It's not going away

Rumours that Ireland will soon be forced to seek a cash injection from the eurozone rescue package of no less than €80 billion have been denied by both a Commission spokesperson and Irish Taoiseach Brian Cowen.

Pressure on Irish bond spreads seems to have eased following a statement by France, Germany, Italy, Spain and the U.K., with the purpose of assuring investors that they wouldn't be forced to chip in to future eurozone bailouts (with regards to existing outstanding debts).

The statement says:

any potential private-sector involvement (...) does not apply to any outstanding debt and any program under current instruments.

The current jitters in the markets seem - at least in part - to have been triggered by German calls for a permanent euro crisis mechanism, which would force bondholders to shoulder part of the burden should a eurozone country go bust. Irish PM Brian Cowen commented that "It hasn't been helpful".

A mechanism for an orderly default procedure is a sensible idea, but it cannot be used as an excuse for avoiding tough decisions, such as cleaning up the banking sector, coping with the government bonds bubble, or most importantly, solving the inherent problems in the current eurozone structure.

What's clear is that this issue won't go away - there are many strong forces at work, creating the same toxic political-economic-monetary mix which preceded the Greek bail-out.

In an interesting post on his WSJ blog, Alen Mattich looks at the EU's €440 billion EFSF vehicle (one of the bail-out mechanisms agreed in May), arguing:

"Would such guarantees do the trick?

Insofar as it’s just a confidence game, yes. But there’s a real risk we are once again facing a solvency crisis. If Ireland, Greece and Portugal cannot make good on their existing debt, they will have to be bailed out or be made to default. All the evidence is that the Irish, Greek and Portuguese populations cannot support the debt they already have. For instance, at current yields, Greece would have to fork out something around 10% of its GDP to foreign creditors just to meet interest payments.

Since default would mean an instant crumbling of the euro zone, bailout is the only answer.

Germany, with help from the Dutch and maybe even the French, might be able to cover Irish, Greek and Portuguese debts, at least to the point where the local populations could reasonably be expected to service the remainder.

But could these countries resolve the problems with their structural deficits? Would their voters be happy to be, once again, poor within the euro zone when they’d gotten used to feeling rich? And would the Spanish and Italians be happy to sit by while others are being helped–never mind contributing to the bailout? What are the chances they too wouldn’t demand assistance?

It’s a game the Germans won’t play for ever. Or even for long.

All this links with the most fundamental problem of them all - the huge differences in competitiveness between the different economies in the eurozone, locking in the current tensions.

Incidentally, Ireland seems to be showing signs of engaging in a more fundamental debate about its monetary arrangements and the implications of EMU membership

The finance spokesman of Fine Gael, Ireland's largest opposition party, yesterday said:

Once the instrument of devaluation was taken from us, which we resorted to on a number of occasions in the 80s and 90s to restore competitiveness, a new regime had to be put in place and that was not put in place

Talk of devaluation, an indispensible ingredient in any IMF cure for bankrupt countries, is likely to catch on.

Government's referendum lock tabled

The Government has today tabled its "European Union Bill", containing the so-called 'referendum lock' and 'sovereignty clause', which the Tories have said will prevent the transfer of powers from Westminster to Brussels without the consent of the electorate and strengthen the power of Parliament.

The Bill is a welcome 'democratic break' on any major future treaties, for example, but it's going to take some thorough analysis before anyone can really say how it will stand up to all the potential permutations that EU politics is likely to throw up in future. Day-to-day transfers of power to Brussels can also be highly significant - and there's a bit too much ministerial discretion in the bill for comfort, i.e. on what constitutes a 'significant' transfer of powers.

As we have argued before, the current also Bill misses the opportunity to incorporate decisions on whether to opt in to new EU justice and home affairs laws. The Government should be required to seek the prior approval from Parliament before it can opt in to a JHA measure, such as the controversial European Investigation Order. An amendment to this should be added to the bill.

If this is included, and some of the other loopholes in the bill are closed, this would actually represent a very big step forward for democratic control over EU decision-making. MPs therefore have work to do.

Watch this space for more...

What do a dog fitness centre, a €5.25m fleet of limousines, a cartoon horse and 'virtual language swimming' have in common?

Yep, you've guessed it, it's that time of year again. Today we've published yet another list of wasteful EU projects, the third such list in as many years (you can find the previous ones here and here).

One of our favourites is "Eurogaloppo" the cartoon horse which was dreamt up in order to teach German schoolchildren about the EU. A booklet was published chronicling Eurogaloppo's journey to Brussels on which he met several high-profile EU leaders, including Chancellor Angela Merkel and former European Parliament President Hans-Gert Pöttering.

The cartoon horse also bumped into Commission President Jose Manuel Barroso, seemingly unable to contain his excitement:

Eurogaloppo: “I have so been looking forward to finally meeting a commissioner!”

Barroso: “Do you mean a commissioner like in a crime programme?”

