Is the EU really like 27 garden gnomes?

We've been making a concerted effort here on the OE blog to bring you many of the more memorable quotes from the eurozone crisis, and we've had at least one more following a debate in the German Bundestag ahead of tomorrow's European Council summit.

As expected there was a lot of anxiety about potential debt pooling. From CSU MP Gerda Hasselfeldt, for example, who said that calls for a pooling of liabilities between eurozone members would be:

"a betrayal of German interests... It would not be right for the deposits of German savers to be put at risk from the misconduct of banks in other countries” 

Meanwhile, speaking to journalists before the debate, FDP leader Rainer Brüderle slammed the present state of the EU, claiming that:

"The whole world is laughing its head off over these 27, soon to be 28, garden gnomes that are trying to play global politics but can't even get their own act together."

Brüderle, renowned for his tendency to shoot from the hip, had to row back when asked if he counted Angela Merkel among these gnomes, saying that the comment had not been directed at any one individual.

Combined with Merkel's comments yesterday that there would be no shared total debt liability for as "long as she is alive", the mood in Germany is certainly feisty ahead of tomorrow's summit...

What could Cameron hope for?

As has been repeated, and repeated again, in the UK media over the last few days, David Cameron isn't in the easiest spot as he attempts to square off a number of circles with EU leaders today and tomorrow. The referendum debate has taken on a life of its own (not so much driven by backbenchers as by media and high-profile interventions by two ministers and a mayor).

Cameron's squeezed position stems from an unusually complicated mix of domestic pressure, an economic crisis running out of control and an EU negotiation cobweb of massive proportions. But, we all know this. The question now is, what can he realistically hope for?

As Bruno Waterfield explained on the Telegraph live blog earlier today, Cameron is fighting to insert language in tomorrow's (or the weekend's - it might be a long session) conclusions that would commit EU leaders, on paper at least, to "consider and develop concrete and effective mechanisms" to ensure the integrity of the internal market at 27 and that the essential economic interests of non-euro members are fully protected (i.e. for the UK, the City).

The thing to remember is that the Treaty changes will not be agreed tomorrow - what this summit is designed to do is to lay the groundwork for a deal (and possible finalised Treaty changes) at the summit of EU leaders that will take place in March. So if Cameron managed to insert this kind of language in a political declaration attached to the summit conclusions, though it may on the surface seem like nothing, it could actually set Cameron up for negotiations to achieve some sort of "emergency brake" over new EU financial regulation - which we have called for.

Is it doable? It depends on a number of factors.

1) Treaty changes involving 17 or 27 (or 17+ or 17- ) - Berlin is set on 27, and for Merkel it will be difficult legally to achieve a eurozone-only Treaty, for reasons we've discussed before and though several countries have expressed reservations about the Merkozy proposals, they could well be adopted in some form at the end of the day and trasnlated into Treaty changes. As it has been over the last few weeks, our money is on a Treaty at 27.

2) A limited or even more limited Treaty change: The changes that the Germans want require a proper Treaty change (although often described as "limited") through what's known as the 'simplified revision procedure'. As these changes would involve the EU institutions, which as Cameron rightly pointed out are the property of all 27 member states, that would give the UK a veto over the Treaty change. But there's also a second way to change the Treaties, proposed by Herman Van Rompuy, which would only involve tweaking protocol 12, which is the protocol governing the eurozone. This would still give Cameron the right to veto the changes as they require unanimity in the European Council - but it would be a relatively small change to a protocol (a protocol which doesn't impact in the UK as it's not in the euro).

3) Will Cameron have any allies? Several countries are worried about fragmentation of the EU, including the Poles, Romanians, Swedes as well as eurozone 'ins' such as the Netherlands, so any moderate measure Cameron takes to counter such a trend could draw some support from these countries. However, many countries are fed up with the whole Treaty business, and see it as unnecessary (merely designed to cater to German domestic concerns) and the quicker they can move on from these talks, the better. Most EU leaders are unlikely to be too patient with additional demands.

However, as one of the EU's big three and given the importance of financial services to the UK economy and the domestic pressure Cameron is under, few EU leaders are out to get Cameron. He's still well liked among many. Question is if they feel it's politically possible to meet any of Cameron's demands.

And to say, as some have, that financial regulation is "not on the agenda" is pretty silly. It is on the agenda. And it wasn't put there first by the UK, but by France and Germany which are pushing for a Financial Transaction Tax and increased regulation of financial markets.

So Cameron's best hope is:

1) Insert a political declaration in the summit conclusions tomorrow that calls for concrete measures to protect non-euro member states' economic interests
2) Work out concrete protocol language amounting to a UK safeguard over EU financial services (see here for how it could work), which can then be inserted via Treaty changes
3) Insert such a protocol at the first possible opportunity (it's unclear to us whether this can be achieved legally under a limited treaty change - but political will and expendiency is king in EU law).

In combination, this would amount to establishing an effective veto over a key UK national industry - and would be a massive achievement.

However, what is more likely to happen is some sort of language in the text of the summit conclusions which makes no mention of 'concrete measures'. It would rather be a general formulation of the importance of the single market at 27. At the March summit, this could possibly be turned into a political declaration, which would be useful but would have no legal force.

In terms of 'safeguards', this wouldn't be perceived as enough, and Cameron would potentially have a grave party management problem on his hands...

A busy day in Euroland

It’s been another busy day in the eurozone crisis, with European Council President Herman van Rompuy putting out his report on the prospects for treaty change and greater eurozone fiscal integration and then German Chancellor Angela Merkel and French President Nicolas Sarkozy sending a letter to Van Rompuy with their take on the issue. That’s just the formal announcements, not to mention the usual rumour mill of giant bailout funds, ECB and IMF intervention and a UK referendum.

To help digest this mass of info, we’ve picked out some of the key points from each text along with our thoughts on them.

Van Rompuy report:

- Need to enhance credibility of debt and deficit rules and ensure full compliance. Greater budgetary discipline to move euro area to true economic union. Commitment to balanced budgets.
- All introduced into national law – the ECJ would judge whether these rules had been correctly implemented.
- Two processes for achieving this: revise Protocol No 12 (in annex of treaty) or full treaty change with amendment to Article 48.
- Changing protocol 12, which relates to excessive deficit procedure, has the advantage of only requiring unanimous approval in the Council, therefore does not need national ratification and avoids triggering an Irish referendum.
- Amending article 48 would be a lengthy process but reforms could be much more far reaching including – automatic sanctions using EU institutions, specifically enhanced Commission oversight of budgets.
- Longer term move towards common debt issuance.
- Adhere to “well established IMF principles and practices” with regards to private sector involvement in future bailouts. Basically, rewrite the ESM treaty so that private sector losses are not encouraged. Also make most ESM decisions QMV.
- Allow ESM to recapitalise banks directly and have the “features of a credit institution”. This likely means that it should be able to borrow from the ECB.
- Review the clause which limits lending capacity of EFSF and ESM jointly – to allow them to run in parallel.

