An EU banking union within a year? Don't think so.

In an interview in today's FT, Commission President Jose Manuel Barroso is raising the stakes in the talks on a 'banking union' in the EU and/or eurozone, involving an EU-wide deposit guarantee scheme, a rescue fund paid for by financial institutions and giving an EU-wide supervisors the power to order losses on banks, without the approval of national authorities. The Commission, keen to get back in the game following the shift in focus to national capitals in the wake of the crisis, says it'll present a proposal for a banking union at the EU summit at the end of June.

According to the FT, Barroso said all of this could be achieved within the next year and didn't necessarily require an EU Treaty change. He said, "there is now a much clearer awareness" in national capitals, including Berlin and London, that Europe needed to press ahead with more integration "especially in the euro area."

Barroso noted,

“We have a chancellor of Germany that is indeed proposing a political union for Europe, which is extremely ambitious. We have a French president that has been highlighting the need for a more European approach regarding crucial issues like growth and investment. And we have a British government – and this is indeed a very interesting development – that while stating its willingness to stay out of the euro, assumes as indispensable and desirable to further integration in the eurozone.” 

Good marks for optimism. In reality, though, there's no way a banking union will be up and running within a year. Even if he was hinting at an agreement in 2013, that too is optimistic - at least on the chunkier stuff. A number of member states still have huge reservations. The UK won't be part of a banking union regardless, and anything requiring unanimity and/or Treaty change may be used by Britain to re-heat demands for safeguards over UK financial services, which Osborne has already floated. Other non-euro members also have reservations, with the Swedes opposing a banking union based on cross-border liabilities on a point of principle and the fear of moral hazard (unlike the Treasury, which seems happy for the eurozone to do this as long as the UK is not on the hook).

Merkel will face resistance from various corners: the Bundesbank, the legal class (hello Treaty change), its financial supervisors BAFIN, the media and a host of backbench MPs. This will have to go through the German Parliament, which per definition takes time. And as for the French, we're not entirely sure that Hollande quite has his head around what a banking union would involve - and that France's position is somewhat fluid at the moment.

And remember, a proposal by the Commission for limited cross-border bank deposit guarantees has been stuck in the Brussels machinery for two years, at the hands of resistance in member states.

This will be a drawn-out one.

Leaving the EU would raise more questions than answers - what we need is a new model of EU membership

Open Europe's Christopher Howarth has written the following article for Conservative Home:

Growing public frustration with the costs of EU membership is making the UK’s EU membership unsustainable and cannot be ignored. Moves in the eurozone towards fiscal union also mean the status quo EU membership terms we have may not be an option even if we wished it. Given this, Open Europe has published a study of the UK’s trading interests and the most likely options for the UK if it were to choose to leave. We conclude that there is no clear-cut or easy option for the UK outside the EU making leaving the EU as complicated as staying in and renegotiating.

We found that the EU continues, on a purely trade basis, to be the most beneficial arrangement for Britain. If we left the EU we would have to negotiate a new trade agreement with the EU and probably one that would not, at least for now, serve the UK’s trading interests as well as the present one.

But, plainly, trade is only one part of the equation when it comes to assessing the costs and benefits of EU membership. Although, at present, all the alternative options come with major drawbacks in terms of trade, the price of membership remains far too high. Many of these costs are not directly related to trade, such as the UK’s contribution to the EU budget, the loss of national control over key political decisions that affect the British economy and society, and an increasing regulatory burden. These are the alternative options:

• The ‘Norwegian option’ or EEA membership: This would free the UK from the Common Agricultural Policy (CAP), EU fishing rules, EU-wide regional policy, and reduce our budget contribution. However, while guaranteeing access to the Single Market in services and goods, outside the customs union, access for goods would be subject to complex rules of origin and Britain would still be subject to EU regulations on employment and financial services but with no formal ability to shape them.
  
  • The ‘Swiss option’ or free trade agreement: If we had the same Swiss-EU bilateral deal, we would also be without the CAP, EU fishing rules, EU-wide regional policy, and have a reduced financial contribution. This would offer more sovereignty and less EU regulation. However, the UK’s access to the Single Market would be dependent on the deal we could negotiate with the EU – the Swiss deal currently excludes the vast majority of services, including financial services.
  
  • The ‘Turkey option’: The UK would continue to benefit from full access to the EU’s Single Market in goods by remaining in customs union with the EU but Britain would be bound by any external deals that the EU strikes in trade in goods without any formal way of shaping them. A separate deal on services would be required to maintain UK access to the Single Market in these sectors. It would be free from EU social and employment regulation, the CAP, CFP and EU-wide regional policy.
  
  • The full break ‘WTO option’: If the UK left the EU without securing a version of the options above, the UK could fall back on its World Trade Organisation membership. This would see some exports facing relatively high tariffs (i.e. 10% on car exports) and market access for services would be limited.

So how do these alternatives stack up against the UK’s trade interests?

Well, 53.5% of UK goods exports currently go to the EU but only 39% of services exports. This makes the EU important - but the EU is likely to be an area of slow growth, while fast growing areas such as China and India together account for only 3.75% of UK exports, this proportion needs to grow. The UK is currently the second largest global services exporter but the single market in services has stalled. Services account for 71% of total EU GDP but only 3.2% of this is a result of intra-EU trade.

Given the proportion of goods trade we do with the EU the UK’s trading interests are currently best served by remaining within the EU’s customs union to allow goods to flow free without complex ‘rules of origin’. Our interests also demonstrate the need to push the EU to back services liberalisation at home and in EU trade talks abroad. However, the EU could retreat into protectionism and so thwart UK trade in the internal market or globally thus reducing its relevance to the UK. This makes it all the more important for the UK working with our allies to speak up for free trade: for instance, regaining an economic commissioner in 2014.

The Coalition should also conduct a full in-depth analysis of the options open to us, to move the debate onto a higher level and help us figure out the genuine reason why we were in the EU in the first place - as well as the areas we would do better on our own. With this the Coalition could then set out a vision for EU reform, and “examine the balance of the EU’s existing competences” and as it is pledged to do. The UK should also continue to concentrate on growing its trade in the wider world where growth will be faster, and if at some point in the future the proportion of UK trade with the EU has shrunk our options will have grown.

Renegotiate our membership

In order to continue to justify its membership, the UK needs to achieve a new model for EU cooperation based on different – and equally legitimate – circles of EU membership. In this structure, the UK should remain a full member of the single market in goods and services and of the EU’s customs union, but take a ‘pick and mix’ approach in other areas of EU policy. This would achieve a vital reduction in the non-trade costs of EU membership, such as the EU budget and the burden of regulation, while allowing the UK to remain at the heart of the EU’s cross-border trade.

What a new UK membership of the EU could look like:

There will be those who say that such a model is not possible - that there can only be one form of EU membership. That is plainly wrong as it ignores current fact as well as moves, by others, towards further integration. The status quo is not an option, we now need to decide for ourselves what we want.

Do not adjust your television set, this is not a Spanish rescue (despite looking an awful lot like one...)

Well, that was the line that Spanish Economy Minister Luis de Guindos was spinning yesterday. Sorry Luis, this is essentially a Spanish rescue - external funding sources filling a gap which the state can't (check), monitoring of a large chunk of the economy (check), involvement of all the big international organisations (check - EU, IMF, ECB etc.), the list goes on.

