Sarkozy wins back party leadership, but road to French presidential election remains very long

Nicolas Sarkozy took a further step on the road to his political comeback over the weekend, as he won back the leadership of France’s centre-right UMP party. The former French President secured 64.5% of votes in an online survey of UMP members, finishing well ahead of former Agriculture Minister Bruno Le Maire (29.2%) and outsider Hervé Mariton (6.3%).

Sarkozy was always going to win, but the outcome is most certainly below what he was hoping for. In 2004, he had sailed through the leadership election with over 85% of the vote. Still, he holds again the reins of his “political family” – to use his own words – and has already made at least two interesting announcements:

• The UMP will change name before the next round of local elections in March 2015. 

• He will set up a committee of former UMP prime ministers to help him manage the party – although the idea has reportedly not gone down particularly well with François Fillon, one of the former prime ministers supposed to sit on this committee. 

On this blog, we have noted how Sarkozy’s political comeback has the potential to really spice up the French debate over Europe. The former French President has this year repeatedly spoken of returning half of the EU’s powers to national governments. He also wants to scrap the EU’s passport-free Schengen travel area in its current form and replace it with a more selective ‘Schengen II’, which could only be joined by countries adopting the same immigration policies.

Sarkozy’s political strategy looks pretty clear: take a tougher, more ‘realist’ stance on Europe and immigration to stop the UMP losing voters to Marine Le Pen’s Front National. What is far from clear at this stage, though, is whether the new line will draw unanimous support from the rest of Sarkozy’s party.

Another important point to keep in mind is that the victory in Saturday’s party leadership poll does not automatically make Sarkozy the centre-right candidate for the 2017 French presidential election. A separate ‘primary election’ is due in 2016, when Sarkozy is going to face at least one much tougher rival: former French Foreign Minister Alain Juppé.

How that duel will end is anyone’s guess, but recent opinion polls suggest that Juppé would have a better chance of victory in case of an ‘open primary’ – where members of smaller centrist parties can vote alongside with UMP members to elect a single centre-right presidential candidate. Sarkozy has so far spoken in favour of an ‘open primary’, although he looks reluctant to involve the Democratic Movement (MoDem) in the exercise. The centrist party led by François Bayrou actually endorsed François Hollande in the run-off of the 2012 presidential election against Sarkozy, and Bayrou has made no secret of his support for Juppé as the centre-right candidate in 2017.

Finally, Sarkozy remains (directly or indirectly) involved in a series of pending legal cases that may well dog his campaign.

The road to 2017 is still very long. 

Catalonia's symbolic independence referendum: What it means and why it would be wrong to ignore it

UPDATE (1:00pm) - As promised, here's an update on the results of Catalonia's symbolic independence referendum now that all votes have been counted.

Turnout: 2,305,290 people (around 37% of those eligible to vote)
Votes in favour of independence: 1,861,753 (80.76%)

 *****

ORIGINAL BLOG POST (9:55am)

Catalonia's symbolic independence referendum eventually went ahead yesterday. With 88.4% of votes counted, the Catalan government puts turnout at over two million people. Nearly 1.7 million of them (80.7%) voted in favour of Catalonia's independence from Spain. We will update the blog with the final results as soon as they come in.

This infographic from El País compares yesterday's turnout (far right column) with the 2012 Catalan regional elections and the 2006 (binding) referendum on the amended Statute of Autonomy of Catalonia:

In other words, less than a third (32.8%) of those eligible to vote cast their ballot yesterday. However, this is still quite impressive considering that Catalan voters knew yesterday's vote was purely symbolic. Furthermore, the percentage is calculated on a broader electoral base - since young Catalans aged 16 were allowed to vote in yesterday's referendum, unlike in regional elections where the voting age is 18.

On the other hand, the outcome of yesterday's vote is probably not a great indication of where the majority of Catalans stand on independence. Due to the non-binding nature of the referendum, there is likely to be a significant amount of self-selection bias. Many Catalans who felt strongly about independence thought it was worth queuing at polling stations to cast a non-binding vote and show defiance of the Spanish government, while many of those who would vote against independence in a real referendum, or were undecided, stayed home since they knew the result would have no legal validity. 

This certainly helped push up the pro-independence vote to nearly 81%. As a reference, the four pro-independence parties currently holding seats in the Catalan parliament won a total 2,093,709 votes in the 2012 regional elections. 

Recent opinion polls clearly show that the split is much more even than that. For example, a Metroscopia poll published by El País two weeks ago found that 44% of Catalans would vote for independence in a referendum and 42% would vote against. Interestingly, when offered a third option involving "new and bulletproof exclusive competences" for Catalonia, 46% of respondents said they would choose this option, while 29% would vote for independence and 17% would opt for the status quo.

So where does yesterday's vote leave the debate on Catalan independence?  

Pep Guardiola was one of over 2m Catalans who cast their vote

As we argued in our previous blog posts (see here, here and here), the situation in Catalonia has got to a point where the status quo is looking increasingly untenable. The issue has so far been handled quite poorly by both the Spanish and the Catalan governments, who have failed to engage in any meaningful negotiations.

Unsurprisingly, Spanish Prime Minister Mariano Rajoy has talked down the significance of yesterday's vote and stressed that, if anything, it makes future talks between him and Catalan President Artur Mas more difficult. However, Rajoy's unwillingness to engage in any real discussions with Mas so far makes this position look somewhat strange.

Furthermore, this approach sort of misses the point. The Spanish government continues to use a legal argument (the Spanish Constitution forbids regions from organising binding referenda without the authorisation of Madrid) to address a political problem. In this regard, the fact that the next Spanish general election is due next year is clearly an incentive for Rajoy to show even more inflexibility vis-à-vis Catalan demands.

That said, Madrid and Barcelona can't just keep talking past each other indefinitely. Constitutional reform giving Catalonia (and, why not, other Spanish regions) more powers to set and collect taxes, for instance, would probably go a long way to address Catalan voters' concerns that the wealthy region is paying too much towards the national coffers and getting too little out of it - although it would be simplistic to boil the Catalan question down to money only.

Incidentally, constitutional reform is being openly backed by the new Spanish Socialist leader Pedro Sánchez, the Matteo Renzi of Spain. Going forward, as we already argued no less than two years ago, a reform of the Spanish Constitution envisaging further devolution of powers may well impose itself as the most sensible solution for everyone.

The EU, Russia and the Ukraine crisis: What are the limits of Europe?

Following a speech to both Houses of the Russian Parliament this morning, Vladimir Putin has signed a Treaty that will see Crimea and City of Sevastopol joining the Russian Federation. Western leaders have warned the move would have “additional and far-reaching consequences”, on top of the targeted sanctions agreed by EU foreign ministers on 21 Russian and Ukrainian individuals yesterday.

