How close did the Dutch come to ditching the euro?

The Guilder - was it close to making a comeback? 

Yesterday, former Dutch Finance Mininister Jan Kees de Jager, who held the role until November 2012, revealed something very interesting. Apparently, the Dutch government, together with the German govenrment, made contingency plans during the height of the eurozone crisis for the two countries to ditch the euro. A “team” of lawyers, foreign policy experts and economists were employed to investigate different scenarios,. One was to reintroduce the “guilder”:

"The team met regularly on Friday afternoons, but could also be present very quickly in case we needed to make a decision"

He also revealed how Germany was closely involved but other countries were less keen to prepare:

"Some countries considered the fact that several scenarios were being discussed in Europe already very scary. Remarkably enough they did not do this. We were one of the few countries[to discuss scenarios], together with Germany. We even had a team discussing scenarios, Germany-Netherlands.”

Finance Minister Jeroen Dijsselbloem also admitted that the Dutch government was at one point “preparing for the worst case scenario”, saying:  

 “Heads of government, including the Dutch cabinet, always said: ‘We want to keep the euro together and to keep the euro as a single currency.’ That said, we also looked at what would happen if that didn't succeed”.

Dijsselbloem added that no guilder notes were actually printed, and unlike de Jager, he refused to confirm whether Germany had made similar preparations.

This of course is in line with what we've heard before. The Dutch Central Bank has already admitted it made some contingency plans for a euro exit in 2012, while De Volkskrant has revealed that, in June 2012, Prime Minister Mark Rutte threatened the possibility of the Netherlands exiting the euro. Nevertheless, the detail and the format of the planning highlights just how seriously this was taken.

We can't help but feel it puts the continuous protestations by ECB President Mario Draghi that the single currency is  "irreversible" into a new light...

EU budget row: How much interest will the UK pay if it refuses to cough up?

300% interest - in the EU it is legal

As most of you will know by now, the European Commission has asked the UK to pay an extra £1.7bn surcharge into this year's EU budget - before December 1. David Cameron has said he won't pay anything "near that amount", which in turn has triggered an almighty stand-off with the Commission itself insisting that if the UK fails to pay, it'll be charged interest from day one.

There has been a lot of confusion as to how much interest the UK will be legally liable to pay if it follows through on David Cameron's threat to refuse to pay. The answer as always lies in an EU Regulation as we pointed out here.

So how much is it? The short answer is a lot. Let's say Cameron holds out for one month. He'll then owe the EU £3.5 million in addition to the original £1.7bn surcharge. If he holds out for six months, UK taxpayers are looking at an additional £39.1 million while one year will increase the bill to £89 million - the annual interest will then stand at 5.25% . If the debt is still outstanding after 10 years, the UK would owe an eye watering £5.5bn of interest on a £1.7bn debt - over 300% interest.

In other words, under EU rules, the penal rate is ever increasing.

This is how it is worked out. Firstly the regulation states an annual interest rate of 2% above base rates per year - making a current 2.5%. It's worth keeping in mind that this is much more than the UK pays itself to borrow (in maturities up to 12 years or so, see UK yield curve here). However there is a sting - a rising penal rate of 0.25% for each outstanding month, and the total interest is all paid at the higher rate. This quickly adds up as you can see below:

So if this drags on, it has the potential to really become messy. However, as with everything in the EU there is usually a political solution. The Netherlands and Italy are also upset at receiving demands while the calculations (particularly around the interaction with the UK rebate) and the EU amending budget that goes with it are still up for 'clarification' and/or amendment. As reports today also indicated, it seems likely the UK will be able to do a face saving deal to pay something more than zero and less than £1.7bn - but if not the implications are huge.

EU budget surcharge: how much support does the UK have around Europe?

David Cameron has taken a very tough position on the EU budget surcharge, claiming that he "won't pay" the £1.7bn the Commission has demanded from the UK by December 1 after concluding the UK had been underpaying into the budget relative to the size of its economy. Other countries have also been hit - so how much support does Cameron have around Europe?

These changes which again are due to recalibration in the way the size of economies are calculated (more on this later) are being tagged on to the annual "adjustment" to the EU budget, which is basically normal procedure.

However, this also means that EU leaders will have to agree to an "amending budget" via a decision taken by Qualified Majority Voting. This also means that the UK might have some chance of "blocking" the change if it can get other allies on board.

Below is the voting balance, if all "net losers" are clubbed together under QMV. 

EU member states' voting weights: 93 votes needed for a blocking minority

However, not all the other member states affected have been as firm as Cameron. The Dutch have appeared to soften their stance with Dutch Finance Minister Jeroen Dijsselbloem stating on Dutch TV yesterday that the Netherlands would pay its €642m surcharge "if the facts and figures are correct". Irish Taoiseach Enda Kenny said his Government will pay the additional bill, adding that “we have always abided by the rules”, while Maltese Prime Minister Joseph Muscat claimed that:

“Malta is not surprised that the EU has asked for this top-up… but we are still seeking clarifications on how the [Commission] calculated this figure”. 

Italian Europe Minister Sandro Gozi said that:

“An in-depth examination is needed… we will see whether it will be really necessary to apply the new method to calculate [national] contributions. In any case, this doesn’t imply an immediate payment.”

So hardly an endorsement of the UK's tough position, but there may be enough support for a delay or some alternative arrangement such as paying the surcharges in installments. Meanwhile, Cameron did at least get some support from an unexpected source... France (which has received a €1bn rebate). The Telegraph cites former French Europe Minister Pierre Lellouche as saying that:

"I think it's ludicrous to actually go and punish the one country that has suffered the reform. The results are showing up now - the unemployment rate has gone down to half what it is in France. The growth rate is four times what it is in France - and we go and punish the British? It's madness". 

