Updated: Commission silent as foundation for increased EU budget contributions remains unclear

Update 24/10/14 17.05:
Outgoing Commission President Jose Manuel Barroso has just given his press conference which frankly did not clear much up. Barroso insisted, as the Dutch position below does, that this payment demand is part of an annual adjustment which is based off of the revised figures for annual GNI (which are produced by national statistics agencies and then verified by eurostat).

Essentially, he is suggesting that the final figures for the UK in 2013 proved to be so far ahead  of expectations that they altered the UK's share of the budget significantly.

This is not a completely implausible scenario but it leaves some glaring gaps. Firstly, its hard to imagine the economy outperformed so much and other EU economies underperfomed so significantly that the UK has to stump up another €2.1bn. Secondly, this doesn't fit with the leaked doc from the FT. As discussed below, the figures clearly seem to relate to a longer term assessment based off the ESA changes to the way GNI is calculated.

All that said, its becoming increasingly clear that the positions of the Commission, UK and others are not quite compatible so something will have to give in a negotiation.

***********************************************************

Currently, there is still no clear explanation for where the demand for increased contributions to the EU budget came from or exactly how it was calculated - see our comprehensive analysis here. While the Dutch and the Brits are both concerned about being asked to contribute more, they are actually putting slightly different versions of events forward. These two split the prevailing theories about how this has come about.

The first version of events, pushed by the Dutch, suggests that this is not as surprising has been made out since it is actually down to the regular assessment of the four cycle of VAT receipts and tax returns related to GDP of countries. When asked by Dutch BNR radio ‘Does this revision have anything to do with the new accounting method?’, Dutch Finance Minister Jeroen Dijsselbloem responded,

“No, this seems to come from a [annual] source revision which is something different from the statistical method that is used to calculate [the GDP].” 

The point that surprised the Dutch was that the demand came out at almost double what they had forecast and there is no clear explanation of why this is.

The other version of events ties into the document leaked by the FT. Judging by this document it is hard not to see this cost as a result of a calculation based off the introduction of the new European System of Accounts 2010. The UK is suggesting it was unaware of such a significant overhaul to the EU budget calculations and has not been included in the discussion around the changes. The document clearly looks to alter the budget contributions over the period between the introduction of the previous system of accounts and the end of 2013. The total figures also line up with the reports and are yet to be rejected or even disputed by anyone. The fact the figures are so large also fits more with this version of events than the regular adjustment - in this sense something will have to give (size of demand primarily) for the first version of events to be true.

What do they agree on?

• There is clear agreement that this has been handled poorly by the Commission, who is still yet to provide any clarity into the debate or explain exactly how much they are asking for and why.
• Furthermore, the demand for payment immediately also seems to be a miscalculation by the Commission which caught some unawares at least in terms of the size, if not the timing.

While this may seem trivial it is vitally important that the Commission makes clear and gets to the bottom of what is going on here. Ultimately, Cameron’s options will be very different depending on whether the demand is driven by a unique one off event (such as long terms GDP changes) or part of a regular assessment of the EU budget. In any case, whatever the source serious questions need to be asked about how a bill of €2.1bn can materialise with little or no political discussion.

Why is the UK being asked to pay in more to the EU budget and what can it do about it?

There are a number of headlines today around the EU’s request for a further €2.1bn from the UK in terms of its contribution to the EU’s budget.

Below we breakdown exactly how and why this has happened and what options the UK has now.

How has this happened?

• The European Commission has launched a review of EU budget shares (based of VAT receipts and Gross National Income [GNI]) going back to 1995.
• This is tied in with the introduction of the new European System of Accounts (ESA) 2010 which came into force in September. This is a new approach to assess the true value of a country’s economy (its GDP) by counting some activities which are often missed. Many of you will have read the countless headlines about how GDP will now try to quantify the value of prostitution and the drug trade. However, the new calculations also give more weight to research & development and other softer types of investment. The Commission has estimated that these adjustments will push most member states GDP up, albeit by varying degrees.
• Essentially, since 1995 the UK has performed better than expected and better than many of the other EU member states. As such its economy is larger than originally thought. Under the review this means that its share of the EU budget – which is calculated off the back of GDP and population as a share of overall EU GDP and population – has increased.
• The EU is also in the process of producing an amendment to the annual budget which we discussed here. At some point, very recently, the EU has decided to almost combine the two issues possibly causing a speed up in the payment date for this €2.1bn lump sum.

Why has everyone been caught off guard?