What could these additional measures involve? And how far can the EU go? We have just published a new briefing addressing these questions. We have looked at what tools the EU has available to force Russia to back down in Crimea, including the effectiveness of the various sanctions it could deploy.

Our assessment is that, in the short term, the most effective economic measures could be a combination of targeted sanctions on individuals and business interests and potentially limiting sales to Russia of products on which they are externally reliant – such as machinery, chemicals and medical products. While Moscow can employ rogue tactics in the short-term which Europe can’t match, in any prolonged economic stand-off, the odds are in the EU’s favour.

You can read our new briefing here. These are our key findings:

• Additional targeted individual sanctions or a potential arms embargo, would be hard to agree amongst the EU’s 28 member states and their impact remains unclear, though there may be some scope for a group of EU states to move ahead with some additional sanctions if it’s not possible to get agreement at the level of all 28. 

• Still, cleverly targeted sanctions on individuals and business interests could hurt Russia. Between 2008 and 2013, $421bn worth of private sector money – equivalent to 20% of Russian GDP – has flown out of the country, while Russia’s Net International Investment Position (NIIP) remains strongly positive. This suggests that there are sizeable amounts of Russian money invested abroad on which sanctions could be imposed, causing significant problems for high-ranking individuals and businesses. That said, the routing of this money through offshore centres makes it very difficult to track (click on the graphs to enlarge).

• Therefore, the most effective economic measures could be a combination of targeted sanctions on influential individuals close to the top of the regime, business interests, specific firms wielding power in Ukraine (such as Gazprom) and potentially limiting sales to Russia of products on which they are externally reliant – such as machinery, chemicals and medical products (click on the graphs to enlarge). 

• Sweeping energy sanctions would hit Russia the hardest but due to the EU’s dependence on Russian gas – in some countries as much as 100% of gas imports are Russian – this option is politically unlikely and could prove prohibitively expensive for the EU. 

• Such decisions should not be taken lightly and Russia has an array of retaliatory options, including leveraging energy market power to secure favourable bilateral deals with other countries, applying tit-for-tat sanctions or, in extremis, wielding its hard power. 

• However, whilst Moscow can use such rogue tactics in the short-term, which the EU, for various reasons can’t, in any prolonged stand-off the odds favour the EU, due to Russia’s disastrous demographic trends and relatively undiversified economy. For all these reasons, a negotiated settlement still remains the most likely option. 

• Fundamentally, while this is a conflict driven by Moscow, it illustrates the EU’s “all or nothing” approach to its neighbourhood is no longer viable in the 21st Century. If the EU is to extend its influence further, it must be prepared to offer an alternative model of enlargement or association, lowering the political hurdles on the path to Europe. 

Follow us on Twitter @OpenEurope for all the latest updates on the Ukraine crisis.

French public opinion and Europe: Winds of change?

With the European Parliament elections approaching, the number of EU-related opinion polls is growing. Beyond the mere voting intentions, these surveys help get a clearer picture of how citizens see Europe in various countries.

Two separate opinion polls published in France over the past few days caught our attention. Just in case you don't read our press summary every day - France is a particularly interesting case, given that the anti-EU Front National may well win the most votes in the upcoming European Parliament elections.

The first poll, conducted by IFOP and published by French news site Atlantico over the weekend, found that 59% of French would be in favour of France "reconsidering the Schengen agreements [which created a passport-free travel zone in Europe] and restraining the conditions for the circulation and the establishment of European citizens on its territory."

A separate OpinionWay poll for Le Figaro and LCI found that, while a solid majority of French want to keep the euro, the number of those against a return to the franc dropped from 62% to 53% since April 2012. Also, the share of respondents who think EU membership is "a good thing" for France went down from 48% to 42% over the same period - again, still a relative majority.  

Interestingly, one of the questions in the poll was, "Which one of these feelings comes to mind when you think of the EU?" Well, 45% said 'disappointment', 18% 'hope' and 12% 'indifference'.

It would be exaggerated to claim that the French are turning their back on the EU, but the winds do seem to be changing somewhat, and the French electorate seems to be shifting towards a less idealistic approach to the 'Europe' issue. Looking at the bigger picture, this also highlights that, without sweeping reform of the EU, the risk is that voters will increasingly turn to anti-EU and anti-immigration parties - and potentially throw the baby out with the bathwater.

An increasing number of politicians across Europe have realised this, including in France. Rachida Dati, a French MEP from the centre-right UMP party, told our pan-European EU Reform Conference last month that the "disregard" of the EU elite for the citizens had to stop, adding that "it is the peoples that must impose their will to Brussels and not the other way around".

EU hit with downgrade

While the spate of EU downgrades has slowed to a relative drip feed this year, it turns out there was at least one left in the locker – the EU, which Standard and Poor’s (S&P) this morning cut from AAA to AA+.

Many may ask, does the EU even have its own credit rating? And if so why? The answer is, of course it does, although why is a bit more ambiguous. It relates mostly to the rating of the EU budget and any bodies which borrow with EU guarantees. This includes the European Financial Stability Mechanism, the smaller €60bn bailout fund which is backed by the EU budget.

The move is largely symbolic but the reasoning behind it is interesting if a bit strange in places:

• The first couple of points are obvious: the on-going financial and political instability in some states has led to the downgrade. This is par for the course in terms of ratings.
• It’s also obvious that the EU rating would be reflective of the ratings of its largest members, some of which have seen downgrades over the past year.
• However, it then gets a bit odd. S&P cites the EU budget negotiations, which were admittedly tricky and divisive, as an example of declining support for the EU. Firstly, the budget negotiations are always difficult but were eventually concluded and were pretty much wrapped up early this year. It’s also a bit strange given that the budget cannot run a deficit and countries are obliged to contribute – it’s not clear exactly how this relates to a credit rating issue.
• The final point S&P raised was the issue of ‘Brexit’ and how the UK referendum could create uncertainty. Again this is some time away so the timing of the decision seems strange. Nevertheless, it does drive home an interesting point, in that S&P believe the EU would be less creditworthy without the UK. Something for members to ponder as the push for reform begins to get underway properly.

In any case, the main impact is likely to be symbolic. S&P have choice timing delivering the news on the same day when there was much backslapping and congratulations over reaching a deal on the banking union.

The stand-off in Kiev shows the EU's greatest weakness – and its greatest strength

Our Director Mats Persson writes on his Telegraph blog:

A deal between the EU and Ukraine involving a "deep and comprehensive" free trade area, finally seems to have the hit the wall, after weeks trying to reach an agreement.

