Timing, not substance, is the biggest obstacle to David Cameron's reform agenda

Our Director Mats Persson writes on his Telegraph blog:

In a recent Sunday Telegraph article that received surprisingly little attention at the time, David Cameron came close to setting out a “shopping list” of what he wants to change in Europe. He outlined seven areas, though they were more principles than policies: powers flowing back, a beefed-up role for national parliaments, less regulation and more free trade, limiting the influence of European judges (possibly opting out of the ECHR, which is not an EU institution), tightening welfare benefits for EU migrants, tougher controls on future EU accession countries and no more “ever closer union”.

Nick Clegg – in a strange kind of way – has almost endorsed the plan, saying that "Now [Cameron] doesn't even talk about repatriation, instead proposing a mild seven-point plan, most of which wouldn't even require treaty change." European Commission President Jose Manuel Barroso has said that the EU wants to "cater" to the UK without "threatening the Union’s coherence" (though he was all over the place on EU treaty change). And in the Financial Times this week, Jean-Claude Piris, former legal guru of the European Council – the key decision forum for EU leaders – concluded that Cameron's changes could pretty much be done without actually changing the EU treaties.

For Cameron, this is a double-edged sword. Sceptics at home already see Cameron’s starting position as a “sell-out” – mere presentational changes that will allow him to recommend a “Yes” vote in the 2017 referendum. This is a premature accusation as there’s a huge range within the Sunday Telegraph piece, from token reform to sweeping changes.

Cameron could cobble together a decent package without changing the EU treaties. First, areas like toughening up rules on access to benefits, removing trade barriers, signing free trade deals or scrapping red tape – key planks in Cameron’s renegotiation agenda – just fall under normal Brussels decision-making (which doesn’t meant it will be easy. Think European Parliament). Secondly, “repatriating” powers wouldn’t necessarily require EU treaty change but could still be meaningful, for example devolving the EU’s irrational regional policy (saving UK taxpayers £4bn over an EU budget period) or exemptions from maddening working time rules for the NHS.

Finally, the EU specialises in legal acrobatics. When pushed – say when the bloc’s second largest economy risks leaving – it can be amazingly creative. For example, it created a €440bn bailout fund out of thin air and via so-called political agreements, the Danes got four surprisingly effective opt-outs after having rejected the Maastricht Treaty in 1992, which were incorporated when the next EU treaty came around. Something similar can be done for some of the reforms currently being discussed, including giving national parliaments the right to block or revise EU laws.

So it's right that Cameron seeks to maximise the reforms that can happen without EU treaty change. However, not only would a Treaty change be a form of political insurance to the Tory party and public that things have changed but it's also needed since the treaties simply aren’t fit for purpose. With a more integrated eurozone, we need new organisational principles and practical measures to avoid the EU becoming the eurozone, while allowing powers to flow back to countries that wish to be less integrated. A 2017 referendum should be the start of a slimmed down, flexible Europe, not the end destination. A quick and dirty solution will only bring us back to where we are today – and could well generate a referendum result too close to call, solving nothing.

Ironically, the strongest and most plausible contender for a Treaty change is one measure that Cameron – oddly – didn’t mention in his piece: safeguards against the Eurozone writing the rules for the rest of Europe, which will also effectively kill the notion of "ever closer union". Exactly how this principle will be organised needs careful thought (ideas here), but it’s highly desirable that this principle is firmly enshrined in EU law.

Since it’s the eurozone that is now changing the rules via banking union and other measures, not the UK, Cameron would be given a fair hearing in national capitals on this point. It is conducive to a "grand bargain": the Germans and French solve their catch-22, agreeing to beefed up supervision in the Eurozone in return for Berlin underwriting the euro, while the British ask for safeguards against Eurozone stitch-ups in return for nodding through EU treaty change at 28 (which Berlin still prefers). In this scenario, it’s the German-led EU treaty change that may trigger a referendum in France, not the UK’s.

It's whether it can be done before 2017 that remains the biggest question.

UK and Germany present united front in favour of EU reform

In a major coup for David Cameron, Chancellor George Osborne has penned a joint op-ed in the FT with his German opposite number Wolfgang Schäuble. Both argue for the need for EU reform (including services liberalisation) and for safeguards for non-eurozone states in the face of further eurozone integration - all areas of potential consensus we flagged up in our recent 'Anglo-German bargain' briefing.