• While the annual amendments to the budget are expected and usual (though often unnecessary and far too high as we have pointed out numerous times) this adjustment on GDP terms is unprecedented and seems to be largely a one off – as such it has caught most people off guard.
• It also seems that the release has been kept under wraps for some time. While the amending budget has been known and discussed for some time, with the final details circulated to member states a week ago in preparation for the current EU summit, the details of this were only released to member states a day ago. Essentially it was somewhat sprung on them ahead of the summit.
• This is exacerbated by the fact that this is clearly an extensive long term process and that the ESA 2010 adjustment has been running for years. To say the release and interaction with member states on this issue has been poorly handled would be a massive understatement.

What are the UK’s options now?

• First, it’s clear the UK is not alone in its outrage. The Netherlands has been asked to pay in a further €640m, while Italy has been asked for €340m. Dutch Prime Minister Mark Rutte has called this “an unpleasant surprise which raises a lot of questions”, adding, “when I say go to the bottom of this, it means to look at all aspects, including legal ones. It is still too early to run ahead on this.”
• The first option is to get an agreement to deduct any payments from future budget contributions. This would avoid having to pay in a lump sum now and also mean that it on net the UK does not pay any extra.
• The second option would be to secure a political or legal agree to ignore these uprated GDP shares and stick with the originals. This should be doable through a vote in the European Council. That said, because some members are getting a rebate – France and Germany in particular – this could prove a very tricky agreement to strike.
• As Rutte has already pointed out, countries may have legal recourse. Exactly what form this could take is unknown but the retroactive nature of the cost and its lack of discussion and warning could provide some grounds.
• Lastly, the UK (and the Netherlands) could simply refuse to pay. As large net contributors to the EU budget, there is little that others can do to force them to pay. Obviously the EU could launch its own legal action in terms of infraction proceedings; however, the maximum fine for the UK is around €225m on an annual basis – much less than it is being asked to stump up here. This could also be combined with the point above, with the UK refusing to pay until the legal proceedings have run their course. ***see update below***

Open Europe’s take
While this does not necessarily seem to be a political stitch up from the EU there is no doubt that it is unreasonable and politically irresponsible. Retroactively taxing someone over 20 years is fundamentally unfair. The fact that the UK and Netherlands are being punished for doing better than expected and better than others almost encapsulates everything that is wrong with the EU’s approach – particularly when the Eurozone economy is struggling to find any growth.

Once again the EU has failed to learn any lessons from the previous budget negotiations and has helped to feed those who want to leave the EU, possibly ultimately shooting itself in the foot. Still, what's interesting is that in a debate marred by splits, the UK political class is almost entirely united in its outrage against this move. It is ironic that in the week when one poll found British support for EU membership at its highest since 1991, the Commission has managed to unite everyone from Lib Dem MEPs to UKIP in outrage. If Cameron manages to resist the demand somehow, he would be able to score a massive victory.

Update 24/10/14 12:05:
One point to add regarding the refusing to pay option and the potential fines. On top of the potential fine from infraction proceedings mentioned above, the amount of €2.1bn will be charged 2.5% interest (standard 2% above the Bank of England base rate currently 0.5%), which increases by 0.25% for every additional month which the outstanding amount is not paid off. Such interest could clearly mount up very quickly and become very expensive. If the UK is eventually forced to accept £2.1bn figure, then it could clearly turn out to be very costly. Ultimately, though, if the UK is prepared to play hard ball, it would lead to a stand-off that will would need to be resolved by a political negotiation. Such disputes rarely reach such escalated levels and resolutions are normally found before costs mount up. 

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.

Italy claims "great victory" over "looser" eurozone fiscal rules

UPDATE (11:30am) - In a separate interview with Quotidiano Nazionale on Saturday, Mr Del Rio explicitly speaks of a "great victory" for Italy at the EU summit.

Here's the full quote:

"The green light to flexibility is the great victory [...] One needs to acknowledge that, thanks to Italy, the work of the summit was not focused on names, but on what to do to move from the time of austerity [rigore] to the true implementation of the [EU's] Stability and Growth Pact. We really won a substantial battle."

ORIGINAL BLOG POST (9:50am)

It was bound to happen.

The battle to make EU fiscal rules more 'flexible' was one of the key issues on the table at last week's European Council summit. Italian Prime Minister Matteo Renzi and French President François Hollande were seeking to make their support for Jean-Claude Juncker conditional on a de facto loosening of the rules. So what was the outcome? Well, depends on who you ask. If you ask Renzi's people, this weekend saw a watering down of the rules.

