way to pay their staff the market rate. This will likely end up being in the form of higher base salaries, something which will make banks less flexible and push up their average costs. This could potentially harm competitiveness and possibly force banks to pass on such costs to consumers.
• The biggest concern is a broader one of precedent and where laws are really made. The bonus cap was a specific law tagged onto a much larger piece of legislation to which it is largely unrelated. This significantly aided its passage through and watered down scrutiny. Then given the technical nature of the rules a lot of the holes were filled in by the Commission and the EBA in setting the exact parameters for implementation – providing a lot of power to the two institutions. The temptation to take such an approach with complex financial regulation is obvious and circumvents the little accountability and control which member states have.

This debate surely has some way to run yet but this looks to be one battle which so far the UK is losing.

What would a British withdrawal from the ECHR mean for its EU membership?

Justice Minister Chris Grayling has today announced that a new Conservative Government could pull Britain out of the European Court of Human Rights in Strasbourg unless it secures Council of Europe agreement that the UK Parliament has the final say over its rulings. Grayling wants to ensure that the UK Supreme Court is the “ultimate arbiter of human rights matters”.

Under the plan, the Conservatives would repeal Labour’s Human Rights Act and put the text of the original Human Rights Convention into a new British Bill of Rights.

Parliament would be asked to vote every time the Strasbourg court judged that UK law was incompatible with the European Convention on Human Rights, and the judgment would be binding only if MPs agreed it should be enacted. A future Conservative government would try to negotiate with the Council of Europe, which oversees the convention, but if no agreement could be struck, they say the UK would be “left with no alternative” but to withdraw.

So is this compatible with the UK’s EU membership?

It is by no means certain that this plan would inevitably result in Britain withdrawing from the Convention. But, if this were to happen, Grayling has insisted that the plans are consistent with EU membership. Nevertheless, it is clear that the growing links between the European Convention on Human Rights and the EU makes the matter complicated.

All EU member states have ratified the convention and being a signatory of the convention has effectively become a pre-condition for new countries seeking to join the EU. However, there is no formal requirement in the EU treaties binding on existing member states such as the UK to remain signatories of the convention.

Article 2 of the Treaty on European Union states that the Union is founded on “…the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities...” Elsewhere the EU treaties state that:

“Fundamental rights, as guaranteed by the European Convention for the Protection of Human Rights and Fundamental Freedoms and as they result from the constitutional traditions common to the Member States, shall constitute general principles of the Union's law.”

Neither of these EU treaty clauses appear to be incompatible with UK withdrawal from the convention and remaining a member of the EU. If the UK were to withdraw, there would certainly be much political fallout and, in theory, other EU member states have the power to suspend the UK Government’s EU voting rights if they unanimously “determine the existence of a serious and persistent breach” of these values. But it would be hard to argue that UK withdrawal from the convention would be a breach of these values in itself – particularly given the commitment to enshrine the convention in domestic law.

Would the UK remain bound by EU human rights law?

The short answer is yes - when applying EU law in the UK. Even complete withdrawal from the convention would still mean that the UK would continue to be bound by the EU’s Charter of Fundamental Rights (which basically replicates the ECHR) and the EU Court of Justice’s interpretation of these rights as they apply to EU law, which in turn is either implemented in UK law or has direct effect. The ECJ’s ruling that insurers could no longer determine their premium on the basis of gender is a prime example.

A further complication is that the Lisbon Treaty gives the EU the legal basis to join the convention in its own right. This could see the European Court of Human Rights court ruling on EU laws which apply in Britain and greater use of the convention by the EU Court of Justice. New European Commission President Jean-Claude Juncker has said he would like to see the EU accede to the convention under his term, but it is important to remember that the UK retains a veto over EU accession to the convention and the logical position would be to use it.

Out of the euro but run by the euro? The UK & ECB prepare to lock horns at the ECJ in what could be the most important case yet...

Could euro clearing be moved from the City to the eurozone?

Tomorrow will see the first hearing of the next in the line of important UK cases at the European Court of Justice (ECJ). The case in question is the UK’s challenge against the ECB’s location policy – and it could be the most important of all the cases. The case is shrouded in technical detail but, fundamentally, is whether we're moving towards a two-tier single market and an EU run by the euro for the euro.

Background
On the 5 July 2011 the ECB published its Eurosystem Oversight Policy Framework, which argued:

As a matter of principle, infrastructures that settle euro-denominated payment transactions should settle these transactions in central bank money and be legally incorporated in the euro area with full managerial and operational control and responsibility over all core functions for processing euro denominated transactions, exercised from within the euro area.

In that paper and future opinions the ECB has stressed that it will not provide central bank liquidity to clearing houses outside the eurozone but that all such institutions should have access to it.

The UK quickly challenged the policy in September 2011, calling for the ECB’s policies to be annulled, and has launched two further challenges at the ECJ, in which it updates its list of complaints, the key points of which are as follows:

• The ECB lacks powers in the specified areas, especially since it did not include the plans in a regulation to be adopted by the Council or by the ECB itself, simply decreed it in a policy paper and opinion.
• “De jure or de facto” the rules will impose a residence requirement on clearing houses which want to clear euros, meaning existing clearing houses will face a choice of moving within the eurozone or changing their business approach.
• The rules offend the principle of equality in the single market since firms incorporated in different EU member states will be viewed differently and the rules will not apply equally.
• There are less onerous methods for achieving the same goals (namely security of the financial system) cited by the ECB.