Meanwhile, the oft absent Spanish Prime Minister Mariano Rajoy held a press conference today, declaring the package a 'victory' for the euro and stating that if it were not for the current government's reforms it would have been a full bailout package. If this is a victory (finally dealing with a glaring problem after four years) then we don't want to see a defeat, but at least Rajoy made a public appearance this time. That said, in the midst of the worst crisis his country has faced since the financial crisis hit, Rajoy is now jetting off Poland to watch Spain vs. Italy (a mouth watering prospect admittedly but his timing could take some work), while the likes of the Education Minister are heading to Roland Garros to watch Rafael Nadal - the Spanish government not quite in crisis mode then, we're not sure if that should inspire confidence or not...

In any case, as we predicted over two months ago, European assistance to help Spain deal with its banks is now official, so what does this rescue mean for Spain and the eurozone, below we outline some of the key points and our take:

The plan
Spain will access a loan from the EFSF/ESM (the eurozone bailout funds) which it will use to recapitalise its ailing banking sector. The money will be channelled through the FROB (the bank restructuring fund) but will still be a state liability (it will not go directly to the banks). However, unlike the other bailouts it will not come with fiscal conditions but only conditions for reforming the financial sector.

Open Europe take:
Firstly, the ESM will not be in place in time to provide the loan (the treaty is yet to be ratified by numerous countries and has faced many delays) so at least initially it will come from the EFSF. As others have pointed out, this is important because ESM loans are senior to other types of Spanish debt while EFSF loans are not. This may make things easier to start with (as it removes the threat of legal challenges based on clauses in other Spanish sovereign debt which could be triggered if it suddenly became junior), however, Finland has already raised concerns over its exposure and role in the rescue - an issue we tackle in more detail below.

The lack of additional fiscal conditions is fair given that Spain is already subject to a deficit reduction programme and that this is ultimately a financial sector problem. There are questions over conditionality and moral hazard though - we would like to see bank bondholders and shareholders sharing more of the burden (bail-ins) to ensure the necessary reforms take place. As things stand its hard to see how the banks will 'pay' for this capital, particularly given the Spanish regulators previous failures (during and after the property bubble).

De Guindos confirmed that the funds would be counted as Spanish debt, so Spanish debt to GDP could be about to jump by 10% in the near future and given its current path this could put Spain over 90% debt to GDP (the level beyond which sustainability becomes questionable) much sooner than had been anticipated. This will require adjustments in its reform programme and lead to increasing market pressure.
 
Size - is it enough?
This is the key question - the total amount has been put at "up to" €100bn. That is much higher than was suggested by the IMF assessment released on Friday night, which suggested €40bn.

Open Europe take:
It sounds like a big number, but upon closer inspection it may not stretch as far as many expect. Consider that Bankia requires €19bn, while three other very troubled cajas need around €30bn (Banco de Valecia, Novagalicia and Catalunya Caixa) meaning half the money could already be eaten up, leaving only €50bn for the rest of the huge banking sector.

This compares to around €140bn in doubtful loans, and a total €400bn exposure to the bust real estate and construction sector. Doubtful loans to this sector total around €80bn currently, but we expect house prices to fall by a further 35%, broadly meaning that the number of doubtful loans could easily double. On top of this we have further losses on mortgage loans as well as losses on other corporate debt and a decrease in the value of Spanish debt held by banks. So huge number of issues - putting a clear figure on it is difficult due to the difference between tier one capital and 'loss provisions' (tier two capital). But even if this €50bn is given in tier one capital and stretched to increase provisions its hard to see that it will be enough given the huge exposure to mortgages and the bust sectors, especially at a time when growth is falling further and unemployment continues to rise.

Finland and Ireland - flies in the ointment?
If the EFSF is used (which looks likely) the Finnish government is obliged to ask for 'collateral' as it did with Greece - the noises coming out of Finland suggest it will, especially given its objection to 'small' countries bailing out 'larger' ones. Ireland has also suggested that if Spain is able to avoid fiscal conditions on its bank bailout then it could request similar treatment (i.e. a loosening of 'austerity').

Open Europe take:
The Finland issue will get messy, as it did in Greece. It will add another complex layer to negotiations, while politically it will help the (True) Finns who are already launching a campaign against further bailouts. It could also lead to legal challenges - as we pointed out with Greece, it could trigger 'negative pledge' clauses on Spanish bonds given that they essentially become subordinated to Finland's claim on Spain. Not guaranteed, but a legal grey area which adds to the confusion.

As for Ireland, they have a fairly strong case here. Ultimately, their fiscal troubles stemmed from bailing out their banks, something Spain is now able to dodge thanks to external help. Ireland already feels that it is paying a huge price for protecting the European banking system - this will only add to this ill feeling. Given Ireland's perceived 'success' in Germany some flexibility may be forthcoming but we doubt enough to assuage Irish anger.

Impact on the UK?
The IMF will only play a 'monitoring' role, meaning the UK will not be liable for the money provided to Spain. However, given the links between the UK and Spanish banking systems it is imperative that the problems in the Spanish financial sector are finally dealt with - whether that will happen this time around is yet to be seen but given the points above it is not off to a great start.

Impact on the eurozone - Open Europe concluding remarks:
Markets responded positively to rumours of external aid for Spain on Friday afternoon, but, given the points above, a huge amount of uncertainty remains which will keep markets jittery and increase pressure on the eurozone. That is far from needed given the uncertainty surrounding the Greek elections. Given the ongoing assessment of the actual needs of Spanish banks the rescue will now enter a state of limbo as attention turns back to Greece, in the meantime Spain is likely to find it difficult to access the market (since this is broadly an admission it cannot raise any substantial funds itself).

Questions will also arise over the strength of the eurozone bailout funds - Spain guarantees around 12% of them, surely its guarantees are now worthless or would do more harm than good. Additionally, now that one of the larger countries has asked for support pressure will intensify on Italy (particularly with the falling support for the technocratic government and the slow pace of reform).

Referendum confusion: Is Cameron protecting Britain from British plans for a eurozone superstate?

The eurozone crisis alone is complicated enough. Add in UK domestic politics and calls for a referendum on EU membership, and this stuff becomes maddening.

Today's Europe coverage in the UK press was a wonderful cocktail of a euro Armageddon, EU-UK relations and a huge dose of British domestic politics.

The Telegraph reported that:

"The Prime Minister dismissed as 'nonsense' a suggestion from Angela Merkel, the German chancellor, that the European Union should eventually have a single national identity and described as 'nonsense' the idea of loyalty to a common European flag."

It also noted that Merkel said yesterday, “We need more Europe, a budget union, and we need a political union first and foremost”, which led the paper to proclaim that "David Cameron promises to 'protect' Britain from German plans for a eurozone superstate with common banking and political systems".

But is that really what's going on here? It's true that both Cameron and Osborne have floated the idea of "safeguards" if the eurozone presses ahead with a banking union and further integration. But here's the thing: Germany's default position remains strongly anti-fiscal burden sharing, meaning that Merkel's 'budget union' is still based on exporting German fiscal discipline to the eurozone-level by introducing stronger budget oversight and enforcement mechanisms - only then could some form of debt mutualisation be considered. A German-led superstate still seems years off - if it ever will be agreed (no matter how much other parts of the eurozone or markets might like to see it right now).

In contrast, David Cameron last month called for a bigger bailout fund, shared eurozone bonds and a more active monetary policy from the ECB - in other words, the eurozone quickly moving to "joint and several liabilities" with stronger states indefinitely underwriting weaker ones. That would really be a German-led super state.

So, who's plans are Cameron and Osborne really trying to 'safeguard' themselves against? Of course, Cameron is right to stay well clear and seek safeguards in return for nodding through treaty changes designed to achieve a fiscal or a banking union, for example for UK financial services. But this discussion leaves the impression that Cameron is actually seeking safeguards against his own plans for eurozone integration. Not necessarily a contradiction, but not a good starting point for future negotiations over EU treaty changes either.

