The EU’s zombie tax

Back in September, we wrote on this blog that the EU’s Financial Transaction Tax was “dying a death of a thousand cuts”.

However, following that opinion of the EU Council of Ministers' legal service, the European Commission has hit back with its own legal opinion. We have got our hands on the full text, which can be seen here (thanks to Italian magazine Valori for posting it on its website). 

Despite this, we stick with our statement. For all intents and purposes, the extensive FTT that was initially proposed by the Commission seems to be dead as a policy. Indeed, it remains part of a rather heated technical discussion within the EU institutions - but we have already noted the likelihood of it returning in a much watered down version to save face of those invested in the idea.

It is, therefore, a living dead policy – a 'zombie tax' if you will.

The Commission’s counter arguments are very specific to those put forward by the Council’s legal service – itself setting up an interesting head on clash between the two bodies – the main points of which are:

• The Council does not present any legal basis for its argument that the FTT breaches international law. The Commission stresses that the issue of “more relevant” right to impose taxes is not legally defined.
• The Commission essentially argues that its FTT proposal does present enough of a nexus between the state and the transactions to allow for taxation – specifically that the counterparty principle fits with international law.
• That the FTT does fit with the enhanced cooperation procedure since it does not stop non–participating member states from pursuing their own financial taxes.
• “What the Council LS perceives as discrimination is in reality nothing but a disparity between different national tax regimes.”

The first thing that is clear, is that this is beginning to become an intensely theoretical legal discussion. It remains important, but the practical and political aspects should not be forgotten.

As we highlighted along with our exclusive release of internal documents earlier this year, one of the key reasons behind the loss of enthusiasm for the FTT was the economic impact. It became clear it is not practically workable in many cases, particularly due to its impact on repo markets as well as government and corporate bond markets.

We also still strongly agree with the Council’s take. While in legal terms the impact on non-participating states can be fiddled, in real terms there will be a sizeable impact on the financial sectors of states explicitly opposed to the tax – something which remains politically explosive in terms of EU precedent.

Again, with the FTT now slowly ambling along in zombie mode we’re sure this is not the last we have heard of it.

Historic EU budget cut one step closer, but still plenty of scope to reform how it is spent

Following a reported 16 hour marathon negotiation, representatives from member states, the European Commission and the European Parliament struck a deal on the 2014 annual budget in the early hours of this morning.

As the sides failed to agree under the normal timetable, the so-called 'conciliation' process was invoked to tackle the remaining sticking point  - the final billion euros either on or off the Commission's proposal. In the end the sides met roughly half-way - MEPs accepted a €400m cut and the member states agreed a €500m increase compared to their demands. As ever with the EU budget, politics and symbolism were just as important as the actual substance of how and where the money is spent.

Having said that, there is some good news - the budget sees actual payments of €135.5bn and new spending commitments of €142.6bn - decreases of 6.5% and 6.2% respectively compared to 2013. This reduction is because the 2014 budget is the first to be agreed under the new overall spending limits (2014-2020) agreed by David Cameron and other EU leaders back in February - the first ever long term budget to be lower than its predecessor. The coalition will therefore be able to credibly claim it has achieved tangible reform in this area.

The bad news, as we noted way back in June, is that in order to achieve these cuts, the UK was forced to swallow an additional €11.2bn in retroactive top ups (so called 'amending budgets') to EU spending in 2013. Without these tops ups, the EU budget would actually have seen a small real term increase from 2013 to 2104, albeit under the rate of inflation. The second tranche, coming in at €3.9bn, appears to have been formally signed off by ministers yesterday as well despite the UK's opposition.

Furthermore, as we've said many times before, as well as the size, the substance of the budget remains hugely flawed with the bulk of the budget composed of growth destroying farm subsidies and regional development funds recycled between wealthier member states, and millions wasted on unnecessary quangos and institutions. So in summary a good start, but still plenty of scope for further reform.

The UK manages to water down the EU's north sea power grab - to Scotland's benefit

MEPs yesterday voted on a new safety regime for offshore oil and gas platforms. And what do you know, it appears that the UK has managed to come up with an acceptable solution.

Fears that the Commission's original plan to push its plans via a regulation (which have direct effect) have not materialised and it is now to be done via a directive, giving states some leeway, and through careful negotiation the final outcome is similar to the existing UK rules.

This is interesting on a number levels. Firstly it is a good example of the UK successfully pushing its case in the EU. It is also a good example of how the UK can use its weight to influence MEPs and the Council of Ministers - and for the benefit of an industry based primarily in Scotland.

One interesting question is whether an independent Scotland within the EU would have the same potential to succeed (This is of course if they were in the EU at all.)

The Four Presidents Report?

Or was it the Van Rompuy report...looking at the report on moving "Towards a genuine economic and monetary union" released earlier today its hard to judge how closely involved the other Presidents were, notably ECB President Mario Draghi and Commission President Jose Manuel Barroso.

So to recap, this was meant to be a report reflecting the views of the EU's four Presidents (in addition to the three already mentioned, also Jean-Claude Juncker, the outgoing head of the Eurogroup).

First, we've spotted a couple of areas of confusion between what European Council President Herman van Rompuy and Draghi have been saying.

The report suggests that,

"The ECB has confirmed that it will establish organisational arrangements guaranteeing a clear separation of its supervisory functions from monetary policy." 