On the acceptance of the different needs of non-euro and euro members, and therefore the need for safeguards, they say:

“As the euro area continues to integrate, it is important that countries outside the euro area are not at a systematic disadvantage in the EU. So future EU reform and treaty change must include reform of the governance framework to put euro area integration on a sound legal basis, and guarantee fairness for those EU countries inside the single market but outside the single currency.”

Getting explicit German support for this view and providing a united front on this issue is an important step forward for the UK and for Cameron's EU reform agenda. While Germany has previously hinted at willingness to support the UK on this issue, this is certainly a step up. It also brings Cameron closer to ticking off one of the key targets he recently put forward in what was probably the most important article nobody spotted. Open Europe has long argued that safeguards against further eurozone integration are crucial and that they will play a key role in determining the new set up and balance of the EU.

That being said, the UK government should not be complacent about where it now stands in terms of its reform agenda. While this represents progress, there is some way to go. This provides an important opportunity and a good base for the UK to begin testing specific reform proposals on other EU governments and electorates. After all, while Germany is the largest and possibly the most important partner to get on board, the UK also needs to convince the rest of the EU. While teaming up with Germany should broadly help on this front there is one constraint - not everyone buys into Germany's vision of the new eurozone with significant central oversight and limited share of liabilities. However, as the banking union shows, Germany has so far been adept at influencing the construction of new eurozone structures in its own image.

Possibly a more surprising inclusion is the joint support for services liberalisation, of which they say:

“We must complete the EU’s single market, especially in services, open up to international markets and conclude reforms to the euro area.”

Again, we've been advocating this for some time - we estimate that it could be worth up to €294bn for the EU's economy. Traditionally, Germany has been one of the staunchest obstacles to such service liberalisation, due to its many protected professions. As such gaining its public support is another big coup for Cameron and a positive step for the EU economy.

One final interesting point is noted by the FT:

"Mr Schäuble told Bruges’s College of Europe on Thursday that he wanted negotiations on a revised treaty to start straight after the European Parliament elections in May."

This is equally as important as all of the above for Cameron given that some of the biggest doubts around his push for EU reform and referendum have been on the time-frame of the negotiations. There is clear hope that discussions around treaty changes will begin in earnest after the elections (although in an ideal world they would have been part of an open and transparent debate within the elections). 

Overall the approach isn't perfect - it still speaks of a two-speed Europe, suggesting all member states are heading in the same direction, which is not the case - but it is a big step and an important one for Cameron. It is now vital that he seizes this opportunity to push a wider EU reform agenda.

Rien à voir ici? Hollande says treaty change is "not the priority" for France, but...

David Cameron and François Hollande have just held their joint press conference following the Anglo-French defence summit in Oxfordshire. Predictably, though, most of the questions focused instead on Cameron's EU renegotiation strategy and the prospects of it being achieved by changes to the EU treaties.

Here's what stood out for us:

• Significantly, Cameron explicitly said that renegotiation of the UK's EU membership "will involve elements of treaty change". This is quite a rare admission, and is the most explicit he's been so far on the need to change the EU treaties. As The Times's Sam Coates flagged up, the Prime Minister has been categorical about EU treaty change once before, speaking of "the treaty change that I’ll be putting in place before the referendum", on the Andrew Marr Show earlier this year - although the question was specifically on EU migrants' access to benefits. 

• The Prime Minister also reiterated that "the eurozone needs change...It needs greater co-ordination, it needs those elements that make a single currency succeed. That's why in recent years we've already seen treaty changes."

• Hollande said that "France wants more coordination and integration in the eurozone", but treaty change "is not the priority" for the time being. Though this is what the headlines are likely to focus on, this is nothing new, nor surprising. It's been the French position for ages. However, Hollande didn't rule treaty change out. He said it wasn't "urgent" or "the priority". As we have argued from the beginning (see here, for instance), the timetable remains a weakness in Cameron's plan - not least because discussions on changing the EU treaties can drag on for years and the eurozone remains on an uncertain development path.

• The French President also stressed that major treaty changes (he mentioned the Maastricht Treaty as an example) would have to be put to a referendum in France - while for smaller ones parliamentary approval would be enough.