Eurogaloppo: (sheepish silence)

Barroso: (grins) “Actually, you are not far wrong. The EU Commission and the crime commissioners of the police have something in common: they are both authorities.”

The top of the list is however reserved for the aforementioned "dog fitness centre", designed to “improve dogs’ wellbeing”. Perhaps the biggest crime of all, or maybe not, is that the dog rehab centre is yet to be built, despite receiving €411,000 of EU funds.

Hungarian media have noted that apart from new office buildings that remain derelict (click here for photographic evidence), the centre remains a distant dream for the local dog population. For now dogs in the area will have to put up with the kind of equipment pictured, which we can all agree doesn't compare to the "hydrotherapy" promised by the new centre.

All joking aside, the list is well worth reading ahead of tomorrow's likely agreement on an increase to the 2011 EU budget as a reminder of the kind of waste inherent in the EU's outdated and overly-complex budget.

Of course not all EU spending is bad, and we pick out a few good examples at the end of our list. But until the EU budget is reformed around more rational priorities (rather than used to subsidise farmers and redistribute large amounts of money among the EU's richest countries) and had the fat trimmed from it, we make no apologies for pointing out its flaws and mismanagement.

The right priorities

This one is from back in August but still:

Apparently, Peterborough City Council has lost out on £1,325 from the EU, meant to go towards a YMCA initiative aimed at encouraging young people to volunteer in local communities, known as the Red Triangle project.

The reason? The Council failed to display the EU logo on the few hundred business cards that were printed as part of the project.

As Jonathan Martin, chief executive of Peterborough and Cambridgeshire YMCA, put it:

It’s a shame that no song and dance has been made about what a success the project was. It seems all the noise is about a lack of logos on some cards.

The craziest part here is not the amount lost but that someone, somewhere along the long, complex chain of EU funding actually could be bothered to spend time and taxpayers' resources to work out that the failure to display the EU logo on a few hundred business cards should cost Peterborough City Council exactly £1,325...

A step backwards? Hardly

In an interview with the FT, Nick Clegg today declared that the Coalition Government would not use the negotiations over a new EU treaty to repatriate powers from Brussels to London. "We are not going to reopen this issue of the repatriation of powers. We are not proposing to go backwards", he said.

Well, we kind of suspected that was the Government's position already, but "not going backwards"?! That's an utterly silly comment - it belongs to a time when the EU debate was divided between arch-eurosceptics harking back to the British Empire and European federalists equating more EU integration with "progress".

Europe and UK politics have both changed however (clue: the coalition itself). Clegg's assertion is a bit like saying that the Coalition's drive for more localism - which the Lib Dems champion - is somehow a reactionary move. Bringing back powers from Brussels to the UK means bringing decisions closer to people. That, Nick, is not a step backwards by your own definition - on the contrary.

The interview wasn't all nonsense though. Clegg did suggest that the UK's willingness to passively wave through an EU Treaty change, must be matched by reforms to the budget and changes to some of the EU's more counterproductive habits.

He said,

There is no interest for the EU in getting entirely on the wrong side of public opinion on this budget issue...They have got to get real. You can’t make these budget decisions in a political vacuum.

He also lashed out at the EU's “summit inflation” which left EU policymakers “chasing their tails”.

That's sensible stuff. But the question now is: having given away its veto over Treaty change, how does the Coalition plan to deliver in the post-2013 EU budget negotiations?

Talking about EU reform as a "step back" is probably not the smartest way of doing things. Not least since many member states would make the same argument about any change to the EU budget.

Cap and trade - not the only way to skin the cat

Following his defeat in the mid-term elections, US President Barack Obama has now announced that he will drop his plans for a cap and trade system to reduce CO2 emissions. The idea behind cap and trade is to put a limit on greenhouse gases and then allow companies to buy and sell pollution permits under that ceiling.

President Obama said:

Cap-and-trade was just one way of skinning the cat; it was not the only way...I'm going to be looking for other means to address this problem.

As we've argued many times before, the cost of the EU's Emissions Trading Scheme (EU ETS) is massive and it's far from clear that a cap and trade system is the best way to achieve global emission cuts, while also encouraging investment in alternative energy. Obama's decision is sensible. But it clearly has implications for Europe, not least since the EU might now be put at more of a competitive disadvantage in the absence of a cap and trade system in the US.

Interestingly, former deputy prime minister John Prescott - who was a key UK negotiator at the Kyoto global warming conference in 1997 - today argued that in light of Obama's decision world leaders should ditch their hopes for achieving enforceable targets for emissions reductions. Instead, he said, they should push for a voluntary agreement at the upcoming Cancun summit:

Let's have a voluntary agreement. Let's stop the clock. Instead of Kyoto having to be done by 2012, stop it for about five years, put in a voluntary agreement and a verification system.

For his part, German Economy Minister Rainer Brüderle warned yesterday against imposing more environmental rules on German industry, arguing that global competition doesn't allow for a go-it-alone approach. He has a point.