However in his monthly press conference today, when pushed on the ECB's view on the single supervisor Draghi stressed that the ECB is a "passive actor" in all of this and was not involved in designing the legal structure of the new supervisor. Clearly these two views are directly at odds, which fails to fill us with confidence that the new tasks of the ECB will be combined with its current ones in a legally sound and practical way. A concern which has previously been voiced by ourselves and many others.

Draghi was also at pains to stress that the link between sovereigns and banks can only be broken when the banking union is complete, i.e. with a common resolution mechanism. The report argues that the set up of the single supervisory mechanism (SSM) will play an important role in "contributing to breaking the link between sovereigns and banks". Not necessarily directly at odds, but it again peaks concerns that the Council plans for banking union over-estimate the impact of the SSM.

Additionally, as the FT's Brussels Blog notes, Van Rompuy also disagrees with European Commission President Jose Manuel Barroso on the issue of debt mutualisation, with the latter favouring eurobonds.

We at least can't blame Draghi for struggling to find the time to help write the report while also running a giant institution. But if the supposed authors can't agree on the logistics it doesn't bode well for next weeks EU summit...

A two-speed EU patent

EU ministers and MEPs have done something very sensible: agreed on an EU-wide patent.

According to the Commission, obtaining a patent protection for all member states in the EU is currently around 15 times more expensive than obtaining patent protection in the US. And for a change, their estimate might actually be about right.

The absence of an EU-wide patent is a massive obstacle to growth and innovation in Europe - and a barrier for fledgling SMEs in particular. Given all the regulations pumped out by Brussels every year - many far from essential - it's surprising that it has taken so many years for EU leaders to agree on something that instantly can have such a positive impact on Europe's economy and competitiveness. But it's welcome nonetheless.

Not everyone is happy though. Spain and Italy oppose the proposal, feeling snubbed as the EU patent will primarily be translated into English, German and French (who cares about competitive disadvantages for Europe against the rest of the world, eh?).

Spanish and Italian opposition means that other member states will press ahead with a patent under so-called structured cooperation (which allows at least nine member states to take a proposal forward even if some other countries oppose it).

The benefits of this proposal aside, we now await a rash of media comments on how Spain and Italy will be stuck in the EU's "slow lane" on innovation. Because, surely, media's two-speed Europe analogy cannot only apply to the euro?

The Italian government seems to have few regrets, however. El Pais quotes a fuming spokesperson for the Italian government saying that the proposal has been approved "in a worrying and surprising way." Referring to a pending court case at the ECJ (lodged by Spain and Italy on discrimination gounds), he goes on,

It's a failure of respect between the EU institutions.

As ever, there's more to two-speed Europe than what meets the eye.

Regardless, well done EU ministers and MEPs for finally pulling your fingers out.

Is there an answer?

As the European Parliament 'confirmation' hearings for incoming EU Commissioners rumble on in the background, we thought we might take a look at Cathy Ashton's hearing yesterday.

It received a fair amount of press coverage (see here, here, here and here).

You can watch the hearing here but unless you have trouble sleeping tonight, you might want to give it a miss. These Parliament hearings were never going to set Europe alight with inspiration, and were always going to be filled with that old favourite - the "non-answer" answer - or the "answer-so-bland-and-long-winded-that-you-have-lost-the-will-to-live-by-the-end" answer.

Example: Cathy Ashton - we have a "once in a lifetime opportunity to create the External Action Service"..."we need to be results orientated".

She identified "Afghanistan, Pakistan, Iran, the Middle East, Somalia, and Yemen" as "clearly among some of the top priorities" for foreign policy, and adding that she intends to travel to Washington soon to discuss how to co-ordinate strategies on such global issues. But apart from name-dropping some obvious countries, there wasn't a trace of substance in her answers.

One MEP was moved to ask Baroness Ashton what the next step in her vision for Afghanistan was - and reiterate that a specific answer was wanted.

Baroness Ashton's response: "The next steps are going to be very important...we've had some really good successes in the amount of change in primary health care...but there's a huge amount still to do on the ground and I really want to provide concrete results for the people of Afghanistan through what we do."

While the EU Foreign Minister blazing a trail ahead of individual member state governments' foreign policy is clearly not a desirable scenario, does Baroness Ashton have an opinion beyond what is she is being briefed on by the Commission advisors she has surrounded herself with?

Back in December, Cathy Ashton was told by a German MEP that she would need more specific policies at this hearing, and she assured them that she would have "more considered policies".

But that didn't seem to be the case. German MEP Elmar Brok reportedly said after the hearing, "She clearly still has a lot of learning to do; there are many gaping holes that will have to be filled very quickly."

While Baroness Ashton is new to her job (and new to most things in high international politics it seems), this does highlight some of those niggly points we raised back then - that this new sui generis role blurs the line between transnational and supranational, and as yet it is unclear how it will operate in the 'eurospace' between the Commission and the Council - and above all that the Foreign Minister job is a blank cheque and it is still unclear how EU policy will be formed in concrete terms.

One rather telling question from an MEP asked Baroness Ashton where her loyalty will lie in a disagreement between the Council and Commission on a given issue, e.g. Iraq.

Baroness Ashton's response: "The issue for me is not to be in that position - the issue for me is to bring the Council and Commission together, in order to develop strategic and common policy in the right way."

Right...much clearer.

NB: there is a rather hilarious anecdote on the Economist's Charlemagne blog, relating to MEPs' concerns that overseas EU delegations employ the appropriate protocol staff to ensure that MEPs are met at airports with official cars when they go on foreign jollies.