Graziano Del Rio, Renzi's top aide (see picture), claims thus in an interview with today's Corriere della Sera:

Q: Italy comes back from Brussels with the rule of the 'best use' of the flexibility already provided for [by the EU Treaties]. Isn't that too little to speak of a Europe that abandons austerity and of a victory of the Renzi government?

A: No, it's not too little because it is precisely the lack of use of flexibility that has caused our most serious problems.

Q: So, during its semester of [rotating] EU Presidency, Italy won’t ask to raise the [EU's] deficit limit, the famous 3% of GDP? 

A: I don’t think that’s a rule set in stone forever, but we don’t want to be the ones who move it onto sand. No, we won’t ask to raise the 3% [deficit/GDP threshold]. That’s also to avoid suspicions and titters in Europe, keeping in mind that there are other countries that glaringly breach that limit – and even Germany has done it during a certain period of time.

Q: Excuse me, but what does this greater flexibility mean then?

A: It means that, when deficit is calculated, part of the spending is not taken into account, or, better, it is considered as flexible. The [EU’s] Stability Pact effectively becomes looser. It can be done for co-financing, that is the money Italy is obliged to spend to use EU funds. We’re talking about a figure around €7 billion a year. But there’s also the investment clause, that would allow [us] to leave out of the calculation spending with a high social impact […] We’re talking about a figure around €3 billion. In total, flexibility could be worth €10 billion a year, although it can’t be taken for granted that these two items can be added together.

Of course, everyone is talking about 'interpretation', and no-one will say the rules have been formally re-written. Still, this looks as if the Italian government is claiming they have managed to loosen EU fiscal rules, via a new interpretation. Spin or otherwise, Berlin and Frankfurt won't be entirely pleased.

What do Wayne Rooney, Rambo and Don Quixote have in common?

The script is written and the scene is set: Cameron will go down fighting in his bid to prevent Jean-Claude Juncker from becoming the Commission President with only Viktor Orban for company. While this has earned him some relatively positive headlines in the British press, the German press has not wasted an opportunity to stick the boot in.

According to Bild, “Cameron is becoming more and more the Wayne Rooney of EU politics: he lines up, he loses, he goes home.” The paper adds that:

"Great Britain and Hungary - this is not the strongest alliance in the EU. This could be a foretaste of what could happen if the Brits decide leave the EU in the 2017 referendum announced by Cameron. Instead of taking part in the largest and most economically significant association of states in the world, the Brits will be locked outside. The relevance and influence of Great Britain will fall dramatically."  

Die Welt describes Cameron as “the loneliest man in Europe”, and earlier this week likened him to "Rambo" - running in head first all guns blazing. FAZ’s London correspondent Jochen Buchsteiner describes the Cameron as the “Don Quixote” of EU politics, noting that “a majority of Brits see him as a hero – even when he comes back home beaten.”

Of those three, we suspect Rambo is the most favourable comparison, even if it was not meant as such. At least, Rambo is usually the only guy left standing once the credits start to roll. 

Merkel: If you want more Europe, be prepared for EU treaty change

Angela Merkel this morning delivered her first Europe remarks at the helm of the new German Grand Coalition. It wasn’t a “Europe speech” per se but rather her usual pre-EU summit briefing in the Bundestag - although it undoubtedly had a bit more meaning since it is the first under the new coalition.

Two key points stood out to us:

First, she wants a Eurozone “banking union” to be agreed – and possibly up and running – at some point during 2014. However, as we noted in our pre-German election briefing, and which is most certainly being borne out by events, this is a watered down, very German version of banking union. This was clear from last night's (partial) deal on banking union (more on this later). So if you’re the typical Anglo-Saxon economist hoping for a big, joint backstop – don’t hold your breath. This one will be messy.

Secondly, she again hinted at EU treaty change. It’s interesting that Merkel just won't let that idea go. She said,

“Those who want more Europe, also have to be prepared to reregulate new competences…We have a situation in Europe where everyone says, ‘We can do everything to evolve, but they one thing we can’t change are the treaties.’ I don’t think we will develop a Europe that functions in this manner.”  

Third, Merkel again pushed for so-called "reform contracts" arguing:

"It is necessary to ensure that the required structural reforms are pushed through...[there must be] contractual agreements...We will be discussing such contractual agreements at the European Council for the umpteenth time... [I expect] to see progress."

Translation: if you want us to underwrite the euro, we need 'see-you-in-court' style supervisory powers, firmly grounded in law. That means, EU treaty change.