Ukrainian president Viktor Yanukovich is now looking increasingly likely to sign a deal to join the Russian backed customs union instead. As the Russian deal is a customs union it is incompatible with Ukraine signing an individual agreement with the EU. Any further negotiations with Ukraine will therefore need to be jointly negotiated with Russia – something unlikely to prove easy.

Kiev (or its President) has chosen Russian over EU integration.

Ukraine is a big country and market, with 45 million people and substantial resources. It’s also a geopolitical hot spot, it looks both east and west, parts speak Ukrainian and are historically linked to existing EU members, Lithuania, Hungary, Austria and Poland. Other parts speak Russian and historically look to Moscow.

There are two ways of looking at this:

The EU’s “soft power” foreign policy – luring countries in by offering them gradual access to or membership of the EU’s zone of stability and trade – has hit its limits. EU enlargement as a foreign policy tool – betting on others voluntarily imitating the EU – worked as long as it could offer a haven to post-dictatorship countries in the Mediterranean and Eastern Europe, but without confronting the geopolitical orbit of hard power. With Ukraine, it has come up against precisely that in the form of Russia. Moscow offered its neighbour a binary choice: us or them. In a region still responding more to the whip than the carrot, the EU’s soft power proved highly limited. No amount of tweeting from constructivist-inclined EU foreign ministers will change that.

However, there’s a second way to look at it. The hundreds of thousands of pro-European protesters taking to Kiev’s streets show that, in fact, EU soft power is alive and well. Or at least, people in the EU’s neighbourhood still have a desire to join the club in some form. Therefore, and paradoxically, the stand-off between the EU and Russia over Ukraine simultaneously illustrates the EU’s greatest weakness and its greatest strength.

One final thought: I very much doubt that the protesters lining Kiev’s streets are voicing their support for the country joining the European Economic and Social Committee, or are particularly keen on plans to ban national flags (such as their own) from packs of meat, enforce quotas in boardrooms or prohibit refillable olive oil jugs in restaurants. They want to join a European club, broadly defined.

Those who press for more EU integration and increasingly want to make the EU an extension of the single currency should be aware that they’re also creating more hurdles for newcomers to join such a club. So far the “widening” of the EU has also led to “deepening”. With countries like Ukraine and Turkey in the game, that simply cannot continue. Scaling back the EU’s rulebook and allowing for differing levels of integration would lower the barrier to entry and therefore allow Europe to continue to use enlargement as a foreign policy tool.

The EU should want Ukraine and Turkey in but this won't happen as long as "ever closer union" is the mantra. A new flexible model of membership is needed. It is also one that may help to some existing members feel more at home in the club.

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.

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.

Cameron needs to begin putting specific reform ideas to Berlin

Our Director Mats Persson has an op-ed in today’s Telegraph. See below for the full text.

The old joke about the European Union was that it had two capitals: Brussels and Berlin. In the wake of the eurozone crisis, we can replace Brussels with Frankfurt – which is why Germany’s elections were watched with such keen interest in Downing Street.

David Cameron knows that his plan to negotiate a new deal between Britain and Europe depends almost entirely on Germany’s approval. So Angela Merkel’s crushing victory will have been a cause for both celebration and trepidation. The incumbent squashed all opposition, with her CDU/CSU party winning 41.5 per cent of the vote. This can only be seen as a massive endorsement of her approach to the eurozone crisis, trading German cash for others’ austerity.

Whatever the differences between the CDU and the Tories, Cameron retains a hugely powerful centre-Right counterpart with whom he can definitely do business. Merkel won’t pay any price to keep the UK in the EU, but she has dropped hints in public and private that she’s willing to grant concessions – including a reduction in the EU’s powers – so long as it doesn’t mean completely unpicking the founding treaties. The CSU, the CDU’s Bavarian sister party, is also an ally of Cameron’s, not least on issues such as rewriting EU rules about foreigners’ access to benefits.

In any coalition, the CDU and CSU will control the chancellery and finance ministry. This is where most of the de facto power over EU decisions now lies. Put simply: Merkelism will continue to dominate. Which is why, as one journalist told me yesterday, “Cameron should pop open the champagne.”

But it isn’t quite as simple as that. Merkel’s old partners, the free-market FDP, failed to make it into parliament. Ironically, it may have been the anti-euro Alternative fur Deutschland party which blocked them, by stealing the FDP’s votes. To form a new government, the chancellor will need a new partner, and it will have to be one of the Left-wing parties: either the Social Democrats (the SPD) or the Greens.

For Cameron, a centre-Right coalition would clearly have been a better deal. If the CDU and the Tories are distant cousins, the SPD belong to a completely different species – and the Greens even more so. The German Left is oriented towards Paris rather than London, and strongly in favour of tougher EU regulation, including the dreaded financial transaction tax. (With anti-banker sentiment still running high in Germany, this will remain a huge area of contention for years to come.)

The most likely outcome in Berlin is a grand coalition which hands the foreign ministry to the SPD. This is not a deal-breaker for Cameron’s plans. But it will certainly add a layer of complication, and may well take some issues off the negotiating table. For example, it’s hard to see how a German coalition and a socialist government in France will allow the UK to repatriate powers over employment law, even though this has been a Tory demand dating back to the early Nineties.

Still, with no German or French elections on the horizon – and the euro no longer fighting for survival – Cameron has what he has long needed: a window of opportunity. The tide is with him. Holland’s ruling party made clear only last week that it wants “less Brussels in several domains” including the return of “whole policy areas”, and has called for there to be a way to overturn, or at least challenge, the sillier rulings of the European Court of Justice. Even the Italian prime minister recently said that the return of EU powers “can be possible and it could be useful for us too”. “Everyone is now talking EU reform,” as one Brussels diplomat put it to me.

Most importantly, the European public are also in favour. As a recent Open Europe Berlin poll showed, German voters – by a margin of two to one – want their chancellor to back efforts by other EU leaders to decentralise powers. German voters’ trust in the European Parliament has plummeted from 52 per cent in 2007 to 33 per cent today, with a full 60 per cent wanting national parliaments to be able to block unwanted EU laws.

So how should Cameron play this? He certainly appreciates the importance of winning Merkel over to his cause: some estimates say that the number of visits by British ministers to Berlin has quadrupled over the past two years. Yet while the chancellor is instinctively sympathetic – particularly over the need to make the EU more competitive – the parliamentary backlash over Syria, as well as several other incidents, have left her wondering whether Cameron is really in control at home.

To assuage such concerns, Cameron needs not just to show that he is in charge of the agenda, but to begin putting specific reform ideas to Berlin to first slow and then reverse the drive to ever closer union. First, the core of the EU needs to be defined as the single market – not the euro. Giving the rest of Europe a veto over any eurozone proposals that touch on the single market could well win support in Berlin – and might prove more effective than a UK-specific veto over financial services.