Merkel and Sarkozy letter:

- Commitment to push ahead with broad treaty changes although willingness to work with just 17 eurozone members.
- Regular eurozone summits (twice a year usually but once a month in the crisis). Focus on policies to foster growth, competitiveness and fiscal stability. “Ministerial Eurogroup” to prepare for meetings and enforce decisions.
- Framework of prevention using ECJ to ensure that fiscal rules are correctly transposed in national framework.
- Foster growth and competitiveness through eurozone convergence and integration on: financial regulation, labour markets, harmonisation of corporate tax base, introduction of eurozone FTT and more efficient use of European funds.
- Automatic sanctions for states which breach 3% deficit rule (can be reversed by QMV vote). Continuous failings will result in increasing interventions.
- Move forward ESM to 2012, rewrite clauses so it’s clear PSI in Greece was an exceptional occurrence. Decisions on ESM made by 85% QMV (based on ECB capital shares).

So, all in all a lot of words without saying much we didn’t already know. It is clear though that both documents line up fairly closely on many key issues. One area where they don’t agree, and where Merkel is apparently annoyed by Van Rompuy’s proposal, is the plan for the ESM and EFSF to run in tandem offering a boosted bailout fund.

Other things that caught our eye include: common corporate tax base - good luck getting Ireland to agree that, especially after all the austerity they have successfully introduced - and the plan for the eurozone FTT, which they seem determined to push ahead with, no matter how much havoc it would wreak on the European financial system.

In any case, as always, this doesn’t fill us with hope for the summit. If anything these plans are likely to be watered down through the negotiations, despite already looking relatively similar to the toothless stability and growth pact. Even if finalised in their current form the plans will only provide more austerity and take some time to implement. The (misguided) hope still remains that they will encourage the ECB to step up its bond buying – although if we were the ECB the commitment doesn’t seem large enough or credible enough for us to put our independence and principles on the line.

Summiting the mountain that is the eurozone crisis

The perpetual rolling meetings which have characterised this eurozone crisis look to be reaching a head this week. The EU summit which kicks off on Thursday evening will undoubtedly be preceded by a series of smaller meetings between European officials and bilateral meetings with foreign leaders keen to see a solution to the crisis found (and in town to apply the suitable amount of public pressure).

Below we flag up a few key points of discussion to look out for, and outline some of the key issues which still need to be resolved:

- Today’s meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy must produce a united front on the plans for budgetary integration. If they fail to produce a set of concrete and workable proposals from the summit, planning will already be behind schedule and markets will begin to expect another failure. That said, given outstanding areas of disagreement (see here) some broad political agreement short on detail looks likely as always.

- The role of the ECB. Reports over the weekend suggested that the ECB was ready to step in once an agreement on strict fiscal discipline is reached. Whether or not eurozone leaders’ commitments will satisfy the ECB's idea of austerity remains to be seen, and the unlimited backstop which markets want still looks unlikely. A plan involving the ECB lending to the IMF has been touted again.

- A greater role for the IMF. Germany agreed to explore the possibility of greater contributions to the IMF last week, although where these will come from is unclear. US opposition to expanding the IMF’s resources is significant (it requires congressional approval), but reports suggest financing could come from central banks in an attempt to circumvent political opposition.

- The UK’s approach to negotiations. Whether Prime Minister David Cameron will look to repatriate powers will depend on the details of any proposal Merkel and Sarkozy put forward, but it’s increasingly looking like he will keep his powder dry regarding his desired bigger push for retrieving powers from the EU. (For some of our recommendations see here and here).

- Italy unveiled a new set of controversial austerity measures yesterday, which look to have been well received so far. An important debate on the measures will take place in the Italian parliament today, while the reception which Italian Prime Minister Mario Monti gets at the summit will be a good gauge of what Italy can expect in the coming months. If the pressure is instantly for even more austerity, it could set the tone for a torrid few months for the interim Italian government.

- Other issues which still need to be ironed out include the leveraging of the EFSF, the eurozone bailout fund, and the second Greek bailout. Discussions over the extent of private sector involvement in the Greek package were put on hold last week – the package just looks too complex and will always be held up while it is voluntary. We would argue that the plan should be scrapped and a simpler, cleaner restructuring put in place for Greece, although that looks very unlikely.

All in all, plenty to keep an eye on.

In 2020 Greece will be...Italy

So, another summit passed and another chance to assess the agreements in the cold light of day. Unsurprisingly, we’re not too enthusiastic over the deal which has been struck, not least because it doesn’t seem to have changed much from the drafts which were circulating yesterday, which we critiqued here. To be fair, given the complexity of the deal, we shouldn't judge eurozone leaders too hard for not reaching a comprehensive agreement last night (it's more a matter of judging them by their own standards).

In any case here are some of our initial thoughts (most focus on the complete lack of detail or practical implementation included in the plan).

Revised second Greek bailout:

Eurozone leaders and Greek bondholders agreed a 50% write down along with €30bn in “sweeteners” for those private investors who take part and another €100bn bailout for Greece.

Open Europe’s take:

- Significant questions remain over the actual level of debt reduction which this plan will yield. Given that Greece's debt-to-GDP ratio is still expected to be 120% in 2020, we’d imagine not much. Also, this means that basically in 2020 Greece will be where Italy is now. Is that meant to be desirable?

- High levels of Greek debt mean another write down is likely. However, with more and more debt being from official sectors how will this happen and will it fall on taxpayers?

- 50% write down is in nominal terms, meaning the net present value reduction could actually be less (depending on numerous technical details which were left open by the agreement).

- Greek banks need €30bn under the recapitalisation - it's not clear exactly where this money will come from. It looks to be from the amount earmarked for banks under the first bailout, but this is normally counted towards covering other Greek funding needs. Unclear, therefore, if the €100bn will be enough to cover Greek funding needs over the next three years.