Berlusconi: Let's breach EU deficit rules, no-one would throw us out

With the next meeting of EU leaders only one week away, Silvio Berlusconi has stepped his anti-austerity rhetoric up by a few notches. He said yesterday,

"We need someone from the [Italian] government to go to Brussels and tell those gentlemen, ‘We are in this situation because of your damn austerity policies. We must put things back in their place. From now on, you can forget about the fiscal pact and the deficit limit of 3% of GDP. Do you want to throw us out of the single currency? Go ahead. Do you want to throw us out of the EU? Well, we’d like to remind you that we pay €18bn a year [into the EU budget] and only get €10bn back’. Who would throw us out?"

As usual when Berlusconi is involved, these incendiary remarks form part of a broader communication strategy. Following his party's poor showing in the latest round of mayoral elections, Berlusconi wants to make clear to his electorate that he is still dictating the agenda to Italy's coalition government - and that he means business when it comes to keeping his flagship electoral promises, be it about scrapping a property tax on first homes or putting an end to EU-mandated austerity.

However, this time the explicit invite to ignore EU deficit rules is in clear contradiction with the line taken by Italian Prime Minister Enrico Letta so far: Italy does want an easing of austerity at the EU level, but will keep its deficit below 3% of GDP and respect all its commitments. Therefore, Berlusconi's words risk shaking the coalition government at home, and undermining Italy's credibility vis-à-vis its eurozone partners.

It will be extremely interesting to see if, once in Brussels next week, Mr Letta pretends his coalition partner Berlusconi never said those words or takes Il Cavaliere's advice on board and adopts a tougher anti-austerity stance with German Chancellor Angela Merkel and the other Northern eurozone leaders.  

As much of a 'Nein' as a 'No' - Don’t blame Cameron for the break-down in EU budget talks

On his Telegraph blog Open Europe's Mats Persson analyses the breakdown of EU budget talks, see below for the full piece:

As predicted, the talks over the EU’s long-term budget have broken down. What does this mean? In truth is, not that much. Postponing a decision was always the most likely outcome. A new deal will now have to wait until after the December EU summit when leaders will try to hammer out the details involved in a European banking union. On substance, this is a far bigger issue than the EU budget, as it’s breaking new ground and links to the stability of the euro. The EU budget is a maddening legacy issue.

Had Cameron been forced to pull the veto this time around, it would have been a completely different matter.

There will be those on all sides tempted to blame David Cameron for the breakdown in the talks. This is simplistic. As Angela Merkel pointed out at her press conference just now, there were two main groups who disagree — net contributors and net recipients. Within these groups, as Open Europe has consistently highlighted, there are a series of disagreements. From the Danes who want a rebate to Malta who want to be treated as a ‘special’ case. All positions matter since every country has a veto. In total, eleven countries had explicitly threatened to veto the budget in case they couldn’t secure a favourable deal for themselves. Interestingly, France and Germany struggled to reach a common position, with Berlin leaning towards London on several points, including on cutting the EU’s admin spending. So forget the 26 vs. 1 narrative.

Moving forward, David Cameron remains in a very tricky, but far from impossible, position. His negotiation mandate is exceptionally narrow following the Parliamentary vote in which a majority of MPs backed a cut in the EU budget, rather than the freeze Cameron has called for. He also suffers from a major communication error committed early on in the talks. The British Government decided to use the amount of cash that was actually paid out from the EU budget in 2011, €886bn, as its “baseline”. When this figure is extrapolated to the entire seven-year EU budget period, it creates an artificially low figure – far below the “appropriation ceilings” (the maximum amount of cash that can be paid out rather than the actual cash paid out) — meaning that Cameron has to fight seriously hard to live up to the high threshold for a “freeze” that he had set for himself. But if the Government is using the same measure as everyone else – payments appropriations over the full seven years – it is now on way to actually achieve a freeze or even a cut, when compared to the full 2007-2013 EU budget period. So budget period to budget period, the Government is in a pretty good position.

David Cameron had a very solid press conference after the summit – he sounded plausible (which hasn’t always been the case) – but to date, the Government’s communication strategy around the EU budget talks has been pretty appalling. It’s been very difficult to figure out what, exactly, the UK government actually was pushing for, and by focussing on a 2011 real terms payments freeze it may have been a bit too smart for its own good.

The real tragedy with these talks is that no one is actually focussing on the substance of the EU budget. As we have shown – comprehensively – the EU budget is an economic anomaly. It’s not a huge amount of money, but if targeted properly – rather than wasted on economically inactive landowers or recycling regeneration cash – it would make a real difference.