Why is this case so important?
The case manages to combine two crucially important issues:

1. The question of maintaining the EU single market and whether countries outside the eurozone will be dominated by those inside
2. How to ensure the safety, transparency and security of the modern financial system in Europe to avoid a similar crisis to one we have barely overcome

For the UK, there are additional concerns:

• Firstly, it will once again play a role in setting the boundaries of action the ECB and eurozone can take without the non-euro members. It will also create a clearer boundary on what powers the ECB has. 
• If the ruling goes against the UK, there would be a clear split in the single market and, the precedent set, will make it harder for the UK to stay in the EU
• It would raise further questions about whether the UK can trust the ECJ as a neutral arbiter.
• It would undermine the role of the City of London as a financial centre serving the eurozone (the City remains a trading hub for a single currency of which the UK cannot take part), meaning London could lose business to Paris and/or Frankfurt.

Does the ECB have a point?
From the financial stability perspective it is easy to have some sympathy with the ECB’s stance. More and more transactions are being directed on to exchanges and through central counterparties (clearing houses) therefore it makes sense for them to have access to sufficient liquidity. Then again, the LCH Clearnet clears products in 17 different currencies without the need for central banks backstops in all of them.

Given that, and the huge political stakes, one option would be to establish a permanent swap line between the ECB and the Bank of England (or all non-eurozone central banks). Such swap lines are well tested and were used extensively during the financial crisis. In exchange, the ECB would likely require some greater involvement in terms of supervision of institutions which may receive such cash. The easiest and most practical way to achieve this would be through the existing EU institutions such as the European Systemic Risk Board (ESRB) and the European Securities and Markets Authority (ESMA).

Needless to say, the UK also has a strong case since its hard to say this will not hamper the single market at the very least. In any case, whatever the outcome there will likely need to be changes made to accommodate a new structure, hence the repercussions of the ruling will be widely felt.

On what and how might the ECJ rule?
Trying to second guess the ECJ is a hazardous business. That said, this case is interesting because there are a few different elements which the ECJ could choose to rule on or not.

Whether the ECB has competence or not? The first relates to the UK’s first point of challenge regarding whether the ECB has competence in this area. While the ECB does have control of payment systems and gave an extensive legal grounding in its original policy paper its clear that this is a very political decision. Determining who has competence should be a fairly basic question which the ECJ can rule on.

Which has primacy - ECB policy or EMIR? That said, the matter is complicated by the recent European Market Infrastructure Regulation (EMIR). In the preamble point 47 and 52, as article 85 in the main text, all stress that there must be no “discrimination” with regards to where currencies can be cleared and that nothing should “restrict or impede” clearing houses based in other jurisdictions from clearing foreign currencies. As such, the ECJ may have determine who has primacy in this area, as currently it isn’t clear which set of rules should be adhered to (although given that euros are still being cleared in London one might de facto think EMIR is winning). If the ECJ is swayed by the non-discrimination provisions in EMIR, the UK Treasury should be given some credit for pre-empting the ruling - which Open Europe also has recommended.

Does the ECJ actually have anything to rule on? As with the Financial Transaction Tax decision, the ECJ has shown itself reluctant to rule on issues it sees as hypothetical. Given that the rules that the UK are challenging are actually not in place, the ECJ may rule that the challenge is somewhat premature. Obviously, the risk here is that this would be self-fulfilling and act as a catalyst for changes to happen. It would also leave many questions (not least those above) unanswered.

What happens next?
The oral hearing will take place tomorrow. After that the Advocate General will produce an opinion and a ruling will follow, both most likely in a few months’ time.

It’s possible the ECJ could rule on only part of the UK’s claims or support some and dismiss others. It will also be important to see what happens with regards to the primacy of a regulation over the ECB in this particular area which could itself be an important legal precedent (not least because the ECB is becoming increasingly powerful).

It's also still possible that this will be 'settled out of court', given the stakes involved and the risks of unintended consequences.

We'll watch this one closely.

Swedish and Dutch patience running out over proposed FTT?

EU finance ministers met today, with the financial transaction tax (FTT) once again topping the agenda.

They were presented with a new proposal or brief under which the 11 countries pursuing the FTT under enhanced cooperation could move forward. The plan involved significantly amended terms and (again) suffered from a significant lack of detail:

• The scope will be “limited” to “shares and some derivatives”, according to German Finance Minister Wolfgang Schäuble – suggesting bond markets and probably repo markets will be exempt. The level of the tax on shares could be cut from 0.1% to 0.01%.
• This will form part of a “step by step approach”, suggesting the tax will be expanded in the future.
• Non-participating countries will be fully informed on all future FTT discussions.
• The FTT will not be introduced until January 2016.
• It is unclear whether Slovenia will participate in the FTT anymore, given that it did not sign the recent statement on the issue due to domestic problems and uncertainty around its government.
• Reuters reports that the revenue from the adjusted tax is expected to be about a tenth of the original forecasts – putting it at €3.5bn.

Those outside the proposed FTT zone showed quite significant hostility to the process of enhanced cooperation (as it has been conducted in this case) and continued to warn of legal action. UK Chancellor George Osborne said:

“The FTT that people have talked about is not a tax on bankers, it’s a tax on jobs, investment and people’s pensions.”

“Here we have a situation where 11 member states are working up their proposals largely in secret, I do not know how involved the Commission is in this or not. Then as we start our discussions here we get a piece of paper handed to us all by the 11 member states saying this is what we have agreed.”

“We will wait to see the final text of the proposal, but we will not hesitate to [legally] challenge an FTT which has extraterritorial impacts, that damages other member states, including the UK, or that damages the single market.”