Leveraging EFSF:

Essentially the same plan as in the drafts, split between insurance and special purpose investment vehicle (SPIV). Still a huge number of questions which need to be answered, particularly over who will and how they will invest in the SPIV. Starting point of leveraging the fund (how much is left in the EFSF) is unclear, therefore total leverage is still up in the air. The lack of progress on this area is indicative of the complexity and lack of clarity of how this will work in practice.

Bank recapitalisation:

EBA estimates that it will cost €106bn for banks to meet the new 9% threshold by June 2012. UK banks pass all the tests, with most failures coming in the PIIGS.

Open Europe’s take:

- Huge number of issues here. Firstly, where will this money come from? Clearly given the leverage plans, they don’t expect much to come from EFSF. So most is thought to come from private market – not clear if the demand is here. For PT, IR and GR, the deal suggests the money will come from their original bailouts – it's not clear if there is enough money left in the first rescue package. In any case, this may be self-defeating if it forces PT, IR and GR to ask for more money.

- Not clear exactly how the 9% threshold will be calculated, or what capital can be used. However, reports suggest that hybrid capital and convertible capital will be allowed to some extent (win for Germany and Spain) which suggests the targets will be easier for banks to meet.

- The UK banks pass partly because all debt was marked to market (even that which had seen an increase in value) meaning UK and German debt became more valuable, in turn making the UK and German banks look healthier. This is an incredibly pro-cyclical precedent to set (although admittedly logical here if you were marking down other debt), so should not be common practice.

- The plan to block dividends and bonuses until capital requirements are met is misguided. If the banks are receiving public funds there should be limits and strong conditionality. However, applying it to those still raising on private markets will just cause uncertainty and share price fluctuations, therefore having the opposite effect to the one desired.

Now, are there any questions?

Q & A: What could tonight’s summit agreement involve?

The hope for a “comprehensive plan” to save the eurozone, as originally touted by the eurozone leaders, looks to be a lost cause. The best outcome we can hope for today looks to be a broad political agreement, with technical details left to be sorted at a later date. Given previous experiences with technical changes (notably the second Greek bailout package and the Finnish collateral deal) it is definitely possible that the deal could be watered down, for example with investors being offered greater guarantees over their involvement in the second Greek bailout or with the bank recapitalisation actually turning out to be less stringent than expected.

How might the revised second Greek bailout look?

The IMF, Germany and most eurozone countries are pushing for a 60% face value cut, although the Institute for International Finance (IIF) – effectively representing banks - still seems someway from agreeing to that. Write down on Greece’s debt are likely to be between 50% and 60%, probably achieved through a bond swap with the new bonds having a maturity of 30 years. EFSF – the eurozone’s temporary bailout fund – is unlikely to offer collateral, although Kathimerini reports that some portion of the bonds may be swapped in cash (essentially bought out or retired, presumably using bailout funds).

Open Europe’s take:

- We still don’t have an exactly detailed plan, but if EU leaders managed to push through a 60% write down, that would be positive. However, the lack of participation and the ‘voluntary’ nature of the plan mean that the actual debt reduction may still be limited and far below what is needed in Greece.
- There is still an on-going desire amongst some eurozone countries, the ECB and the IMF to avoid a so-called “credit event”, involving the triggering of credit default swaps (CDS) – a form of insurance on government debt, which would force some investors and banks to take significant losses. Such an event may be triggered anyway given size of haircuts, but even if it were, he evidence suggests a cascading effect would not take place. It’s worth keeping in mind that not triggering CDS also has an impact, as it could ruin the finances of those who take losses, since they can’t recoup from the hedges they have in place.
- IIF will always have stronger negotiating position until the ‘voluntary’ nature of the plan is abandoned, meaning that banks can still avoid losses despite them having to be incurred sooner or later. In short: a full hard restructuring is needed and will only become more costly in the future.

Can we expect details on the leveraging of the EFSF?

In a word…No. There will be some details, with the plans focusing around two options which can be implemented separately or together:

1) Using the remaining EFSF funds to insure new issues of sovereign debt, likely to be 20% for countries such as Italy and Spain. The insurance is expected to be tradable, not permanently tied to bond it is issued with, and may take form of a certificate with a claim to EFSF bonds or cash repayment.
2) Creating a Special Purpose Investment Vehicle (SPIV) to attract foreign investors (public and private). The SPIV will purchase sovereign debt of struggling eurozone countries, and is likely to take the form of an account with IMF, to which IMF will contribute (amount tbc). Other countries (BRICS and their sovereign wealth funds in particular) and private investors could also invest in this fund. They may chose to create numerous SPIVs, for country specific purchases, and would likely need some EFSF guarantees to get it going, but could then issue its own debt instruments or get capital contributions.

Open Europe’s take:

- This proposal is still massively vague on technical details and how much leverage is achievable. However, no matter what the details look like, the insurance plan is fundamentally flawed, given that guarantees may not be viable when they are most needed and 20% wouldn’t be enough to calm markets any way (see here for a full breakdown of our thoughts). As we’ve noted before, a complicated and tradable form of default insurance is precisely what EU politicians have spent years to try to regulate against. So their ‘solution’ is riddled with irony given many eurozone leaders aversion to CDS. Furthermore, since the current plan suggests offering EFSF bonds as insurance rather than a cash pay-out, it may be close to worthless since it would only be needed in a situation where a default of Italy or Spain is a real risk. So, in such a worst case scenario, the EFSF insurance scheme becomes almost redundant.
- The SPIV plans also hinge on who is willing to invest. Given the massively correlated nature of the risky assets which these funds will be buying, we’d imagine that investors may ultimately get cold feet. To get up and running the SPIV may require significant guarantees from EFSF (such as a pledge to take the first loss, similar to the insurance plan) which would be self-defeating, since the EFSF could not afford this.
- Again, there’s massive irony here, as Europe is now falling back on massively complex ‘Anglo-Saxon’ financial instruments to help save the eurozone. Putting these at the heart of an already complex, diverse and flawed monetary union is far from desirable.

What structure could the bank recapitalisation take?

- Probably marking to market on debt as of 30 September 2011, with target capital tier one ratio of 9% (not clear on which set of Basel rules this measure will be based). Expected to total €108bn, and needs to be done by 30 June 2012
- Banks must first attempt to raise capital from private sources (including debt-to-equity swaps). Drafts suggest that until this is done there will be restrictions on the dividends and bonuses which banks can pay. If the capital cannot be raised on the private markets then governments will have to step in with an effective bank bailout, and failing that, the buck will be passed to the EFSF. We expect that funds from governments and the EFSF will have even greater conditionality, and will probably require some restructuring of the bank.
- Some guarantees of bank liabilities (or bank bonds) may also be required to allow banks access to funding and to stop them shrinking their balance sheets (meaning that they could stop lending money to, say, small businesses).