A couple of points are worth making. It is no secret that one of the reasons France is wary of changing the EU treaties is that referenda are not exactly easy to win (think of the one on the EU Constitution in 2005, but also the one on the Maastricht Treaty, both of which split the country and the political establishment).

This is true assuming that the new Treaty gives the EU more powers. But this is not what Cameron is aiming for. So it is not entirely clear that any UK-led changes would necessarily have to be put to a vote in France.

That said, though, the common wisdom on this point is that an EU treaty change would be part of a 'grand bargain' to strengthen economic coordination in the eurozone - meaning that the UK's new relationship with the EU would be negotiated alongside greater central controls in the euro area. This type of treaty change could clearly trigger a referendum in France (and elsewhere).

The question remains open. With Germany likely to keep pushing for an EU treaty change to complete the overhaul of the eurozone structures, we still think Hollande may have to face the issue sooner rather than later - with the question being what deal Berlin can broker.

And yet again, that brings us back to Angela Merkel.

A hint as to what a eurozone grand bargain could look like?

German coalition talks are dragging on, but we may have got a hint as to what a grand bargain between the eurozone north and south might look like, with German Chancellor Angela Merkel again appearing to open up for an EU Treaty change.

She told a Süddeutsche Zeitung leadership conference,

"Germany is ready to develop the treaties still further. At the very least we have to be ready to improve the euro protocol of the Lisbon Treaty – which only applies to euro states – to allow an institutional co-operation via the so-called community method and not to only be active at intergovernmental level."

She proposed a "new co-operation" between the European Commission and member states, with the policy recommendations being the result of negotiations.

She added,

"In this way we create a sense of ownership, a sense of responsibility is created among member states to implement necessary change. That's what I understand by economic co-ordination."

As we've argued before, it's easy to get sustained whiplash injuries from tracking the German position on EU treaty change, but this (again) sounds like 'reform contracts' or 'competitiveness pacts' to us - which we have long argued would come back on the agenda - with the European Commission acting as the 'structural reform police'.

Meanwhile, in an interview with Les Echos and other European papers, Eurogroup Chairman Jeroen Dijsselbloem also had some interesting things to say: 

"If a country is not persuaded that it’s in its own interest to reform and modernise, it cannot be motivated from outside. It doesn’t seem wise to me to propose a ‘reward’ in return for a reform. Instead, I think one should link the concession of additional time to correct budget deficits to stricter conditions in terms of reform. I give you more time if you speed [reforms] up. The European Commission may, if a country fails to do so, demand more on budget [adjustment]."

A lot to play for...

Is Merkel gearing up for a scrap over EU Treaty change?

The big EU related story of the day (our bumper report on EU regulations notwithstanding) is Der Spiegel's splash that German Chancellor Angela Merkel set out her proposals for giving the EU greater powers over eurozone members’ national budgets to EU Council President Herman Van Rompuy last week, a move which would require EU Treaty change. Merkel will reportedly insist on legally enforceable contracts between the Commission and individual member states, setting out their obligations for maintaining budgetary discipline and improved competitiveness. In return, Germany could agree to a eurozone budget which would amount to tens of billions. Finally, the President of the Eurogroup would become a “Euro Finance Minister” of sorts.

In one form or another, these ideas have been around for a while but many politicians and commentators asserted that the German government had no interest in opening up the EU treaties. However, as we noted in our pre-election briefing:

"German politicians and the general public are both keen on stronger central eurozone control over taxation and spending as a prerequisite for any further financial aid... Such beefed-up supervision and enforcement could well require EU treaty change in some form. A Merkel-led government may well push for a formalised 'competitiveness pact' after the elections."

This is only one Spiegel report, but it could well be that Merkel is looking to make a concerted push after all. She will have significant opposition to overcome in the form of the SPD, who will almost certainly be her coalition partners by December. The party remains opposed to any treaty change that could trigger referenda in individual member states (although the debt-redemption fund proposed by the German Council of Economic Experts, a policy broadly backed by the SPD, could have the same effect). Likewise other member states (chiefly France) and the EU institutions are far from keen on Treaty change. However, if Merkel has set her sights on something, we would not bet against her, not least because this move would be very popular back home.