There's also a second confusion: an EU referendum.

In response to questions about the impact on Britain of more eurozone integration, Osborne yesterday told the BBC Today Programme that:

“I think what the public are concerned about, the British people would be concerned about, would be if there was any transfer of power...A reshaped relationship with Europe would imply, would involve, a transfer of sovereignty or powers from the UK to Brussels.” 

In reality, Osborne merely re-stated what's in the 'referendum lock', i.e. a substantial transfer of powers to the EU will, by law, trigger a public vote. But the context is confusing. In all likelihood any eurozone focused treaty change would not legally and constitutionally impact the UK enough to trigger a referendum. Furthermore, the government's talk of safeguards suggests that, if none are present, the UK would veto any treaty change before it actually gets to a referendum. So a referendum still looks unlikely, at least on the back of the eurozone crisis.

Osborne and Cameron are in an unenviable position - the eurozone crisis threatens to send Britain into a deeper recession, and remains a fundamental threat not only to the UK economy but also now to the Conservatives' 2015 election prospects. Tory backbenchers and UKIP are both breathing down the necks of the Conservative leadership over an EU referendum. All factors considered, Osborne and Cameron are doing a decent job balancing all these interests.

At the same time though, as we hint at in today's Telegraph, the UK government could end up in a rather strange position by sending all these political hares running at the same time. Is it going to veto the same Treaty changes (to establish a fiscal / banking union) that it is now effectively calling for? If it's deemed that these treaty changes de facto transfer powers away from the UK - i.e. by shifting the institutional balance of power towards the eurozone at the UK's expense - will it then also call a referendum on those treaty changes? What would the question be?

This may all work out both in the polls at home and in talks in Europe. But given the unrealistic expectations it raises - and how very difficult it will be to square all these various factors - it may well come back to haunt the Tory leadership, at home as well as abroad.

Is a bailout of Spanish banks now imminent?

At the beginning of April, we published a briefing predicting that Spanish banks were heading for a eurozone bailout - hoping that we wouldn't be right. Well, alas, it looks like we were. It's been another frantic week for the eurozone, with Spain taking centre stage amid reports that a request for a bailout to help deal with its troubled banking sector might actually be a matter of hours away. Here is an overview of where we are at.

When?

• EU and German sources told Reuters this morning that Spain is expected to make a formal request for a bailout over the weekend, possibly as early as tomorrow afternoon;

• Another EU source told La Stampa's Brussels correspondent Marco Zatterin, "We need to intervene before the Greek vote on 17 June." The message here is clear: if the second Greek elections fail to deliver a stable, pro-bailout government, the contagion to Spain could be almost immediate;
   
• Quite significantly, the Spanish government has been slower than on other occasions in denying the reports. A spokesman initially just said, "The government doesn't comment on speculations". A couple of hours later, Spanish Deputy Budget Minister Marta Fernández Currás said it's "false" that Spain is going to ask for a bailout this weekend;
   
• As flagged up on Twitter by the Telegraph's man in Brussels, Bruno Waterfield, an EU source has called the Spanish government "incoherent" in light of the latest remarks;

• In a press conference early this afternoon, Spanish Deputy Prime Minister Soraya Sáenz de Santamaría has also denied that eurozone finance ministers are to hold a conference call tomorrow - as suggested by the sources quoted by Reuters. The Deputy Prime Minister insisted that the government will wait until after the publication of the IMF report on the Spanish banking sector (due on Monday) and the results of the two independent audits of the real estate assets held by Spanish banks (due on 21 June at latest) before making a decision on whether to ask for financial assistance.   

How much?

• Media reports seem to be converging on the estimates the IMF is due to publish on Monday. It looks like the IMF will put the recapitalisation needs of the Spanish banking sector at €27 billion in a basic scenario and up to €37 billion in an adverse scenario;

• However, sources who have seen the draft report have said that the IMF will recommend a fresh capital injection of at least €40 billion - with the additional money to be used as a buffer against potential short-term downturns, especially after the Greek elections (see above);

• All kind of numbers have been floating around during the week, from the €80-100 billion mentioned by Spanish MEP Antonio López-Istúriz, who also happens to be the Secretary General of the European People's Party (EPP), to the €60-100 billion estimated by credit rating agency Fitch. At the end of the day, Santander boss Emilio Botín, the first to mention the €40 billion figure while he was accompanying the King of Spain on a visit to Brazil last weekend, might have got it right.

How?

• At the moment, the eurozone bailout funds are not allowed to lend money directly to banks. This is possibly the main reason why the Spanish government has not tapped the EFSF yet: saving Spain, the eurozone's fourth-biggest economy, from the 'humiliation' of a fully-fledged bailout with strict conditions attached;

• Germany is reportedly considering a 'face-saving' compromise, which would see the bailout money going directly into Spain's national bank restructuring fund (FROB). A senior German official explained that, under this plan, "conditionality would be focused mainly on the banks, because Spain has already tackled the other reforms."

• In theory, this arrangement would not break EFSF rules - it would be money going to the Spanish government first, and then to the banks. Most importantly for Spain, it would also mean that the country would be imposed softer conditions than those attached to the Greek, Irish and Portuguese bailouts.   

Millions of Spaniards are bracing themselves for what could be a decisive weekend for the future of their country in the eurozone. If a request is made for external assistance, even a win for La Roja against Italy on Sunday evening may not be enough to soothe their fears.

The UK should throw its weight behind a Europe based on sound money

In today's Telegraph, we argue:

Whatever the future of the single currency – and the entire European project – it will largely be decided in Berlin. The most important relationship for David Cameron is therefore with the German Chancellor, Angela Merkel. But there is a risk that the Prime Minister will miss a vital chance to cement a new Anglo-German deal on the future of the European Union.

For years, the UK’s European diplomacy has been defined by its relations with the Élysée, but the eurozone crisis has demonstrated that Germany now stands alone as Europe’s leader, however reluctantly. Despite there being a great deal of cultural and political overlap, however, the basic problem is that Britain does not really understand Germany, and vice versa. Britain perceives itself as a seafaring country of traders, Germany as a continental land of engineers.

Much like the UK, Germany is undertaking a highly charged internal debate about its place in Europe. For the first time, the twin pillars of Germany’s extraordinarily successful post-war settlement are in conflict: its commitment to Europe, and its belief in sound money and stable budgets. Whatever the outcome of this debate, it will have a defining impact on the future of the EU.

The UK, however, risks ending up on the wrong side of the debate. To the great annoyance of Berlin, Cameron and George Osborne have developed a fondness for calling on the eurozone to move towards fiscal union, including eurobonds, and for the ECB to effectively start the printing presses. Britain has a right to voice its opinion – a full-scale crisis would have implications well beyond the eurozone – but its advice is misguided.

Eurobonds and cheap money create huge incentives for more spending, which is exactly what the Coalition is arguing against at home, and feel awfully like solving a debt crisis with more debt. Cameron has also stressed that “Europe’s lack of competitiveness remains its Achilles’ heel”. But, as Merkel has rightly countered, eurobonds do nothing to address this. If anything, allowing countries to piggyback on Germany’s credit rating takes away pressure for the vital reforms that many of these countries need.

After having spent a decade in opposition calling for a more dynamic European economy and a slimmed-down, more democratic EU, the Conservative leadership’s cocktail of Eurosceptic fiscal federalism is not only intellectually inconsistent but, in the key debate about the future of the EU, needlessly aligns the UK with European federalists and socialists such as François Hollande.

At the same time, it locks Britain into a weak negotiation position over future EU treaty changes – which will be needed if the eurozone is going to move to fiscal union – as Britain can hardly block the same treaty change that it has effectively argued for.