Osborne was notably annoyed by the fact that the one page sheet on the new proposal was presented to the other EU ministers only five minutes before the meeting. His position was strongly backed by Swedish Finance Minister Anders Borg, who said:

“Even if this is a rather narrow proposal, there is a clear risk of a slippery slope toward a broader proposal with much more harmful effects on growth, and particularly on the capital markets.”

“The burden of proof is on the countries that want to enter the enhanced cooperation to prove, beyond a reasonable doubt, that those not participating are not harmed by this measure.”

“We did not support the U.K. when they started this legal case; we are much closer to doing that, because the process has not been satisfactory during these last few months…I’m very disappointed in the process.”

While even Eurogroup Chief and Dutch Finance Minister Jeroen Dijsselbloem warned:

“The impression I get is that, you [meaning the 11 FTT countries] have found a very, very small common ground, which is still very vague on the basis for the tax, when it will actually take place, on what products etc. but you have decided we must come out with something before the elections. That’s fine, but please also respect that we’d like to know a little more.”

“I don’t think that there is any basis at the moment for the Dutch government to consider joining, certainly not on what we have here… I’m a little disappointed in the way the process is going at the moment.”

All in all then, while there is talk of progress on the FTT, its scope has been slashed as expected, while the time line has been pushed into the long(er) grass. The process under enhanced cooperation has taken a public hammering, while it remains clear that those involved are struggling to find any clear agreement.

However, the fact that the Swedes and Dutch have expressed their anger so openly highlights that this will continue to be politically fraught. In addition, that the 11 countries seemingly want to reserve the right to expand the FTT in future, means this still has a way to run and future legal challenges are a genuine possibility.

ECJ throws out UK's FTT challenge, raising questions about whether it can be trusted to police the EU treaties

This morning’s ECJ judgement that the UK’s legal challenge against a proposed Financial Transaction Tax (FTT) is premature was what many had expected. The UK had challenged the decision to authorise the use of so-called ‘enhanced cooperation’ (where a smaller group of EU members can move ahead with legislation even if it does not have broader EU support) for the FTT. For the UK Government, today’s result is not what it had hoped for (an annulment of the decision to authorise enhanced cooperation), but neither is it the worst outcome.

Today’s ruling effectively said that the court could not rule on the UK’s substantive objections to the FTT since the final shape of the tax is unknown and subject to further negotiation between those taking part. This does not prejudice the UK’s ability to mount a second challenge once the final FTT has been agreed and its implications are clearer.

The ECJ judgement (in full here) said:

“It is clear that the objective of the contested decision is to authorise 11 Member States to establish enhanced cooperation between themselves in the area of the establishment of a common system of FTT with due regard to the relevant provisions of the Treaties. The principles of taxation challenged by the United Kingdom are, however, not in any way constituent elements of that decision.”

“The two pleas in law relied on by the United Kingdom in support of its action must be rejected and, accordingly, that the action must be dismissed.”

“Those effects are dependent on the adoption of ‘the counterparty principle’ and the ‘issuance principle’, which are however not constituent elements of the contested decision, as stated in paragraph 36 of this judgement.”

“That review should not be confused with the review which may be undertaken, in the context of a subsequent action for annulment, of a measure adopted for the purposes of the implementation of the authorised enhanced cooperation.”

However, while the UK will get a second stab at challenging the FTT, today’s ruling poses major questions about how ‘enhanced cooperation’ works and how it is used in the future. The EU Treaties stipulate that authorisation of enhanced cooperation (which is given by a qualified majority vote of all EU member states) is conditional on the proposed legislation respecting the integrity of the single market and not impacting on those not taking part – this is meant to be a legally enforceable safeguard for those countries not participating.

Enhanced cooperation is a relatively new phenomenon that has only been used twice before (for a European Patent Office and divorce law), but it could have huge implications for the future of the EU and Britain’s place within it. In an increasingly multi-tier EU, enhanced cooperation may be used more often by countries that want to integrate further. For those that don’t wish to follow suit, it is vital that their rights in the single market are respected.

Let us start with an analogy. Imagine you had agreed to let your neighbour build a new house based on a certain agreement and set of plans. Halfway through building it becomes clear that he has adopted a new plan which will hamper your view or infringe on your land. You appeal to the council but they rule that it is too soon to tell where the house will end up and that they can only rule when the house is built. Tearing down a house is much messier and more costly than stopping one being built in the first place. Hardly seems efficient or fair, does it?

Yet, in this case, this seems to be what the ECJ has done. It has effectively decided that it could not decide whether the decision to authorise the FTT proposal does respect the rights of those not taking part because the final outcome of the FTT negotiations cannot be known now. This is strange because this is by definition true in pretty much all cases of enhanced cooperation, since the countries involved negotiate the finer points of the legislation amongst themselves after getting approval to go ahead.

While this may seem legalistic and technical it raises a fundamental question: are the authorisation criteria for enhanced cooperation worth anything? Surely, any decision on the use of enhanced cooperation should be made on the basis of the proposal that is on the table, irrespective of whether it might change (for the better or worse) by the time it is finally agreed as a legal act, which could still be challenged in any case. The potential spill-overs should be examined before those member states not involved give those involved the go ahead. Otherwise they are ultimately authorising an unknown piece of legislation, which once it has built up a political head of steam could be much harder to challenge later on.

By its very nature, enhanced cooperation will be used for controversial proposals but today’s ECJ judgement has increased uncertainty surrounding this procedure (it was already uncertain) and undermines the logic of the process for authorising its use. We cannot know what the long term implications of this will be for the EU and the UK but they could be important.