The better way forward for the EU would be to set overall targets but then allow individual member states to reach them in whichever way they deemed to be the most cost-effective.

There is more than one way to skin the cat - also in the EU.

Talk about micro-managing...

First the EU sets renewable energy targets that force member states to build thousands of wind turbines, then the Commission tells them how not to build them...

According to Euractiv:

The European Commission has issued guidelines on how to design wind farms so that they do not disturb birds and bats living in the EU's 'Natura 2000' network of protected sites.

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.

Two vetoes for the price of one

In Parliament this afternoon, David Cameron gave his statement on last week's EU summit, followed by questions from MPs. The debate was a bit all over the place if we're to be perfectly honest, with the 2.9% increase to the EU's 2011 budget dominating.

The most talked about intervention came from Ed Miliband who said in response to Cameron's alleged cave-in on the EU budget freeze for 2011: “He wished he could come back and say No, No No, but in his case it's a bit more like No, Maybe, Oh go on then.” (apparently a phrase Miliband didn't quite come up with himself).

On actual substance, Chris Heaton-Harris made the most astute observation. He noted that the PM now has two separate vetoes at his disposal: one over Treaty change and one over the EU budget post-2013. Heaton-Harris asked whether Cameron would use the two vetoes independently to achieve EU reform. As we’ve argued before, a twin-track approach to EU negotiations is by far the smartest way to achieve reform in Europe and the restoration of some democratic control over key EU powers.

If the two vetoes are used in parallel but for seperate issues - one for repatriation of powers and the other for concessions on the CAP for instance - we bet anyone (eurosceptics and federalists alike) that the Coalition government will get at least one game-changing concession in return.

The Coalition could even get other member states along for the ride if it's confident and strategic enough. After all, Merkel has given us a great example for how to do it.

Unfortunately, in response to Heaton-Harris and also earlier in the debate, Cameron hinted he would pass up his veto over the treaty change, effectively giving EU partners a two-vetoes-for-the-price-of-one deal.

Hopefully this isn't the end of the story though, as there's still much to play for before Treaty changes are agreed. But MPs need to get their line of argument in order or the Coalition might well go for the do-nothing option.

For Cameron to use the twin-vetoes separately but in parallel, is surely what backbenchers in favour of EU refom should be pushing for?

The euro cannot live by budget discipline alone

An interesting new paper by German think tank Centrum für Europäische Politik has listed "Five hard rules for a hard Euro". It sums up some of the ideas on how to save the euro, currently floating around Germany.

Here they are:

1. More automatic sanctions for countries with excessive deficits.
   
   
2. A new sanctions regime for budget deficits should be introduced, but the paper argues that the 60% debt to GDP ratio target is arbitrary if it doesn't include how much new debt is being added every year. Interestingly, the CEP argues that the current Commission proposals necessitates Treaty change (not only Merkel's proposal for a eurozone crisis mechanism).
   
   
3. A 1% budget deficit should be restored as a medium-term goal, by establishing stronger preventive sanctions. This should include imposing non-interest bearing deposits on countries as a sanction, instead of interest-bearing deposits.
   
   
4. An insolvency procedure for member states along the lines of what Merkel has pushed for. However, the CEP argues that this only will be effective if the concept that banks are "too big to fail" is also tackled. We look forward to seeing the CEP elaborating on this point, as it's absolutely vital.
   
   
5. Macro-economic supervision by the European Commission would improve the functioning of the Stability Pact. However, there shouldn't be sanctions for persistent economic imbalances. Hardly surprising, the think-tank argues that EU recommendations to reduce imbalances shouldn't focus on strong export countries, as this would be to the disadvantage of Germany.
   

Whether all these proposals will fly is doubtful. But the paper is important, because although Merkel has won praise for getting treaty change agreed to in principle - and although we tend to favour a crisis mechanism which transfers risks away from taxpayers - some key questions remain.

Frankfurter Allgemeine Zeitung this weekend complained that Merkel has in effect already conceeded to putting in place a permanent eurozone rescue mechanism before

it is made clear how owners of state bonds would have to take a haircut in case of a rescheduling of sovereign debt.

The Telegraph's Ambrose Evans-Pritchard notes that ECB President Jean-Claude Trichet warned EU leaders on Thursday night that they didn't understand what they were unleashing. He writes that "Eurozone sovereign states must issue €915bn in new bonds next year", which might get more complicated

as investors have just been told in blunt terms to charge a hefty risk premium on any peripheral debt that expires after 2013, with great confusion over what happens even before that date.

And then there's democracy. Granting unelected bureaucracies such as the European Commission unprecedented powers over budgetary and economic policy will unavoidably weaken the powers of national Parliaments.

Ultimately, however, the proposed solutions don't tackle the core problem, which is the loss of competitiveness among eurozone countries on the periphery. (See point 5 above for the predominant German attitude to being told that this is partly Germany's fault.)