Second, national parliaments must be the ultimate democratic check on Brussels’s decisions, while EU judges must be reined in. And third, there are several individual policy areas where Cameron should woo the Germans, from cutting the cost of Brussels to further liberalising the EU’s services market. With the German elections finally behind us, and Angela Merkel firmly in control, Britain will never have a better chance to get a better deal.

State of the (same old) European Union

It’s that time of year again, when European Commission President José Manuel Barroso delivers his ‘State of the European Union’ speech, laying out all his hopes and dreams for the coming year – few of which make it through the decision making gauntlet.

This year’s speech seems little different and, frankly, was a bit all over the place.

Barroso talked up the prospect of greater national flexibility, but, as always, within the end-goal of ever closer "political union". He said:

"The EU needs to be big on big things and smaller on smaller things - something we may occasionally have neglected in the past. The EU needs to show it has the capacity to set both positive and negative priorities."

"I value subsidiarity highly. For me, subsidiarity is not a technical concept. It is a fundamental democratic principle. An ever closer union among the citizens of Europe demands that decisions are taken as openly as possible and as closely to the people as possible.

"The European Union must remain a project for all members, a community of equals."

"I believe a political union needs to be our political horizon, as I stressed in last year's State of the Union. This is not just the demand of a passionate European. This is the indispensable way forward to consolidate our progress and ensure the future."

Therefore, despite mentioning subsidiarity, Barroso's end goal remains clear – full political union. A feature of the eurozone crisis has been that Barroso and the Commission have been increasingly sidelined when setting the agenda (which member states now dominate). This is also due to the fact that there will be a new Commission in place soon.

The Q&A session revealed that, despite Barroso's professed desire to "find ways" to "make Europe stronger", he is rather less open in practice.

In response to Conservative MEP Martin Callanan (who had said he had no interest in being European Commission President) he said:

"Let me tell you very frankly, I think that even if you were interested you would not have a chance to be elected as President of the Commission. And do you know why? I’m not saying that happily. Because I think your party, and your group, is increasingly looking like UKIP and the eurosceptic, anti-European group. And I start to have some doubts that you’re going to be elected in Britain yourself, and if it’s not UKIP that is going to be the first force in the British [European] elections. Because when it comes to being against Europe, between the original and the copy, people prefer the original. That’s probably why they’re going to vote more for Mr Farage than for Mr Callanan. And I don’t say this with any kind of satisfaction, because even if we have some differences, we have worked very constructively with the Conservatives – the British Conservatives and the Conservative group – in many areas."

Once again, it seems the Commission would rather help UKIP rather than work for reformers who don't share a belief in 'ever closer union'.

Barroso's analysis of the crisis hinted at his on-going denial of the role of the euro in causing the crisis:

"We can remind people that Europe was not at the origin of this crisis. It resulted from mismanagement of public finances by national governments and irresponsible behaviour in financial markets."

"What I tell people is: when you are in the same boat, one cannot say: 'your end of the boat is sinking.' We were in the same boat when things went well, and we are in it together when things are difficult."

There is still a sign that Barroso believes that all eurozone woes were caused by the financial crisis – though it may have been a trigger and there is no doubt that national finances were mismanaged, there can (or should) also be no denying that the structural flaws of the euro are what have caused the crisis to be as long and deep as it has been.

The Commission's hope that banking union is the eurozone cure has already come up against resistance from Germany, which is deeply sceptical of the Commission's desire to increase its own power. Barroso's insistence that the proposal be implemented in full before next year's elections will not have helped much on this front and simply highlighted how out of touch he remains with the concerns of even core eurozone countries.

So, despite some lip-service to greater flexibility, reform and acceptance of the shortcomings in the EU and the eurozone, the solutions presented by Barroso remain the same – greater political integration. Fortunately, this is very likely to be Barroso's last 'State of the Union' speech, while member states such as Germany and the Netherlands have shown themselves more open to reform.

Europe reacts to David Cameron's defeat on Syria

Europe has reacted with surprise - and a degree of shock - to David Cameron's defeat in the House of Commons, which has de facto ruled out British participation in any potential military operation in Syria, at least for now. Here is a first round-up.

In an interview with Le Monde, French President François Hollande commented the outcome of the vote as follows,

Each country is sovereign [and can decide] to take part in a [military] operation or not. This is valid for the UK as well as for France.

Hollande suggests France could go ahead with or without the UK, and says,

If the [UN] Security Council is unable to act, a coalition will be formed. It will have to be the largest possible…It will have the support of the Europeans. But there are only few countries that have the capacity to inflict a sanction through the appropriate means. France is one of them. It’s ready [to act]. It will decide its position in close contact with its allies.

An editorial in Le Monde carries the headline, "The Commons vote against...Tony Blair", and notes,

It's the trauma of the Iraqi episode…that explains the 'no' of the British parliament to a [military] action in Syria. It's not David Cameron…who has been defeated. Rather, he pays for Tony Blair – as Mr Cameron himself acknowledged during the debate. 

As regards the international implications of yesterday's vote, the article goes on,

Washington has indicated that the decision of the UK – the privileged ally, the one of the 'special relationship' – would not stop the US intervening. But [the UK’s decision] can’t not embarrass Paris – even though, officially, France’s position remains that it is impossible not to react to the use of chemical weapons.

Germany's Die Welt has a comment piece entitled, "Cameron experiences his greatest humiliation". The article notes,

The refusal of the British House of Commons to participate in a military strike against Syria has left Cameron badly damaged - and with him the 'special relationship' with the United States.

Die Welt's chief correspondent Michael Strümer stresses how, once again, when it comes to 'hard power' the EU disappears. He writes,

While all eyes are on Washington, New York, Moscow, and on Damascus, Ankara, Cairo and Jerusalem, awkward silence reigns in Brussels…In the corridors of powerlessness in Brussels you can sense frustration and little momentum.

Christian Zaschke of Süddeutsche Zeitung describes the vote as,

A political slap in the face of historic proportions” for the Prime Minister, adding that it will define his tenure…On the international stage, [Britain] will be taken less seriously.

In Denmark, the only other EU country that has signalled it might take part in a strike, political leaders have this morning signalled that the country remains committed - although Foreign Minister Villy Søvndal also warned that the UK vote "calls for reflection".

When asked about the vote, Polish Foreign Minister Radoslaw Sikorski dodged the question, replying that it is important to have confidence in the UN inspectors' evidence. Sikorski also suggested that a possible solution could be for Russia to secure the Syrian regime's chemical weapons stockpiles - as the majority of them dates from Soviet times.
 
In Spain, an article in El País under the headline, "A blow to Cameron", argues that, as a result of the vote,

The British Prime Minister sees his authority seriously dwindled and, in an unprecedented event in the country’s modern history, has lost control over foreign policy.