As for the FTT, the UK will have another chance to challenge the final legislation (which may end up being watered down anyway due to concerns from those taking part) but by the time it gets to that point, there will be so much political capital invested in it, it may make it harder for the court to strike it down, even if the UK has good legal grounds.

Judgement day for the EU FTT: Will the ECJ rule in favour of taxation without representation?

There has been an important development brewing in the UK’s flagship case against the EU's proposed Financial Transaction Tax (FTT). We've known for some time that the European Court of Justice (ECJ) will take a shortened proceeding and rule on the case on the 30 April – this has now become public, as European Voice reported this morning. A ruling hadn't originally been expected until 2015. We expect the ECJ to either throw out the case or rule against the UK - which is problematic for numerous reasons.

We have covered the FTT extensively and the court case is an important marker for the UK’s place in the EU.

The UK claims that the use of enhanced cooperation here is fundamentally against the EU treaties as it imposes costs on those outside the FTT-zone. If the ECJ rules against the UK, it could become a wide-ranging precedent with three key effects:

• Allowing for the broader use of enhanced cooperation (even with extraterritorial impacts) including for eurozone integration
• Making it more difficult for the UK to employ a veto over further EU integration it's not part of 
• Undermining trust in the ECJ as a fair, impartial arbiter and guardian of the single market

However, it's important not to be too alarmist about this. While the ruling looks unlikely to go in the UK's favour (but it still could) it seems more likely to be dismissed on grounds of the UK's challenge being premature (given that the proposal is yet to be finalised) rather than being outright wrong. So the UK will have another shot at challenging the final decision.

Also, the FTT is likely to be substantially watered down so the actual effect might be far less damaging than the Commission proposal pursued under enhanced cooperation. As a key proponent of a watered down FTT, the UK is already to a large extent a winner. Finally, this is a different sub-set to the eurozone (with Ireland and the Netherlands outside).

Below is a Q&A on the issue - pardon the length of it.

What are the UK’s objections?
As a recap, the UK has called for the decision authorising the use of ‘enhanced cooperation’ for the FTT to be annulled. As such it is not directly challenging the measure itself. The key reasons for the UK’s challenge are (as published by the ECJ):

1. The FTT is not compatible with Article 327 of EU Treaties which states that any member states not participating under enhanced cooperation must not feel any impact. The FTT will hit UK firms if there are any transactions with those inside the FTT zone.
2. There is no basis in international tax law which justifies imposing taxes on a sovereign state which does not wish to be part of said tax regime. Adopting a law with extraterritorial effects does not fit with the code of international tax law.
3. The tax will be distortionary and impact competition across the EU. Rather than improving the single market it could fragment it.
4. The FTT is not compatible with Article 332 of the EU treaties which states that any expenditure from enhanced cooperation will come from those directly involved. Given that taxes will be raised from UK and other countries not involved, this has been breached. The UK would also likely be directly responsible for collecting and enforcing this tax due to rules on mutual assistance, producing a further burden.

What are the potential outcomes from the ruling?

1. The ECJ rules in favour of the UK – seems very unlikely, but not impossible. In this case the Council would be forced to reconsider the FTT. It would need to adjust the details of the FTT to fit with the ECJ’s ruling and then get renewed support for enhanced cooperation.
2. The ECJ rules against the UK and dismisses some or all of its claims – possible. This could amount to the ECJ ruling that the FTT does not have any extraterritorial effects nor that it cuts across the single market. This would not only set a worrying precedent for any future challenge against the specific nature of the FTT itself but also for the UK’s position in the EU more generally, weakening its ability to bloc future eurozone integration with a direct or indirect impact on the UK. Combine this with the growing use of intergovernmental agreements and using the single market legal base for eurozone integration and it's clear the net effect is reduced UK leverage in Europe. 
3. The ECJ deems the challenge premature or unwarranted – likely. Given that the FTT is still a work in progress and the final proposal remains uncertain, the ECJ could throw the complaint out on technical grounds. This would not be too detrimental to the UK, although it would still be a blow as the UK was hoping to stop the FTT as soon as possible. It would also mean that, out of four key legal challenges on financial services at the ECJ (short selling, FTT, bankers bonus cap and ECB location policy) the UK is now at 0/2 - not exactly an encouraging score.

Usually, ECJ cases take a minimum of 16 months to work their way through the process of deciding a case. This has taken around 12 months.Written proceedings and arguments were concluded in January this year, normally the case would then move onto a hearing and an Advocate General would present an opinion before the final ruling. The fact that the ECJ has effectively skipped two steps and moved straight to the ruling. This could suggest that the ECJ considers it a straightforward case, which is unlikely to have been the case if the ECJ ruled against the European Commission (always very controversial).

Does this mean the UK was wrong to launch its challenge?

• In the end, we still think it was the right thing for the UK to do. It seems clear to most that there are numerous negative side-effects from the FTT, many of which seem to break rules enshrined in the EU treaties. The broader point is that the UK is right to establish the boundaries of what the EU can do and what enhanced cooperation can be used for. 
• The one caveat in this instance is that, given the large and growing concerns about the FTT, it has floundered and stalled on its own to a large extent, suggesting the legal challenge may not have been necessary. This would especially be true if it ends up going against the UK and setting the precedent described above.

Is this the end of the story?

If the ECJ rules in favour of the UK, the European Commission will need to table a new proposal. If the challenge is either thrown out or goes against the UK, the Government can still challenge the final legislation (as opposed to the decision to authorise enhanced cooperation). 

If the ECJ does end up throwing out the challenge for being premature, then the process has taught us little and the final result remains to be seen. It does raise the question though: why was authorisation given for enhanced cooperation before the final make-up of the proposal was known?