Instead of prejudging the eurozone’s future, Britain should spend all its political capital on convincing Merkel that Europe as a whole needs to move in the direction of free trade and structural reform. This means that, instead of talking about “digital government” as Cameron and Merkel did yesterday, Cameron should have said the following: “I will support the Chancellor’s vision for a Europe based on responsible spending, sound money, liberal cross-border trade and respect for the rule of law. Like the Chancellor, I believe that Europe must learn how to live within its means and reform itself if it is going to remain a vibrant economic actor on the world stage. But just as Germany will need to seek the right conditions to be comfortable with its new position in Europe, so must Britain. Since we cannot join the euro, Britain will need a different – and more flexible – set of arrangements under EU law than euro members. This is the only way to reconcile continued EU membership with UK public opinion.”

In the end, this would benefit Germany, Britain and Europe as a whole.

European banking union isn’t the solution to the immediate crisis facing the eurozone

In City AM today we lay out our thoughts on the latest plan to save the eurozone - a 'banking union'. Although the plan has some merit and may be needed in the long term it just doesn't look suitable for solving the short term crisis facing the eurozone right now. See below for full piece:

WHATEVER new twist the Eurozone crisis takes, the answers always seem to be another union: economic, fiscal, political, federal – you name it. The latest in this long and somewhat misguided list is a banking union. The idea is simple: a deposit guarantee scheme and a bank resolution fund would be created at the Eurozone level to backstop any systemically important bank which finds itself in a solvency crisis.

It sounds promising and it is a worthwhile idea. In particular, if Europe is ever going to get its act together, there has to be a way for bust banks to fail. Additionally, no-one can dispute that, if the Eurozone is to ever become workable in the long term, ensuring it has efficient and effective cross-border financial markets – most importantly interbank lending – will be vital. In the past few months, we have seen an increasing re-nationalisation of Europe’s banking sector, as domestic banks increasingly buy up their respective countries’ sovereign debt, tightening the link between banks and sovereigns with huge systemic implications.
Unfortunately, there are three key reasons why a banking union – as with any other union – does not present an answer to the immediate crisis.

Firstly, any banking union would need to be backed up by strong Eurozone-wide financial regulation. All regulation would need to be harmonised to limit any moral hazard from the new guarantees underpinning financial institutions. This would also require very strong central enforcement mechanisms, to counter the temptation among national regulators to fudge the rules.

This raises a second point. For a banking union to work, the Eurozone would need a whole new set of institutions, equipped with powers cutting deep into the economic sovereignty of its member states. Such powers would include ordering wind downs of banks, forcing bail-ins on bondholders and even taking shares in tightly held flagship national banks. Even if this was possible – it’s not at the moment as Germany remains strongly opposed – it would be a time consuming exercise, even with crisis serving as a whip on Eurozone leaders’ backs.

Thirdly, though a banking union would address instability stemming from solvency issues, it would not deal with the redenomination risk. Consider the state of banks and the economy in Spain and Greece. The flight of deposits in Spain is at best based on a single institution’s insolvency (Bankia), but also possible concerns over the cash-strapped state’s ability to provide a backstop. The banking union would assuage these fears, although it is not a necessity to do so in the short term, a thorough recapitalisation of the banks with external assistance would have the same effect. However, in Greece the concerns stem from the country’s potential exit from the euro – an increased backstop would not stop this unless deposits were underwritten and banks guaranteed in euro terms indefinitely (even if Greece were to exit the euro). This would be impossibly complicated and would provide a huge burden on the other Eurozone states while making an exit far easier and more attractive for Greece – creating further moral hazard concerns.

On top of all this, there is the thorny issue of the UK. The Eurozone would not want to exclude the UK, as it would be perceived as giving the City of London a competitive advantage. But including the UK would be politically impossible given the need for regulation and institutional control at the EU level, and economically impossible given the size of resolution fund needed to backstop a financial sector as large as the UK’s. Though a compromise may be possible eventually, for now it would simply throw up another impasse in UK-EU relations and attempts to tackle the crisis.

A banking union can’t solve the situation in Greece and may not be needed for Spain, but movements towards a cross border resolution scheme should continue. This can be combined with a recapitalisation of Spanish banks with Eurozone funds – albeit with strong conditions, including winding down banks – as well as moves to encourage the pre-funding of national deposit guarantee schemes to help tackle the solvency risk in countries such as Spain.

Outlining a long-term vision for the euro is important but outlining policies to tackle the immediate crisis must be the priority.

 For an(other) excellent round up of the problems facing the creation of a European banking union we suggest checking out Alex Barker's ten points over on the FT Brussels Blog.

Let's dare to have less Europe!

As leading UK politicians and commentators urge eurozone countries, above all Germany to take the plunge into a fully fledges fiscal and economic union (while firmly rejecting the UK’s participation), it seems they have failed to contend with quite how deep resistance to such a move might be. Indeed we are beginning to witness a bizarre spectacle in which the UK is arguing for more EU intervention while many on the continent are arguing for less, a complete turn-around from recent history.

For example, at the time of going to pixel, the homepage of Die Welt leads with a comment piece by Clemens Wergin entitled “Lets dare to have less Europe”. In the piece, he makes the sorts of arguments often made by the more nuanced EU-critical UK-based commentators, such as:

“The principle of collective responsibility should remain an exception. Therefore, we must return to a Europe in which the welfare of one nation does not depend on how others organise themselves.” 

“[The moves towards a fiscal and banking union] mean even larger intervention rights for the European institutions in national budgets. At the same time it would also mean that the inability of Italian and Greek officials to persuade their wealthy citizens to pay their taxes would be compensated by fees from the dutiful North. It would be the perfect recipe for Europe-wide organized irresponsibility.” 

“This type of deepening is not wanted by the citizens, it will not work and it drives a wedge of division into the continent. It is also further evidence of the implacability with which the political elites of the continent run in the same direction. When it comes to European issues, there is a form of ‘group-think’ that is far too rarely questioned. According to this creed, only he or she who calls for more integration can be considered to be a good European. Meanwhile, it has long been the opposite.” 

Surely these are the sort of sentiments that constructive UK EU-reformers ought to be embracing?

Reforming the EU budget: could the reform-minded states ask for a better opportunity?

Today we published our long anticipated report breaking down the EU budget line by line and putting together our alternative that would reduce spending by almost 30% - saving European taxpayers around €41bn annually - while focusing the spending far more effectively on boosting the jobs and growth that both the UK and Europe desperately need.

In the press release accompanying the report, we argue that:

“Given the economic climate in Europe, the UK has a golden opportunity to push for fundamental reform of the EU budget. However, the Coalition is selling itself short in on-going talks over the EU’s long-term budget, given that its primary objectives of freezing spending and defending the rebate could be achieved simply by wielding its veto.” 

In particular, we recommend that the UK and other reform-minded states ought to prioritise and target one key area of the EU budget that it could generate the most benefit compared to the political capital needed to reform it. It could put forward a strong economic case and also threaten to veto the EU budget unless this reform goes ahead. Clearly, the potential for the cleanest policy option would be to devolve regional policy back to member states with a GDP of 90% or above the EU average. As we have pointed out repeatedly, such a move would generate huge gains for Britain (including a net saving of around £4bn over seven years) and the EU as a whole, while also boosting the EU’s jobs and growth agenda at a time when Europe needs it the most.

As Andrea Leadsom MP, co-chair of the APPG on EU reform. told the Times (which trailed the report): “It is ridiculous that we should be handing over money, that they administer, convert to euros, decide what to do with, then hand back”. The report was also trailed in the Mail.