 It speaks volumes about the current state of the EU that this budget remains unchanged. That’s not only Cameron’s problem, but also the rest of Europe’s problem.

Open Europe publishes (and analyses) leaked draft of Van Rompuy's new EU budget proposal

We’ve got our hands on a leaked copy of the latest HermanVan Rompuy (HvR) proposal for the EU budget (see here for the full doc). The headline spending figure remains broadly unchanged in the new proposal, standing at €1,014bn (a €4bn increase), but more cash is spent on farm subsidies and structural funds, in a move designed to appease France, Poland, Italy and Spain.

(The figures here includes off budget items, if they are discounted the second proposal is actuall a decrease, from €973bn to €972bn. This is mostly due to items which weren't off budget in the original proposal, being off budget in the second version).

No figure is given for payments appropriations – the figure that the UK government is targeting – but given that this figure has widely been cited to be €940bn, it’s likely that it’ll have to come down more if acceptable to the UK (with the government's initial proposal at €886bn).

Also, just like with the previous draft, the latest HvR proposal foresees cuts to the UK rebate – which is a non-starter for Britain.  As a refresher (from our recent flash analysis):

“The proposal also includes an adjustment in the way in which the UK rebate is calculated. This could result in the UK rebate falling by as much as 11% or €3.5bn across the next budget period, solely due to this adjustment.

The plan also suggests that ‘corrections’ such as the UK rebate will be “fully financed by all member states”. It’s not entirely clear what this means, but it does suggest that the UK could actually be responsible for funding part of its own rebate. If this were the case then the rebate could be reduced by a further €3.316bn, cutting the rebate by a further 11.5%, and 21% (€6.8bn) from its original amount.”

The increased spending on CAP and Cohesion moves further away from the spending split which many in the UK would like to see (more growth focused) while although the headline figure has not increased it is still probably slightly too high. See table below for the full break down (click to enlarge):

So, despite talk of progress last night, it still seems that, from a UK perspective (but also likely a Swedish, Dutch and German one) there are some significant divisions.
 

The EU budget 'veto count': and then there were ten...

Here's an update of Open Europe's 'veto count': ten EU member states (UK, Denmark, Sweden, Italy, France, Portugal, Latvia, The Netherlands, Austria and Romania) have now explicitly threatened to veto the 2014-2020 EU budget. Several other countries are also unhappy with all or part of Herman Van Rompuy's compromise proposal (see our latest flash analysis for further details).

This is what changed since we made our first 'veto count':

Italy and Portugal have both used the 'V' word for the first time. Interestingly, Italy has also suggested that it could seek a UK-style rebate to avoid its net contribution to the EU budget skyrocketing.

Latvia has also threatened to wield its veto. Latvian Prime Minister Valdis Dombrovskis said his country is not happy with the cuts to agricultural subsidies and cohesion policy proposed by Van Rompuy.

In Romania, incidentally, it looks as if EU budget talks have triggered another row between President Traian Basescu and Prime Minister Victor Ponta. The latter said he was ready to veto the budget, but President Basescu said this morning that "Romania's interest is to negotiate, not to brandish the threat of using its veto right." Given that Ponta is the one who usually attends EU summits, we consider Romania to be in the veto camp.

So over one-third of EU member states has therefore threatened to veto the next long-term EU budget so far. EU leaders could be looking at a long weekend...

Banking union: moving forward or standing still?

Media reports on the outcome of eurozone summit discussions last night are mixed, but there is general theme that eurozone leaders have taken ‘a step closer to banking union’. Looking at the latest conclusions  (see here),we wouldn't quite describe it as a step closer - at least not a big step.

·         The timetable (which everyone admittedly knew was unrealistic) has been delayed. Previously the eurozone was insistent on the single supervisor being up and running by the start of 2013, now it is some point during 2013 (with strong suggestions that this will be after the autumn German elections).

·         There is discussion on including / accommodating non-euro members but no detail on how this will be done (particularly in reference to Sweden, Poland but also the UK) or how the recently publicised legal concerns within the Commission will be dealt with. There is expected to be a substantial amount of progress on tricky legal and political issues before the end of the year.

·         The one point of agreement was that the ECB will supervise all 6,000 eurozone banks, seemingly a positive step on the surface. However, in a concession to Germany, it was also established that much of the day to day running of the supervision of smaller regional banks would still be conducted by national financial supervisors. This raises further difficult questions about the already poorly defined relationship between the ECB and national supervisors.