ECJ sets important legal precedent by striking down Data Retention Directive

The European Court of Justice (ECJ) has this morning struck down the EU's Data Retention Directive by declaring it "invalid". The ECJ had been asked by the Irish High Court and the Austrian Constitutional Court to rule on whether the Directive complied with the EU's Charter of Fundamental Rights.

In one sentence, the Data Retention Directive requests telecommunication services providers and operators to store certain categories of information (date and length of phone calls, senders and recipients of e-mails, etc.), but not the content of conversations, for a minimum of six months to a maximum of two years. It was introduced in 2006 to help national authorities fight serious crime and terrorism.

Interestingly, the UK has 'gold-plated' the Directive by fixing the data retention period to twelve months. But other EU member states were less zealous. Last year, Sweden was issued with a €3 million fine from the ECJ itself for failing to transpose the Directive into national law in time. Germany has been taken to court by the European Commission for the same reason. 

According to today's ECJ ruling,

By requiring the retention of those data and by allowing the competent national authorities to access those data, the Directive interferes in a particularly serious manner with the fundamental rights to respect for private life and to the protection of personal data.

The statement goes on:

The retention of data required by the directive is not such as to adversely affect the essence of the fundamental rights to respect for private life and to the protection of personal data [...] However, the Court is of the opinion that, by adopting the Data Retention Directive, the EU legislature has exceeded the limits imposed by compliance with the principle of proportionality. 

One of the reasons cited by the ECJ is:

The Directive covers, in a generalised manner, all individuals, all means of electronic communication and all traffic data without any differentiation, limitation or exception being made in the light of the objective of fighting against serious crime.

Therefore, the real problem for the ECJ seems to be the violation of the proportionality principle. Or, put differently: the rationale behind the Directive is correct, but its scope is disproportionate. Now, we would argue, this is a problem affecting many other pieces of EU legislation (think, for instance, EU employment and health and safety rules) - which is what could make today's ruling an important precedent.

New rules on access to benefits: another UK legal stand-off with the Commission?

The Government has today announced the details of the "minimum earnings threshold" that will be applied from 1 March to EU migrants seeking to claim certain benefits in the UK. The plan was first outlined in David Cameron's FT article last year, and the DWP has today revealed the details.

Under the new system, EU migrants will have to demonstrate they have earned around £150 a week - the level at which employees pay National Insurance contributions - for three months in order to qualify for "worker" status, which opens the door to certain benefit entitlements. Jobseeker's will need to wait three months before getting income-based jobseeker's allowance and, after the introduction of new rules on April 1, they will be ineligible for housing benefit. Those deemed not economically active would need earnings above income support levels and comprehensive sickness insurance, to be eligible to claim child benefit or child tax credit.

In our briefing following David Cameron's article in November 2013, we noted that the proposal for an earnings threshold had the potential to intensify the legal stand-off between the Government and the European Commission over the rules on access to benefits.

The Telegraph today quotes a Commission spokesman as saying:

The Court of Justice's case law makes clear that part-time workers, trainees and au pairs can be classified as 'workers', provided their activity has an economic value and is genuine and effective. This case-law makes clear that a definition of a worker according to the amount he or she earns is not compatible with EU law.

This is only an initial reaction and the Commission cannot take further action until it has reviewed the proposals. But, as we understand it, the Government will argue that it is not illegal because the threshold simply acts as an 'alarm bell' at which point claimants will face a fuller assessment of whether their work is "genuine and effective", with the possibility of being denied worker status.

This extra step means that the threshold is not an automatic criteria and should therefore fulfil the EU requirement that each applicant be assessed on their individual case.

What the Commission will make of this argument we cannot say but, as we have argued before, rather than the constant battling between the Commission and member states on this issue (it's not just the UK), the rules on access to welfare need proper reform, with a much stronger link between access to welfare and an economic contribution to the host country.

German Constitutional Court believes ECB bond buying is illegal, but asks ECJ to rule first

Hanging up their robes? Ball is now in ECJ's court

As has been widely reported this morning there has been some surprising news out of Karlsruhe with regards to the ECB's bond  buying programme and its legality.

Our full take is here, with the summary below:

Summary: The German Constitutional Court (GCC) – Bundesverfassungsgericht – has referred several questions surrounding the ECB’s Outright Monetary Transactions (OMT) programme to the European Court of Justice (ECJ). It is evident that the Court believes the OMT is illegal and incompatible with EU and, therefore, German law. However, the Court only has jurisdiction to rule on matters of German domestic law. It therefore argues that it must refer the key questions to the ECJ – the body which interprets EU law – given that the ECB’s mandate and any overstepping of EU treaties is obviously a question about EU law.

The ECJ is likely to side with the EU institutions and rule that the OMT is compatible with EU law, with the GCC likely to therefore say its hands are tied. Still, the decision throws new uncertainty into the fragile eurozone economy and could hamper the recovery. The GCC may also, in its interpretation of the OMT’s compatibility with German law, insist in new red lines - potentially limiting the level of purchases. This itself would severely restrict the role of the ECB. 

Markets, while briefly spooked, seem to have broadly recovered, whilee the euro remains slightly weaker. This doesn't seem to have had much impact, with many coming round to the view that the OMT will remain practically usable until the ECJ almost inevitably fully approves it.

The broader fallout is interesting, as this case has often been cited as one of the remaining risks in the eurozone. Despite the GCC's strong objections to the OMT, this could end up actually bolstering the ECB's position.