Italian political commentator Gianni Riotta notes in La Stampa,

Paradoxically, Hollande, a French Socialist, seems to be the ‘hawk number one’. After securing a very prudent pension reform, he’s now trying to use strength against an ex colony inherited by the Turks to titillate the nation’s imperial pride – although Cameron’s defeat will lead him to take a milder stance.

We will keep updating the blog with any other interesting reactions throughout the day.

What the Egyptian crisis tells us about the (in)effectiveness of EU aid

As the crisis in Egypt continues to intensify by the day, European Council President Herman Van Rompuy and Commission President José Manuel Barroso warned in a joint statement yesterday that the EU would "urgently review in the coming days its relations with Egypt" - including the new aid package worth around €5 billion that was pledged to Cairo last year.

EU member states' ambassadors are holding talks today, followed by a meeting of EU foreign ministers on Wednesday. For the moment, though, Egypt's new military-backed government does not seem very impressed by threats coming from Brussels. As Foreign Minister Nabil Fahmy put it,

"I want to determine what is useful and what is not and what aid is being used to pressure Egypt and whether this aid has good intentions and credibility. We are not looking to replace one friend with another but we will look out to the world and continue to establish relations with other countries so we have options."

There is plenty of political posturing in Mr Fahmy's words, but this kind of reaction inevitably raises questions over how the EU has handled its relations with Northern African countries over the past few years, particularly via the European Neighbourhood Policy (ENP). 

In a report we published in May 2011, we stressed how, in the name of 'stability', the EU had consistently increased funding allocations for countries like Egypt and Tunisia, despite the European Commission itself noting limited progress on human rights and democratic reform over the years. In particular, we argued that the Commission's reliance on so-called 'budget support' - whereby EU aid money is given directly to neighbouring countries' governments and then directed towards specific projects by the latter - was clearly problematic, given the lack of transparency on how these funds were used.

The European Court of Auditors recently made a similar criticism in a tough report on EU aid to Egypt, where it suggested that the European Commission had been "too flexible" in assessing whether the Egyptian authorities were actually meeting the conditions for granting 'budget support'. The Court noted that,

"The Commission and EEAS [the EU's diplomatic service headed by Baroness Catherine Ashton] have not been able to manage EU support to improve governance in Egypt effectively. This was partly due to the difficult conditions they have faced in Egypt but also to shortcomings in the way the Commission and EEAS have managed their cooperation with Egypt."

The recent events in Egypt add one further element of concern. Despite its generous funding (Egypt was initially allocated approximately €1 billion for the period 2007-13, around 60% of which via 'budget support'), the EU seems to have failed to gain any significant leverage on the Egyptian establishment. Calls to stop the violence have been ignored - and the threat to stop the disbursement of aid has so far been openly snubbed.

This is of course a complex political situation and the circumstances are difficult, but given that the ENP is a very political aid instrument (seen by the EU as a tool to exercise its 'soft power'), it is getting increasingly difficult to see what value it has added in the case of Egypt.

What would leaving the EU mean for the UK's services sector?

Our Director Mats Persson writes on his Telegraph blog,

The UK’s services sector accounts for around 75 per cent of the country’s GDP. Britain’s 0.6 per cent growth in the second quarter of this year was largely thanks to this sector, which grew at its fastest rate in over two years.

Whether we like it or not, the UK will remain a services-based economy for a very long time. So it goes without saying that as David Cameron looks to negotiate a new settlement with Europe, getting a good deal for the UK’s services sector should feature highly.

By far the most common argument from Better Off Outers is: “We sell more to them than they sell to us”, implying that the UK’s trade deficit would give London leverage to secure a favourable Free Trade Agreement in place of EU membership. It’s a persuasive argument. It is also simplistic. As the graph below shows (click to enlarge), the UK’s trade deficit with the EU is the result of a large goods deficit, while it is a net exporter of services.

This is critical for several reasons.

First, UK services firms clearly use their comparative advantage to do business in Europe, boosting UK growth.

Secondly, if you buy into the “trade deficit” argument, it follows that while Germany and others would have an interest in maintaining open markets for selling manufactured goods in the UK, this logic does not apply for services, where they are net importers from the UK.

Therefore, the UK would be vulnerable to tit-for-tat trade games in its key economic sector. Perhaps Germany would be so keen to continue selling tariff-free cars that it would happily offer market access for UK services firms as part of a new deal. However, it’s far easier to remove tariffs for goods than it is to eliminate the myriad of barriers that exist to market access in services. Despite 40 years of negotiations, the Swiss still have patchy EU market access for services, while the EU and US have spent decades trying but failing to agree reciprocal market access for certain types of funds.

Critically, there’s only one off-the-peg model offering full market access for services outside the EU – the Norwegian model (EEA) – which for a range of other reasons would be a bad deal for the UK. The other potential models – the Swiss, Turkish and WTO options – would restrict access for the UK services industry absent separate agreements for specific sectors. This also spells problems for the City of London, currently used by a range of firms as an entry point to the single market, often via a so-called passport (involving a firm being allowed to sell its services across the EU as long as it’s authorised to do so in one member state).

Again, given that the City is also a gateway to global markets for European firms, a deal might be struck. However, since “Anglo-Saxon” bankers and fund managers aren't exactly universally loved on the continent, it’s also easy to see France et al blocking passport-style provisions for UK financial firms in perpetuity.

So, there’s a strong argument for the UK to remain a full member, not only of the single market in goods, but also in services. Now, this cost-benefit analysis could of course change. For example, if the many non-trade costs of EU membership aren't reduced through fundamental reform; if the single market in services – which is under-developed – continues to be held up by protectionist interests; if the EU prevents the UK from taking advantage of growth opportunities from around the world; if Brussels continues to be more interested in restricting financial services activity rather than facilitating trade – then the case for fully remaining in the single market could weaken significantly.

Which is why another round of serious liberalisation of the EU services market is long overdue. Over to you, Berlin.

The Balance of Competences may not set pulses racing but EU's impact on NHS is a crucial issue

This afternoon, while the nation's attention is focussed on other matters, the government has released the first tranche of reports coming under the 'balance of competences review'. In total, six reports have been presented, of which health is the most interesting and politically significant. This is because although the EU Treaties make clear that health is primarily a national competence, the cumulative impact of EU laws on the NHS has been considerable, and in many areas largely detrimental. The report (somewhat diplomatically) states (on p.10) that:

"Concerns were also raised about various cross-sectoral EU legislation which has a significant impact on the delivery of healthcare in the UK. Many of these concerns related to proposals around data protection and the Working Time Directive (WTD) – neither of which were specifically designed with healthcare in mind."