Open Europe’s take:

- Bank recapitalisation is definitely necessary, although the marking to market on all sovereign debt does set a dangerously pro-cyclical precedent. Again more technical details to come, but definition of 9% threshold is key - if watered down, this could undermine the whole process.
- Applying restrictions to banks raising money on the private market is also not necessarily desirable. This could cause huge fluctuations in share prices and lead to market distortions. Obviously, it is important to make sure banks recapitalise during the given time frame, however, setting these conditions could do more harm than good. Strong conditionality needs to be imposed on banks when the governments or the EFSF lend them money.
- Offering guarantees can also be dangerous, as was demonstrated in Ireland. Some guaranteeing of bank bonds to maintain access to funding may be necessary, but offering broader guarantees could begin to weigh on the debt and deficit of states.

What role will the ECB play in all of this?

Germany has won out the argument over whether the ECB should step in and fully back stop Italy and Spain, despite protestations from France. So the ECB is likely to play a limited role for now – though that could change should there be no solution to the crisis this week. Recently, France was still pushing to include a phrase which encouraged the ECB to continue its bond buying even after the EFSF was leveraged, however this looks to have been dropped from the draft summit conclusions.

Meanwhile, Martin Wolf’s article in the FT today called for the ECB to step in and backstop the eurozone.

Open Europe’s take:

- It’s definitely desirable to keep the ECB role at a minimum, given already big questions over its independence, credibility, and the risks on its opaque balance sheet. The ECB currently has an exposure of €590bn to the PIIGS, up from €444bn only 4 months ago.
- In his article, Wolf makes some valid and interesting points, but, uncharacteristically, glosses over the fact that the problems with the ECB’s monetary policy helped to fuel the crisis (by cycling cheap credit to the peripheral economies, which fuelled asset bubbles and sovereign spending). Looking at the averages of the eurozone is massively misleading and says very little. On average the picture for the eurozone doesn’t look too bad but it masks the huge divergences and imbalances which are nearly impossible to overcome.
- Having the ECB step in now and expand its balance sheet with no clear exit strategy or conditionality would have unknown effects and would be undesirable in the long run.
- The ECB cannot act as full lender of last resort in the eurozone without engaging in fiscal policy. This is a structural flaw in the eurozone, which cannot be overcome by some panic solution.
- The ECB will ask for a say in exchange for providing the funds – having policy dictated by an independent, unelected central bank is not desirable or sustainable. To expect the ECB to just put up the funds without a say would make it a political pawn and would cease to be effective at any of its goals.
- In any case, forcing it through would risk German support for the eurozone. There’s no point sacrificing the long-term viability of the eurozone, in return for short-term stability.
- See here and here for a full discussion of the ECB issue.

Facts on Italian and Spanish funding:

- Even if the rumoured leverage of €1.25trn - €1.4trn could be achieved, it will not be enough to fully backstop Italy and Spain. Italian funding needs over the next three years total between €825bn and €907bn, depending on budget policies. Spanish funding needs could reach between €500bn and €602bn. Add into this the cost of bank recapitalisation and the needs of other countries and it becomes clear the fund can never really be large enough to act as the full backstop which markets want.








- The main point in the short term is that it significantly undermines the planned budget cuts of around €100bn, even if this target is achieved which seems very unlikely. If yields reach these levels or increase, then Italy will miss its deficit targets for the next few years. This will increase market fears and impatience of Eurozone leaders and ECB.
- All of this adds significantly to longer term debt, plays on debt dynamics, as average interest rate paid increases and makes it harder to keep balanced budget.

Doom, Gloom and a dash of slapstick: Commentariat responds to EU summit

And it is said that the British press is exceptionally cynical…

On his Coulisses de Bruxelles blog, French journalist Jean Quatremer argues, “The eurozone makes one think of that cartoon where Wile E. Coyote chases Road Runner: it continues to run above the vacuum and it’s only when it realises it, that it will fall down.”

In the New York Times, Paul Krugman writes: “If it weren't so tragic, the current European crisis would be funny, in a gallows-humor sort of way. For as one rescue plan after another falls flat, Europe's Very Serious People - who are, if such a thing is possible, even more pompous and self-regarding than their American counterparts - just keep looking more and more ridiculous… at this point, Greece, where the crisis began, is no more than a grim sideshow. The clear and present danger comes instead from a sort of bank run on Italy, the euro area's third-largest economy. Investors, fearing a possible default, are demanding high interest rates on Italian debt. And these high interest rates, by raising the burden of debt service, make default more likely. It's a vicious circle, with fears of default threatening to become a self-fulfilling prophecy.”

In the FT, Wolfgang Münchau writes, “It is time to prepare for the unthinkable: there is now a significant probability the euro will not survive in its current form. This is not because I am predicting the failure by European leaders to agree a deal. In fact, I believe they will. My concern is not about failure to agree, but the consequences of an agreement.”

Writing in La Repubblica, Italian economist Tito Boeri notes, “It was supposed to be the weekend of the rescue of the euro and the entire European construction. Instead, it will be remembered for Sarkozy’s sarcastic smiles during the closing press conference, when he was asked about the commitments made by our Prime Minister.”

Italian daily La Stampa’s Editor in Chief Mario Calabresi argues, “It’s annoying to be put under tutelage, to be citizens of a state whose sovereignty is limited and whose agenda for reform is dictated by foreign leaders who allow us three days to give answers…It’s humiliating to hear that Europe puts us on the same level as Greece.”

On the frontpage of FAZ, Holger Steltzner argues that: “Italian industry is strong, but politicians are weak. Italy could quickly gain international competitiveness and economic growth, if it only wanted to."

In Süuddeutsche, Cerstin Gammelin writes that this weekend, European leaders had “for the first time risked looking into the mirror of truth, and that what they saw exceeded all negative expectations…regardless of how much money will be mobilised [by the EFSF], it will not save the euro. It will just be a matter of buying time to solve the fundamental problems.”

European "union"

So, by Wednesday, EU leaders will have held nine meetings in five days, which is extraordinary. In addition, they will also have seen through a huge number of rows. So how many rows can we count to, over the last week or so? Here we rank them in order of their potential significance and level of intensity.

