The EU's possible new sanctions on Russia: What 'burden sharing'?

As we noted in our previous blog on the potential 'Stage 3' of EU sanctions on Russia, the options considered by the European Commission and the EEAS seem heavily focused on financial markets, raising the question of whether London would have to shoulder too much of the burden.

The document notes:

Between 2004 and 2012, a total of USD 48.4 billion was raised through IPOs in the EU by companies incorporated in Russia. Out of those, USD 16.4 billion was issued by state-owned financial institutions.

In 2013, 47% of the bonds issued by Russian public financial institutions were issued in the EU's financial markets (€7.5bn out of a total of €15.8bn).

However, what the memo does not say is that all those deals took place in London - as data from the London Stock Exchange show quite clearly.

As the graph above shows, VTB (twice) and Sberbank have raised $16.4bn from IPOs (and follow on issuance) in London. This seems to correspond (or even outstrip) the figure cited in the EU document. Furthermore, the total value of IPOs from Russian firms also comes from London, since it stands at $48.96bn (between 2004 and 2012).

The spread of debt securities seems a bit wider, and data are harder to find. However, it is a good bet that quite a few were issued or at least cross-listed in London.

Ultimately, this is not 'make-or-break' for London. The fees from debt and/or equity issuance and stock listings are a nice income, but not huge in terms of the City. We would expect the figure to be within the hundreds of millions maximum. It's also worth remembering that any sanctions are likely to be only forward looking so relating to new debt and equity issuance not existing stocks (although this is still up for grabs in the negotiations). 

Hence, as we asked in our previous blog, the real question is why is so much of the burden (even if it is not a massive one) falling on the UK? France and Germany might be talking tougher, but they do not quite seem to be following through with actions.

*(Update: We have seen an updated version of the document which has the exact $16.4bn figure, and so have updated it in the text above). 

Leaked EU memo with options for 'Stage 3' sanctions on Russia highlights underlying confusion

France's Mistral warships seem to be off the table

As Greek daily To Vima and the FT have been reporting, there is a draft going around of the EU options paper on possible further sanctions on Russia that will be discussed at today’s meeting of EU ambassadors. The paper includes potential options for 'Stage 3' sanctions, and the key ones are:

1. Restrictions on access to EU capital markets for Russian state-owned financial institutions
2. Embargo on trade in arms
3. Restrictions on exports of dual use goods
4. Restrictions on exports of sensitive technologies including in the field of energy

We have seen a version of the document, and these are our initial thoughts:

• The section on capital markets is by far the most detailed. This raises the question of whether the UK would be taking a larger share of the burden. This is possible, and the document does not provide national estimates in terms of costs. However, as we have pointed out many times, the links between the City of London and Russia are not as huge as is made out. The draft paper stresses that financial links come from around the EU, seemingly confirming this analysis.

• Reuters notes that the four largest Russian banks with state ownership of over 50% are Sberbank, VTB, the Russian Agriculture Bank and VEB. The first two are listed on the London Stock Exchange. It is not clear what these sanctions would mean for companies such as Gazprombank, which is 100% owned by Gazprom - which in turn is 50% owned by the Russian state.

• That said, one has to question the level of burden-sharing taking place under these proposals. It seems France would put up almost nothing, as it could achieve a specific carve-out to guarantee that previously agreed arms deals – such as its €1.2 billion Mistral warship sale – are exempted.

• Once all the caveats are considered, the arms embargo seems essentially pointless. It would also have little impact on Russia since it imports barely any EU arms.

• The impact of all this on Russia would be mixed. The financial sanctions could have some impact but it would likely be a drawn out one. They would force companies to shift to much shorter financing and force the state to back them up even further – a blow but not a killer one.

• Linked to all this is the issue of international cooperation. For example, refinancing the €7.5 billion of bonds issued (in 2013) by Russian state-owned banks on EU markets would not be prohibitively difficult if markets in Singapore and Hong Kong are still open to these firms. Similarly, in terms of high tech imports, there may be alternatives on offer. At least on this front, Japan, South Korea and others are unlikely to turn against the West. Of course, the role of China is important. Beijing may help Moscow out (particularly on the finance front), but probably not to the extent Russia is hoping. China is keen to keep its holdings and investments diversified, and also has a lot invested in Russia.

• The fact that all of the sanctions are only forward-looking is also a big caveat, and allows both sides time to diversify away.

• Hence, the final question to ask is whether this document will bolster the threat of EU sanctions. In some areas yes, in others no. For example, the detail on financial sanctions will be welcome, although it is unlikely that Putin will be shaking in his boots. On the arms, tech and dual use side, though, the lack of clarity and the number of caveats could actually undermine the EU’s position and would once again highlight how hard it would be to actually reach unanimity to move to 'Stage 3' sanctions.

The document is still being negotiated. We will update our blog as and when we hear of new developments.

Will EU foreign ministers agree on what to do with Russia?

(l-r) The foreign ministers of Italy, Spain and France

EU foreign ministers will meet tomorrow to discuss what to do with Russia in light of last week's MH17 plane crash, where almost 300 people lost their lives. The option of moving to tougher 'Stage 3' economic sanctions will be on the table. While the UK, France and Germany have all warned Moscow that it will face further sanctions if it fails to secure the crash site and guarantee a thorough and independent investigation, all eyes are on Italy and Spain - usually among the most dovish member states when it comes to EU-Russia relations.