Spain and Ireland more or less respected the stability pact, but they're still in a mess - a mess in no small part caused by unsuitable interest rates in the boom-years, which were really designed to serve Germany. The only solution to these problems is a break-up of the eurozone or perpetual fiscal transfers (highlighted by so many people, including FT editor Lionel Barber a couple of days ago).

As Barber concluded, the medium term solution will be to "muddle through" but at some point the eurozone, and Germany in particular, will have to adress the eurozone's fundamental problems.

Indeed, the euro cannot live by budget discipline alone.

Is the ECB trustworthy?

...according to an increasing number of citizens, the answer to that quesiton is "no". Handelsblatt today notes that trust in the European Central Bank is at its lowest level among citizens in the EU since the introduction of the euro.

From never-never land to reality; Angela Merkel takes care of business

Before yesterday’s European Council meeting, the European press were predicting that the Franco-German agreement made in Deauville might as well have been made in “never-never land”. Member states will resist and President Sarkozy and Chancellor Merkel will stand “isolated”, they said.

And even as late as this week, UK-based EU observers were in the news repeating that a new EU treaty is virtually impossible, only a year after the Lisbon Tretay entered into force.

Open Europe has argued for months that Merkel means business in her drive for Treaty change - and that she could achieve it if she puts down her foot (the exposure of German taxpayers to sub-prime eurozone loans is one clue, the need to address potential challenges in the German Federal Court is another).

And sure enough, today the German press is buzzing. FT Deutschland’s headline reads, “Merkel wins at Euro-Poker”. Die Welt writes, “Merkel asserts her will in Brussels”. Spiegel chimes in with, “Europe comes up against the Iron Chancellor”.

In a commentary in Handelsblatt Thomas Ludwig writes that, “Merkel and the German government held their nerve at summit negotiations and ultimately had the better argument on their side”. He also congratulates the German Chancellor for “being hardheaded” and said it will “pay off for the eurozone in the long-term”.

Handelsblatt also reports that Merkel advocated the suspension of voting rights for members who flout budget rules purely “for tactical reasons”. In reality, her primary aim was to push for a permanent crisis mechanism for the eurozone, which most member states have agreed is the best way forward. In other words, she established an outlier for member states to reject, pavign way for a deal on what she really wanted.

Merkel just gave her EU colleagues a lesson in how to get things done in Europe - is Whitehall taking note?

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.

Has Cameron underplayed the UK's hand in Europe?

Over at Conservative Home, we examine how David Cameron is getting on in Brussels - the performance so far is a mixed bag, but there's a clear risk that he has underplayed the UK's hand in the negotiations.

Meanwhile, German media praises Angela Merkel's "poker skills". She has now achieved backing from EU leaders, in principle at least, for changing the Treaty in order to introduce a permanent crisis mechanism for the eurozone.

In the words of a true EU statesman

European Council President, Herman Van Rompuy, presented his imaginatively titled new book yesterday - "Inside the world of Herman Van Rompuy" to a Brussels audience with bated breath.

But those interested in Van Rompuy's exploits as a top EU statesman would have been surprised to hear him declare:

"I don't speak here as a politician but as a free man. I don't have any voters. And I also prefer readers to voters".

Remember, this is the president of an organisation consisting of 27 democratic countries - full of voters!

Now, what does this say about the mindset at the top of the EU? And will this comment make European taxpayers feel better about handing over billions extra (including between £450 mn and £900 mn from UK taxpayers in 2011 alone) to an organisation whose head apparently "has no voters"?

Cameron gives way on new treaty for 2.9% budget increase?

Die Welt is reporting that Cameron has done a deal with Merkel on treaty change.

The article notes that Merkel signed a letter penned by Cameron stating that the Council would not accept a budget increase higher than 2.9% in negotiations with the European Parliament. In return, Cameron will back Merkel's demand for a treaty change, reportedly assuring Merkel that he will secure the passage of a new treaty through the UK Parliament without a referendum.

As we argued earlier today, even if Cameron were to achieve a freeze to the EU budget, there’s nothing stopping MEPs and other member states from pushing through a substantial increase in 2012 or 2013 to make up for it.

If the reports are true, Cameron may well have severely underplayed the UK's hand, missing the opportunity to get real concessions in return for treaty change. A one-year 2.9% budget increase certainly doesn't cut it.

If true, Cameron has just given away the greatest leverage the UK has had in EU negotiations in a very, very long time...

Nice to know that you're expected...

The publication of our annual list of examples of EU waste seems to have become a much-anticipated occasion in Brussels.

As L'Express reports today, an internal document prepared by EU Tax Commissioner Algirdas Semeta reveals that the Commission expects us to "publish a list of 'absurd' EU projects" on the eve of the publication of the EU Court of Auditors' annual report, due for 9 November. The Commission is reportedly investing extra energy in preparing its defence.

All this attention could seriously make us blush...