Sadly for Cameron, Lellouche won't have a vote.

What happens when four EU leaders get into a rowing boat?

Swedish PM Fredrik Reinfeldt is today hosting David Cameron, Angela Merkel and Dutch PM Mark Rutte, in Harpsund, Sweden - a recreational estate for Swedish PMs throughout the years. The summit apparently features a trip on the "Harpsundsekan" - a worryingly small rowing boat. The tradition involves various world leaders holding on for life and limb in the boat, and was introduced by Tage Erlander, Swedish PM in the 1960s. Nikita Krushchev, Willy Brandt and Kofi Annan have all been in the boat.

Merkel has already had the dubious honour of going on a trip with Reinfeldt in 2008. It should be said that getting four people into any rowing boat is actually a bit of a mission. Given that Rutte is 6'4, Reinfeldt 6'2 and Cameron not a small guy either, this will require some focus.

So what will be discussed?

Well, the summit was decided ages ago and pre-dates the ongoing Juncker row. Initially, the idea was that the leaders of the EU's most competitive economies were going to meet in order to hammer out the priorities for the next European Commission in particular and the EU in general, with a focus on the jobs and growth agenda.

Reinfeldt has said that there won't be any "discussions about personalities" at the summit, but no one really believes that. It'll probably be a mixture of the two. If Cameron can get a better idea of whether Merkel can find a away out of the corner the SPD has pushed her into (a very rare occasion) over Juncker, as well as some reasonably concrete commitments on EU reform, linked to the mandate for the next Commission, he should be happy.

Is it wishful thinking to see this as the "EU reform quad"?  If they could speak with one voice, it would no doubt be a very powerful group which would be hard to ignore. Together with Finland, they are the only EU countries on the World Economic Forum's list of the top 10 most competitive countries in the world. They also account for 41% of the gross contributions to the EU budget (much more if we count net).

The four leaders formed a formidable alliance in February, achieving the first ever cut to the EU's long-term budget. Sweden's Reinfeldt has been very helpful to Cameron on numerous occasions, including shooting down a bunch of proposals for financial regulations. In those EU budget talks, Stockholm deliberately positioned itself further out than London so as not to isolate the Brits. Reinfeldt was also quite helpful after Cameron's "Bloomberg speech" (in contrast to the Swedish Foreign Minister, Carl Bildt). If Juncker is stopped, it'll be in no small part due to Reinfeldt's willingness to stick his head over the parapet, giving Cameron much needed political cover. However, Reinfeldt will probably lose the Swedish elections in September, meaning Cameron will have to negotiate with a centre-left coalition ahead of the potential 2017 referendum.

Likewise, Rutte was key in the EU budget talks and the Dutch have very much emerged as the thought leaders on EU reform, not least when it comes to the role of national parliaments in the EU. In fact, the Hague has been more vocal on many occasions than London itself. Encouragingly, EU reformers in the Netherlands did better than expected in the European elections in May.

As for Merkel - well, we've written endlessly on the need for Germany to row behind EU reform. As the debate over Juncker shows, the country is currently embroiled in a hugely complex debate about how Europe should be governed, and what role Germany should play within it. The Juncker episode was Cameron's first real encounter with Germany's grand coalition politics. It won't be easy.

What's clear is that if Cameron is to achieve the sweeping change needed for the UK to stay in the EU, these four countries will have to be able to agree a common position.

Dutch reformers hold ground as Wilders falters

We've already blogged about the Dutch #EP2014 exit poll but we thought we'd also break down the projected result according to the classifications we used in our recent briefing which forecast the composition of the new parliament. Rather than using the arbitrary and artificial EP political groups (which tell you little about what the parties actually believe), we classified the parties in three blocs - status quo/more integration, critical reformers, and the malcontents' block (see here for a detailed explanation of these classifications).

Here is how the projected Dutch result looks:

While we predicted that overall, there is a risk that the malcontents' bloc and the status quo/more integration parties could crowd out the critical reformers, the Netherlands could slightly buck this trend with the critical reformist parties - Dutch PM Mark Rutte's VVD party and the ChristianUnion - increasing their vote share.

This is encouraging although sadly it looks unlikely to be replicated across the EU given that Dutch politics is particularly fertile for reform minded parties.

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.

Rutte shows Clegg how its done on EU reform

It's good to hear a Dutch speaking liberal party leader forcefully expressing the case for EU reform. Sadly, as we noted earlier, it certainly wasn't Nick Clegg.  

In fact it was the Dutch Prime Minister Mark Rutte, who once again today reaffirmed his credentials as a key proponent of EU reform with a speech to the FDP in Berlin.

As we have also noted before, the Netherlands (both the country and its government) is becoming a bit of a breeding and testing ground for ideas on EU reform. In his speech Rutte said:

"A lot of people in Europe are angry at the EU. Angry at those who sat at the controls in Brussels during recent years. Our common project of peace becomes, if we don't recognise this on time, a project of discontent."

"We won't restore the future and the belief in a functioning Europe with European elections or with European ‘spitzenkandidaten’. The ball is now in the court of national parliaments. Their legitimacy is greater than that of the European Parliament. So they should deal at an earlier stage and also more intensely with decision making in and from Brussels"

"European where necessary, national where possible. Tasks such as healthcare, education and taxation really are things which are for the Netherlands to decide, I think."