Here are the report’s key points:

• Due to its inflexible design and poorly targeted spending schemes, the EU budget is particularly ill-suited to deliver the jobs and growth that Europe needs. However, the window of opportunity for radically reforming the EU budget is swiftly closing. Before the end of the year, national governments could potentially conclude talks over the shape and size of the EU’s next long-term budget, locking in the overall spending priorities for the period between 2014 and 2020.

• Despite the austerity facing Europe, the European Commission has proposed a 6.8% increase in EU spending for 2013, while cutting only six out of almost 41,000 EU jobs. For the next long-term EU budget post-2014, the Commission has proposed to increase the budget by yet another 5%, while only offering minor reforms on substance. 

• Based on a line-by-line analysis of the EU’s 2012 budget, Open Europe has set out an alternative budget that would reduce spending by almost 30% - saving European taxpayers around €41bn annually - while focusing the spending far more effectively on boosting jobs and growth. The UK would reduce its annual gross contribution to the EU budget by almost €5.7bn (£4.6) under such a scheme. Areas in the current budget where both savings and better targeted spending could be achieved include: 

1. Focusing the EU’s structural funds on less wealthy member states and stopping the recycling exercise whereby richer member states subsidise each other’s regional development policies would save just over €20bn.
2. Over one quarter of the EU budget is spent on subsidies to farmers and landowners, irrespective of whether they are engaged in any meaningful economic activity. Slimming down and re-focusing the CAP would bolster both rural job creation and the delivery of environmental benefits, while also achieving a saving of almost €24bn.
3. The cost of EU quangos to European taxpayers has increased by 33% in two years. Simply scrapping those that duplicate others’ work or add no value, would save €431m.
4. Scrapping the European Parliament’s additional seat in Strasbourg could save €180m. Last year, the Parliament issued tenders with a combined value of over €62.4m related to the maintenance of the Strasbourg seat – despite the building standing empty 317 days a year.
5. The cost of running the European Parliament has increased by 36% since 2005, and totals €1.7bn, while expenditure on MEPs’ salaries and allowances has increased by 77.5%, and cost €190m in 2012, excluding pensions and transitional allowances. This is largely due to reforms in 2009 which standardised MEPs' pay across all member states, which had been hugely divergent, and shifted the cost from member states to the EU budget. 
6. Also, since 2005, spending on Commission officials' pensions has increased by 48.6%, amounting to €1.3bn today, while expenditure on Commission staff salaries has risen by 17.9% and now totals €2.1bn, although this is down from a high of €2.2bn in 2010.
7. Since 2005, EU spending on ‘Education and Culture’ has risen by 61%, now standing at €1.54bn. The DG for Education and Culture employs 487 staff – more than the DG for Internal Market and Services.
8. Meanwhile, despite the importance of trade and the single market, only 2.6% of the EU budget is explicitly dedicated to facilitating these policies. Aside from the EU's six highly specialised joint undertakings, general R&D – the one area where the EU budget really can add value – only accounts for around 4.5% of EU spending in 2012. This amount should be radically increased.

• To mirror tough economic decisions in member states, there are also substantial savings to be had in a range of other areas, including administration, communications, justice & home affairs and foreign policy. 

• In the on-going negotiations over the next long-term budget, the UK is pushing for a budget freeze and seeking to defend its rebate. While this strategy has merits, it will also not achieve anything more than if the UK simply chose to veto the proposal for the next long-term budget, as in the absence of an agreement, the status quo would effectively prevail. The UK must set the bar higher and push for, at the very least, the devolution of the structural funds back to richer member states, which would be a win-win for the UK and Europe. If this is not forthcoming, the UK should be prepared to veto the budget. 

We hope that the report will stir things up in Whitehall in the on-going negotiations on both the EU’s next annual budget and the next long term, seven-year financial framework which will largely lock in EU spending until 2020. Though it won't be easy (yes, we know about every single perceived and real political obstacle to EU budget reform), the UK potentially has a number of allies if it plays its diplomatic cards right, ranging from the new member states (with the right pitch) who stand to gain substantially under the proposals, to Germany, where both government and opposition politicians have been increasingly critical (see here and here) about the current EU budget.

It's a matter of just doing it.

A euro exit may benefit Greece eventually but it won't be an easy ride

Over the weekend, we published a new briefing looking at the implications and likelihood of a Greek exit from the euro. We argued that an imminent Greek exit isn't inevitable, nor that it would solve Greece's problems - though, if managed, leaving the single currency could potentially be beneficial for the country in the long-term. Over on Telegraph blogs, we argue:

"if Greece defaulted and left the euro – perhaps following a failure to reach a compromise after the Greek elections on 17 June – it would be bad news all around:

• The Greek banking sector – woefully undercapitalised since the losses it took as part of the second bailout – would instantly collapse. Pensions would take a massive hit too. In order to avoid a complete economic – and social – meltdown, between them, banks and pension funds would need an instant €55bn injection of fresh capital. At the same time, full nationalisation of Greek banks – which has been mooted by the ‘radical left’ Syriza party – could prove pretty disastrous. The balance sheets of the six largest Greek banks are equal to 113pc of the country’s GDP – taking on all their liabilities would send Greek debt to GDP skyrocketing once more, potentially eliminating the benefits of the debt write-down.
• The new Greek Central Bank would also need to create at least €128bn worth of the new currency (63pc of Greek GDP) in liquidity to help keep Greek banks afloat as the Eurosystem withdraws its support. Hello inflation.
• Contrary to popular belief, a euro exit wouldn’t mean the immediate end to austerity for Greece either – the country would still have to find savings of at least €12bn to pay various bills, including hospital and social security expenditure vital to uphold social order.
• At the same time, the new Greek currency could devalue by around 30pc, which in theory increases chances of growth in the long-term (as the country is no longer stuck with a hopelessly over-valued currency), including a potential boost to exports equivalent to 10pc of GDP. But in reality, any potential export gain could be diminished if the ‘stub euro’ weakens (Spain springs to mind) or demand in Europe decreases further. Unlike previous devaluations in Argentina and Iceland – often used as comparisons – Greece has few natural resources or industries to fall back on, which may limit the benefits of devaluation. And remember, devaluing or removing a currency peg is not remotely the same as introducing a whole new currency. The latter is far more challenging.

So where does that leave us? Well, if Greece left tomorrow, we estimate that it could still need between €67bn and €259bn in external short-term support just to stay afloat. This could be split between the IMF, the Eurozone and non-euro countries.
The UK could potentially be involved in such a rescue package, via its IMF participation. In addition, the EU’s so-called ‘balance of payment’ fund – designed to help non-euro countries (which Greece technically would be) and in part underwritten by Britain (to the tune of 13pc) – could be activated. If the UK can get away with underwriting between €4bn to €6bn, which would be one scenario, it should count itself lucky. These would be loans, not up-front cash gifts, and if it served to stem contagion from a Greek exit, such loans would be justified.
To minimise the need for external support and risk of contagion, two steps need to be taken before Greece should even contemplate a euro exit: first, the banking sector should be recapitalised, shrunk, consolidated and restructured. Second, a primary surplus should be achieved to allow the Greek state to fund its day-to-day running costs without external help. Though this would make an exit far more appealing and – with a lot of luck – potentially beneficial for Greece in the long-term, the truth is that for Greece, whether inside or outside of the euro, the road ahead looks very rough indeed.
This is also why a new government in Greece – no matter what such a government would look like following the Greek elections – will likely reach a deal with its creditors, allowing it to remain inside the euro for now.
In European politics, the safest money is always on another fudge."

"Ciao ciao" to the euro?