After a couple of cautious statements over the weekend, a spokesman for the Italian Foreign Ministry is today quoted as saying,

"If Russia doesn't cooperate with the investigation [into the crash], we are very much ready to support the sanctions."

Belated compared to other big EU countries, but this is the most strongly worded statement coming from Rome to date. One could expect Italy to take a tougher stance this time around, not least because the main objection raised by Eastern European member states to the appointment of Italian Foreign Minister Federica Mogherini as the new EU foreign policy chief is precisely the fact that Italy is regarded as too soft on Russia.

Meanwhile, speaking to the press this morning, Spanish Foreign Minister José Manuel García-Margallo took a milder position. He refused to condemn Russia for the crash, and suggested waiting for the outcome of the investigation by the International Civil Aviation Organisation (ICAO) before considering any further steps.

On top of this, despite presenting a united front, Germany, France and the UK might not yet be on exactly the same page - not least because France continues to look unwilling to put its sale of Mistral ships to Russia on the table, and Germany's prime concern seems to be to preserve cohesion within the EU, rather than driving tougher sanctions. The big EU member states are therefore still not all on the same wavelength - although the fact that Italy might be hardening its stance is an interesting development.

Once again then, it is far from granted that EU foreign ministers will be able to agree on tougher sanctions on Russia tomorrow. However, it is looking the most likely it has been for some time.

Why Cameron needs to make a swift decision on the UK's next EU Commissioner

In a recent briefing, we stressed that David Cameron needs to pick a 'heavy-hitter' as UK's next European Commissioner if he wants to secure a key portfolio for the UK. Our point is reinforced by a quick look at the candidates being (more or less officially) lined up by other EU member states.

If the UK drags its feet on 'declaring' its candidate, and then sends someone not considered up for the job, we suspect its chances will pretty much have evaporated.

FRANCE - Former Finance Minister Pierre Moscovici is regarded as the frontrunner. The possible alternative could be Élisabeth Guigou, who has served as French Europe Minister, Justice Minister and Employment Minister.

GERMANY - Günther Oettinger looks very likely to stay on as German Commissioner. A former Minister-President of Baden-Württemberg, he has gained influence within Angela Merkel's CDU party during his five years as EU Energy Commissioner.
 
ITALY - Foreign Minister Federica Mogherini is widely tipped to become the new Italian Commissioner. She is currently regarded as the frontrunner to replace Lady Ashton as EU foreign policy chief. 

FINLAND - Former Prime Minister Jyrki Katainen will be the new Finnish Commissioner. He has already replaced Olli Rehn, who had to take up his seat in the European Parliament. Importantly, Katainen stepped down as Finnish Prime Minister precisely because he had set his eyes on a job in Brussels.

SPAIN - Former Agriculture Minister Miguel Arias Cañete is the favourite to become the new Spanish Commissioner. He resigned in April after being picked by Spanish Prime Minister Mariano Rajoy as Partido Popular's top candidate in the European Parliament elections.

POLAND - Various names have been suggested. Foreign Minister Radosław Sikorski remains the frontrunner (despite the recent wiretapping scandal). Former Finance Minister Jacek Rostowski and former EU Budget Commissioner Janusz Lewandowski - recently elected as an MEP - are also in the race.

NETHERLANDS - The frontrunner is Finance Minister and Eurogroup Chairman Jeroen Dijsselbloem, who is one of the two big contenders for the key post of Economic and Monetary Affairs Commissioner along with France's Pierre Moscovici.

ESTONIA - Former Prime Minister Andrus Ansip, leader of the liberal Estonian Reform Party, will be the new Estonian Commissioner, according to what Jean-Claude Juncker just said during his hearing with MEPs from the ALDE group.

What is somewhat different with this lot is that it includes a range of acting or former senior ministers still very much operating on the political centre stage in their respective countries. With some exceptions, the time when countries sent to Brussels whoever the sitting government tried to 'get rid of' seems pretty much over.

Cameron better get a move on.

Juncker: The next Economic and Monetary Affairs Commissioner will be a Socialist

UPDATE (14:15) - One possibility we have not considered in our original blog post is that European Commission portfolios can change. They can be split, broadened, and so forth.

However, at this stage it is quite hard to know whether and how this will happen. Hence, our reasoning is based on the existing portfolios.

ORIGINAL BLOG POST (13:15)  

Pieces are falling into place with regard to the composition of the next European Commission. Jean-Claude Juncker, who is waiting to be confirmed as new Commission President by MEPs in a vote next Tuesday, has just said that the next EU Commissioner for Economic and Monetary Affairs will be a Socialist.

Given the recent debate over EU fiscal rules and their 'flexibility', this sounds like a key pledge from Juncker to secure the backing of centre-left MEPs - since the Economic and Monetary Affairs Commissioner is responsible for enforcing such rules.

Now, two candidates for the post spring to mind instantly: former French Economy Minister Pierre Moscovici and Dutch Finance Minister Jeroen Dijsselbloem, both from their respective countries' centre-left parties. The decision will likely also depend on what happens to the Presidency of the Eurogroup of eurozone finance ministers - with Spain making no secret of its interest in the job.