·         The leaders simply reaffirmed that the ESM, the eurozone’s bailout fund, would be able to recapitalise banks directly once the single supervisor is in place – but this was never in doubt. The real question over whether the ESM can retrospectively take on the burden on bank recapitalisations, relieving ailing governments of the problem, was left unanswered with little discussion.

·         There was another call for the harmonisation of deposit and resolution schemes across the eurozone – an issue which has already been delayed by two years due to political posturing. More importantly, talk of a combined backstop and resolution mechanism for the banking union was kicked into the long grass. As we said before, that element of banking union is, at best, years away.

·         Lastly, we still find it hard to see how the EU can hold a meeting and not find time to discuss Spain or Greece in detail, given that their problems are the most immediate concern.

So more standing still or treading water. Again this reinforces the fear that, as soon as the financial and economic climate looks slightly more positive, any hope of progress on the tough decisions goes out the window.To be fair though, as Swedish PM Fredrik Reinfeldt likes to say, the most important thing is to get it right.

François wants to chat...

Ahead of tomorrow's EU summit, French President François Hollande has decided to give a lengthy interview to several European dailies (including the Guardian, Italy's La Stampa, Spain's El País and Germany's Süddeutsche Zeitung). The full interview - the first major foreign interview since Hollande was elected last May - is due to appear in tomorrow's print edition of these papers, but is already available on Le Monde's website.

The French President made some interesting remarks about Germany's role in the eurozone crisis:

The return to growth involves mobilising funds at the European level – which is the [growth] pact we adopted [at the EU summit] in June – but also improving our competitiveness, and, finally, coordinating our economic policies. Countries running a [trade] surplus must stimulate their internal demand through salary increases and tax reductions – this is the best expression of their solidarity.

Well, Germany is not mentioned here, but the reference is obvious...

Hollande also said,

We all take part in solidarity, not only the Germans! The French, the Germans, as well as all other Europeans within the framework of the European Stability Mechanism [the eurozone's permanent bailout fund]. Let’s stop thinking that there is only one country paying for all the others. This is false! Nonetheless, I know our German friends are sensitive about surveillance. He who pays has to control. He who pays has to sanction. I agree. But budgetary union must be completed by the partial mutualisation of debt: through the Eurobonds.

And then something specific about German Chancellor Angela Merkel,

She is outspoken, she says things…This saves time. And I have the same attitude…Indeed, we are not in the same time scale. I was elected five months ago, and the Chancellor has her elections in ten months – but this does not lead us to defer choices.

The language used is certainly diplomatic, but the message to Berlin is clear. First, Germany should bear in mind that there are other countries paying for eurozone bailouts. Second, that debt pooling remains high on France's agenda.

Hollande also addressed the issue of UK-EU relations,

I would like a United Kingdom fully engaged in Europe, but I can’t decide for the Britons. I’ve noticed that, for the moment, they want to be rather in retreat. The Britons are bound by agreements which they signed up to. They can’t detach from them. They now at least have the merit of being clear. The eurozone, the budgetary union: they are not in them. I do not intend to force them.

He added,

I’m in favour of monthly meetings of eurozone heads of state and government…This Eurozone Council will allow us to better coordinate economic policies and make, country by country, the appropriate decisions. It’s not about excluding the other countries: those who want to join the eurozone will be associated to our debates. Certain countries do not want to – it’s their choice. But why would one need them to come and tell us how to run the eurozone?

Finally, some thoughts on the next steps of European integration,

France defends the idea of ‘integration with solidarity’ [intégration solidaire in French]. Every time we take a step towards [greater] solidarity, the union – that is, the respect of common rules – must progress too.

Political union is for later. It is the stage which will follow budgetary union, banking union, social union. It will give a democratic framework to what we will have achieved in terms of ‘integration with solidarity.’

This is not new, but a clear indication that France and Germany are on opposite sides with regard to whether surveillance or solidarity should come first.

It is also rather telling that the democratic framework or political union underpinning Hollande's vision "is for later"...

EU Summit: Everyone is a winner... for now

As is traditional, a leaked copy of the next EU Summit Conclusions has already been making its way around the media long before the summit has even commenced (due on 17-18 October).

As it is still an early draft, little can be drawn from these 'conlcusions' but so far the officials charged with drawing them up seem to have dropped in something for everyone:

France, has received a mention of an EU Financial Transaction Tax despite, as we reported yesterday morning, it still being far short of the nine states needed for the project to get off the ground.