After a fairly long absence, Silvio Berlusconi is back on our blog. And he hasn't lost his provocative touch. Speaking at a meeting of MPs and Senators from his People of Freedom party, the former Italian Prime Minister had some pretty interesting things to say about the euro, money printing and Germany. Drawing from several Italian media sources, we can offer you some of the best quotes from Berlusconi's speech. Here goes:

"We must tell Europe with strength that the ECB has to start printing money. The ECB has to change its mission."

Good luck with that Silvio, but not the one who's easily deterred he went on:

"Either the ECB becomes the [eurozone's] lender of last resort, or the problem of Europe, or better of Germany in Europe, arises. Germany should leave the euro instead, if it doesn't agree with the ECB acting as the lender of last resort."

So Germany leaving? It's Silvio, but still. He wasn't done, however:

"I'll tell you the crazy idea that I have in mind: let's start printing euros with our national mint [if the ECB refuses to do so]."

"If Europe doesn't pay attention to our demands, we should say 'ciao ciao' and leave the euro."

"Leaving the euro wouldn't be the end of the world. Britain is a solid country and has never joined the euro." 

Il Cavaliere's remarks are literally all over the place, i.e. ECB money printing or the Italian Central Bank should fire up the printing presses with or without Frankfurt's approval. Alternatively, either Germany or Italy itself leaves the euro "which wouldn't be the end of the world." Extraordinary stuff.

All empty rhetoric? Most likely. But if there's one thing Berlusconi knows better than many other Italian and European politicians is how to tell people exactly what they want to hear. And remember, Italy will see key national elections in 2013 in which Berlusconi's party is a contender. It's no coincidence that he is now mentioning the possibility of Italy leaving the euro - an idea floated by Italian comedian Beppe Grillo, the rising star of Italian politics, during the campaign for last month's local elections (from which Grillo's Five Star Movement emerged as the big winner).

And it's a most interesting development that a senior Italian engages in outright anti-euro rhetoric.

Germans stick to their guns on data retention

As we've noted before, the Germans take privacy and civil liberties seriously, and have refused to implement the EU's Data Retention Directive (the first part of the Directive was meant to have been implemented in 2007 the second part in 2009). There's a lot of history here. Two years ago, the German Constitutional Court ruled the implementing law of the Directive unconstitutional, which in turn triggered the current stalemate.

As the Germans continue to drag their feet, the European Commission has now proposed that the ECJ impose a daily penalty of €315,037 on Germany until it implements the Directive. However, Süddeutsche reports that the liberal FDP Justice Minister Sabine Leutheusser-Schnarrenberger is sticking to her guns and is still refusing to implement the law - something which is increasingly straining relations within the German ruling coalition, with CDU/CSU MPs, and CSU Interior Minister Hans-Pieter Friedrich in particular, less keen to make a stand on the issue than the FDP.

This is becoming a very interesting test case for a potentially new-found German assertiveness in Europe, though it's not alone on this on this one. Sweden, Austria and Romania have gone into this Directive kicking and screaming, but it's definitely Germany that is offering the most resistance at the moment. More widely, of course, this is an interesting example of an EU member state unilaterally refusing to accept an EU law what it goes against the country's fundamental political and constitutional settlement.

Catching depositors in your web

What's the best way to stop a bank run? Well, ask Bankia. According to Spanish business daily Cinco Días, The Spanish bank - which is set for a multi-billion state bailout - has launched an initiative called "The amazing Spiderman".

The plan is to convince Bankia's youngest depositors not to pull their money out as things are looking a bit shaky, by providing some impossible-to-resist incentives. First, any customer that can muster an account balance of €300 or more by the end of May will get a Spiderman themed beach towel. As if that wasn't enough, a lucky few winners will also be in line for:

• A trip to New York;

• Twelve PlayStation Vita consoles;

• 1,050 tickets for the new movie, "The amazing Spiderman" - with 50 of the tickets to the very première.

The winners will be announced on 12 June.

And we were just starting to worry about the reported €31.44bn drop in  private Spanish bank deposits last month. This should sort it...

Spanish regional profligacy sits as a worrying lesson for the eurozone

In today's City AM, we argue:

Beyond the troubled banking sector, there is another potential problem on the Spanish horizon that could be instrumental in how the euro crisis develops: the central government’s relationship with the 17 Spanish regions, and particularly its ability to keep public spending at the regional level under control.

The 1978 post-Franco constitution designed Spain as a highly decentralised state. Regional statutes are treated as an integral part of Spanish law, and the regions legislate over a wide range of policy areas, from local infrastructure projects to culture and healthcare. As a result, they currently handle over 50 per cent of Spain’s total public spending.

Earlier this year, the new centre-right government, led by Mariano Rajoy, was quick to blame the regions for Spain’s failure to meet EU-mandated deficit targets. He had a point, but, ironically, some of the spendthrift regions – like Comunidad de Madrid and Comunidad Valenciana – have been led by the Prime Minister’s own party, Partido Popular, for years. More worryingly, earlier this month, excessive spending in these regions again forced Rajoy to revise upwards the country’s deficit.

This shows just how difficult it will be for Madrid to control the regions, and therefore Spain’s public spending. Spanish regions have committed to a total of over €18bn (£13.6bn) of savings by the end of 2012 – almost half of Spain’s planned deficit reduction for this year. Given their past record, the regions are unlikely to deliver, meaning that the central government would have to pick up the slack. This would put further strains on Spain’s public finances, which will need much of the ammunition at their disposal to deal with potential future bank bail-outs.

What can Rajoy do? The Spanish parliament has recently passed new legislation giving the government the power to take over the accounts of regions that look set to miss their deficit targets, and the tiny principality of Asturias may become the guinea pig for the new system. But will regions such as Catalonia or the Basque Country – which take their regional identity and independence extremely seriously – accept Madrid coming anywhere near their partial budget autonomy? It looks doubtful. The Basque Country is going to take the government to the Constitutional Court over planned cuts to health and education, while the Catalan governor, Artur Mas, has threatened to break his regional alliance with Partido Popular, unless Catalonia is granted greater tax autonomy.

Spain could be heading for a major political showdown. In theory, Rajoy’s Partido Popular holds a sufficient majority to push through legislation without the support of regional parties. This is precisely what happened with this year’s budget, when the Prime Minister’s party rejected all of the over 3,000 amendments tabled by the opposition. However, the price of consistently taking such an inflexible stance may well be greater discontent in Barcelona and Bilbao.

In general, the feeling is that Rajoy may already have reached the political limit of how much he can encroach on regional autonomy, and any further steps in this direction would require important changes to the Spanish constitution – for which there would be very little support.

So what is the significance of all of this for the future of the Eurozone? First, those that put their hope in the Spanish government being able to deliver far-reaching deficit cuts, via equally far-reaching savings in the regions, are likely to be disappointed. Spain is not going to become France – a highly centralised country where the national capital rules supreme over public spending. Spanish regions will remain a liability, and pushing them too far may trigger a huge political backlash, which would hardly benefit the Eurozone either.

But second, there’s a bigger lesson. If Spain faces difficulties in achieving more fiscal centralisation in its own country, due to political constraints, how much more difficult will it be for the single currency to achieve similar centralisation at the level of all 17 Eurozone members – considering its own number of different parliamentary and economic models, government structures, and cultural preferences? Just a thought.

Spain races against time

Things are looking sticky in Spain.

Firstly, the Spanish government announced a bail out of Bankia to the tune of €19bn in addition to the €4.5bn already put in - and is currently looking at the least painful way of getting cash to the bank. The plan is still up in the air. Yesterday there was talk about swopping government bonds for shares in the bank (Bankia could then use the bonds as collateral to get more cash from the ECB). This made a lot of people nervous, not least the Germans, who already worry that the link between states and ECB funding, via banks, is getting a bit too strong. Today's talk has instead focused on issuing bonds from Spain's specific bank bailout fund, FROB, to raise the cash Bankia needs.