"That's why the European Commission should be given four core tasks: to strengthen the single market, to stimulate international trade, to more strictly apply agreements made and to only regulate in Brussels what really must be dealt with at the European level."

"All too often agreements regarding the budget or the democratic rule of law haven't been respected...Europe is more and more being associated with an anonymous, formal and impersonal layer of government where national sovereignty is being replaced by normative rules ‘from Brussels’".

Lots of overlap (at least in tone) with what Chancellor George Osborne and German Finance Minister Wolfgang Schäuble laid out in the FT last week.

There was however one of Rutte's comments lacked credibility:

"Unemployment is the biggest problem of our time. I see it in my circle of friends.  You probably do too..."

Admittedly we’re not familiar with the Dutch Prime Minister's circle of friends but we find it hard to believe many of them are struggling for work...Nevertheless, Clegg could learn a thing or two.

Is an EU referendum back on the Dutch agenda?

Thierry Baudet

This week, the Dutch Parliament held a debate on whether it is necessary to hold a referendum on transferring new powers to the European Union. The debate was triggered by a campaign, called "Citizen's forum - EU" which managed to gather over 63,000 signatures, above the threshold needed (40,000 signatures necessary) to force it on to the agenda of the Lower House.

The campaign demands:

1. An end to the creeping transfer of powers to the EU.

2.  If powers are transferred to the EU, a referendum must be held so the Dutch population can have a say on this transfer of powers.

Two of the campaigners, Dutch academic Thierry Baudet (photo), and economist Ewald Engelen said in a speech to MPs: 

"The Lower House is about to lose its core competences...You won’t be able to decide policy any more. You abolish yourself. But you don’t have the right at all to do this. Because the sovereignty is with us, the people. You are merely the representatives of the Dutch people."

As De Volkskrant reported, the reception was more positive than expected. It was not only the "usual suspects", like Geert Wilders' PVV, the Socialist Party and the Party for the Animals that welcomed the idea. These parties have expressed support for a Dutch-style "referendum lock" in the past,

More interestingly, the social-democrat PvdAalso  came out in support, with its EU-spokeswoman Marit Maij MP, saying: "the PvdA wants to proceed quickly with a possible referendum" - albeit with a lot of qualifications,The party is only in favour of a non-binding referendum, and wants it to be held according to new rules currently being negotiated in the Dutch Senate, which would make it necessary to first obtain 300,000 signatures, a high threshold in the Netherlands (but something which the EU referendum campaigners are considering).

The Christian Union, which sits with the Tories in the ECR Group in Brussels, support the idea, with its spokesman, Gert-Jan Segers MP, saying that "by means of exception we accept an advisory referendum".

Dutch PM Mark Rutte's governing VVD reiterated its support for strengthening national parliaments (something which the PvdA also wants), but is against referendums as a tool of policy.

Meanwhile, a new poll, by prominent pollster Maurice de Hond, reveals that 67% of Dutch citizens want a referendum in the event of new powers be transferred from the Netherlands to the EU:

Ja = Yes, Nee = No

This is against a tricky backdrop: current opinion polls show that Geert Wilders' PVV would have almost as many seats the governing VVD and PvdA combined, if an election was held today (though that goes far beyond Europe as an issue). With the Dutch government's campaign to set limits on the powers of the next European Commission shows, the European election campaign could prove interesting in the Netherlands.

It's not just the UK that's losing patience with the Commission over access to welfare

Viviane Reding

In a few weeks time, the transitional restrictions on citizens from Bulgaria and Romania gaining full access to all EU member states' labour markets will expire. As we have covered in our press summaries and on our blog, it's not just in the UK where this has led to political upheaval.

Last week, European Commissioner Viviane Reding finally responded to concerns expressed by the UK, Germany, Austria, and the Netherlands back in April about benefit tourism in the EU. Although she was right when saying that “free movement is a right to free circulation; it is not a right to migrate in member states' social security systems”, her actual policy proposals aren't terribly convincing.

In order to crack down on the abuse, the Commission proposes:

- a handbook to help local authorities spot sham marriages as well as guidelines on habitual residency, which would determine the extent to which a person is entitled to draw benefits in a host EU country (in other words, more intervention into national policy)

- helping local authorities understand EU free movement rules

- topping up the European Social Fund

That throwing more money at the problem isn't going to improve things shouldn't need to be said, especially given the sorrow state of the EU budget. The UK, is according to EU officials, "very disappointed with the scale and ambition", while German Interior Minister Hans-Peter Friedrich reacted by saying, "To launch discussions or to develop brochures won't suffice".


Hans-Peter Friedrich

What Germany will do next most likely depends on how smoothly the "second accession" of Romania and Bulgaria in January goes, but in any case the German coalition deal doesn't leave any room for doubt that it is determined to do something about it if problems arise.

Friedrich has threatened to work with other governments “outside the structures of the EU” if the Commission doesn’t respond adequately to concerns about welfare tourism - another signal that Germany is ready to resort to intergovernmentalism as it has signalled it will do with the banking union, at least for now.

Dutch Interior Minister Lodewijk Asscher, who has been making many similar noises to the UK and Germany, thinks that more Romanians and Bulgarians will come to the Netherlands than has been predicted. He said, "The official predictions are low, but earlier predictions weren't correct either."

He added that he would have liked to extend restrictions for Romania and Bulgaria, but "if you have an agreement with other countries, you should stick to it". However, local authorities in the Dutch cities of Rotterdam and The Hague are reportedly ready to defy EU law by denying tax or social security numbers to Romanians or Bulgarians who fail to pass housing and employment checks.