Germany, has received an assurance that there will remain a "clear separation" between the ECB's monetary policy and its new supervisory functions - another clear hat tip to Bundesbank demands that price stability (inflation) remains the ECB's primary focus.

The UK and other non-euro states, have recieved an assurance that there will be a "level-playing field" (an English expression) in the new supervisory structures under the proposed eurozone banking union and that the "integrity of the single market" will be preserved for financial services.

The UK has also managed to insert a phrase regarding the "voting modalities" in the European Banking Authority, which the document suggests will be looked at to ensure non-eurozone countries will not be prejudiced by a Eurozone caucus.

The MEPs, often an obstacle when it comes to financial regulation, have been promised that the ECB will have "appropriate accountability" in its newly widened role. This is unlikely to placate their desire for new powers but might buy some peace.

Spain, has received wording designed to calm its bond market by raising the prospect of ESM direct bank recapitalisation including 'legacy assets' (i.e. bank bailouts which have already taken place being shifted onto the ESM books). The draft wording calls on the Eurogroup (read Germany, Finland and the Netherlands) to "agree on the exact operational criteria that will guide bank recapitalisation by the ESM in full respect of the 29 June Euro Area Statement". This could still go either way, but Commission President Jose Manuel Barroso has made it clear that he wants Germany to stick to the plan as was originally envisioned/interpreted.

This is, of course, all well and good, but we find it hard to imagine that the final conclusions will be able to maintain what everyone wants. There are likely to be some fights along the way (not least over the last point), lets hope the UK Government is ready to ensure its needs remain included.

Credit where its due: EU Patent office is a good deal for British and EU businesses

The creation of an EU patent office, somewhat overshadowed by the latest twist on the eurozone crisis rollercoaster, was one positive piece of news to emerge from the recent EU summit. As we have noted previously, this is not before time.

It has taken ages to agree a patent and it has now finally passed through the European Parliament via the use of the novel ‘enhanced cooperation procedure’ in order to overcome the objections of Spain and Italy, who are upset that not all EU languages are to be used (something that would have lumped a higher cost on users).

If they manage to sort out the outstanding issues (which unfortunately is a big if) for the first time a British inventor will only need to register a patent once to protect their work throughout the EU. If done right this should reduce costs and increase protection for the UK’s important knowledge based scientific and creative industries. In other words, good news for UK business. But as well as being good for UK and EU business, this is also interesting as it breaks two EU taboos:

• Firstly it's another example of a 'two speed' EU, (with the UK in the fast lane) implicitly acknowledging once again that the one size fits all EU Commission dogma no longer work as overarching basis for European cooperation.
• Secondly, if David Cameron’s statement is correct, it will exclude the costly involvement of the European Court of Justice, something two UK Parliamentary reports here, and here concluded would increase cost and give jurisdiction to a court with no expertise. 

We have long been a critic of the way the ECJ works so an acceptance that it cannot be the final arbiter of everything is good news and sets an important principle. Unfortunately, this is not a done deal yet. Unsurprisingly, the ECJ has already ruled that it must have jurisdiction, in a move that reflects poorly on the Luxembourg court.

Still credit to David Cameron and other EU leaders for taking a positive step to boost innovation and business growth. Sometimes "more Europe" can help.

How many German economists does it take to change a banking union?

The discontent in Germany following the decisions reached at last week's EU summit continues to grow. This morning, a coalition of 160 German economists, marshalled by Hans-Werner Sinn (pictured), the heavyweight head of the IFO Institute and long-standing critic of the eurozone bailouts, published an open letter to their "fellow countrymen" criticising the decisions taken at last week’s EU summit. In the letter, published on the FAZ website, the economists warn that:

“We view with great concern the step towards a banking union, which will result in the collective guarantee of the debts of the banks in the eurosystem. These debts are almost three times as large as the government debt and in the five crisis-affected countries they lie within the range of several trillion euros. The taxpayers, pensioners and savers of the still stable European countries cannot be allowed to be held liable for this debt… Banks must be allowed to fail. If the debtors cannot pay, there is only one group who can and should bear the burden: the creditors themselves.”

The letter continues:

Politicians may hope to be able to limit the amounts of liability and prevent abuses through common bank supervision. They will however not be able to pull this off for as long as the debtor countries command a structural majority in the eurozone. If the ‘solid’ countries agree to the pooling of liability for bank debt in principle, they will be constantly exposed to pressure to increase the amounts of liability or to soften the requirements for liability provision. Strife and discord with our neighbours will be inevitable. 