Scenario 1 - Dijsselbloem becomes the new EU Economic and Monetary Affairs Commissioner

This looks very likely to happen if Spain secures the Presidency of the Eurogroup. German Chancellor Angela Merkel would not be keen to see Mediterranean countries holding the posts of ECB President (Italy), Eurogroup President (Spain), and Economic and Monetary Affairs Commissioner (France) at the same time.

This would also mean that France will push to secure another key economic portfolio for Moscovici: Internal Market, Competition or Trade. This would not be ideal from David Cameron's point of view, although the UK would be likely to get whichever of the bigger briefs France did not get.

Scenario 2 - Moscovici becomes the new EU Economic and Monetary Affairs Commissioner

This would probably mean that Dijsselbloem will stay as Eurogroup President. At that point, Spain could be 'compensated' with an important portfolio in the new Commission. According to the Spanish media, Miguel Arias Cañete - a former centre-right Agriculture Minister who is widely tipped to be appointed Spain's new Commissioner - would be interested in the Trade brief.

Under this scenario, the UK would possibly have a greater chance of securing the Internal Market or the Competition portfolio (both very relevant, as we explained here) - not least because France would no longer be a contender. That said, as we pointed out above, Germany is probably wary of this scenario. And the UK may well be concerned about France controlling the brief which has the most impact on the issue of the balance of power between euro 'ins' and 'outs'.

One to watch for the UK: Finland's Jyrki Katainen  

One more thing to bear in mind. Until today, former Finnish Prime Minister Jyrki Katainen was seen as a strong candidate to succeed his fellow national Olli Rehn as Economic and Monetary Affairs Commissioner. However, it now seems he will have to go for another portfolio. This could have important implications for the UK. Under a positive scenario, reform-minded Finland along with the UK could secure the Internal Market brief as well as the Competition portfolios. Indeed, France getting the Economic and Monetary Affairs portfolio could increase the chances of this happening. 

This is all quite speculative, and based on wishes Juncker expressed during his hearing with the centre-left S&D group in the European Parliament. National governments will play an important role when the time to assign portfolios in the new European Commission comes.

At the moment, there is still a decent chance of the UK securing a good porfolio despite the Juncker débâcle. One thing is clear, though: most other EU countries have already settled on high-profile candidates (note the numerous mentions of both former and acting finance ministers and prime ministers above), while the UK is yet to even decide on a clear shortlist of candidates. It is time to kick it into gear on this front.

Post-Juncker press conference round-up

We have been following the post-summit press conferences of EU leaders. Here is a round-up of the highlights, starting with German Chancellor Angela Merkel:

MOST IMPORTANT POINTS FROM #MERKEL #EUCO PRESSER: (1/3) "Ever closer union" does not mean one-speed Europe.
— Open Europe (@OpenEurope) June 27, 2014

MOST IMPORTANT POINTS FROM #MERKEL #EUCO PRESSER: (2/3) #spitzenkandidaten process will have to be discussed in #Council.
— Open Europe (@OpenEurope) June 27, 2014

MOST IMPORTANT POINTS FROM #MERKEL #EUCO PRESSER: (3/3) "flexibility" on fiscal pact does not mean member states get to re-write the rules.
— Open Europe (@OpenEurope) June 27, 2014

In his press conference, David Cameron took his defeat on the chin but noted that it would make his reform strategy harder:

“Today’s outcome is not the one I wanted. And it makes it harder, and the stakes higher…This is going to be a long, tough fight and sometimes you have to be ready to lose a battle to win a war. It has only stiffened my resolve to fight for reform in the EU, because it is crying out for it.”

Cameron was asked whether much more of this kind of thing would prompt him to recommend an ‘Out’ vote in a referendum. He declined the offer but did make the point that:

“And at the end of 2017, it will not be me, it will not be the House of Commons, it won’t be Brussels who decide about Britain’s future in the European Union. It will be the British people. It will be their choice, and their choice alone.”

He also pointed to the paragraph in the Council conclusions dedicated to the UK:

1. The UK raised some concerns related to the future development of the EU. These concerns will need to be addressed.  

In this context, the European Council noted that the concept of ever closer union allows for different paths of integration for different countries, allowing those that want to deepen integration to move ahead, while respecting the wish of those who do not want to deepen any further.  

Once the new European Commission is effectively in place, the European Council will consider the process for the appointment of the President of the European Commission for the future, respecting the European Treaties.

Italian Prime Minister Matteo Renzi was particularly keen to claim victory on a more 'flexible' application of EU fiscal rules. Van Rompuy’s agenda for the next European Commission is “very very very good on substance. For the first time, the focus is on growth. Insisting on growth is a turning point for Europe,” he said.

“Those countries who implement structural reforms have the right to greater flexibility, which is the most important political point for us.”

Renzi also touched on other EU top jobs, and made clear that:

“The name of [former Italian Prime Minister] Enrico Letta for European Council Presidency has never been made”

As for French President François Hollande, he tried to wrap his battle for looser EU fiscal rules into a European flag:

“I did not intervene only to defend France. When I evoke the flexibility in the margins of the Stability Pact [EU fiscal rules], I defend a conception of Europe.” 

And as regards the next European Commission, he said France wants “an organisation around big Vice-Presidencies. I will demand a Vice-Presidency for France.”

Read our take on what Cameron's defeat means for the reform agenda here.