Meanwhile, today, UK Work and Pensions Secretary Iain Duncan Smith has announced that new migrants will be asked to prove that their English language skills will be no barrier to them finding employment in Britain, under plans to strengthen the UK’s Habitual Residence/Right to Reside Test. The Dutch coalition agreement already states that "Individuals who cannot speak Dutch will not receive social assistance benefit. This principle will be applied consistently: to EU nationals, third-country nationals and Dutch nationals."

The European Commission's run-ins with the UK, over the 'right to reside test', and Germany, following which Friedrich accused Commissioner Reding of "ignorance", highlight the level animosity its approach has caused.

The EU Treaty doesn't need to be re-written to deal with this issue. We've made a few suggestions here that the Commission would do well to engage with it if it really cares about maintaining support for free movement in Europe.

The Dutch are emerging as Europe's thought leaders on reform

The Dutch are quickly becoming Europe's thought leaders on EU reform. The Dutch government's "subsidiarity review" contained numerous interesting ideas for EU reform, the Dutch lower house, Tweede Kamer recently published a paper outlining key proposals for how to strengthen the role of national parliaments. And today, the Dutch foreign minister, Frans Timmermans, used a piece in the FT to set out some new ideas for reform.

Timmermans wraps his ideas in quite friendly language but there are some pretty sharp lines in there.

He says that "During the crisis the European Commission...was relegated to the sidelines and never regained the initiative", adding

"That has not stopped its machine from producing directives and regulations, creating a regulatory burden that bears down on businesses and people." 

He notes the European Parliament

"has been fully empowered by the Treaty of Lisbon. It has an important role to play, but at every turn it demands more resources for more Europe while it attracts ever lower electoral turnouts."

His key ideas include:

• A European Governance Manifesto for the next five years with the member states, laying down what the EU should and should not do. "This will mean more Europe in some areas, and less in others."
• "Create a smaller, reformed commission with a president and vice-presidents heading a limited number of policy clusters. The vice-presidents would have the sole authority to initiate legislation."
• Encouraging "national parliaments to bring Europe back home where it belongs." He throws his weight behind a "red card" for national parliaments - if one-third of them object, a Commission proposal is history. As you know, we love this idea. 

However, he says he doesn't want treaty changes and, interestingly, claims the ideas he put forth can be achieved without such changes. We assume that, for the red card, this would effectively mean a political agreement to the effect that the current yellow card means a red card in practice.

Timmermans concludes:

"In this we do not stand alone. Other partners have put forward proposals that share a similar thrust: a more focused and balanced EU with less burdensome regulation. Let us seize this momentum and start with an in-depth debate on change and reform. For this is our chance to shape “our” Europe together."

'Green card', 'Late card': Dutch parliament ups the ante in EU democracy debate

We already knew that the Dutch parliament is a legislature that takes 'subsidiarity' seriously. But now it has really come out swinging.

In today's press summary, we reported on a recently published position paper on the role of national parliaments in the EU from the Tweede Kamer - the lower house of the Dutch parliament - and it includes some seriously good ideas to increase national parliaments' power over EU decisions (the report available in English here, though the translation is a bit awkward).

Amongst plenty of good ideas, building on the current 'yellow card' for national parliaments, there are two key proposals that would substantially bolster the role of national parliaments:

• A 'Green card': This new mechanism would allow national parliaments to propose new policies to the European Commission, including the amendment or repeal of existing EU laws. This would make national parliaments 'agenda-setters' in the EU decision-making process, as opposed to the current situation in which they can only react to proposals originating in Brussels. At present, only the Commission can make proposals to scrap EU laws.

• The 'Late card': This would give national parliaments the right to object to proposals at the end of negotiations between the European Commission, the Council of Ministers and MEPs. At the moment, national parliaments can only examine a proposal when the Commission has tabled it. However, the final product can often look completely different. For example, the bankers' bonus cap was introduced by MEPs and wasn't in the version of the proposal on capital requirements national parliaments received from the European Commission.

Dutch MPs also want to beef up the existing 'yellow card' system - whereby a minimum of one third of national parliaments can force the European Commission to reconsider a proposal if they think the proposal violates the subsidiarity principle. Since the Lisbon Treaty introduced the yellow card, it has only been triggered twice - most recently this week.

The Tweede Kamer proposes three ways to boost the yellow card - all of which are excellent:

• Extend the period during which parliaments can object - at the moment national parliaments only have eight weeks from the date a proposal is published to submit their objections.

• Broadening the grounds upon which parliaments can object to EU laws to proportionality and the legal base of the proposal (the latter is incredibly important). 

• Lowering the threshold for the number of parliaments required to activate the yellow card - they don't provide the 'magic number', but the Dutch report complains that it is always the same group of parliaments that raise objections.

The report also tries to address the important question of how to get national MPs to work more closely together and so act as a counterweight to the Commission's and the European Parliament's centralising tendencies.

It doesn't, however, propose  a new 'red card' system to empower national parliaments to veto unwanted EU proposals - which we have long argued for. However, on the whole, this is a massively welcome contribution to the debate.

We look forward to the UK Parliament throwing its full weight behind these ideas.

EU 'welfare tourism' is not a big problem but that doesn't mean existing safeguards should be removed

The Sunday Telegraph's front page story about a study commissioned by the European Commission into EU migrants and access to welfare has caused a bit of a stir.