The main issue is the impact of the EU's Working Time Directive - passed as a 'health and safety' measure, but in reality a politicised piece of social legislation - which has imposed significant additional cost burdens on the NHS as well as messing with the ability of junior doctors to learn effectively on the job. To re-cap quickly, the original Directive imposed a cap of 48 working hours, but this was then followed by a couple of rulings from the ECJ (see here for more details) which made a bad piece of legislation a lot worse by creatively interpreting its provisions concerning on-call time, further limiting the amount of time staff could spend actively looking after patients.

The Royal College of Surgeons has estimated that the WTD has led to a loss of 400,000 surgical hours per month, while the BMA has calculated it has led to the equivalent of the loss of up to 9,900 doctors. The total cost of the Working Time Directive to the UK economy currently stands at over £4bn every year, much of which falls on the NHS which has to employ additional staff - many of them locums. A recent Telegraph investigation found that many of these locums were being paid up to £2,000 per day to provide cover.

Aside from the (huge) direct financial cost, there is also the issue of trainee doctors not being able to gain the requisite level of experience, with potentially dangerous implications for patient care. The irony is that due to its own inflexibility, the Directive fails to even fulfil its basic premise of ensuring medical staff work sustainable hours - a number of investigations has found many doctors still work dangerously long hours.

Moreover, EU laws can further impact the NHS in the following, often unexpected areas:

• Language competence testing - a highly sensitive issue following the Dr. Ubani case,
• The Clinical Trials Directive which has contributed to a fall in the number of clinical trials taking place,
• EU data sharing legislation which could remove the exemptions for medical research charities,
• The Energy Efficiency Directive requires energy efficiency improvements from all public buildings which imposes a particularly heavy cost on the NHS,
• There is no data sharing obligation to inform the UK's regulator, the GMC if a doctor is struck off in another EU country,
• EU free movement which allows EU migrants the ability to access the NHS free of charge (although in theory the NHS is supposed to be reimbursed), 
• Wider issues around public procurement and competition law.

In conclusion there is clearly a clash between the EU treaties which state that health ought to be a national issue and the real impact of EU legislation on the NHS. In part, this could be due to the unique nature of the NHS compared with other European models but the political reality is that all main political parties are committed to broadly keeping the NHS. However, the report does note that other EU countries 'bypass' the WTD by treating service delivery and education via separate contracts, which suggests its not only the UK that has a problem with it, and that it could muster allies in an effort to force through reforms.

Highlighting such problems is exactly the point of the Balance of Competences review and its good that these issues are being brought to light. That said, for the impact to be lasting, this information must be turned into a political strategy and fed into the government's attempts to renegotiate the UK's position within the EU. Such a strategy is yet to be formulated, and the quicker this is done the clearer the impact of such reviews will be. 

Italy: A new (and unexpected) ally on EU reform for David Cameron?

Italian Prime Minister Enrico Letta has probably made a lot more friends than he expected on his first official visit to the UK. This is largely due to a couple of quite sensible remarks he has made about the future of Europe and Britain's role in it.

Asked by the BBC's Gavin Hewitt about the UK returning significant powers from Brussels, Mr Letta said, 

"It can be possible and it could be useful for us too...We need a more flexible Europe...We can have a new [EU] treaty negotiation for the UK to have a different link, but remaining on board, and for Italy or other countries in the euro to have a more integrated eurozone."

He was even more specific during the joint press conference with David Cameron earlier today,

"I think it will be possible to have a common very near future in which we can have [EU] treaty changes for having a more flexible Europe in the interests of the UK, but also in the interests of Italy and the euro area countries."

This certainly challenges the assumption that there's no appetite for major treaty changes across Europe.

Meanwhile, in a piece for the Guardian's Comment is Free, Mr Letta also argued,

"Greater integration in the eurozone should not challenge the integrity of the single market or leave countries outside the eurozone less comfortable with their membership of the [European] Union...We need to reshape the Union, so that it can accommodate the interests of countries which want to move forward towards greater political and economic integration, and countries which prefer a co-operation around the single market."

Furthermore, during the joint presser, Mr Letta repeated several times that the single market is "the main pillar" of the EU because, unlike the single currency, it is shared by all 28 member states.

This is music to David Cameron's ears. Italy is traditionally one of the most pro-integration EU member states, and while Mr Letta believes in the 'United States of Europe', the fact that he also acknowledges the need to make the EU "more flexible" is potentially significant. It means that more integration in the eurozone, if that is what happens, is not incompatible with a more flexible, looser relationship for other countries outside the single currency.

As UK Foreign Secretary William Hague put it in his speech at Open Europe's summer reception last night,

"Change in the EU is worth fighting for and that change would not just benefit Britain but every country in the EU."

Well, the UK may just have found a new, and somewhat unexpected, ally in this fight. 

The coalition has missed a chance to debate the fundamental issue at the heart of cross-border crime and police co-operation

Our Research Director Stephen Booth has written a piece for the Guardian's Comment is Free section, where he argues:

The Home Secretary, Theresa May, has announced that the UK will opt out of 133 EU criminal justice measures, using a "block opt-out" negotiated by a previous Labour government. It will then seek to sign up again to some of them, including a "reformed" European arrest warrant (EAW).

As ever, the devil will be in the detail and we should reserve judgment on the government's reform proposals until we've had time to digest them. Nevertheless, there is much here to raise an eyebrow or two. For one, the coalition seems to have arrived at the number of measures it wants to sign up to (35) through a process of "split the difference" between Liberal Democrats who would rather the UK didn't exercise the opt-out at all and Conservatives who would be inclined to opt out of the lot, or only opt back into a handful. An arbitrary process such as this is hardly the model of principled policy-making.

No one seriously argues that the UK would be better off cutting itself off completely from international co-operation on crime and policing. However, there is a legitimate debate to be had about the institutional form it should take and how citizens' rights can best be safeguarded, especially given the current backdrop of transatlantic spying allegations. Governments and the powers that be will always be tempted to abuse their authority. The best antidote to this is democratic scrutiny and accountability.

The EU opt-out is not simply a decision about keeping 133 EU law and order measures. It is also about whether the European court of justice should have full jurisdiction over them for the first time – once the UK opts back in to these 35 measures, EU judges rather than UK judges will have the last word on how they are interpreted. This would have been an important debate, because amending EU law in the wake of an EU judgment that results in something our elected representatives did not intend is extremely difficult, as it can only be achieved through complex EU negotiations. Thus, the democratic link to citizens is broken. In the context of the UK's wider relationship with the EU, an opt-out could have provided the opportunity to debate this fundamental issue.