Neither the euro nor the European idea will be saved by extending the liability to the banks; this will instead help Wall Street, and the City of London - and some investors in Germany – and a number of ailing domestic and foreign banks which will burden the citizens of other countries which have nothing to do with them. The socialization of debt will not permanently solve our current problems; instead, under the guise of solidarity, certain creditor groups will be subsidised.”

The letter concludes with an appeal for members of the public to lobby their elected representatives to make them aware of this danger to the German economy.

Further evidence of the fact that domestically, as we noted earlier this week, Angela Merkel is rapidly running out of room for manoeuvre in terms of selling the eurozone rescue to the German public and elite alike.

Finland and Netherlands raise doubts over summit conclusions

As we expected, doubts are already arising over the package agreed at last week’s summit. In particular, Finland and the Netherlands have today expressed strong reservations about the plans to allow the EFSF and ESM to purchase the debt of struggling countries.

Finland suggested today that it will not support any bond purchases by the bailout funds, while the Netherlands took a less stringent line simply saying that it would assess each purchase on a case by case basis (although behind the scenes it is widely thought not to be keen on the idea).

However, as has been noted, the countries may have backed themselves into a corner here with one of the previous summit amendments to the ESM treaty, which says:

“An emergency voting procedure shall be used where the Commission and the ECB both conclude that a failure to urgently adopt a decision to grant or implement financial assistance, as defined in Articles 13 to 18, would threaten the economic and financial sustainability of the euro area. The adoption of a decision by mutual agreement by the Board of Governors referred to in points (f) and (g) of Article 5(6) and the Board of Directors under that emergency procedure requires a qualified majority of 85% of the votes cast.”

It is worth remembering though that under the EFSF unanimity is still needed so in the short term they can block any attempt to purchase bonds. However, once the ESM comes into force, in around a week’s time if done on schedule, the countries could well be outvoted, since they control less than 8% of the votes combined. It is obviously not completely clear cut, the ‘emergency procedure’ would need support from the ECB and/or the Commission, although it is unlikely that the purchases would be started up in a non-emergency situation. At the very least it should make for an interesting vote on the ESM in the upper house of the Dutch parliament tomorrow and even though ratification is likely (especially since the lower house has already approved it) we’d hazard a guess that this isn’t the last we’ve seen of this issue.

A summit plus for Greece?

Given that Greece lacked any real political presence at last week’s EU summit, discussions on the crisis in Athens were fairly minimal and it was largely overlooked during the ensuing press coverage.

However, Kathimerini has an interesting report today suggesting that Greece could attempt to get the cost of its bank recapitalisation removed from its sovereign debt levels – in the same way that Spain is hoping to do. This could well be seen by eurozone leaders as a way to quickly reduce Greece’s debt burden – although we don’t think it will change any of the fundamental problems which it faces.

A large amount of the second Greek bailout – around €50bn – is actually going to Greek banks to help them absorb the large losses they faced from the Greek debt restructuring. With Greek debt currently standing at around €327bn or 160% of GDP, removing €50bn from this figure could provide a significant boost to Greek debt sustainability – bringing the figure down to 136% of GDP.

There are, however, a few important caveats to note here:

• Firstly, 136% is still an unsustainable debt level, even with this reduction the Greek debt burden is still huge and the need and demands for austerity are not likely to waiver . 
• Secondly, and possibly more importantly, is that this will only be an adjustment on paper for all intents and purposes. Greek banks are dead on their feet, living off liquidity from the ECB and the Greek Central Bank. They will never be able to repay this money and it will still ultimately be underwritten by the Greek state. So, even if this debt is shifted off the official figures it will still be a burden of the state – in reality little will have changed. 
• Lastly, this process will not happen anytime soon. The bailout funds cannot lend directly to banks until the ECB is in place as the eurozone’s financial supervisor, and as we have noted, this will be at the earliest the start of next year. This also happens to be the period by which we have suggested that leaving the euro may become more attractive from a Greek perspective. 

An interesting development which seems to have mostly slipped under the radar then. We wouldn’t be surprised to see the eurozone and Greek leaders take advantage of this opportunity to gain a large reduction in the superficial figures on Greek debt – it would make for an effective headline figure and would likely buy them some more time in terms of making Greek debt look sustainable in their and the IMF's models. Ultimately, though, it would only be window dressing, further shifting of funds around to try to make the situation seem better than it is. In the end, as we have always said, there are no easy answers to the Greek or eurozone crisis.