As we have pointed out several times before, we support the principle of free movement as it has the potential to boost growth and competitiveness. In addition, the ability for companies based in the UK to easily draw on a wide talent pool is seen by many firms as an advantage of EU membership. However, there is no doubt that EU migration also throws up a huge number of political challenges, such as a substantial loss of national control over who can enter the country, increased competition in low-skilled sectors of the labour market, and increased demand for public services and infrastructure.

Therefore, if public confidence is not to be lost, free movement needs to be managed with extreme care and tempered with other policies including the right of national governments to protect their welfare systems from abuse.

In recent months, the risk of 'welfare tourism' is something that has been highlighted by both national governments and the media, not just in the UK but also recently in Germany, Austria and the Netherlands. Several governments have complained that the rules need to be tightened. EU Commissioner László Andor has responded by accusing the UK of pandering to xenophobia and taking the Government to court over the ‘right to reside test’ it applies to anyone seeking to access benefits. Both sides have been talking past each other, and the result is a focus on 'welfare tourism' that is almost certainly disproportionate to the problem it poses.

The available evidence and academic research overwhelmingly suggests that EU migrants have come to the UK in search of work and not to claim welfare benefits. For example, a 2010 study found that migrants from the new EU member states are “59% less likely than natives to receive state benefits or tax credits and 57% less likely to live in social housing.” The study concluded that in the four fiscal years after 2004, these migrants made a positive contribution to the UK’s public finances. In 2008, the ONS estimated that the employment rate of these migrants was over 80%.

Nevertheless, the report cited by the Sunday Telegraph did have some important findings for the current debate between national governments and the European Commission about EU migrants and access to welfare. Much of the focus has been on the study's finding that over 600,000 “non-active” EU migrants are living in Britain. Now this doesn't actually tell us that much about the impact on welfare. For example, these people could be family members of EU migrants working in the UK, pensioners and so on. The fact the UK Government does not currently keep statistics on those who claim benefits means we do not know exactly who is receiving them or how much this costs.

However, what is relevant in this context is that the report found that the "number of job-seeking EU migrants increased by 73 per cent between 2008 and 2011" and that the number of EU migrants coming to the UK "without a job awaiting them has been increasing".

At the moment, it is unlikely that this is having a major impact on the UK's welfare system, but precisely because the UK applies its 'right to reside' test to those claiming benefits (this is an important safeguard because the UK's universalist welfare system is particularly hard to police). But logic would suggest that weakening these rules would create the wrong incentives by allowing access to benefits such as jobseekers allowance more or less from day one. It would also further undermine UK public confidence in the principle of free movement altogether. However, this is precisely what the European Commission's legal challenge to the UK's right to reside test would do, if successful. This is why the UK and other member states are so concerned.

So, in summary, no there is not a welfare tourism crisis at present, but this is no reason for the European Commission to seek to remove the UK's welfare safeguards. It is the European Commission that is moving the goalposts here.

Are the Irish more optimistic about an austerity cure for Europe than the Germans?

A new Gallup poll for Debating Europe has asked peple all over the EU, except Luxembourg for some reason, about their views on austerity.

Now, of course, 'austerity' is rather a nebulous concept, particularly as different member states have had different experiences, while deficit cutting and structural reform all fall under the same term. Nevertheless, there are some interesting results.

The table above (click to enlarge) shows that across Europe as a whole, 51% said austerity is not working, while 34% said it is working but will take time, and 5% were sure it is already working.

Clearly, there are differences across the member states. No surprises that Greeks (80%) and Cypriots (64%) are the most sceptical about the merits of austerity. Portugal and Spain are also towards the right hand, anti-austerity side of the scale.

But look at Ireland. According to this poll, more Irish respondents (53%) think that austerity is working than Germans (42%), Finns (40%), or Dutch (39%)  - whose governments are considered to be the eurozone's most hawkish.

It is also striking that people from the new member states in central and eastern Europe, albeit outside the eurozone, have the most trust in austerity policies. The Baltics (Latvia, Lithuania and Estonia) in particular were subjected to significant austerity in the aftermath of the financial crisis yet many in these countries still support such an approach.

It is not clear what exlpains Irish optimism about austerity. It is likely to be a mixture of the fact that, so far, the Irish economy has made relatively good progress (although fears about the banks and property market still remain) and a general cultural disposition - as we noted in a paper last year, of all the struggling eurozone countries Ireland has the economic and social setup and history most likely to fit with the austerity approach.

But taken as a whole, this poll highlights the political and social scale of the challenge the eurozone faces with its current policy approach, particularly among the populations of Southern Europe.

Dutch government: "Time of ‘ever closer union’ in every possible area is behind us”

Dutch PM Mark Rutte (VVD) and Foreign Minister Frans
Timmermans (PVdA) discussing what the EU should
and should not be doing?

For anyone involved in the EU reform debate, this is a must-read. The Dutch government has today published its “subsidiarity review” – an assessment of what the EU should and shouldn't be involved in. Again, we're first to the punch in publishing an English version of the document on our blog.

This is likely to be welcomed with open arms in Whitehall – and should be studied carefully by MPs in Westminster. Though not all good news for David Cameron’s renegotiation strategy – the Dutch have explicitly said they don’t want EU treaty change for example – this is clearly a major step towards a reformed Europe.

First, it shows that discontent with the EU status quo is not simply a UK phenomenon – or a Tory problem as some commentators would have us believe. Secondly, the ideas the Dutch are putting forward are in themselves pertinent, and would go quite some way in achieving a better functioning, more democratic and better focused EU. Finally – and this is where it gets really good news for Cameron - countries like Sweden. Denmark and Germany are far more likely to be persuaded down the reform path if the Dutch are prepared to take a lead with the UK.