However, this opportunity has largely been wasted: the temptation to revert to type in any EU debate – be it pro or anti – is often easier than arguing about substance. There are few issues that galvanise Liberal Democrats like civil liberties. Lib Dem backbench home affairs spokesman Julian Huppert has argued that May's claim that "criminals, terrorists and paedophiles" would want MPs to vote against the UK data communications bill (or "snooper's charter") was misleading and the sign of "someone without a rational argument to make". However, in defending the EAW and other EU measures, Lib Dem politicians including Nick Clegg have used the spectre of "paedophiles, murderers and terrorists" to try to shut down the debate. In addition, the party's enthusiasm for keeping the EAW stands in stark contrast to its tough stance on the UK-US extradition treaty, particularly in the case of Gary McKinnon. This is despite the fact that, once the UK opts back in, the EAW is part of a permanent, supranational EU legal system and the UK-US treaty is a bilateral arrangement which, in theory, can be rejected by either party.

The Conservative side of the coalition has not covered itself in glory either. While it is clear that Conservatives are the driving force for taking the opt-out, there has not been a robust principled defence of this move by Conservative ministers, particularly on the role of the EU's court, and therefore, why the party's often cited robust stance on law and order at home could be compatible with exercising the block opt-out.

Poll after poll shows that the British public would like a looser relationship with the EU, including on crime and policing issues. My view is that the UK should return to a system of bilateral, practical crime and policing co-operation with EU partners, which does not involve ceding control to the EU institutions. Others may take a different view, but let's debate the issue.

Portugal's Finance Minister quits: A bolt out of the blue? Not really...

A surprise development in Portugal this afternoon, as Finance Minister Vítor Gaspar has announced his resignation. The office of Portuguese President Aníbal Cavaco Silva has said in a note that Gaspar will be replaced by Maria Luís Albuquerque - one of his deputies, with a long career in the Portuguese Treasury.  

Initially, the news sounded very much as a bolt out of the blue. That was until Jornal de Negócios published Gaspar's letter of resignation on its website. The letter reveals the following:

• Gaspar had already written to Portuguese Prime Minister Pedro Passos-Coelho in October 2012, stressing "the urgency of [his] replacement as Finance Minister."

• At the time, Gaspar had decided to quit over "a series of important events". In particular, he mentions the Constitutional Court ruling that struck down the government's plan to limit extra holiday and Christmas pay for public sector workers as unconstitutional in July 2012, and "the significant erosion of public support" for the austerity measures attached to the Portuguese bailout.

• However, Gaspar was asked to stick around a bit more - at least until the 7th review of the Portuguese bailout by the EU/IMF/ECB Troika was finalised and an extension of the bailout loan maturities was secured. Incidentally, the fact he has now been allowed to leave could be seen as a vote of confidence from the government in the strength of the Portuguese economy (although Gaspar may simply have been stepping up the pressure to be allowed to exit).

• Gaspar also points out that Portugal's consistent failure to meet its deficit and debt targets under the EU/IMF bailout agreement had "undermined [his] credibility as Finance Minister." On this point, it is probably worth reminding that, on Friday, it came out that Portugal's public deficit in the first quarter of 2013 had reached 10.6% of GDP - with the target for this year set at 5.5% of GDP.

• Interestingly, Gaspar concludes his letter by saying, "It's my firm conviction that my exit will contribute to reinforce your [Prime Minister Passos-Coelho's] leadership and the cohesion of the cabinet". This seems to suggest Gaspar may have lost faith in the reform approach taken in Portugal, and may not have been willing to push ahead with it (not least for the reasons mentioned above).

In any case, the news of Gaspar's resignation hardly comes at a great time for Portugal. As we noted in a recent briefing, the country faces some tough challenges this year:

• Domestic demand, government spending and investment are contracting sharply, leaving the country heavily reliant on uncertain export growth to drive the economy. 

• By cutting wages and costs at home (internal devaluation), Portugal has in recent years improved its level of competitiveness in the eurozone relative to Germany. However, this trend actually started to reverse sharply in 2012, meaning that the divergence between countries such as Portugal and Germany has begun growing again – exactly the sort of imbalance the eurozone is seeking to close. 

• In its austerity efforts, Portugal is now coming up against serious political and constitutional limits. For the second time, the country’s constitutional court has ruled against public sector wage cuts – a key plank in the country’s EU-mandated austerity plan – while the previous political consensus in the parliament for austerity has evaporated. 

How much impact this will have remains to be seen, although in a country where the economic future remains uncertain, suprises such as this are hardly ever welcome. In practice, though, the approach is likely to continue in much the same vein, firstly because the EU/IMF/ECB Troika has shown little willingness to be flexible with Portugal, and secondly because Maria Luís Albuquerque has often voiced her support for the approach taken so far.

That said, it is an interesting reminder of the strains the bailout programme is putting on the Portuguese government, as it begins the difficult task of finding a way to smoothly exit from its reliance on external funding.

Will the closure of public broadcaster set the scene for a coalition showdown in Greece?

Imagine a Number 10 spokesperson announcing during the afternoon news bulletin that the BBC has become too expensive to run and will be shut down with immediate effect. You would be excused for thinking that the Government and the Corporation have joined efforts to take you for a ride.

Well, this is exactly what happened in Greece - and it wasn't a joke. Greek government spokesman Simos Kedikoglou went on TV yesterday afternoon to say that the country's public broadcaster ERT would go off the air a few hours later, because it had become a "refuge of poor transparency and waste."

As a result, ERT's almost 3,000 employees have been temporarily laid off. The Greek government says that a revamped and slimmed-down broadcaster (NERIT SA) will be up and running by the end of August. Protests were staged outside ERT's headquarters yesterday and are continuing today, while ERT journalists are still putting programmes on air via digital frequencies and the internet.

A couple of points are worth making at this stage:

• The decision to shut down ERT is clearly linked to Greece's commitment to firing 15,000 public sector workers by the end of next year under its EU-IMF bailout deal, although it's up to the Greek government to choose where to cut. Therefore, it's probably not entirely fair to blame the Troika for this (admittedly pretty extraordinary) decision;

• The fact that the Greek government prefers shutting down ERT altogether and then opening a brand-new company, instead of trimming the existing company down, could be seen as further evidence of how difficult it is to fire public sector workers in Greece - even in cases where inefficiency and waste are evident (at least according to what the Greek government spokesman said);

• On the domestic politics front, Greek Prime Minister Antonis Samaras has decided to go ahead with the closure of ERT despite open opposition from his coalition partners - PASOK and Democratic Left. The latter now want to submit a draft bill to scrap the decision, meaning that there is a risk of a coalition split - unless someone blinks.  

As the Troika has long suggested, it is clear that Greece's bloated public sector needs to be downsized significantly. That said, it is also clear that this situation has been poorly handled, particularly given the wider political and social tensions already at play in the country. The fallout of this story might be worrying - further splits in the governing coalition and wider public backlash against an austerity programme for which there is already very little buy-in.