1) The 'you shut up' row: French President Nicolas Sarkozy finally lost it with David Cameron's consistent criticism of the eurozone leaders' handling of the crisis, reportedly telling him he "had lost a good opportunity to shut up", while also trying to cut Cameron out of important meetings deciding the bank recapitalisation plan (a move that eventually failed). You can understand Sarkozy's frustration but if he snapped at everyone who criticised the handling of the crisis we'd imagine he wouldn't have too many people to talk to.

Result: Sarkozy 0 Cameron 1

2) The 'laughing at Berlusconi' row: After teaming up and privately lambasting Italian PM Silivio Berlusconi for his lack of economic reform (or any reform at all) despite the growing market fears surrounding his country's debt sustainability, Sarkozy and German Chancellor Angela Merkel let their feelings slip publicly by laughing in response to a question on whether Berlusconi had convinced them of his ability to finally make the necessary reforms. Not the proudest moment for either the French or German leaders but sums up what seems to have been another bad weekend for Berlusconi in a terrible year. To top it off he returned to Italy and announced a plan to increase the retirement age by two years, a policy likely to put him on a collision course with his coalition partner Lega Nord. In terms of consequences then this row could be a biggy, given that it may threaten the stability of the Berlusconi government.

Result: Merkel & Sarkozy 2 Berlusconi 0

3) The 'not so happy couple' row: Despite seeming united while ganging up on Silvio, the facade of unity between Merkel and Sarkozy was quickly shattered. In something that seems more like a scene out of a bad High School Musical sequel, Merkel is reported to be hurt after Sarkozy remarked to other leaders about the Chancellor,"she says she is on a diet and then helps herself to a second helping of cheese". We'd imagine this could turn out to be one of the more costly insults in history if Merkel decides to remove any sympathy for the French government or banks from her approach to the crisis. Add to this the reports of a loud slanging match at Jean-Claude Trichet's leaving party and all does not look well behind the scenes for the EU's proverbial power couple.

Result: Sarkozy 0 Merkel 0 (Only half-time, could easily turn into a rout for Merkel)

4) Merkel v the Bundestag: Last Friday saw the recent tensions within the Bundestag come to a head, with the parliament refusing to give Merkel a mandate to negotiate on at Sunday's summit, eventually forcing the EU to agree to hold another summit on Wednesday. In terms of consequences for eurozone decision-making, this one is key. The row over how much say the Bundestag has in the eurozone crisis negotiations and policies has been simmering for some time and we expect this to be the first of many flash points. Merkel took an early lead by sidelining the Bundestag but with the recent German Constitutional Court ruling and by forcing Merkel's hand here, the Parliament has clawed it back.

Result: Bundestag 2 Merkel 3 (but plenty more to come, with Bundestag on the up)

5) Conservative Party 'rebellion': Yes, we put this fifth, despite this being the biggest internal test Cameron has faced to date - this is because, to us, it's a bit of an inflated Tory row. Scratch the surface, and the Conservatives are more united on Europe than they ever have been (arguably) - most of them want renegotiation. Still, media loves that old Tory split story and there are widespread reports of a growing 'rebellion' in the Conservative Party ahead of today's vote on the prospect of an EU referendum. Definitely, become a bigger issue than the government would have wanted and has gained some vocal support but with a three line whip the government looks likely to get its way eventually (albeit after handling the situation poorly). The actual motion is non-binding and the Government will win the vote in any case. But in terms of political outcome, it's finely poised, though we give it a draw for now.

Result: Government 2 Rebels 2

6) The 'banks won't pay' row: An old classic here, with the usual arguments between the banks led by the Institute for International Finance (IIF) and EU officials. Banks refuse to take bigger write downs angering the officials and stalling any permanent solution. As long as the write downs continue to be voluntary in nature the banks will continue to hold the power.

Result: EU officials 1 Banks 4

7) The ECB 'footnote' row: As we noted in our post on the latest troika report, the IMF and the ECB had a significant disagreement over the debt sustainability in Greece and the level of write downs needed to keep Greece stable. The IMF looks to have one out given the analysis in the report, although the ECB got a footnote in stating it doesn't agree with the scenarios. A win for the IMF but given the previous row and result it may become a moot point.

Result: IMF 2 ECB 1

The EU summit - our take

So the eurozone crisis talks go on, but for those of you interested, the conclusions from this week's EU summit can be found here. There were no surprise statements as most decisions were deferred to the extra meeting on Wednesday, though most EU leaders did their best to give assurances at their respective press conferences that they're making "good progress". A few points:

- It was agreed that a full European Council meeting will precede Wednesday's eurozone meeting - a concession to the UK, Poland, Sweden and other 'outs'.

- How to leverage EFSF still needs to be resolved, with two options reportedly under discussion - none of them, thankfully, involving the ECB (according to Merkel).

- No agreement on what to do with Greece.

- EU leaders seem to have reached a preliminary agreement on bank recapitalisation, with most reports stating that leaders see a need for a €100bn capital injection (add or take away a few billions) into the EU's banking sector, first coming from private funding, then governments and finally EFSF as a last resort.

- Viewed from London, it's interesting that that draft conclusions state that any EU treaty change must be agreed by all 27 member states. This is of course the case per definition for an EU Treaty change but could also be an attempt by the UK and others to steer the eurozone away from pursuing a eurozone-only Treaty (similar to Schengen), effectively stripping the UK and other non euro-members of their veto over changes that could have an indirect, but significant, impact on them.

At his press conference, David Cameron also said that any EU Treaty change could be used to "advance British interests", which is interesting. Cameron is probably playing to sceptics at home ahead of tomorrow's vote in the Commons on a motion calling for an in/out referendum. But by upping the game like this, it will be difficult for him not to deliver some sort of safeguard or even powers back when EU Treaty changes or further eurozone integration are put on the table (a first discussion over Treaty change can be initatied as early as December). That pressure will be there even if that change technically impacts on the eurozone only.

As we've argued before, the eurozone crisis is changing the way Europe operates, which has all kinds of implications, for example steering the EU in a more "inter-governmental" direction. The implication for the UK's Coalition government is clear, however: Cameron and Clegg simply can't freeze the EU as an issue during this parliament, as was its original strategy. The status quo is no longer an option, whether they like it or not.