So what does the document say? Well, it sets out nine broad principles and 54 specific recommendations, relating to what the EU should and shouldn't do. Many of the proposals have also been championed by Open Europe in various forms (it’s worth re-visiting our “European localism” paper). Most significantly, in the press release, the Dutch government proclaims that the “time of an ‘ever closer union’ in every possible policy area is behind us”. This is not going to go down well in certain corners in Brussels.

The guiding principle is described as “European where necessary, national where possible”, and the tone of the entire document chimes well with Cameron’s EU speech, calling for a “European Union that is a more modest, more sober and at the same time more effective.” Interestingly, it notes that the Dutch EU Presidency in the first half of 2016 “could play a role in promoting such an agenda” – this could coincide with the beginning of the EU referendum campaign in the UK should Cameron be in power.

The 9 general principles include:

• Where the European Court of Justice interprets EU law in a way that EU legislators had not provided for and/or did not intend, then this should be possible to address by amending the EU rules on which the Court based its ruling (this could well be a key plank in Cameron’s renegotiation strategy. An example of where the ECJ ruled in precisely such a way is the Working Time Directive, where the ECJ's interpretation of rules governing on-call time and rest periods for doctors has caused havoc in the NHS);
• Every EU intervention needs to be motivated by a clear legal basis in the EU Treaties, and the Commission shouldn't be making proposals on a legal basis that is tenuous or insecure. The Dutch Government explicitly mentions the English term “creeping competences” (this is very similar to what the UK government wants); 
• EU legislation should focus on main points to achieve shared goals rather than to prescribe in detail how those goals should be achieved (again echoes Cameron’s speech);
• When there are widely shared objections to EU legislation, there should be a mechanism to stop the Commission taking any further initiative in that area – this is a bid to stop new EU laws in areas where national governments don’t want them.

As regards the 54 specific recommendations, they mention individual measures where EU power should be scaled back. There are many overlaps with UK ideas. These include:

• Halting the further harmonisation of social security systems. The document says: “It is necessary to combat the negative impact of labour migration, including the abuse of social security systems” – an issue UK Home Secretary Theresa May has been keen to highlight; 
• Limiting the EU budget - the Dutch hint at scrapping the EU's Globalisation Adjustment Fund and structural funds outside of the poorest regions in the poorest countries on the basis that these do not demonstrate added value (the latter is a proposal Open Europe has championed and which the previous Labour government had pushed for. It’s also gaining traction amongst Tory backbenchers) 
• No expansion of agencies’ remits and no increases in their budgets – Cameron was very critical of EU quangos in his EU speech;
• Working conditions, which should only be regulated in broad outline (health and safety and working time, for example);
• No EU regulation of media pluralism; 
• A two-year freeze in salaries of EU officials;
• Sunset clauses should be incorporated in EU proposals (an old UK demand);
• The Financial Transaction Tax is heavily criticised, because "it has been designed in such a way that even parties outside the FTT area, like Dutch pension funds, will be taxed when they trade financial instruments issued in FTT countries";
• CO2 emissions should be dealt with at the global level rather than via EU legislation.  

There are also some further detailed examples of where the EU has gone too far and where powers should be rolled back. For example, the suggestion is made that flood risk management should only be harmonised at European level for truly trans-boundary water courses. The report also recommends the phasing out of the EU programmes for school milk and school fruit, and heavily criticises the recent proposal to ban refillable olive oil jugs from restaurant (which was eventually dropped by the European Commission).

However, the document also sets out clear limits to what the Dutch government says it is prepared to consider and it does not does call for entire policy areas to be returned to national governments. The Dutch government also says it is “not interested in treaty change or opt-outs” for itself.

Nonetheless, the fact that one of the EU’s founding members has stated that "the time of ever closer union is behind us" is clearly a major development.

A pan-European desire to clarify rules on free movement and access to welfare?

To some, the Commission's decision, two weeks ago, to take the UK to the ECJ over its rules on EU migrants' access to welfare was further evidence of an 'isolated' UK. However, there are a whole host of other countries concerned and eager to discuss the issue.

At last week’s meeting of EU Home Affairs Ministers, it was agreed to look at the concerns raised by the UK, Austria, Germany and the Netherlands on this very issue.

But it is not simply the wealthier member states (that are the main destinations for intra-EU migration) that want this deeply sensitive debate around access to welfare to be clarified. Yesterday, Dutch Foreign Minister Frank Timmermans and his Polish counterpart Radosław Sikorski, discussed this very issue. Here is what Timmermans said on the matter:

“The Netherlands strongly believes that the free movement of people is one of the fundamental matters of the EU…We are not talking about restricting this freedom but we believe that a discussion is necessary on whether this freedom should entail full access to the social security systems of member states.” 

This is what Sikorski said during his subsequent speech at Leiden University:

“I tell you frankly, we will veto any attempt to compromise on one of these four freedoms of the single market. But this not to say that the member states should not be able to regulate their social provisions. You are a richer country then we are, so you have more generous unemployment benefits... if you have gaps in your social security system, you are free to plug them”.

Both countries (the host and sending state) have an interest in ensuring that the rules governing access to welfare are clear and transparent and not open to abuse. As we've argued, this could help to restore public confidence in free movement.

And all the more reason for the Commission to sit up and listen to national governments rather than taking them to court!

Testing the EU's budget discipline

The Netherlands, considered one of the eurozone's fiscal hawks, has become the latest country to test the EU's new instruments for imposing budget discipline (now composed of the Fiscal Compact, Six-pack, Two-pack and European Semester).