How Cameron should play his cards in Europe

Over at the Spectator's Coffee House blog, we take a look at how David Cameron should approach today and tomorrow's EU summit - and how he should play his cards in negotiations in Europe moving forward.

We argue,

The British media woke up this week, realising that Europe still exists. As David Cameron travels to Brussels, questions loom over what, exactly, he can achieve in Europe – at this summit, and more importantly, moving forward.

Much of the commentary surrounding the summit has focussed on the increase to the EU’s 2011 budget, which Cameron is fighting. And for good reason. It’s insane that Britain – or any other net contributing state – should be forced to accept any increase to the EU budget, at a time of tough austerity at home.

Cameron has spent considerable time talking up the negotiations on the budget increase, so he may have an ace up his sleeve to achieve a cash freeze tomorrow or in the coming weeks. But a 2.9% hike is not unlikely, meaning that an extra £430 million would be added to UK taxpayers EU bill – or even more once the European Parliament has had its greedy hands on it.

However, as outrageous as it is, the annual budget increase is only a side show in a far bigger act.

Even if he were to achieve a freeze to the EU budget, there’s nothing stopping MEPs and other member states from pushing through a substantial increase in 2012 or 2013 to make up for it. The EU budget is negotiated in seven-year periods (though that can vary), with minor adjustments being made on an annual basis. Sadly, negotiations over this budget period have already been lost – courtesy of Tony Blair in 2005.

So the bigger prize – which may or may not be discussed in corridors at the summit – is clearly a reduction in the size of the budget from 2014 onwards. Cameron has rightly stated that this is his priority moving forward.

But here Cameron could be committing a strategic mistake. The temptation is to try to ask for concessions on the post-21014 EU budget, in return for supporting Merkel’s repeated calls for a Treaty change to fix the eurozone.

Thing is, the UK already has a veto over the negotiations on the post-2014 budget. If the UK refuses to agree, an effective cash freeze will be achieved anyway as the previous budget will be carried over. Secondly, member states are desperate to get rid of the UK’s rebate from the EU budget – in itself a powerful bargaining chip.

So if Cameron trades budget concessions for Treaty change, he will effectively be giving his EU partners two for the price of one.

A better way forward for Cameron is to horse trade on the EU budget and possible Treaty change separately.

Despite strong opposition from EU leaders, German Chancellor Angela Merkel continues to push for a Treaty change to fix the eurozone. And she won’t cave in easily.

As we’ve argued before, Cameron should back Merkel’s calls for Treaty change in return for repatriating powers to Britain. It Treaty change actually materialises, the whole package can then be put to a public vote in a genuine referendum on EU reform. Many Tory backbenchers are now picking up on this idea as well.

Cameron and Merkel will meet on Saturday night over dinner to discuss the way forward for the EU. The Prime Minister must think carefully about how to use the unusually fluid European situation to put Britain’s relationship with the EU on a more sustainable path.

The scope for a new Anglo-German grand bargain is greater than in a long-time. But for Cameron to give away his hand this early would be a serious mistake.

Merkel refuses to fold

German Chancellor Angela Merkel is a tough cookie.

Sandwiched between Deauville and tomorrow's EU Summit, Dr. Merkel took to the podium today to defend the controversial pact with President Sarkozy on economic governance in the eurozone that has left both German politicans and EU leaders incensed (but in different ways).

Addressing the Bundestag this afternoon, a firm Merkel said both President Sarkozy and herself will relentlessly insist on a "culture of stability" at tomorrow's European Council summit. She stressed the necessity of taking "precautions today for dealing with future crises" in the eurozone.

Such precautions, she said, will simply have to include a Treaty change. Merkel stated that the measures taken earlier in the year to bail out Greece were "unavoidable" but did not provide long-term solutions. She insisted on a new, robust and legally unassailable "crisis management framework" anchored firmly in a new EU treaty; a move that she admitted is "ambitious". But she confidently asserted that, for the EU

success will only come with a change to the treaty...improvement is always possible, even if the road is rocky.

Presumably responding to Luxembourgish Foreign Minister Asselborn's and others' sneer that Europe does not work with only a "two-stroke engine", the German chancellor said, "the Franco-German union is not everything in the EU, but, without a German and French union, it is not much."

Tomorrow's summit could be really interesting...

Reding vs. Lellouche: Round Two

Following the infamous quarrel over the Roma deportations, EU Justice Commissioner Viviane Reding isn't exactly the French government's préférée.

But, it seems, there is one person in Paris who really can't stand the Commissioner: French Europe Minister Pierre Lellouche. The two are now at it again. This time the disagreement concerns the Franco-German proposal to change the Lisbon Treaty to allow struggling eurozone countries to default.

In an interview with Die Welt, published today but with extracts circulating already yesterday, Ms. Reading said,

It seems to me completely irresponsible to put on the table these chimeras on new Treaties.