Now, at his press conference, Cameron flagged up the risk of an integrated eurozone effectively taking bloc-decisions with a profound impact on the UK economy, but without the UK having a presence at the negotiation table, for example in trade and financial services. He's absolutely correct to highlight this potential risk.

But he is wrong to say, as he also did at the press conference, that we shouldn't 'get ahead of ourselves' on a potential EU treaty change, as such changes "take years". It's true that Treaty changes will be slow-moving, but the key to set the agenda in EU negotiations is to get in early and get in with clear objectives, meaning that now is the exact right time for the Coalition to develop a game plan for how to achieve reform in Europe. Not through grand posturing or meaningless symbolic demands, but a concrete, credible and positive blueprint, forming a part of the constitutional and political settlement that is likely follow in the wake of the eurozone crisis, whatever turn that crisis takes. And just for the record, there's a crucial difference between the immediate crisis, which is wholly inappropriate to seeking to exploit and the long, political discussion that will follow afterwards, where the UK has little choice but to engage with its own sets of demands (like everyone else).

Following tomorrow's vote in UK parliament on an in/out referendum, this is where the debate on EU reform probably needs to move on to.

Much ado about nothing?

And so passes another fatefully underwhelming summit on the eurozone crisis - at least as far as markets are concerned

You’d have thought by now that Sarkozy and Merkel would have learnt that holding a meeting without having anything meaningful to say is often worse than not having a meeting at all. Alas, that was not the case and markets dropped following the rhetoric filled press conference in Paris this afternoon. As ever, markets move infinitely faster than EU politicans can act.

However, the conclusions from the meeting do carry political significance, as they essentially reinforced German and French desires to press ahead with more centralised control over eurozone countries' economic policies (on Franco-German terms, if those can be agreed). The meeting also seems to be paving the way for turning Council President Herman Van Rompuy into more of a Franco-German puppet than what he already is, with a proposal floated to give the Belgian the effective chairmanship over the eurogroup, that now is to meet separately twice a year. It's politically significant as that would effectively institutionalise the eurogroup, which could have consequences for non-euro members, including the UK.

The discussion seemed to focus on long term issues and was lacking short term policies or any inventive ideas – not particularly surprising but by holding a meeting people, markets in particular, always seem to get their hopes up slightly, making the inevitable let down worse than it might have been.

The key points to come out of the discussion were:

• ‘No’ to Eurobonds right now from both leaders, although Sarkozy did suggest they might be possible one day (with more democratic legitimacy and as a last resort Merkel added). Notably, Merkel didn't seem to completely rule them out long-term.
• Refuse to enlarge the EFSF. Sarkozy suggested it is large enough and is now the suitable instrument to help save the euro (which is slightly delusional)
• Agreement to hold biannual eurozone summits and to elect (from within leaders - don't think for a second that voter will be involved) a eurozone president to sit for two and a half years (again, with Herman Van Rompuy as the likely candidate to fill the position initially)
• Will put forward proposals to include a debt brake in the constitutions of all 17 eurozone member states by the summer of 2012
• Reiterated their joint support for a financial transactions tax, possibly to help fund future eurozone bailouts (which would be big), plan to present proposals next month
• Create a common corporate tax base for France and Germany, to take effect from 2013 – interesting given the exemptions and confusion surrounding the French corporate tax rates and gulf between the French and German tax systems in general. Again, this is politically very significant in the medium-term.
• Emphasised need for struggling countries to enact necessary economic reforms and repeated their continuing commitment to defending the euro (nothing new)
• No plans to rewrite any EU Treaties, but Merkel also noted that the Lisbon Treaty isn't the "last EU Treaty we'll ever sign".

If this was a summit meant to convince markets, as they all seem to be nowadays, it looks to have failed off the bat - judging by the swift drop in US markets (good thing European ones were closed). But it was another piece in the evolving puzzle that is a Franco-German-led eurozone economic government, with more central control over taxation and spending policies (both Sarkozy and Merkel have floated this before, though France has historically been much keener than Germany on enhanced economic governance in the eurozone as opposed to at the level of all 27 member states).

We hastened to add that it might be worth sparing a thought for the ECB during all of this, given that the continuing failure of leaders to soothe markets (and possibly actually antagonise them) makes the ECB's job significantly more difficult, particularly in terms of bond buying. It's likely that markets could push up the Italian and Spanish cost of borrowing over the next few days forcing the ECB to purchase more than it intended to, thereby leading it further down the rabbit-hole of an opaque, bloated and risky balance sheet and into the realms of fiscal policy.

So to sum up: the meeting was politically important but economically irrelevant - at least in the short-term race to assure markets.

Cameron and the bail-outs

Over at Conservative Home we're taking a look at the outcome of the bail-out discussions at today's and yesterday's EU summit, from a UK point of view. We note,

Following a “row” with Germany over the UK’s involvement in a new rescue package for Greece, Cameron has declared something of a victory. The EU bail-out mechanism through which the UK would have been partly liable, the European Financial Stabilisation Mechanism (EFSM), won’t be activated and the UK will only contribute €1bn or so to a fresh Greek aid package via its IMF commitments.

Not that it was much of a row in the first place – it was primarily the Guardian that got a bit over-excited, quoting one German official, which made No 10 look pretty good in the end. A proposal for activating the EFSM was never really on the table. However, since the UK actually doesn’t have a veto over its own participation in this fund (bizarrely, the activation of the EFSM is decided by a majority vote amongst EU leaders) there was still a theoretical risk that the UK could be outvoted. Indeed, the fund could again be called upon in future bail-outs. So this game isn’t exactly over.

But in fact, this is not the most relevant discussion. Yesterday Cameron stated that “when the eurozone suffers, the UK suffers”. In pretty strong language, he has stated that it is very much in the UK’s interest that the eurozone returns to health. But if this is so, why isn’t the UK participating in a second Greek bail-out?

Then we go on to argue what you've heard us argue many times before - that the bail-outs aren't working. As the group of 14 Tory MPs from the new intake argued in yesterday's FT, nodding through a failing eurozone strategy will leave the UK exposed to future meltdowns in euroland. It should instead be pushing for a restructuring - and plan for it to be achieved in an orderly manner. Read the full piece here.

UK-EU asylum "row": smoke and mirrors?

The British press' preview of today and tomorrow's summit has been partly dominated by an expected "row" between Cameron and the EU over a Commission proposal to water down rules on asylum. The fact that this has been covered in almost every paper from The Sun to The Guardian suggests it is a story that the communications folks in Downing Street wanted us to read. The question is why?