Grillo joins Farage, but UKIP's group in the European Parliament is not a done deal yet

Now it's official: Italy's anti-establishment Five-Star Movement will try to form an alliance with UKIP in the new European Parliament. Beppe Grillo launched an online survey of Five-Star members and activists on his blog yesterday, and 78% of votes went for Nigel Farage's EFD group.

The survey has drawn criticism from the Italian press, but also from some Five-Star MPs, for a number of reasons:

• Only 29,584 votes were cast, a microscopic amount when compared to the almost 5.8 million votes the Five-Star Movement won in the European Parliament elections;

• The survey only offered three options: EFD (UKIP's group), ECR (the UK Conservatives' group) or non-attached. Other groups that could have been more natural allies of the Five-Star Movement, notably the Greens and the European Left of SYRIZA and Podemos, were not included;

• The three options were presented on Grillo's blog in a way that appeared to privilege Farage's group. The description of the ECR was shorter and less enthusiastic in tone. As regards the non-attached group, the blog warned that being part of it would mean "limited or no influence on the legislative activities of the European Parliament", and would therefore prevent the Five-Star Movement from pushing its political agenda in Europe. A fair point, although it can also be quite difficult to impose your views if you are sitting in a group where no-one agrees with you on certain issues.

Still, the verdict of la rete (the internet) is sacred for Grillo and the alliance with UKIP will go ahead. It will be very interesting to see how this plays out. Although they both emphasise the importance of referenda and direct democracy, the Five-Star Movement and UKIP are not exactly soulmates. Energy policy, EU farm subsidies, financial regulation, the financial transaction tax, GMOs and the EU-US free-trade deal (TTIP) are all issues on which the two parties do not see eye to eye.   

Indeed, the deal between Grillo and Farage is that their parties will sit in the same group, but will vote independently. This could help make the alliance sustainable in the longer term.

So where does this leave Farage with the formation of his group in the European Parliament? The bad news for UKIP is that they still need two national factions to wrap up the group. At the moment, parties from five EU countries are on board: UK, Italy, the Netherlands, Lithuania and the Czech Republic.

On the other hand, though, Farage is now ahead of Marine Le Pen when it comes to the number of MEPs in the respective groups. Farage has 45 MEPs on his side, Le Pen only 38 (42 if you count the Polish KNP party, whose participation has not yet been confirmed).

Will Le Pen and Farage both succeed in putting together a group? And whose will be the largest one? We will likely get the answer over the next couple of weeks.  

Bonjour Monsieur Cameron, there are potential allies on EU reform on the other side of the Channel

Henri Guaino, a French MP from the centre-right UMP party and a former special advisor to President Nicolas Sarkozy, has an interesting interview on Europe in today's Le Figaro. Here are some key excerpts:

Q: What is the European Union, according to you?

A: The EU is France, Italy, Germany, Spain, Belgium...The [European] Commission, Parliament, Court of Justice are just institutions at the service of the states and the peoples of Europe. It doesn't make sense to speak of a general interest of the EU that transcends the interests of these peoples and these states. Institutions never transcend anything.

Q: Europe is peace...

A: It's not the EU that created peace, it's peace that created the EU, and the idea that one guarantees peace on the continent by weakening the states is a dangerous one: for years, the weakening of states has been going hand-in-hand with the rise in Europe of populism, extremism and social tensions. Let's be wary that the federalist dream doesn't turn into a nightmare.

Q: Are the European institutions in need of reform?

A: The institutional Meccano has hit its limits: every reform has just given birth to a bit more bureaucratic monster. There are only two democratic institutions: the [European] Council of heads of state and government, and the [European] Parliament. The Council is more democratic than Parliament because heads of state are more accountable to their fellow citizens than MEPs. It is not certain that democracy has gained a lot from shifting from an assembly composed of delegations from national parliaments to a directly elected assembly. But if there were only one decisive reform to be made, it would be to eliminate the prerogatives of the European Commission and turn it into an administration under the authority of the Presidency of the Council.

On subsidiarity, Monsieur Guaino said:

[Subsidiarity] is working the wrong way round. The EU tends to leave to member states what it can't do. On the contrary, it needs to be asserted that the EU is only destined to do what member states can't do. This principle must allow member states to take competences back from the EU, which has too many.

He also suggested that the principle of 'variable geometry' (in plain English, different levels of integration within the EU) should be "applied systematically".       
 
Finally, asked whether the EU "contributes to making politicians look increasingly powerless", Guaino replied:

Yes...The EU has buried the historical, geographical, cultural and demographic realities underneath the rules, the bureaucracies and the procedures. But realities always avenge themselves when they are ignored.

To put this interview into context, Henri Guaino belongs to the same party as pro-integration MEPs such as Alain Lamassoure or Joseph Daul - which illustrates that 'Europe' is an issue that cuts across parties in a number of countries, not just the UK. Secondly, David Cameron may have allies in unlikely places, which if cultivated could prove helpful in a future negotiation.

The EU stands united in the face of Russia - or does it?

So, about Ukraine...

Arriving in Luxembourg this morning to discuss events in Ukraine with his European counterparts, British Foreign Secretary William Hague called for a "clear and united" EU response to Russia's 'escalation' of the crisis.

Hague added:

There is very little doubt -- there can't really be any real doubt -- that this [the unrest in Eastern Ukraine] is something that has been planned and brought about by Russia. The forces involved are well armed; well trained; well equipped; well coordinated and behaving in exactly the same way as what turned out to be Rusian forces behaved in Crimea, before the full Russian military takeover of Crimea.