The Dutch government yesterday agreed to postpone €4.3 billion in budget cuts for 2014 in a deal with social partners (trade unions, employers groups etc.), counting on economic growth to keep the budget deficit below the EU-mandated ceiling next year. In the autumn, it will reconsider whether to implement the cuts.

The measures for 2014, now postponed, had been promised to EU Economic and Monetary Affairs Commissioner Olli Rehn only last month in return for leniency regarding the Dutch government's 3.3% budget deficit in 2013, which is in breach of EU targets. The country has been in the EU's "excessive deficit procedure" since 2009, and in 2012 the government collapsed over the failure to stick within EU budget limits.

Predictions for the 2014 budget deficit range from 3.4% (The Dutch Bureau for Economic Policy Analysis CPB) to 3.6% (Commission). If the economic growth the Dutch government is hoping for doesn't materialise, the 2014 deficit threatens to be even bigger. The European Commission will reportedly only respond when it gets to see the full package of measures.

Earlier this week, Finance Minister Jeroen Dijsselbloem vowed to respect the EU's 3% budget deficit rule in 2014, so this is being billed by some in the Dutch press as a U-turn by Prime Minister Mark Rutte. Today's headline of the largest Dutch daily, De Telegraaf, reads: "Rutte backs down" (picture) while the newspaper also complains that "important labour market reforms have been watered down and postponed to 2016."

The Dutch economy is currently going through a large-scale correction after a housing boom went bust, partly as a result of the Dutch government's reduction of generous fiscal incentives to buy a house. Last year, Moody's expressed doubts about whether the Netherlands could keep its triple-A rating.

And, in the background, is Geert Wilders' anti-EU PVV party, which is again polling as the country's most popular political party. 

You know it's bad when even a former EU commissioner calls for a eurozone break-up

Former Dutch Internal Market Commissioner Frits Bolkesten is best known for having authored the liberalising EU Services Directive (in its original form before some member states and the EP watered it down significantly) but from today he has another claim to fame - becoming the first former European Commissioner to publicly back a breakup of the euro. Here is what he said to Dutch paper Algemeen Dagblad:

"The Netherlands has to exit the euro as quickly as possible... The monetary union has totally failed. The euro turned out to be a sleeping pill which made Europe doze off instead of thinking about our competitiveness... Let’s stop with the euro and instead strengthen the Single Market... We don't need the euro for that."

As an alternative, Bolkestein - who, it should be said, has long been critical of the current direction of the EU - proposed a currency union formed of economically strong countries, a so-called "Triple A euro". Bolkestein also had some tough words for the European Parliament, arguing that:

"It is not representative anymore for Dutch and European citizens. It lives out a federal fantasy which is no longer sustainable."

Is the Netherlands heading for a referendum on Europe?

In 2005, Dutch voters rejected the European Constitution

A Dutch citizens' campaign to make it mandatory to hold a referendum on any new transfer of powers to the EU - reminiscent of the UK's referendum lock - has mustered 40,000 signatures, the threshold needed to force Dutch MP's to debate the issue and decide whether they agree with the proposal or not.

A "Parliamentary Commission" still needs to decide whether the initiative meets the conditions for triggering a parliamentary debate. Even if it does, only the Socialist Party, Geert Wilders' populist Party for Freedom and a few smaller parties support the idea - so there's no majority for it in the Dutch parliament. Last week, the centre-right VVD - which governs alongside the Labour Party -  labelled the initiative "unhelpful".

Is this the end of it then? Not quite. The next threshold is 300,000 signatures - which could trigger a non-binding referendum, subject to a new law which still needs to be adopted by the Dutch Senate. The campaigners are already looking ahead to that. There are lots of hurdles to actually get to the stage where a non-binding referendum on whether to adopt a "referendum lock" can be held - let alone adopted - but there's definitely something stirring underneath the surface.

Diederik Samsom, the leader of the Labour Party, said last weekend that changes to EU treaties should indeed require referenda (which is why the Dutch government wants to avoid such changes for now). According to a new poll, 64% of Dutch voters want a referendum on any new transfers of power to the EU (not surprising). However, more surprisingly, 65% of voters actually oppose such transfers of power altogether. With this in mind, gaining 300,000 signatures in a country with almost 17 million citizens does not seem impossible.

As the Dutch government argued in its "State of the EU" report, "The EU's democratic deficit is [the Union's] Achilles heel." The concerns brewing under the surface in the Netherlands show that this shortcoming will need to be addressed sooner rather than later.

Italian elections: And now for the warnings from around Europe - stay the course, or else...

Responses to the extraordinary results of the Italian elections have started to come in from around the rest of Europe, the most interesting of which we include below. Predictably, an instant raft of warnings has come out  from Northern Europe and Brussels.

Kicking off is German Foreign Minister Guido Westerwelle who argued that:

“It is necessary for Italy – but also because Italy is so important – for the whole of Europe for a new strong and capable government to be formed as quickly as possible. The politically responsible people in Rome recognise that Italy needs a continuation of a policy of reform, of consolidation, one which is able to secure the confidence of the citizens and the markets.” 

If only the the "responsible people in Rome" were in charge of selecting a new PM. German Economy Minister Philipp Rösler also emphasised the need to stay the course, irrespective of government:

“I could have imagined a better outcome for the reformers in Italy. There is however no alternative to the previously adopted path of structural reforms.” 

As did the CDU/CSU’s parliamentary faction leader Michael Grosse-Brömer:

“The reform path of Monti has to be continued consequently.”