Dismissing as 'completely irresponsible' a proposal coming from the two most powerful eurozone governments is pretty strong stuff for a Commissioner. But in case someone still didn't get the message, Viviane added,

Decisions [in the EU] are not taken in Deauville [the small village in Lower Normandy where Merkel and Sarkozy agreed on treaty change last week], but at 27 and by unanimity. France and Germany are the two countries who scuttled the first version of the Stability and Growth Pact in 2004 and 2005. The euro has undergone a severe crisis since, but it seems like someone has not yet drawn the lesson [...] We must stop destroying what the EU institutions propose.

Lellouche - himself not known for shying away from hard talk - was quick to respond. Speaking in the French Senate yesterday, he said,

When you are a European Commissioner, and moreover a Vice-President of the Commission, is it conceivable that you call the President of the French Republic and the Chancellor of the Federal Republic of Germany 'irresponsible'?

Fair enough, but Lellouche wanted to take one last jibe,

Frankly, the words used by this Commissioner [he avoids calling Ms. Reding by name, like Sarkozy did during his row with Barroso last month] to denigrate the Franco-German proposals are unacceptable. They are cut from the same cloth as the insulting tone - which I will not forget - used against France during the polemic she herself used on the Roma question.

We're awaiting round three.

A one-year cash freeze to EU budget won't cut it Mr. Cameron

The news in today's Guardian and Mail is that David Cameron is thinking of doing a deal on the proposed new EU treaty. The reports suggest that Cameron will back the new treaty in return for his demands for a cash freeze to the 2011 budget.

We're not convinced that Treaty-change-for-less-cash is a line that the Government will pursue in the end. But if true, Cameron and his Government risk a mutiny not only from the Tory backbenches but the public at large. And it would be completely justified.

The prospect of a new treaty is rightly seen (and not just by us) as a once in a generation opportunity to renegotiate the UK's relationship with the EU and actually repatriate some of the powers the Conservatives promised they would less than a year ago, or pursue a number of other reforms - for example giving real powers over EU policy to national parliaments.

A one-year cash freeze on the EU budget simply doesn't cut it. Sure, the European Parliament's demands for a 6 percent increase are outrageous and have understandably attracted the headlines recently. But what about 2012 and 2013? There is nothing stopping MEPs, the Commission or even other member states demanding similar increases in these years and there would be little the UK could do about it.

And even the next EU budget period, the the one that starts in 2014, is best negotiated seperately. The UK already has its rebate as leverage in those negotiations. Making horse-trades involving Treaty changes is giving EU partners a 'two for the price of one' deal.

But besides this practical reason, the prospect of yet another 'behind closed doors' EU deal could be politically disastrous. After promising to repatriate powers, Cameron cannot shirk the first, and possibly only, realistic opportunity to do so.

It would certainly make his accusations of "betrayal", levelled at Labour and the Lib Dems for their backtracking on a referendum on Lisbon, look pretty hypocritical.

The EU's problems with agency-itus

The past week has seen the EU come under immense pressure, from press and politicians from across member states, as negotiations for 2011's budget come to a head. However, criticisms have seemed to fall on deaf ears, as the Commission and the European Parliament have continued to push for an overall 5.9% increase in spending.

We released a new report yesterday examining one of the growth areas that provokes serious cause for concern: EU agencies and committees.

While the UK government has announced that it wants to scrap some 190 quangos as part of the spending cuts, the Commission - cheered on by MEPs - has proposed a staggering 8% increase to the budget for EU agencies from 2010 levels.

This would see the EU's annual quango-budget rise by €180mn to €2.4 billion in 2011. The extra cash would be used to fund five new agencies, taking the total number of EU quangos - including the Economic and Social Committee and the Committe of the Regions which are the mothers of all talking shops - to 52. Extra cash will also be sprayed on the existing EU agencies.

And what do taxpayers get in return?

It's Brussels worst kept secret that many of the EU's agencies do not add much value: some duplicate eachother's work; many duplicate work being carried out by the core EU institutions; some deal with issues that shouldn't concern the EU in the first place; while others have no impact on actual policy whatsoever. A worrying number of them tick all of these boxes.

It's also not clear who these agencies are actually accountable to.

We identify eleven agencies and committees which could be downsized or abolished altogether without citizens noticing any difference whatsoever. If combined with 30% efficiency savings, to mirror austerity measures in member states, the EU could save €709mn per year starting in 2011.

First on the list: the Committee of the Regions and the Economic and Social Committee.

Commons weighs in on deposit schemes

Hats off to the House of Commons.

Earlier today it grasped the nettle and employed the Lisbon Treaty's 'yellow card' procedure for the first time (if nine national parliaments object to a proposal from the Commission on 'subsidiarity' grounds, within an eight-week window, the Commission is obliged to re-consider - but not scrap - the proposal). The House of Lords was slightly quicker off the blocks, using the procedure last week to object to the EU's proposed directive on seasonal workers from third countries.

The Commons provided a "reasoned opinion" on the proposal to amend the so-called Investor Compensation Schemes Directive, objecting to it on subsidiarity grounds.