Secondly, Catalonia - Spain’s wealthiest region - has asked the central government for financial assistance to repay its €13bn debt; bad news for the central government's debt and deficit. Thirdly, the the spread between Spain and Germany’s ten-year bonds reached its highest level since the introduction of the euro, with Spanish ten year bonds currently at around 6.4%.

There are a huge number of issues on the table here, but these events highlight three things that we pointed to in our April 3 briefing on Spain:

• Despite Spanish PM Rajoy's remarks to the contrary, it looks increasingly as if Spain is slowly realising that it may not be able to afford to directly fund Bankia or other banks that run out of cash. And the numbers could well go up. This, in combination with talks and leaks over recent days that European money will be needed to backstop the Spanish banking system (Rajoy is very keen on more from the ECB), indicates that Spain is now moving ever closer to bank bailout via the EFSF.

• A huge battle looms over the finances and economic autonomy of Spanish regions, that remain a massive liability for the central government's attempt to cut its debt and deficits.

• Spain is racing against the clock. Naturally it will take time for the structural reforms that Spain is pursuing to have an impact - time that markets just won't give it at the moment.

Instead, it looks as though that time may soon have to be bought by eurozone taxpayers.

European bogies under the bed aside, does Ken Clarke have a point?

UK Justice Secretary Ken Clarke has just been on the BBC's Today Programme, taking a major swipe at those calling for an in/out referendum. Asked if he accepted that voters were deeply eurosceptic, he said "The nation is a bit eurosceptic" (no kiddin'). But he went on to say,

"The idea that they are all demanding a referendum on the European Union would be regarded as ridiculous, it would be out of sight as a public priority. It is the demand of a few right-wing journalists and a few extreme nationalist politicians."  

He said a referendum would create "absolute confusion" and that he couldn't "think of anything sillier to do...it would settle nothing. Particularly it would settle nothing with the more frenzied eurosceptics who keep believing that European bogies are under the bed." 

Hmmm. Looks like Ken is continuing arguments from ten years ago - and he comes across as very patronising. But he does have a point though: an in / out referendum would actually settle very little - and probably raise more questions than answers. In the next two weeks, we'll publish a briefing looking at these very issues. In particular, we'll look at the tiny issue of what actually happens on Day 2 if Britain did choose to withdraw (i.e. the in / out debate beyond the 'don't bother me with the details' approach that too often comes with this question).

And it ain't easy. This is one you don't want to miss...

Euro opinion polls point to more fudge

Some interesting opinion polls from the heart of the eurozone from the last couple of days:

In Greece, a series of polls shows momentum ahead of the country’s re-run election next month shifting slightly from the radical left anti-bailout and austerity SYRIZA party to the pro-bailout and austerity centre-right New Democracy party, though SYRIZA is still set for gains compared with its election result earlier this month. New Democracy, which won the elections with 18.9%, now leads with between 25.6% and 27.7%, a lead of between 0.5% and 5.7% over SYRIZA. That means that together with the establishment socialist PASOK party, which won 13.2% at the elections, a pro-bailout coalition could be formed with a majority of seats in the Greek parliament, something that evaded the parties last time.

The polls also showed support for staying the euro at 65% versus 25% against. While staying in has enjoyed a consistent majority, voters are potentially starting to re-align their party choice accordingly - realizing perhaps that ripping out the bailout package comes with massive risks - albeit this could change again before the elections and remember, SYRIZA remains the joker in the pack.

Meanwhile in Germany, public opinion seems to be shifting in the anti-euro direction, with an opinion poll published on Friday by German state TV ZDF finding that 79% of respondents rejected eurobonds as a solution to the crisis, which is a stark reminder for the rest of Europe how far away we actually are from eurobonds. Interestingly, though, support for euro membership itself was also waning, with 50% (up from 43% in February) saying they believed it carried more disadvantages than advantages for Germany, with 45% taking the opposite view (down from 51% in February).

These opinion polls - together with events of recent weeks - point towards one conclusion: we're looking at yet more fudge. As we've pointed out before, as sceptical as one might be about the future of the euro, there's still considerable scope for negotiations on all sides of the Greek crisis, and therefore, chances that the country can find a settlement and agreement with its creditors after the elections that allows it to stay in the euro remain strong. It would be different if the public were to turn against the euro itself, which it isn't at this time.

The stakes are simply far too high for another round of Russian roulette.

Anti-austerity inside the eurozone: Greek voters stick to their potentially false choice

The key trend in Greek opinion polls holds steady: voters back anti-austerity parties in great numbers but  remain committed to staying in the euro in equally great numbers. The latest Public Issue poll released yesterday put the radical left Syriza as the largest party with 30% of the vote, New Democracy on 26% and Pasok on 15%. The figures suggest a surge in support for Syriza but also a move back towards the larger parties, with smaller parties falling in the polls.

Interestingly, a poll from Ipsos suggests that 70% of Greeks would vote to keep the euro if a referendum on the issue were held today, this compares to 50% of Italians, 62% of French, 51% of Germans and 55% of Spaniards. Interestingly, 38% of Italians would vote to leave the euro if a referendum was held today - that's quite high given the country's traditional support for the single currency.

On a less surprising note, from today's Die Welt we learn that fears over Greece leaving the euro has triggered yet more Greek tax evasion. Greek tax revenues between January and April were €500m lower than anticipated in the 2012 budget, while April’s takings fell by 13% on the previous year.

That is not a good sign.

Does the SPD really support eurobonds?

Update 1.45: It looks like Trittin has performed one of the fastest and sharpest u-turns of recent times, as he is quoted by Reuters earlier today as saying: "Merkel should stop blocking eurobonds" and suggested it could be a condition for his party's support for the fiscal treaty. This is also a matter of semantics though, as the Greens remain in favour of a limited form of fiscal burden sharing or debt mutualisation. It still illustrates the wider point however: eurobonds are in for a rough ride in Germany.

Update 1.15pm: Die Welt has published a more detailed follow-up on the issue and the Green party has followed the stance of its oft senior coalition partner and also rejected eurobonds at the present time. Green parliamentary co-chairman Jürgen Trittin said that while he agreed with the economic principles behind them, they were the wrong solution at this time, not least because it would require changing the EU Treaties. The paper states that both parties prefer an alternative, only partial, pooling of eurzone debt, possibly via a debt redemption fund.

Original post:

There's a school of thought out there - usually fairly uninformed - which has it that a German government that features the SPD (social democrats), could fairly effortlessly strike a deal with Francois Hollande over further fiscal integration, which would include, for example, eurobonds and greater ECB intervention. People arguing this point notes that SPD supports eurobonds, while doing fairly well in opinion polls. That should cut it right?

Well, this view tends to underestimate the German cross-border consensus on sound money and budget discipline. And from today's Die Welt we learn that the SPD has retreated from its previous support for Eurobonds, thereby distancing themselves from their French counterparts. Thomas Oppermann, the party’s speaker in the Bundestag said:

"We oppose the uncontrolled pooling of debt… There is absolutely no need for general eurobonds". 

Oppermann added that:

“I speak for [Germany] and not for France”.

And there you have it from the horse's mouth...this will be a long, unpredictable debate in Germany.

And the most interesting part of yesterday's EU summit was...