The so-called Dublin Regulation allows member states to send failed asylum seekers back to their first country of arrival in the EU. However, the Commission is pushing to be given the power to invoke a suspension clause to prevent people being sent back to certain countries if they are under "exceptional pressures" from a mass influx of migrants, for example.

These are ongoing negotiations on a proposal dating back to 2008, to which the previous government opted in. The current Home Secretary Theresa May said a couple of months ago that, "We oppose the suspension of transfers under the Dublin regulation." The Labour Government said it was "concerned" about the Commission's suspension clause at the time of opting in but did so anyway, presumably hoping it would be removed during negotiations.

When Downing Street talks up such a "row", it is usually fair to expect it to be followed by a "UK win" - the reports today suggest that Cameron has won French backing for his position. And with EU leaders, at the very same summit, set to discuss a tightening up of the border-free Schengen zone after recent influxes of immigrants from North Africa, it would be miraculous indeed if at the same time they decided to relax rules on asylum seekers.

This is not to say this isn't an issue because the Government could in theory be outvoted as the decision will be taken by QMV (exactly the kind of reason we have been advocating stronger parliamentary scrutiny of opt-in decisions). But what other motives might there be for talking up a UK victory in Europe?

Could it be that Downing Street would rather we didn't focus on another story perhaps? The Guardian reports today on something that could prove far more explosive for the Government. It quotes German officials saying that the UK will need to contribute to the second Greek bailout, over and above its IMF contributions, through the EFSF, for which the UK is partly liable.

"The German legal situation is clear," a German official said. "The EFSM should contribute." Asked whether the UK could veto such a move obliging it to guarantee billions for Greece, the official answered: "I don't understand the question because the decision is taken by qualified majority vote…Everyone is tied to a QMV decision."

The Guardian probably got a bit carried away, as we would be very surprised if the EFSM is activated for a second Greek bail-out (much will depend on how much EU leaders can squeeze out of private creditors under any bail-out plan. Absent private sector involvement - or at least the appearance of it - there's still a risk that the EFSM will have to pick up some of the slack. There's €11.5bn left in the fund). What is true is that the second Greek bailout is still very much an open game, with the theoretical risk of the activation of the EFSM or otherwise still being decided by a majority vote. But this would create a lot of bad blood. For nearly two weeks now Cameron has been saying the EFSM will not be used but, which leads Tory MEP Dan Hannan to suggest that it is in fact the spat over the ESFM that is the fake row.

In any case, this summit might not give us a whole lot of answers. We'll know for sure by 11th July, when EU finance ministers will meet to hammer out the exact details of the second Greek bail-out.

How much longer can the eurozone live an alternate reality?

This week's fun and games are over, with EU leaders concluding their Brussels summit earlier this afternoon.

Once again, this summit is unlikely to be remembered for anything EU leaders could agree on but, rather, for what eurozone leaders, in particular, were unwilling to even discuss. Namely, getting to the root of sorting out the eurozone's short-to-medium-term future.

As the BBC's Paul Mason asks on his blog:

Why, within the space of 12 days, do we get a "grand bargain" to create a Euro Stability Mechanism (11 March), which is then (a) knocked back by Finland (b) defied by Portugal (c) renegotiated at the behest of Germany's FDP coalition partner so they can do a tax giveaway in the coming elections; and (d) excludes Ireland anyway?

Chancellor Angela Merkel's, and by extension Germany's, focus on what are, in the grand scheme of things, minor details is starting to betray a worrying resemblance to an obsessive-compulsive's inability to recognise the bigger and far more important realities in life. Merkel's two 'victories' from this summit appear to be the fact that Germany will now pay in its share of capital to the permanent post-2013 eurozone bailout fund over five years rather than four and an EU commitment to "stress test" nuclear power stations. These are both pretty obvious bones thrown to the domestic German audience - the SPD and Greens are breathing down the neck of Merkel's CDU party in important regional elections - but will do little to reassure people that the eurozone is serious about tackling its problems. Not for the first time, domestic politics is pitted against eurozone imperatives.

True, the proposals on economic governance and tighter fiscal discipline were broadly endorsed, but earlier German proposals have been watered down and there's still much to play for in regards to how much of the package will be credibly enforceable. How will Italy and Greece cope with demands to get their debt-to-GDP below the 60% threshold?

Partly also due to Finnish resistance, eurozone leaders were unable to reach agreement on how to top up the existing temporary bailout fund, which, with Portugal more or less in a state of political and economic crisis seems a little complacent to say the least. We're told that all will be settled at the next summit in June - but haven't we heard this before; "It will all be sorted next time, no need to worry".

Maybe Merkel and the rest of the eurozone's leaders just prefer working under pressure. June really will be cutting it fine: Portuguese elections are expected to have been held only a week or so before and the new attempt at credible stress tests for Europe's banks are due to be published.

How much longer can the eurozone live an alternate reality?

Socrates needs to get philosophical

Looks like Portugal could be asking for a bailout by the end of the week.

Pedro Passos Coelho, Leader of the main opposition party, said on Saturday:

“We need external aid. The Prime Minister does not want to admit that, but the whole country has already understood it.”

He also said he will continue to oppose the new austerity measures, which are due to be voted on by the Parliament tomorrow or Wednesday.

Portuguese Prime Minister, Jose Socrates, announced that:

“Should the Parliament vote against, then the government would no longer have the means to act.”

With massive public protests against austerity in Portugal over the weekend, there seems less and less political incentive for the opposition to cave in and support the new measures. The only thing that everyone seems to agree on is that if the new austerity measures are voted down, Portugal will be forced to ask for a bailout.

However, given Socrates stance the government may fall if he fails to garner the support he needs.

That does not bode well given the EU summit at the end of the week. Socrates needs to get his thinking cap on…as going into summit negotiations without a government cannot be a good strategy.

A third way to bail out struggling countries

Much was discussed and a little agreed during Friday’s eurozone summit, but it was enough to give the euro a bit of a boost. Investors - going into the weekend with exceptionally low expectations - seemed pleased with the news that anything was agreed at all.

The most important and controversial measure agreed over the weekend looks to be allowing the EFSF - the eurozone's main bail-out fund - to purchase government debt, under exceptional circumstances.

The conditions imposed on any country wishing to make use of the EFSF's bond-buying scheme are pretty exceptional as well:

- EFSF can only buy bonds on the primary market (i.e. directly from governments)
- For this to take place, the government must enact an austerity programme as it would under a bailout

So what exactly is the difference between a bailout and using the EFSF to buy government bonds under these conditions? Not much, as far as we can tell.