As we've argued before, this proposal raises various concerns, as under the proposed rules member states would be required to lend to each other should a bank go bust and deposits needed to be guaranteed. As the Swedish Parliament argued, this presents a 'moral hazard' since some member states might be tempted to under-fund their scheme, knowing that someone else would pick up the final bill.

The House of Commons joined its counterparts in Sweden, Germany and Austria in objecting to the proposal.

Only problem is, the deadline for objecting to the proposal expires today. Eight weeks doesn't exactly give national parliaments plenty of time to mobilise, particularly when, as it did now, it coincides with parliamentary recess in most European countries (almost as if it was planned).

We confess to not being up to speed with how many national parliaments actually managed to formally object to the proposal in the end - but will be back shortly with an update.

Regardless, it's good to see MPs taking responsibility.

Double standards on leverage

The excellent WSJ Real Time Brussels blog notes that EU Budget Commissioner Janusz Lewandowski isn't entirely happy with the amount of money that potentially can be lent to struggling governments, using the EU budget as a guarantee.

Mr. Lewandowski told a group of journalists: "That is worrying me...[the EU must] be realistic about the budget as a guarantee." In case of danger, he said, "we should be very watchful" about the maturities of the various pieces of debt issued to countries.

So what exactly is the Big Lewandowski on about?

Well, besides the €440 billion eurozone bailout package, which does not include the UK and is guaranteed by eurozone governments, the EU also agreed in May to a separate €60 billion fund. This fund is to be raised by the Commission on the markets, and then lent to eurozone countries in trouble, using the EU budget as collateral. The loans would therefore be guaranteed by all member states, including the UK, since all member states pay into the budget.

Added to the pre-existing fund for non-eurozone members, which totals €50bn, the EU budget can therefore potentially be used as a guarantee for €110bn in loans. And given the state of the economies on the receiving end, these loans can only be described as sub-prime (with some exceptions).

The size of the EU budget is roughly €123 billion euros this year (set to rise by €7 billion if MEPs get their way), so should countries max out these bailout funds, the bloc's debts could reach 89% of its equity (the EU budget).

Ironically, the Stability and Growth Pact stipulates that no EU country is allowed to have a debt higher than 60% of GDP. We know it's not the same thing, but Lewandowski is certainly making a good point. €110 billion is actually massive exposure.

In addition, isn't this potentially causing the EU - as in the legal entity not individual countries - to break the very same rules that the Commission now wants to beef up?

But then again, on leverage as well as fiscal prudence, the EU isn't exactly known for leading by example.

Sacrificed at the altar of the Franco-German axis?

As we've noted before, Germany's attitude to the EU and the famous Franco-German alliance is changing (plug: we will be organising a debate in Berlin next Tuesday on that very topic). Take German liberal MEP Silvana Koch-Mehrin (photo) for example. She is a vice-President of the European Parliament and has been called the 'European face' of the German liberals - the junior partners in Angela Merkel's coalition government.

However, yesterday she reacted fiercely to the agreement that Angela Merkel and Sarkozy reached in Deauville. The deal had the effect of watering down German demands for a stronger Stability Pact to install some fiscal discipline in the eurozone, in return for French backing for a Treaty change. Ms. Koch-Mehrin accused Merkel of having "broken her promise" on tougher rules for eurozone countries which run excessive deficits. Even more interestingly, she said: “I fear that more German taxes are now being sacrificed at the altar of the Franco-German friendship.”

Strong words from someone who certainly can't be described as a eurosceptic.

European Parliament starting to get embarrased about asking for more money?

We've said a thing or two in the past about the wonders of EU spin 'communication'. But the European Parliament's attempted defence of MEPs' decision to increase the EU's 2011 budget by 5.9% is a stretch so far that it has descended into farce.

Firstly, let's take the EP's press release titled, "MEPs vote for moderate budget for 2011". "Moderate" is hardly the word to describe a 5.9% increase when national governments all across Europe are tightening their belts and, in the UK, George Osborne is announcing the most significant spending cuts for generations.

The press release goes on to say "MEPs understand the pressures on Member States' budgets and have therefore broken with their tradition of suggesting a notably larger budget than the Commission has proposed."

How gracious of them.

Strange too that the press release didn't mention the percentage increase to payments (5.9%), instead opting for the increase to commitments of 0.8%. An earlier April press release has no such qualms about mentioning the higher figure.

To add insult to injury, EP President Jerzy Buzek has stated that "The European Parliament has acted with a great sense of responsibility."

MEPs are certainly doing themselves no favours whatsoever.

How should the UK government respond to EU Treaty change?

We take another look at this question over on the Spectator's coffee house blog. With the risk of sounding repetitive, we argue,

Rather than instinctively reaching for the veto, David Cameron should back Merkel’s demands, in return for the repatriation of powers to the UK, along the lines of the original Tory election manifesto. This package could then, possibly, be put to a public vote, and be turned into a genuine referendum on EU reform. The net effect of a new EU treaty would then be fewer powers for Brussels and more for Westminster.