Very little came out of yesterday's informal EU summit, but here's what EU leaders had for dinner (courtesy of La Stampa's Brussels correspondent Marco Zatterin):

Lobster with asparagus
Fillet of John Dory (aka St Peter's Fish) with vegetables
Chocolate mousse
Coffee

It's interesting because we always wondered what EU leaders actually eat at these summits. In April, a menu from the last meal on the Titanic went for £76,000. Maybe one day the menu from the final summit before the eurozone sank (well we're not there quite yet) will fetch a tidy sum…

Germans hit out at the EU's "debt treaty"

Angela Merkel has grounds to be glum

Most recent headlines concerning opposition to Merkel’s eurozone policies have focused on the anti-austerity positions of Hollande and his supporters, and at the more dramatic end, Tsipras and the radical Greek opposition.

However, recent developments on the home front are interesting as well, with domestic opposition to Merkel’s policies gaining focus and momentum, albeit targeting the taxpayer-backed bailout element of the package as opposed to the austerity one. Yesterday saw the launch of a new pressure group called Allianz gegen den ESM (Alliance against the ESM), comprising a coalition ten MPs, business groups and civil society organisations. The group have a (pretty basic) website setting out their five main objections, which are as follows:

1. The ESM is to be permanent, with member states having no right to leave. 
2. The ESM Board of Governors, comprised of member states’ Finance Ministers, would wield decision making powers over policy and instruments. 
3. The Bundestag will have few opportunities for participation and control. The total size of the ESM “mega bank” will be €700bn, more than five times the size of the EU budget. Finance Ministers could agree on an indefinite increase. 
4.  Member states have to pay €80bn in an-front cash contribution to the ESM, of which Germany’s contribution is around €22bn. Any losses will be borne by taxpayers as the participation of banks and other private creditors is not mandatory. 
5. The ESM has no mechanism for debt restructuring and can therefore not be considered to be a form of emergency assistance. 

The group have also put out a slightly dystopian video warning of the dangers of a Europe built on debt.

The group’s 12 o’clock press conference yesterday prompted Handelsblatt to lead with the headline: “High-noon for Merkel’s euro policy”. The paper also very helpfully compiled a ‘rogues gallery’ of the key players. While many of the MPs are long standing critics of the ESM and the bailouts, such as the CDU’s Klaus-Peter Willsch or the FDP’s Frank Schäffler, linking up so clearly with other groups allows their message to be heard more widely beyond the Bundestag. Other participants worthy of note are:

Marie-Christine Ostermann, Federal President of the Association of Young Entrepreneurs, who warned that:

“With ever larger rescue mechanisms, for which the liability is borne by others, Europe is moving ever further down a blind alley.” 

Lutz Goebel, Federal President of the Family Business Association, who in the past has compared the eurozone bailouts to the voyage of the Titanic, and urged the Bundesbank to seize the wheel of rescue before it was too late.

Karlheinz Däke, President of the German Association of Taxpayers, who argued that:

“The subsidising of the distressed eurozone countries, especially by the German taxpayer cannot be the answer to the debt policy of recent decades. The euro has only a future with individual liability and responsibility.” 

John Hüdepohl from Bündnis Bürgerwille (Alliance for Citizens’ will) which campaigns for more input and involvement from ordinary citizens in the eurozone bailouts.

Ultimately, despite Handelsblatt’s dramatic headline, this group and other similar constellations are not in a position to pose a serious threat to Merkel's policies at the moment. However, it shows that German domestic opposition has the potential to be uniting and organising itself, giving it a much better capacity to campaign for alternative policies. If Merkel appears to give in on ‘red-line’ issues such as eurobonds or greater ECB intervention, or if the eurozone is plunged into even deeper crisis – for example if there is no breakthrough in Greece’s re-run elections – expect such campaigns to pick up momentum.

The EU's Big Five (& Austria): where are they at ahead of tonight's summit?

The 'growth dinner' of EU leaders is about to start. No big decisions are expected (this is a meeting of EU leaders after all) but here's an overview of where the different big countries are at:

Germany

Berlin  remains fiercely opposed to Eurobonds, but interestingly, EU Energy Commissioner Günther Oettinger - a fellow member of German Chancellor Angela Merkel's CDU party - argues in an interview in today's Handelsblatt:

"Eurobonds are a matter of timing. I advice all participants not to position themselves inherently against them."

Similarly, Rainer Brüderle, the parliamentary leader of the FDP (Merkel's junior coalition partner) told German radio Deutschlandfunk that if structural reforms and budgetary discipline were implemented, Germany should not rule out the introduction of Eurobonds “at a later stage".

It won't touch Merkel for now, but an indication that Germany is set for a long, grinding and existential (in the euro sense of the word at least) debate on this issue.

Austria

It looks like Austrian Chancellor Werner Faymann is on a different wavelength to his Finance Minister Maria Fekter. The latter is opposed to the idea of debt-financed growth à la Hollande, while Faymann told Kleine Zeitung in an interview that he "fully supports" Hollande in wanting to discuss Eurobonds at tonight's meeting. However, the Austrian Chancellor made clear that Eurobonds are "a long-term project that cannot be realised in the next two or three years" while stressing the need to also have strong mechanisms to ensure that budget discipline is "an absolute prerequisite" for the proposal to be implemented.

France

French President François Hollande held a joint press conference with Spanish Prime Minister Mariano Rajoy earlier today. Nothing new came out of it and France's focus at the tonight's summit remains:

• Fiscal stimulus is necessary to achieve deficit and debt reduction; 

• Greece must remain in the eurozone, and its partners need to do more to help the country return to growth. However, previous commitments must be respected;

• No taboos on Eurobonds - they must be discussed. Their main purpose is to cut the financing costs of struggling eurozone countries.

We can't help noting how Hollande of late stropped referring to the fiscal treaty as frequently, instead stressing the 'growth pact' for the eurozone.

Spain

In his joint press conference with Hollande, Rajoy simply reaffirmed Spain's priorities for tonight's meeting (and the near future), saying that "financing" of states and banks was "the most urgent" of all the issues:

• Immediate action is needed to keep borrowing costs at sustainable levels for Spain and other peripheral eurozone countries. Rajoy stopped short of mentioning the ECB during the press conference, but a new round of ECB bond purchases is clearly on his wish list

• Eurobonds are not a priority, but could be discussed as part of a broader, long-term debate on  deepening European integration;

• He also said that the EU need "certainties" including that "the euro will exist for ever and no country will default [on its debt]." The EU institutions should start sending clear messages on these points. Okay, Rajoy...

Italy

Staying true to his style, Italian Prime Minister Mario Monti has kept awfully quiet, although he has warned that trying to isolate Merkel tonight would be "impractical and counterproductive" (no kidding). Monti and his cabinet are presumably doing a lot of work behind the scenes, based on a couple of specific proposals (which we mentioned here and here).

The Italian government yesterday adopted plans to unblock between €20bn and €30bn by the end of the year to make overdue payments to private firms that have supplied goods or services to the public administrations. Could this be a sign that Monti's proposal to temporarily exempt overdue payments to businesses from the EU's deficit and debt rules is gaining ground in Berlin? Possibly...

UK

The UK will continue to voice its opposition to a financial transactions tax (the Commission STILL has not given up on this proposal and will apparently present a massaged impact assessment tonight showing that the negative effect on EU GDP is not bad at all, never mind what it said initially). Cameron will also, rightly, push for various pro single market measures. It will be interesting to see how the UK responds to ideas for 'project bonds' and topping up the European Investment Bank. Cameron will also urge "decisive action" over Greece/the euro and may also provide some (largely irrelevant) advice on how the Greeks should vote in the forthcoming elections and the Germans should respond to proposals for Eurobonds.

In any case, as always, EU leaders will have a lot to talk about.