More generally as well, it does raise questions about Germany's role in monetary policy and the GCC's role. On EU related issues it is ultimately bound by the ECJ's interpretation of EU law. Furthermore, we can't help but feel that the Court has tried to somewhat dodge this very difficult and politically sensitive decision. It also suggests Germany may be struggling to fulling impose its will over monetary policy - although it clearly remains very powerful and many would argue continues to hold action such as asset purchases at bay.

Nonetheless, plenty of food for thought and an interesting shift in the dynamic of the eurozone.

ECJ rules against the UK in landmark short-selling case

The ECJ this morning rejected all the UK’s claims against the EU's short selling regulation. The result was surprising given that the Court's Advocate General Niilo Jääskinen issued an opinion supporting the UK’s position last September – court rulings often, but not always, follow these opinions.

The nub of the UK's complaint was that the new regulation transferred too much discretionary power to ESMA (the European Securities and Markets Authority) to ban short-selling over the heads of national regulators. And that the legal base for doing so in the EU treaties was unsatisfactory. The case could therefore set an important precedent.

The UK’s complaint as described by the court:

The United Kingdom contends, inter alia, that ESMA has been given a very large measure of discretion of a political nature which is at odds with EU principles relating to the delegation of powers. The United Kingdom also submits that Article 114 TFEU is not the correct legal basis for the adoption of the rules laid down in Article 28 of the regulation.

The full regulation and article 28 can be found here.

Here is what Jääskinen had to say about the complaint in September:

"The outcome is not harmonisation but the replacement of national decision-making with EU level decision-making. This goes beyond the limits of Article 114."

While he didn’t side with the UK on all issues, he did recommend changing the legal base of the regulation to Article 352, which would have given the UK a veto.

However, the ECJ took a very different line arguing that the regulation is in line with the treaties since ESMA already has a role to play in this area and because the powers are limited to times when financial market stability is in question - of course when this is, remains to be defined by ESMA itself. The court also suggests that, contrary to the Advocate General's view, the new rules do provide for harmonisation.

As we noted before, this ruling has the potential to be very important for the UK and could set the tone/precedent for future rulings. The court’s decision to reject the UK’s claim could have some important implications:

• Firstly, it potentially sets a precedent for the transfer of powers to an EU agency under the single market article (114). This is decided under qualified majority vote (QMV) meaning the UK does not have a veto. Not only that, but the scope of the powers remains vague and widespread, allowing ESMA quite a significant amount of leeway in deciding where to act in what the UK Government would argue are political decisions.

• More generally, there will be a concern that it could allow the use of Article 114 to be stretched – a question which is raised in some of the UK’s other on-going court challenges against EU financial regulation.

• This will raise concerns in the UK over two issues – financial services regulation and the split between euro and non-euro countries. The first is obvious given that the UK may feel its ability to legally protect itself against burdensome regulation is now diminished. The second stems from the potential abuse of the single market article to further the needs of the eurozone - the short-selling ban was largely conceived following the eurozone/financial crisis to combat 'speculators'.

• One saving grace may be that the ruling is quite specific in terms of financial market oversight, a role which the agency in question (ESMA) already has a part in. However, only time and future legal challenges will tell far-reching the implications of this ruling will be.

What happens now?

Given that the ECJ rejected all aspects of the UK's claim, it is dismissed entirely. There is little more the UK can do from a legal aspect, unless it decides to challenge other parts of the regulation but that seems unlikely.

The UK can continue to work behind the scenes to limit the practical power of ESMA and define strict criteria for when it can act on this issue. Of course, if any decision to limit short-selling by ESMA does happen, it could always challenge that specific move.

Nevertheless, this is clearly a political blow to the UK.  

Good Europeans, bad Europeans: Time to revisit a couple of labels?

It's that time of year when the European Commission either assigns gold stars to or puts black marks against member states based on how they implement EU rules. The Commission notes that the number of infringement procedures opened against EU member states is consistently decreasing - from 2,900 at the end of 2009 to 1,343 at the end of 2012. So the kids are behaving better overall.

At the end of 2012, the UK had 61 pending infringement procedures - meaning that the European Commission believes the UK is breaching EU law in 61 cases. That seems quite a lot, but, in fact, the UK is facing less infringement procedures than half of the EU's founding members: Italy (undisputed leader for the ninth consecutive year, 99 pending cases), Belgium (92) and France (63). And it's even with another founding member, Germany. Not bad, for a country usually seen as the 'troublemaker' of the bloc.

Out of curiosity, we took one step further - and looked at the ECJ's latest annual report of activities. There, we found the number of "judgments concerning the failure of a member state to fulfill its obligations" - that is, how many times EU judges have actually ruled that a country either broke or refused to implement EU rules.

Look at this graph (click to enlarge):

Between 2008 and 2012, the UK has been found guilty of breaching EU law in 14 cases, of which two times last year. A Mediterranean trio of Italy, Spain and Greece (46 infringements declared), France (33) and Germany (19) all figure ahead of the UK. Interestingly, the graph also shows that the EU's newest member states have been better at implementing EU rules than the bloc's founding members.

We may be repeating ourselves a bit, but this serves as another reminder that those countries often labelled as 'good Europeans' don't always have the best record of playing by the EU's rules.

UK lines up another court challenge against EU financial regulation

Last week, the UK launched another legal challenge at the European Court of Justice (ECJ) against an unwanted piece of financial regulation – this time, the bankers' bonus cap. This comes in the wake of some favourable legal assessment from a UK point of view, on short selling and the FTT (though both those cases are  still pending), as well as a win on benchmark regulation.