One argument behind restricting purchases to the primary market is that it bails out governments rather than investors. Although that might be true, if the EFSF did purchase bonds in the secondary market the cost of borrowing for peripheral governments would undoubtedly fall by a lot more. There is also the added advantage of purchasing existing debt rather than issuing new debt and increasing the already heavy burden. In the end it looks like the standard EU compromise where both sides meet somewhere in the middle to achieve very little.

The decision also means that the ECB could well be forced to continue buying bonds on the secondary market, since a struggling country will think twice before signing up to strict conditions in return for the EFSF relieving them of some of their junk bonds.

What is significant, however, is that there are now three avenues through which the cost of failing economies can be transferred onto EU taxpayers - about a year ago, there were none (remember the days when some of us were foolish enough to believe that a guarantee in the EU Treaties, i.e. the no bail-out clause, actually meant something?):

1) Direct loans from one of the bail-out funds (requiring unanimity or a majority vote amongst eurozone governments)
2) The ECB buying government bonds, from the secondary market (at the discretion of the ECB)
3) The EFSF buying government bonds, directly from governments (unclear how decisions will be reached on when this can happen).

Many of the key questions remain, however. Such as:

- What interest rate will the EFSF be charging on government bonds purchased?
- Will this option be open to countries who have already received a bailout?
- How will the activation of the EFSF's bond purchasing programme be decided?
- Will Merkel be able to see this through amid domestic political resistance?

We’d hazard a guess that the EFSF would charge below market rates but above its lending rate, but we’d also expect some differentiation from the bailout loans otherwise it would look completely pointless.

Apart from that, we note that Greece - as we expected - has been granted what can only be described as a debt restructuring, though a limited one.

So on the upside, markets are slightly more re-assured. On the downside, expectations are now raised that a meaningful deal will be struck at the summit in two week's time.

When you do scratch the surface, this looks perilously close to more of the same.

In need of an ice-breaker

The traditional 'family photo' from today's EU summit...



Is it just us, or does it seem as if the couple at the end, Ashton and Berlusconi, don't quite know what to talk about...?

(Which could have something to do with the fact that one is your typical monolingual Brit and the other doesn't speak a word of English. Though, in truth, we suspect that's not the only reason)

What should Cameron be pushing for at the EU summit?

We answer that question over on the Spectator's Coffee House blog - read it here.

Many questions - no answers

Open Europe has today published a briefing looking ahead to the EU summit this week, identifying the crucial, inevitable questions on the future of the eurozone that EU leaders have to find the answers to. The small problem that EU leaders are facing is: there aren't really any good answers and any that there are, in turn, throw up a series of new questions.

One of the big questions is whether the current euro bail-out package will need to be increased to ensure market stability in the New Year, when eurozone governments and banks will face record targets of refinancing.

A very simple calculation shows that the current bail-out package looks worryingly insufficient to deal with Greece, Ireland, Portugal and then - the nightmare - Spain all at once. A conservative estimate from Goldman Sachs puts the cost of taking Spain, Ireland and Portugal off the debt markets for two years at up to €450 billion (other estimates put the cost of bailing out Spain alone closer to €500 billion).

And as has been widely documented by now, while the size of the EU/IMF bail-out package on paper is €750 billion, in reality, it's far lower than that.

First, the contributions from Greece and Ireland have to be subtracted (€19bn between them), as they themselves are receiving aid and are therefore exempt from contributing. Secondly, to ensure a ‘triple A’ credit rating – and therefore low borrowing costs – eurozone governments are guaranteeing 120 percent of each bond raised (allowing for a reserve that can never be used). In addition, as the credit rating agencies like to point out, the share of eurozone governments without a triple A rating must also be discounted, if the triple A rating of the EFSF is to be
guaranteed.

When adding up the figures then - and there are a few estimates flying around - the real size of the European Financial Stability Facility becomes more like €213 billion, with another €60 billion added through the European Stabilisation Fund. The final twist is that under the agreement struck in May, the IMF would only add 50 percent of the sum the EU provides, meaning €136 billion as opposed to the original €250 billion.

This leaves a total of €409 billion - as opposed to the official €750 billion.

Pew! Not very helpful, we know, but this amount is cutting it worryingly close. Although no one is saying it out loud, there will probably be plenty of whispers in the corridors of Justus Lipsius this week (where the Council meeting is held) on how to increase the package should the smelly stuff hit the fan in the New Year.

There are, of course, steps that eurozone leaders could take to ease the pain, including restructuring the debts of Greece, Ireland and Portugal in some way (though that would not deal with the underlying competitiveness problem these countries are facing). In addition, banks, not least Spanish ones, should come clean on their loan losses, so that we can flush out Europe's over-leveraged banking system once and for all (here real, rigorous stress tests could help). And, subsequently, the ECB must stop acting as a rubbish dump for bad government and bank debt and become a solid, independent central bank again - its current role is simply unsustainable.

So many questions, so little time...

When the driving force of policy is not to cause a fuss

Over on his blog, the WSJ's Iain Martin is today making clear what he thinks of Cameron's performance at the EU summit last week, and the Coalition's Europe policy more widely:

Cameron’s priority on Europe has been, as it has been throughout his leadership, that it shouldn’t flare up and cause him a problem. In coalition with the Lib-Dems, he now has even more reason to avoid the issue. Around him are former Euroskeptics, such as William Hague, who are prepared to go along with the European project (as currently constituted) in return for a quiet life and the perks of office.

But it’s been obvious for a while that the tectonic plates are shifting in the EU. The sovereign-debt crisis was only dealt with because Germany agreed to underwrite the temporary arrangements put in place to allow for a bailout. Angela Merkel was always going to come back and demand that permanent arrangements be put in place, and that other members of the single currency start to play by German rules...

...Last week Cameron indicated that Merkel could get the changes she wanted to Lisbon, etc., in return for… er, nothing. This is what happens when the driving force of a policy is the desire to not cause a fuss.

So not a fan of the limited EU budget increase then?

"I deplore this initiative. This letter is provocative and has clearly been written for reasons of domestic policy."

- The caretaker Prime Minister of Belgium, Yves Leterme, in response to the letter signed by Cameron, Merkel, Sarkozy et. al. backing a 2.9% increase to the 2011 EU budget.