He added:

I don't think denials of Russian involvement have a shred of credibility.

Meanwhile, Jean Asselborn, the Foreign Minister of Luxembourg, arriving at the same meeting did not seem to get the memo. He said the following:

I cannot actually imagine -- just how the EU could not identify with the men dressed in black in the Maidan -- I cannot imagine that the Russian side identifies with the men in black, with guns and weapons, that are occupying administrative buildings and government buildings in Eastern Ukraine.

He added:

I am still convinced after I heard President Putin, and the Russian Foreign Minister, that the Russians do not want to destabilise East Ukraine and do not want to occupy Eastern Ukraine.

Meanwhile Frans Timmermans, the Dutch Foreign Minister, opted for a more cryptic message, mixing his ducks with horses. Asked if he thought forces in Eastern Ukraine were acting under Russian directions, he replied:

If it looks like a horse, and it acts like a horse, then it is probably a horse -- not a zebra.

As clear as mud.

ECJ sets important legal precedent by striking down Data Retention Directive

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

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

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

According to today's ECJ ruling,

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

The statement goes on:

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

One of the reasons cited by the ECJ is:

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

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

The Battle of Londongrad? What does the data actually say?

On Friday afternoon Open Europe released a new flash analysis looking at the links between the City and Russia.

Much has been written on this issue – see NYT, FT and Economist for background.

While there is anecdotal evidence in these articles about City links to Russia, they fail to delve deeper into the data and, importantly, lack any context as to what Russian business means to a city and financial services sector the size of London.

The summary of the piece argues:

“Claims that the City of London would suffer major losses in case of financial sanctions against Russia are overblown. While it is true that there are some sizeable Russian investments in London, and it is home to a disproportionate number of Russian oligarchs, these are far from critical to a global financial centre such as London. The stock of Russian international investments in London is sizeable at £27bn, but it only accounts for 0.5% of total European international assets invested in London.”

“For all the talk of the large number of financial services provided to Russia, these only amount to 1% of total UK exports of financial services, business services and insurance. This would suggest that accusations that the UK Government is blocking tougher sanctions over fear of losses to the City don’t match the facts.”

“Sanctions related to financial or capital markets, for example severing access to credit for state-owned enterprises or Russian banks, might be an effective strategy to exert more pressure on Russia (given its reliance on external financing). Such move would be far more damaging to Russia than the City of London – though it may involve some losses for the latter. This should not, and does not seem to be, a big concern for the UK government. In any case, if things get to this stage, other EU countries may suffer far greater losses than the UK through wider economic sanctions hitting, for example, gas supplies and exports.”

There are plenty of factors to consider when looking at sanctions. While the City is one of them, in the scheme of the broader European links to Russia it does not seem huge (compared to some economies complete energy reliance). Furthermore, given the size of the City as a global financial centre the links to Russia seem to fall far short of the critical billing they seem to have been given.

EU migrants' access to benefits: A cross-party concern in Denmark

We flagged up last week that the debate on EU migrants' access to benefits was kicking off in Denmark - potentially leading to a row with the European Commission.

New figures have been unveiled that will do little to assuage political tensions. According to the Danish Employment Ministry, government spending on unemployment benefits to migrants from Eastern and Central Europe has increased tenfold between 2008 and 2012 – from DKK 32 million to DKK 345 million.

The data prompted criticism from across the political spectrum - confirming that EU migrants' access to state welfare is very much a cross-party issue in Denmark.

Claus Hjort Frederiksen, a former centre-right Danish Finance Minister, commented: 

We need to discuss what kind of protection we're able to offer in these cases. It's not a problem that will disappear.

Nadeem Farooq, the spokesman of the governing centre-left Social Liberal Party, warned:

The figure has risen quite dramatically, so we must take it seriously. We cherish freedom of movement, which makes Denmark wealthier. But we're also prepared to introduce controls and the necessary safeguards.

Interestingly, a proposal by the left-wing opposition Red–Green Alliance to make sure that EU citizens also pay Danish social insurance contributions in order to create "a level-playing field to qualify for unemployment benefits" is being supported by the anti-immigration Danish People's Party.

Meanwhile, the European Commission has announced that it will take legal action against Finland, which has a similar welfare system to Denmark and will therefore be backed by the Danish government in the legal challenge. The Commission has said it hasn't yet had time to look properly at how the Danish system currently works and what is being proposed (check out our previous blog for more detail), but informally it has said that the newly proposed measures look "illogical".

This looks set to run and run...

German Foreign Minister welcomes discussion on EU Treaty Change

German Foreign Minister, Frank-Walter Steinmeier, is visiting his counterpart, William Hague, in London today. Although the visit doesn't seem to have received much media coverage, we've just been at the press conference, and Herr Steinmeier had some interesting things to say. Unsurprisingly, Steinmeier said he wanted the UK in the EU.

Further Eurozone integration

Steinmeier said that the UK could play a pivotal role in making the EU more effective and competitive, but he also said that it was important not to "backtrack on European integration", but it was not clear if he was referring to Eurozone integration – which the UK actually isn’t against. Hague opened the press conference, saying that both government agreed to work together to ensure a "fairer system" to all Member States in the EU.