The details on the exact basis for the challenge remain vague but the key points of contention seem to be:

• The CRD IV legislation transfers power to the European Banking Authority (specifically the power to regulate wages in some form). When the EBA along with other supervisors was established there were clear limits put on the powers it can have, particularly ones transferred under the single market legal base (article 114). This was also a key point in the short selling case and one that the ECJ backed the UK on. Furthermore, the use of technical standards allows a significant amount of power to the EBA officials to set the boundaries of the cap.

• The second key issue is the legal base itself, should something such as a wage cap fall under the single market legal base? Furthermore, should it even be allowed under EU treaties? This may come down to a question of to the extent to which the cap actually play a role in regulating the financial system (we would say not much).

• The next issue is related to the above. The UK claims that the law is being enacted without any significant cost benefit analysis of its impact and that it remains unfit for purpose.

• There is also an extraterritoriality point to be made potentially, given that all banks headquartered in the EU will have to apply the rules across their businesses around the world, thereby setting rules outside the EU. However, this home vs. host interpretation of regulation is not unheard of. (This obviously makes the plan flawed from a practical perspective although how strong a point it is legally is not clear).

This could prove to be another important case for the UK for a number of reasons:

• It highlights a growing trend that the UK is aware it has significant legal recourse on EU issues which it does not agree with. Using this effectively will be a big part of future EU engagement.

• As we have noted before, the EU is increasingly trying to push through a wider range of measures using single market articles. Showing the limits of this approach, as was done with the short selling ruling, will be key in defining the limits to what the eurozone in particular can push ahead with under the current treaties (though the cap isn't itself a eurozone-specific issue).

• If the UK is able to secure a victory or even an adjustment in the rules it will be significant since this is the first financial services issue which the UK has been directly out voted on – making it a key symbolic point.

Having said all that, on this one, the UK will have a tough time.

ECJ legal opinion marks important preliminary victory for UK in short selling dispute

The UK has this morning been set on the path to an important victory at the European Court of Justice, after the Advocate General Niilo Jääskinen supported the UK’s claim that the EU's short selling Regulation transfers too much power to the European Securities Markets Authority (ESMA).

The opinion is not binding, but is followed in the majority of cases.

The UK objected to the EU's short selling regulation on a number of levels, but the main concern was that Article 28 of the Regulation - which allows ESMA to impose temporary short selling bans in emergency situations, overruling national financial supervisors - amounted to a significant transfer of power to an EU institution, and therefore Article 114 of the EU treaty (the single market article) was not a valid legal base for the Regulation.

The Advocate General did not side with the UK on all points, but on this key issue, he said:

"The outcome is not harmonisation but the replacement of national decision-making with EU level decision-making. This goes beyond the limits of Article 114."

Jääskinen went on to suggest that an alternative legal base for the regulation could be found and recommended Article 352 of the EU treaties. Although this may seem a technical point, it is extremely important. Article 352 (which sets out the so-called 'flexibility clause') requires unanimity, meaning the UK could veto the proposal.

If the ECJ were to follow the advice of its Advocate General, this could prove to be an important ruling for a number of reasons:

• First, it would halt the transfer of further powers (without national permission) to an EU agency and allow the UK to keep control over an important part of financial services regulation;
• Secondly, it would show that the UK government can have success using the right legal channels effectively. This could bode well for other cases, such as the on-going dispute on UK rules on EU migrants’ access to benefits, or ECB demands that transactions denominated in euros be cleared exclusively within the eurozone;
• It also highlights that the single market article, which, as we noted before, has been stretched significantly, cannot be a ubiquitous catch-all legal base for things the Commission believes fit with its view of the single market. This could become important in future negotiations, particularly over banking union.

See you in Court? UK-Spanish dispute over Gibraltar rumbles on

The HMS Westminster leaving Portsmouth for Gibraltar

A week on there appears to have been no progress on the Gibraltar front - the Gibraltarian authorities are still not budging over the artificial reef, the Spanish are maintaining their additional burdensome controls and the UK is still "considering" a legal challenge under EU law.

As we have argued, neither a challenge on free movement rules nor one on "proportional" border checks carries a guarantee of success due to the ambiguity of EU law. Equally, the Spanish feel they have a strong legal case against the artificial reef based on the very specific wording of the 1713 Treaty of Utrecht - meaning a retaliatory case is not out of the question.

An alternative could be an individual or collective challenge by Gibraltarians (or even Spaniards working in Gibraltar) to the Strasbourg-based European Court of Human Rights, but that could take a long time.

Since then, tensions have escalated with the dispatching of several Royal Navy vessels to Gibraltar (reportedly as part of a long planned manoeuvre) and claims in the Spanish media that the country could from a united diplomatic front with Argentina, which of course has its own axe to grind with the UK. Although we think a diplomatic solution is still the most likely outcome, if none of the sides are willing to back down the UK may be forced to actually initiate legal proceedings, most likely under a 'fast-track' arrangement, as it will by then not have many other practical options.

While initiating a legal challenge may itself force all the sides to resume negotiations, should Madrid still not back down and should the ECJ rule in its favour, this dispute may have more fundamental repercussions on the UK's future in the EU.

Will a future Conservative government renegotiate ECJ control over criminal justice?

Theresa May MP may have committed a future Conservative
government to renenegotiate ECJ power over crime and policing

Yesterday the House of Commons voted to opt out of c.130 EU crime and policing measures and then seek to opt back into ones the Government judges to be in the national interest (c.35 at present). These 35 will for the first time become subject to the juristiction of the European Court (ECJ). Given the past history of the ECJ's rulings and the difficulty of amending EU law once (mis)interpreted by EU judges this is no small thing.