We will keep monitoring the situation and give further updates on Twitter @OpenEurope.

Lord Leach: EU reform is the best option, even for us sceptics

Open Europe’s chairman Lord Leach of Fairford has an op-ed in today's Times, where he argues:

Fifteen years ago, when a handful of businessmen set up Business for Sterling to stop Britain joining the euro, we were cold-shouldered by the BBC, patronised as Little Englanders by the Establishment and attacked relentlessly by the CBI’s leadership. 

By the time the previous Government dropped the idea of entering the eurozone, we had nearly 1,000 chairmen or chief executives on our supporter list. 

The centre of gravity has shifted as politicians today line up to argue that the EU in its current form has exhausted its usefulness, and exit is no longer to be feared. Even the most ardent Europhiles pretend amnesia about their former enthusiasm for the single currency. “More Europe” as the answer to every problem has become a bad joke. Even “Thus far and no further” has been replaced by serious questioning of the status quo. In short, the game is up for the Europhiles. 

I disagree, however, with Nigel Lawson and others who have given up on reform and want us to head for the exit. Procedurally, withdrawal would be a nightmare. The famous Article 50 in the EU Treaty would give us two years to negotiate, during which time EU laws would still apply to the UK, without us having any effective say, as we would be sidelined in the EU institutions. That alone should make us pause before pushing the eject button. 

The majority of the public, the political class and business, as shown by multiple polls, are sceptical about the EU but rather than leaving it they want a new deal to reduce its power over their lives. With good reason, for there are two jokers in the pack. First, none of the recent “outers” has set out a credible alternative. It is easy to say “Europe needs us more than we need it” or that if Asians and Americans can trade happily with the EU from outside it, so can we. 

 But this glosses over the reality that without free trade agreements many of our businesses would lose a chunk of their market. The car industry and the City would be especially hard hit. In theory, free trade agreements could cure that, but they would take time to negotiate and the EU would see no advantage in protecting our lead in those business areas. The eurozone’s attack on the City has been brutal enough; and the French would be particularly keen to block British financial services firms from having access to EU markets in perpetuity. 

But it is the second joker in the pack, Germany, that is far more important. Angela Merkel is a cautious leader and doesn’t shoot from the hip. She knows that without radical reform the risk of Britain leaving is huge. She also knows what the consequences would be, as do the Netherlands and Sweden. The EU would lose half its military capacity, nearly 15 per cent of its budgetary contributions, its financial powerhouse, its principal channel to the Anglophone world and its main opponent of protectionism. Berlin would be in a voting minority against the French-led, high spending, uncompetitive Club Med countries. 

Both David Cameron and Chancellor Merkel would therefore be playing with fire if they tried to buy off the British electorate with trivial concessions, as Harold Wilson did in 1975. The public won’t wear it and Germany would risk finishing off its dream of European unity and losing its most effective fellow reformer. 

The first necessary step to a new order would be to redefine the EU as the Single Market, not as a vague aspiration to political union, still less as a currency union. Safeguards would have to be put in place to ensure that the eurozone does not write the rules for the rest of the member states. The next step would be to strengthen the powers of Westminster over EU decisions. 

There is already support for these two reforms in Europe. With those in place, Europe could move to much greater flexibility. Member states could group together in passport unions, fishing or agricultural regimes, defence arrangements or tax and currency unions, but none of this would be obligatory. Subsidies, employment law and energy policy would no longer be micromanaged from Brussels. 

These kind of reforms would ensure that Britain would be at ease in Europe for the first time for 30 years. Norway and Switzerland could join such a structure and the Turkish issue would become more soluble. The euro problem would not go away, but the taboo that makes any change to the eurozone unmentionable would be broken. 

We cannot go on as we are, firefighting crises and ill-judged regulations inside a Union that has become the world’s economic laggard. Most of the necessary reforms have been identified and discussed across the continent. Now we will have to see whether Germany and its Nordic allies will be willing or able to deliver them. 

None of us knows what will happen next. There is still all to play for, and this complex game with so many other players should not be reduced today to a black-and-white argument about staying on the pitch or going home.

The real Europe question: how to kick-start growth

We appreciate that Westminster and the media are occupied with the Queen's speech and internal tory divisions over Europe (be them real or overblown), but real story in Europe lies elsewhere: where will the EU's and UK's growth come from?

Well, we know it's not fashionable, but here's a constructive idea.

Open Europe has today released a new report calling for the liberalisation of the services sector across Europe, both through the implementation of the current services directive but also by widening its scope. The report argues that this could boost EU GDP by €300bn and if it cannot be done with all 27 members, the UK and its allies should look to pursue it under ‘enhanced cooperation’ - allowing a smaller group of countries pressing ahead with more integration if not possible at the level of all 27 member states.

See here for the full report and here for a video with British Chambers of Commerce’s Director of Policy and External Affairs, Dr Adam Marshall, discussing the issue and OE’s proposal. That organisation represents thousands of businesses and knows a thing or two what's needed for economic growth, beyond the navel-gazing of the Westminster village and the platitudes of some politicians.

Key points of the report:

- Fully implementing the existing Services Directive and implementing a new “country of origin” principle, a trade-boosting measure that was removed when the Directive was originally negotiated, would boost EU cross-border trade and produce a permanent increase to EU-wide GDP of up to 2.3% or €294bn, in addition to the €101bn already gained under the Services Directive (0.8% of EU GDP).

- If agreement among all 27 member states isn’t possible, a smaller group of EU countries should now press ahead with greater integration in services under the EU’s so-called ‘enhanced cooperation’ procedure, which is being used to pursue the financial transaction tax. This was an idea first floated by Mark Rutte, the Dutch Prime Minister, in 2011.

- In a “pro-growth” letter in February 2012, twelve member states – the UK, the Netherlands, Italy, Estonia, Latvia, Finland, Ireland, Czech Republic, Slovakia, Spain, Sweden and Poland – all committed themselves to “open up services markets”.

- We estimate that if only this group of countries were to fully liberalise their services markets, it would still produce a lasting boost to EU GDP of up to 1.17% or €147.8bn. If other countries, such as Germany, were persuaded to join, the economic benefits would be increased further. Ultimately, this measure should serve as a springboard to achieve services liberalisation for the entire EU.

- The political benefits of further services liberalisation are threefold:

1) It would be a positive, constructive, and pro-European means by which to secure continued engagement in the EU from non-euro countries, particularly the UK.

2) It would provide a new legally enforceable framework to improve competitiveness and growth in the Southern euro member states and therefore boost the economic prospects of the eurozone, but without costing an extra cent of Northern countries’ taxpayers’ money.

3) It would improve EU-wide growth, competitiveness and employment at a time when Europe is at risk of global economic decline.