Repatriation of Powers 

Steinmeier also made clear that the EU should govern on the "big questions" - that it should rule where it is most effective. In this context, then, he said that there should be a further discussion on which competences would be best regulated on the national level. It was unfortunate that we didn't get a chance to ask Herr Steinmeier to comment on CDU's draft European Parliament election manifesto, which Handelsblatt reported on today as explicitly saying:

“A repatriation of competences to the national level should be possible.” 

Treaty change

The German government – particularly the CDU/CSU wing continue to insist on Treaty Change in some form to provide more central control in the eurozone over spending. At the same time, Cameron wants a Treaty Change to institutionalise flexible integration including the possibility to pursue “less Europe”. The idea is to combine the two in a new grand bargain. Remember, last week French President Francois Hollande restated that Paris didn’t see Treaty Change as a “priority” for fear of a referendum (which would be politically hard to avoid due to the German-style Treaty Change, not the British one). This created headlines in the UK.

Steinmeier said that discussions over Treaty Change are far more nuanced than a polarised vision of Britain on one side asking for the all the Treaties to be opened up, and France on the other, resisting any such discussion – which is exactly what we’ve said. In fact, Steinmeier said he "welcomes a debate" and is "not against discussing an adaptation of the Treaties." He added that there’s a debate raging in Germany at the moment over how to put Eurozone integration on a constitutionally and politically sound footing.

However, he also said that Germany and Britain aren’t completely aligned over Treaty Change, and, somewhat uncomfortably for Hague et al, argued that any major revision to the Treaties along the lines of what the UK is calling for, should perhaps be deferred until the eurozone stabilises further.  "It's not just to do with the UK and Germany that some things are stalling," said Steinmeier.

When asked the crucial question whether he believed that Treaty Change would coincide with David Cameron's 2017 timeline, Steinmeier said it "was too complicated a prognosis" to be able to give a straight answer.

Free movement 

Steinmeier said that the Bundestag has set up a working group to present solutions on how square sensible rules on access to benefits with free movement. He said that the debate in Germany on free movement – while it was definitely was an intense debate - was in "sensible boundaries", a nod to the UK press and its handling of Romania and Bulgaria.

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.

Gaming Europe's Future: First Ever Simulation of negotiations that could shape UK's European future

The year is 2017. It's time to negotiate! Will Britain achieve a new settlement in the EU, and if not, on what terms would it leave?

This is a unique chance to watch leading politicians, policymakers and experts carry out actual, real-time negotiations on the UK’s relationship with the EU – in a so-called war-game.

Check out the trailer of this unprecedented event that will take place Wednesday 11 December in London. Secure your front-row seat now and witness the future of Europe unfold.

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

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

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

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

Look at this graph (click to enlarge):

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

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

The war on EU red tape: Will this time be any different?

The headlines above speak for themselves. From time to time, the European Commission makes an announcement that it will make EU business rules "lighter", "simpler" or "smarter". But it deliberately stays away from the terms "deregulation" or "less regulation". They are usually a mixed bag, ranging from measures with real impact to irrelevant to even involving more regulation. To date, none of these initiatives have come anywhere close to achieving less, but better EU regulation across the board, that we and many businesses are calling for.

The European Commission has now unveiled the first results of REFIT - or its Regulatory Fitness and Performance Programme. Based on a 'screening' of the entire stock of EU legislation, the Commission has set out what it's planning to do (or not do) to make EU law lighter.

So will this time be different? Well, yet again, the proposal is a mixed bag.

The good stuff:

The Commission lists a number of proposals it has already put out, and are pending approval from member states and MEPs. Some of these would have a positive impact, including:

• Making EU public procurement rules more SMEs-friendly, mainly via the reduction of the paperwork needed to bid for contracts;
• Making it easier for professional qualifications to be recognised in different member states;
• A one-stop-shop for clinical trials.

The Commission also stresses it is already carrying out (or will do so in the near future) thorough evaluations of EU regulations in a dozen policy areas. These include:

• All EU rules on health and safety at work (no less than 23 separate Directives at the moment) - though the evaluation would only be published by the end of 2015;
• EU rules on temporary agency workers (which cost the UK economy around €2 billion a year);
• The Renewables Directive, which is dated and ridiculously micro-managing.

These rules are in desperate need of revision, so well done Commission for identifying them.

The not-so-good stuff:

Dropping proposals that are dead in the water: The Commission is offering to scrap proposals that are pending and unlikely to be adopted, which of course has no tangible impact as they haven't been adopted yet. Some of the proposals identified (e.g. a Directive simplifying VAT obligations or a Regulation on the statute of a European private company) have been pending for ages and were unlikely to ever come to pass.

Turning several rules into one rule:  The Commission also puts forth several ideas for the 'codification' and the 'consolidation' of existing legislation, meaning turning different sets of rules into one set of rules. As we pointed out in the past, if you merge ten existing directives into one, you definitely make the acquis more user-friendly, which has value in itself. However, if the substance of the rules remain, the impact on business will also remain pretty much the same, so this is of limited value on the ground.

More EU harmonisation: Somewhat cheekily, the Commission has also snuck in a proposal for more EU integration in a contentious area by presenting a Common Consolidated Corporate Tax Base as an example of simplification. Now, there may be a business-case for a CCCTB, but this also seems like back-door 'harmonisation' - which is a very different thing from 'simplification'.