Many Conservative MPs were rightly concerned and presured the Coalition to first give more time for the Committees to examine these measures and then amend the motion to remove the specific list so as not to prejudge the outcome.

We have argued before that the Conservative part of the Coalition faces a difficult decision and given this, it should hold open the probability that ECJ jurisdiction would form a part of a wider Conservative renegotiation of the UK's EU membership terms. So did the Home Secretary do that?

Theresa May set out her position on ECJ juristiction claiming "we have pursued a policy of seeking co-operation not control” (incidentally the title of an Open Europe paper written by Dom Raab MP on this issue). She then went on to explain that a Conservative Government would revisit ECJ juristiction.

As part of that renegotiation, it would be odd indeed, and colleagues would question it, if the Conservative party, as part of its commitment, said, “We will renegotiate, but not these bits.” We will renegotiate the United Kingdom’s relationship with the European Union.

The issues involving justice and home affairs to which I referred earlier are being considered in the Government’s “balance of competences” review. Undoubtedly the jurisdiction of the European Court of Justice will need to be considered when, after the election, a future Conservative Government renegotiate Britain’s relationship with the European Union; but the choice that is before us now is binary. We are a coalition Government with no mandate to seek a renegotiation of our relationship with Europe..

...Before I took a number of interventions, I mentioned the European Court of Justice. I also want to refer to the European Court of Human Rights, which contradicts laws passed by our Parliament, overrules judgments made by our courts, and interprets the articles of the original convention on human rights in an expansionist way. That is totally unacceptable. I therefore believe that we also have to consider very carefully this country’s relationship with Strasbourg as well as our relationship with Brussels.

Justice Minister Chris Grayling MP added later in the debate that:

I am clear about the fact that the Lisbon treaty paves the way for the creation of a European justice system. That system is now taking shape. A raft of new measures is emerging from Brussels, and the recent addition of a new justice scorecard creates a platform that will enable more to follow soon. My right hon. Friend the Member for Wokingham (Mr Redwood) and many others were right to say that the jurisdiction of the European Court of Justice was a key element... We have decided we do not want to follow a path that leads to a European justice system... 

To my Conservative colleagues, I say simply this: everyone knows my position on matters European—I believe that Britain’s position in the European Union needs, at the very least, to change pretty radically

So we seem to be reaching a clear commitment to renegotiate the ECJ's juristiction over EU crime and policing measures. We have long argued that this is right, necesary and achievable but, like the referendum commitment, will it survive any future coalition talks?

Theresa May to announce EU crime and justice opt-out this week

In January 2012, we published An unavoidable choice: More or less EU control over UK policing and criminal law. A year and half later, and it looks like decision time has arrived.

According to the Sunday Telegraph, Theresa May will announce this week that the Government plans to take its 'block opt-out' from around 130 EU crime and justice laws - negotiated as part of the Lisbon Treaty by the previous government - and then apply to opt back in to those considered of vital national interest.

The opt-out boils down to this: In the first instance, the block opt-out is a choice between accepting all the laws and rejecting all of them. Accepting them also means accepting the full powers of the European Court of Justice over them for the first time. The decision to opt-out or accept the ECJ's jurisdiction has to be made by June 2014 and will take effect in December 2014.

However, once the block opt-out is taken, the rules allow the UK to apply to opt back in to individual EU laws. Opting back in also means accepting full ECJ jurisdiction over the law concerned and the UK cannot opt back out again in future.

In our 2012 report, we concluded that:

Open Europe recommends that the Government should invoke the 2014 block opt-out, which would allow it to consider the following options post-2014:

- Remain outside the EU crime and policing laws it has opted out of.  

- Opt back in to selected EU laws of particular importance, which would need the approval of the EU institutions and mean accepting the ECJ’s powers over the laws it opts back into.  

- Or, seek to negotiate a new arrangement (a variant of Denmark’s position) whereby the UK could cooperate with other EU member states on crime and policing but outside the EU legal framework and therefore without the jurisdiction of the ECJ.

It looks overwhelmingly likely that the Government will take the second option. Given the constraints of the existing EU treaties (option 3 would require EU treaty change) and the Coalition (the Lib Dems have been fighting the opt-out tooth and nail), this is the pragmatic decision to make.

Significantly, and symbolically, it would be the first time that powers flowed back from the EU to the member states - which is a good thing. However, it is also true to say that by opting back in to some measures the UK will be accepting the power of the ECJ over thee laws. The key issue will be the European Arrest Warrant - the likelihood is the UK will seek to opt back in to a 'reformed' Arrest Warrant, but the question is whether there is genuine reform - some things can be done domestically but more fundamental reform requires negotiation with other governments and the European Parliament.

In our view, in the long-term, one of the priorities for David Cameron’s reform and renegotiation strategy should be to return to a system of bilateral, practical crime and policing cooperation with EU partners, which does not involve ceding control to the EU institutions (option 3).

A ComRes poll for Open Europe in May found that just over 30% of respondents selected “Allowing the UK to have control over police and criminal justice laws” as one of their top four priorities in any UK-EU renegotiation, the fourth most popular option. A subsequent poll for Sky News found that 45% of respondents specified policing and criminal justice powers as an area of EU policy that they wanted returned to the UK, the second most popular option after immigration.

No one is opposed to practical co-operation between Europe’s law enforcement authorities. But the UK does not have to cede the same level of national control in order to cooperate with other important non-EU security partners around the world. Therefore, imposing EU-federalist solutions on an increasingly sceptical public simply increases the chances of the electorate throwing the baby out with the bathwater – rejecting the EU entirely.