Not everyone in Germany agrees though, with SPD MP Klaus Barthel (very much on the left of the party) telling Handelsblatt that:

“Mrs Merkel delivered enough substance to Berlusconi’s nationalist slogans. Her advances to the teutons [i.e. traditional Germanic values] bring perhaps one or two votes [at home] but come back negatively a million times over from the neighbours.” 

Dutch Finance Minister and eurogroup head Jeroen Dijsselbloem told television broadcaster RTL-Z that:

"Having a stable government in Italy is important for Europe. In that respect, the outcome does not make us cheerful… I assume that, no matter what a new government in Italy looks like, it will live up to the agreements that have been made".

Over in Austria, Chancellor Werner Faymann gave a pretty cautious response:

“The euro remains stable even when in some countries it is not clear yet who will build the government.”

Meanwhile, over in France Finance Minister Pierre Moscovici said that while the result "creates problems", it would not undermine the single currency, while the Minister for Industrial Renewal, Arnaud Montebourg, claimed the result showed that "Italians do not agree with market imposed policies".

Belgian Foreign Minister Didier Reynders reacted as saying that:

"I fear for a deadlock during a certain period… If it now comes to a standstill this can be very dangerous, also for financial markets".

He should know a thing or two about political deadlocks...

Meanwhile, the European Commission (whose favoured candidate got a bit of a drubbing), also issued a hilariously contradictory response, claiming that "We clearly hear the message of concern expressed by Italian citizens”, while also arguing that Monti's reform and fiscal-consolidation agenda were necessary to "underpin everybody's confidence" in the Italian economy, and the Commission "expects compliance".

Right...

Luxembourg's Foreign Minister Jean Asselborn was clearly unhappy, arguing that:

"This is a scenario that no one had wished for... This is not just bad for Italy, but also a nightmare for Europe." 

Spanish Finance Minister Jose Manuel Garcia-Margallo was also alarmist, warning that there was "extreme concern" about the financial consequences, adding that "This is a jump to nowhere with positive consequences for nobody”.

Finally, the most forthright response has to go to Hans van Baalen, leader of Dutch Prime Minister Mark Rutte's VVD party in the European Parliament, who argued that:

“Italians must elect who they want to elect and must bear the consequences when they elect clowns."

From Amsterdam to Brussels with love?

Events may have conspired to prevent David Cameron from delivering his Europe speech in Amsterdam as originally planned but it has still managed to create political waves in the Netherlands.

It is rare for statements from foreign politicians to be the focus of parliamentary debates but last night the Dutch Parliament held a debate specifically on Cameron's speech. Halbe Zijlstra, the parliamentary faction leader of PM Mark Rutte’s VVD party argued that “Cameron’s speech is a more extensive version of the European chapter of the Dutch coalition agreement.”

The relevant section of the Dutch coalition agreement reads:

"The Netherlands asks the European Commission to inventarise, on the basis of subsidiarity, which policy areas can be transferred to national authorities and will put forward such proposals itself."

Indeed Rutte has himself quipped that what will take Cameron two years (i.e. the FCO's Balance of Competencies Review), will take the Dutch Cabinet 6-7 months. Last week, in a joint letter together with Finance Minister Jeroen Dijsselbloem, Rutte also reiterated the VVD/PvdA coalition’s desire for member states to have the right to opt out of individual EU policies, such as the Schengen zone and the eurozone, or from the EU altogether.

Yesterday, in an effort to apply pressure on the coalition in this area, Sybrand van Haersma Buma, the leader of the centrist Christian Democratic Party (currently in opposition but historically a party of government), claimed that “Europe is indulging too much in all kinds of over-detailed rules”, and put forward his party’s own detailed list of areas in which Brussels should not be involved:

- Nitrates Directive
- Air Quality Directive
- European Soil Framework Directive
- Home Energy Labels
- Freedom of the press
- Occupational Pensions Funds Directive
- Income limit for social housing rent
- Family reunification for immigrants (point system)
- Internet cookies regulations
- Public procurement of small building projects
- Maternity leave
- Ministry of Transport tests
- Female quotas on EU company boards

This is going much further than Cameron, who did not present a ‘shopping list', only mentioning general policy areas such as social and employment law and environmental legislation. Interestingly though, many of the above fall into those two categories. Specifically addressing Cameron's position, Buma said:

"He's right…let's go back to what Europe was originally all about...What I want is for several countries to decide together that [certain] matters can better be regulated domestically. A Europe à la carte isn't a good idea…We must get rid of the idea that if you want less Europe, it means you're against Europe from the start."

This is set to increase the pressure on the VVD-PvdA coalition which will try to agree in the coming months on their own list of policy areas which should be dealt with nationally, and which the government can use as the basis for any negotiations in Brussels. PvdA MP Michiel Servaes reacted by saying that Buma was only “following the line set out earlier by the cabinet", but that Buma's list was "a big leap" which ought to be carefully considered and discussed with other countries.

Meanwhile, on his Elsevier blog, Dutch Professor Afshin Ellian, a well-known political commentator, described Cameron's stance as "a third, more pragmatic way between europhobia and europhilia", while in a letter to NRC Handelsblad, nine prominent Dutch professors and academics argued that in order to bridge the gap between EU centralisation and EU citizens, the Netherlands should also have a referendum on its future in the EU, an option supported by 52% of Dutch citizens according to a recent opinion poll.

As we suggested in our analysis ahead of last September’s Dutch elections, in the medium to long term the Netherlands “could well be on the path to becoming a more assertive – and far more complicated – EU partner.”