In conclusion, so far there are some positive steps in here, but whether it will turn into a serious, de-regulatory exercise - with real impact on businesses - will very much depend on what comes out of the Commission's review and level of follow through.
     

Ten years on, what Britain can learn from the Swedish euro referendum

Last Saturday was the tenth anniversary of the Swedish referendum on the euro, and our Director, Mats Persson, wrote this piece for the Guardian's Comment is Free:

"The best argument against democracy is a five-minute conversation with the average voter," Winston Churchill famously said. He could have added that the best argument against elite rule is a five-minute conversation with your average politician.

I used to be sceptical of referendums. They are populist instruments, I thought. Voters never vote on the actual issue. And what do voters know anyway? Then the euro happened. 

Saturday is the 10-year anniversary of the Swedish public voting no to joining the euro in a high-profile referendum, 56% to 42%. The Swedish elite was in shock. All the major parties, the national newspapers, the business organisations, including the Swedish CBI, and most of Stockholm's chattering classes favoured ditching the krona. According to some estimates, the yes campaign outspent the no campaign 10 to one. There were a lot of clever and genuine people on the yes side, making valid arguments such as eliminating exchange risk for business and replacing the flaky devaluation policies of the past.

However, it was obvious that something wasn't quite right. Yes, perhaps Sweden could benefit from sharing a currency with Germany, the destination of many of its exports. But the euro wasn't about liberal economics: stretching from the Arctic circle to Sicily, it locked vastly different countries, cultures and economic structures, into one monetary system, under a single interest rate – forever binding together the problems of all its members, large or small. It was a system based on the hopelessly flawed assumption that politicians and central bankers would make the right decisions all the time.

As with all referendums, there were various reasons why the Swedish public voted no, including an inherent bias in favour of the status quo. Fundamentally, though, most Swedes' gut instinct – bondförnuft as the Swedes say (literally "farmer's common sense") – told them that a serial defaulter with dubious finances, Greece, and a heavily industrialised exporter with an obsession with sound money, Germany, simply couldn't share the same currency. Swedes treated the exam question with the same kind of book-keepers' approach by which many of them run their own household economies. Whatever the experts told them, the arguments – and the numbers – simply didn't add up.

Ten years on, Europe is shrouded in uncertainty, but one thing is clear: the Swedish public got it right, the elite got it wrong. Though there may have been some politicians in Sweden and elsewhere who saw the single currency as the ultimate way to set the snowball rolling towards an EU superstate, the euro was far more a case of cock-up than conspiracy. Today, 80-90% of Swedes oppose the euro, and the political and business elites are wary too – save the odd isolated politician doing an impression of the Japanese soldiers found in the 1960s refusing to believe the second world war had ended.

However, referendums are by no means a magical potion. It's clear that there are cases where they're hijacked or misused – and where they lead to outcomes that no one intended or that settle nothing. Sweden itself has some less successful experiences with public votes. In 1980, a three-way referendum on whether to ditch nuclear power – arguably a populist kneejerk response to the Harrisburg disaster – generated a vote in favour of a vague plan to incrementally dismantle all nuclear plants. The result was totally inconclusive, leaving half the country embittered on the issue (Sweden still has nuclear power today).

Incidentally, there's a lesson for David Cameron here. He has promised to negotiate a new settlement in the EU and put that to an in/out referendum by 2017. If that indeed happens, the worst possible outcome is a 49-51% type result, too close to call in either direction. As in Sweden in 1980, much of the population would feel disenfranchised and the EU debate will continue just as before. This isn't in either the UK's or Europe's interest.

To avoid this scenario, there needs to be substantial and systemic changes, ideally rooted in EU-wide solutions so that they last (unilateral opt-outs tend to be eroded). That would allow a decisive vote in favour of the UK staying in a heavily reformed, slimmed-down EU.

One can have different views on Cameron's strategy, but given public and political discontent about the EU status quo, sooner or later there will probably have to be a referendum to settle the Europe question in this country. And as the Swedish euro vote shows – warts and all, the public can opt for perfectly rational and responsible outcomes that would not occur if politicians were left to their own devices.

Syria: The Ins, the Outs - and the Maybes

As we noted in our previous blog post, Syria has again shown that the EU holds almost as many foreign policy positions as there are states - though we should also remember that this is an extremely complex and senstitive situation.

However, as we also note below, EU countries seem to be coalesing around at least three positions at present. One group - the UK, France and Denmark - is commited to military action with or without the UN. The second group are the definite 'outs' and the largest group is made up of those still waiting to make up their minds. Added to that there is perhaps a fourth group made up of a number of smaller states who have not expressed a clear opinion.

The table below divided the 28 EU member states into these four groups, based on our reading of the current stated positions. This is of course a very fluid table - heavily dependent on evidence, events and developments - and as ever, we welcome reader comments in case we've missed something or if a country's position changes.

Click to enlarge

Syria: Who’s in and who’s out?

Plenty to ponder over Syria

Following the alleged use of chemical weapons by the Assad’s regime in Syria, the stakes have been raised. But as the calls for international military intervention grows louder, how have Europe’s various players been lining up? Well, the EU is certainly not “speaking with one voice.” Somehow neither the Lisbon Treaty, nor the EEAS nor the arrival of Cathy Ashton has managed to magically replace 28 individual foreign policies with a single EU one. (We remain shocked!)