This could be the opening that David Cameron has been looking for to force through EU reforms but at the very least will present another stage for a clearer definition on the separation between eurozone and non-euro countries and the necessary safeguards. That said, he too will have to contend with the SPD who have made it clear today that they oppose the return of powers to member states, as party of a new treaty deal specifically designed to fix the Eurozone.

UK-German push for EU reform gathers pace as German SMEs call for return of powers from Brussels

Today's FAZ reports on a letter to German MPs from the German Association of Family Businesses (Die Familienunternehmer) which calls for “a fundamental re-calibration of the EU Treaties”. Crucially, this would entail a correction of the distribution of competencies, which in plain English (and German) would mean the possibility of some powers flowing back to member states from Brussels. The letter argues:

“A key element for the sustainable improvement of the situation [in the EU] is the principle of liability. The future of Europe cannot be jeopardised through the progressive pooling of debts with foreseeable cuts to the German budget or the disempowerment of national parliaments in favour of centralisation in Brussels.”

Given the economic and cultural importance of family run businesses/SMEs - the organisation's website notes that there are 180,000 such businesses in Germany employing around 8 million people - this is an important development and the first time a German business group has made such a demand. While it is important not to get carried away - some of the Association's previous calls, such as pushing for MPs to vote down the ESM, fell on deaf ears - it comes at a time when the concept of adjusting the balance of powers between the EU and member states is slowly gaining traction in Germany. Not that long ago the mere suggestion would have been shot down instantly, now even Chancellor Merkel has hinted that it could be a possibility.

As our recent joint opinion poll with Open Europe Berlin demonstrated, there is substantial support among the German public for the return of certain powers.

Source: YouGov Deutschland for Open Europe and Open Europe Berlin

Of course for Germany to support such transfers they must apply to the EU as a whole, which is why British proposals to give national parliaments a greater role in the EU policy-making process could gain support in Berlin, as could proposals to streamline EU legislation. The Sunday Telegraph recently reported that the UK’s CBI is working closely with its German counterpart, the BDI, in order to push through business friendly reforms in the EU which could include the repeal of some EU social and employment laws as well further liberalisation in areas including telecommunications and services.

The momentum for EU reform is definitely growing, and in an encouraging sign of UK-German co-operation (which we advocated before it became fashionable), Conservative MP Alok Sharma and German CDU MP Ralph Brinkhaus argue in a joint piece on the Spectator’s Coffee House blog that “There’s a historic opportunity for Britain and Germany to lead the work of improving the structures of the European Union, together with other like-minded countries. There are areas of common ground for discussion on budget discipline, free trade and efficiency in the public sector to name but a few."

We couldn't agree more.

Why Barroso’s pessimism about achieving EU decentralisation is sort of irrelevant

The Open Europe team is back from the UK party conferences and, when it comes to the UK’s attempt to reach a new settlement in Europe, by far the most common comment we get is: “The EU Commission won’t allow it.” Particularly true amongst the Tory grassroots. European Commission President Jose Manuel Barroso’s interview today with the Telegraph will no doubt have served to reinforce this view.

He said the only way to reform the EU was to review the EU’s body of legislation, the acquis, on a case-by-case basis:

“The other one is to have a fundamental discussion about the competences of the EU, even in terms of renationalisation. I think the second approach is doomed to failure…Britain wants to again consider the option of opting out. Fine, let's discuss it but to put into question the whole acquis of Europe is not very reasonable…What is difficult, or even impossible, is if we go for the exercise of repatriation of competences because that means revising the treaties and revision means unanimity.”

Barroso is sort of misrepresenting the UK position - the debate has moved away from unilateral opt-outs, but let’s not split hairs. In addition to that, there are two reasons why you can take these comments with a pinch of salt: first, Barroso is gone in a year. Secondly, if it came to it, the Commission has a very limited role in the negotiations over brining powers back anyway.

The European Council has to “consult” the Commission and it also has limited representation in a so-called European Convention (needed for a full-scale treaty change, as opposed to a limited one), but that’s pretty much it. Still, it’s very good to have the Commission on-board of course, for a whole range of reasons (some of the stuff the UK wants outside EU treaty change will require a Commission proposal) but an antipathetic Commission is probably not a deal-breaker.

An antipathetic Barroso certainly isn't.