On his blog, the ever-insightful Charles Crawford also has some very interesting things to say about German calls for EU treaty change and the nature of EU diplomacy more generally. He argues,

Do Germany's leaders really think that they can force through this time round a "narrow" Treaty change which gives them enough of what they want by way of financial protection and does not open up all sorts of other clamorous demands?

Or do they know that that is more or less impossible, hence they are pushing for Treaty changes as part of a wider agenda aimed at deliberately prompting a manageable (they hope) mini-crisis which will allow them to redefine the way the European Union works, but on (mainly) German terms? If that means wielding a fierce Teutonic axe on many beloved EU schemes and letting other countries squeal, so be it.

What, I wonder, is the government in London making all this?

In principle this situation represents a huge opportunity for cynical but pragmatic British influence aimed at forcing out great quantities of EU rubbish -- and cutting the bill to British taxpayers.

Question is, have the Coalition folks put on their thinking caps?

Do watch this space...

Germany wins French backing for EU Treaty change

As we anticipated in our previous post, it appears as if Germany has won French backing for a change to the EU treaties in return for greater flexibility on sanctions for eurozone countries which run excessive deficits.

France and Germany have agreed that the Lisbon Treaty should be changed by 2013 in order to:

• Set up a "robust crisis resolution mechanism" for the eurozone, which presumably includes a mechanism for an orderly default procedure for countries that go bust;
• Introduce political sanctions for rule-breakers, including the temporary withdrawal of voting rights within the Council.

The taboo of another round of Treaty change negotiations has now officially been broken. This is potentially huge - and throws up a number of interesting questions for eurozone and non-eurozone countries alike, not least the UK.

You Discuss, We Decide

While hundreds of journalists from all over Europe descended on Luxembourg, hoping to find out what the future of EU economic governance holds, the real decisions were taken in Deauville - a small village in Lower Normandy where Nicolas Sarkozy and Angela Merkel have held security talks with Russian President Dimitri Medvedev.

Security talks aside, the Franco-German axis - which has suffered from strains for quite some time - has come out with a joint statement outlining its position on sanctions for eurozone countries that breach the Stability and Growth Pact:

• Countries running excessive deficits will have six months to get these down before sanctions are applied (a concession to France);
• After that, however, sanctions will kick in and be automatic (a concession to Germany).

According to Merkel and Sarko, the Council should also be given the power to impose "preventive" sanctions, but these are to be decided by majority voting on a case-by-case basis.

We suspect that the bulk of this statement will be copied in the conclusions of Van Rompuy's task force on eurozone economic governance (if that group ever comes up with some conclusions that is).

As the Economist's Charlemagne points out, by agreeing to delay the sanctions for eurozone countries for six months, Germany has caved in to French demands in no small manner. Hawkish countries like the Netherlands and Finland now feel betrayed by Berlin. But this volte-face could also have awarded Germany a bigger price: France's support for a treaty change to introduce an "orderly insolvency procedure" for cash-stripped eurozone countries.

As we've noted over and over again - German calls for a Treaty change to fix the eurozone are real, not mere rethoric.

If the EU did satellites, they'd probably be...

It is hard to think of a better example of how not to run a large-scale infrastructure project than the EU's Galileo satellite system. In a new briefing we set out the latest cost over-runs and delays to a project that is now expected to be completed a decade late and cost taxpayers over €22bn to launch and run over a 20 year period. In 2000, it was projected to cost taxpayers only €2.6bn (UK taxpayers' share has gone from £385 million, under the original estimates, to £2.95 billion, under the revised figures).

This is an overspend which could rival with the previous UK government's handling of the defence budget for incompetence.

The scale of the strategic mistakes made in Galileo's development is simply shocking. The German government has admitted that "All in all, it is assumed, based on the currently available estimates, that the operating costs will exceed direct revenues, even in the long term." The reason for the astronomic rise in costs is primarily due to private investors withdrawing from the project, unconvinced by the project's commercial viability in a market where it is competing with US, Russian, Chinese and now also Indian and Japanese alternatives. Despite this, the European Commission saw a market of potentially 3 billion users and some €275 billion per year by 2020 worldwide. This looks ridicolously optimistic now.

The story behind the Chinese competitor is particularly sobering. Initial Chinese investment in the project was spurned and eventually withdrawn over fears that the Chinese government was a little too interested in the security related aspects of the project. But, due to the delays, China went ahead with its own system using the very radio frequencies the EU wishes to use for Galileo. So the EU is now in the absurd position of having to ask China's permission to run its secure 'encrypted' signal on Chinese frequencies.

With the European Commission's EU budget review expected tomorrow, we can expect the usual calls for more investment in research and development as a way of modernising and redirecting the EU budget. Spending less money on the CAP and Structural Funds would certainly be welcomed but, on this evidence, the EU's R&D spending leaves a lot to be desired.