So when it comes to Syria, there are now three key questions for the member states: whether to take part in military action; whether to back military action without necessarily taking part and, crucially, whether to do either of these two without a UN mandate. The last is obviously key as Russia is liley to veto any UN resolution with teeth, and has already made it clear it would consider any intervention without a UN mandate a "crude violation of international law".  

So far, we count three EU countries that have signalled willingness to participate militarily even if a UN mandate isn't forthcoming – the UK, France and Denmark. France and the UK - that between them account for most of the EU's military spending - are as usual the key players in the EU when matters are moved into the domain of hard power. David Cameron will today present a draft resolution proposing action against Assad's regime in the UN Security Council "authorising necessary measures to protect civilians" in Syria. Writing in the Telegraph today, British Foreign Minister William Hague argues that:

“this is the moment for democratic nations to live up to their values…We cannot allow the use of chemical weapons in the 21st century to go unchallenged. That would send a signal to the Syrian regime that they will never face any consequences for their actions, no matter how barbarous."

Meanwhile, French President Francois Hollande said yesterday that “France is ready to punish those who took the heinous decision to gas innocents," while French foreign minister, Laurent Fabius told Europe 1 radio on Monday: "The only option that I am ruling out is to do nothing." 

Both, it would appear, very much keep the option open to press ahead without the UN. 

Germany is more hesitant. There is virtually zero chance of Berlin playing a major part in any military operation of any sort. The question is - and this is what the German debate is centred around - will it back military action without a UN resolution. Remember, Germany ended up on the same side as Russia and China - against the UK and France - in abstaining on a UN Security Council vote on Libya back in 2011. However, this move was also triggered a domestic and international political backlash, which the Germans haven't forgotten. The country's Foreign Ministry has welcomed the UK's motion at the UN.

#Syria #Westerwelle welcomes British initiative to address poison gas attack within UNSecurityCouncil. United stance needed! @foreignoffice
— GermanForeignOffice (@GermanyDiplo) August 28, 2013

And there's no lack of scepticism. Phillipp Missfelder, the foreign affairs spokesman for German Chancellor Angela Merkel's CDU party, said that,"The [German] army has, through its current international operations, already reached the breaking point," and that military action without a UN mandate is "hard to imagine." However, interestingly, fellow CDU MP Ruprecht Polenz, Chairman of the Foreign Affairs Committee of the Bundestag, said that military action against Syria without a UN mandate could be "legitimate", citing Kosovo as a precedence, adding that the use of chemical weapons was a "serious, brutal taboo, which may not remain without consequences”. However, he stopped short of explicitly calling for German involvement. 

The SPD's chairman Sigmar Gabriel has suggested that German involvement should be limited to the diplomatic front, specifically that Chancellor Merkel ought to fly to Moscow to convince Russian President Putin to change his policy.

According to Number 10, Chancellor Merkel and David Cameron discussed the situation and “agreed that such an attack demanded a firm response from the international community.” (Not that this fairly generic statement tells us much.) Germany clearly remains nervous about foreign policy meddling. 

So far Italy is leaning back too. "Italy will not take part in any military solutions without a UN Security Council mandate," according to its Foreign Minister Emma Bonino. "Even the option of a limited intervention risks becoming unlimited," said Bonino, adding that Italy was "already stretched and even over-stretched" militarily in other parts of the world.

Despite Poland's support for the EU developing a stronger and more coherent military presence, Polish Prime Minister Donald Tusk confirmed today that “Poland does not envisage taking part in a military intervention in Syria. In any form.”

Like many others, Spain hasn't yet made up its mind but it is sticking to the hope of a UN resolution. Deputy Secretary General of the Partido Popular, Carlos Floriano, said Wednesday, that the Government will decide its stance “[once it is] aware perfectly of every detail." Meanwhile the Spanish Foreign Ministry said it hoped the UN Security Council “can make decisions that comply with international law.” 

Of the smaller countries, "non-aligned" Sweden is as usual calling  for “the broadest international support possible” but leaving it open how to approach a US/UK/France led operation absent a UN solution. Fellow "non alinged" country Austria is also staying quiet. Portugal says it won’t comment on potential action, with the Ministry of Foreign affairs simply issuing the generic statement that “it is in close coordination with its partners and allies.”

NATO-member Denmark, on the other hand, yesterday signalled that it’s willing to take part in military action even absent a UN-solution, with a series of pretty robust statements from senior Danish politicians. According to an opinion poll published today, 64% of Danes are opposed to such a move, however. 

Greece is likely to come under pressure to open up its strategically important bases to the US but ANSA quotes Greek officials as saying they have themselves “ruled out the possibility of active military involvement”. 

So what about the EU institutions themselves?  We wouldn't want to forget those. They are sticking to the ‘UN Security Council’ line. As Baroness Ashton said on Monday, "Of course the Security Council is extremely important in this. It is the role of the Security Council to look and see how the international community can and should respond."

With Hermann van Rompuy, President of the European Council, also urging similar action on Syria via the UN Security Council, this begs the question, what happens if that isn't forthcoming and the UK/France and US continue to push for military action? This then has the potential to become one of the biggest foreign policy clashes between the UK/France and Brussels since the new EU foreign policy architecture was put into place.