The best use of Greek politicians' time and effort?

As we reported in today’s daily press summary, the Greek government has set up a ‘working group’ to scour historical archives and tally how much Germany could owe the country in outstanding reparations from World War II. Deputy Finance Minister Christos Staikouras is quoted in Kathimerini as saying that:

"The matter remains pending… Greece has never resigned its rights." 

This is obviously quite complicated historical stuff. But given the state Greece is in, it is worth asking whether pursuing this course of action is the best use of Greek ministers’ and officials’ time and effort.

Banking Union Part II – now for the safeguards

Here’s the continuation of the EU banking union saga – the document (also leaked, see here) that sets out how the single market and banking union are meant to fit together. A crucial point for the UK and others. As we noted on Friday, the Commission was set to table a series of documents establishing the first step towards a banking union. Well, there will be three of them, to be precise:

• A regulation to make the ECB the supervisor for “all” banks in the Eurozone, with non-euro countries able to join if they wish. This is the one we looked at – and published – on Friday.  

• A regulation making adjustments to the European Banking Authority in light of the new powers of the ECB, with the objective to avoid the banking union fragmenting the single market. This is the one that we look at below. 

• A “communication” which sets out the Commission’s vision of the banking union long-term, including a deposit guarantee scheme and a single resolution fund (also known as wishful thinking, at least for now).

Following our analysis of the first document, here are our thoughts on the adjustment to the EBA’s rules and whether the ‘safeguards’ proposed by the Commission will address the risk of the Eurozone/ECB/banking union encroaching on single market territory or the 17 outvoting the non-euro 10 on financial regulation in particular (i.e. Eurozone caucusing at the EBA).

The EBA will have powers over roughly the same areas as before and the same voting weight too, and will continue to serve as the bank supervisor-cum-regulator for the EU-27 (which was already a quite confusing arrangement). However, the EBA may, in a round-about way, actually gain powers vis-a-vis the UK (which we'll return to). To avoid the ECB over-ruling or undercutting it on matters of the single market, the following safeguards have been proposed:

• Interestingly, when within its remit, the EBA would be able to circumvent the ECB in an “emergency situation” and impose a decision directly applicable to an individual bank or financial institution. In such cases, therefore, the ECB would be ‘junior’ to the EBA – much like national authorities. 

• A new “independent panel” of experts could be created by the EBA to judge on breaches of EU law i.e. when a country breaks single market rules or when two “competent authorities” (of which the ECB could presumably be one) disagree on whether rules have been breached. The panel’s decision could be over-turned by a simple majority at the EBA’s supervisory board, which needs to include at least three votes from non-euro members (if they have not opted into the banking union) and three votes from euro-members. This is an interesting one, and we need more details to make a clear assessment as to what this would mean in practice – or how effective it’ll be. Who will the independent experts be (drawn from the EBA itself)? How will they be appointed? Will it always be ad hoc or more permanent? And will this, in effect, make the EBA more powerful at the expense of UK authorities (this will be a tricky one, stay put)?

• Decisions on capital requirements for banks is addressed specifically. This is a key concern for the UK government and an area we’ve pointed to consistently where the Eurozone could face a fresh incentive to act as a block under banking union. The proposal suggests that issues relating to capital requirements – over which the EBA has some moderate powers – will be decided by QMV within the Board of Supervisors but can be overturned by a simple majority, again including at least three non-euro states. 

• The management board of the EBA must consist of at least two non-participating member states (out of six).

Marks for creative solutions, and it seems the Commission genuinely wants to preserve, as it puts it, “the proper functioning of the EBA in the interest of the union as a whole.” Part of the UK financial services industry might be reasonably happy that the UK would have a seat at the table, at least in the EBA. But this remains an awkward patchwork, and it probably won't be enough to eliminate British anxiety over the banking union.

And remember, this only addresses the relationship between the EBA and the ECB, which is only one of the many relationships within a banking union that needs to be clarified. As we’ve argued before, the biggest worry remains an incremental, de facto institutional shift from the EU-27 to the Eurozone 17, involving the Commission and the European Parliament as well, which is why we want to see stronger single market safeguards, also at Council-level.

And it ain’t getting any easier to work out who has final accountability over financial supervision in Europe…

What the Dutch elections could mean for Europe and the euro

We have today published our thoughts on what the 12 September Dutch elections are likely to mean for the future politics of the eurozone.

Although the EU-critical left-wing Socialist Party has had a strong election campaign, recent polls have seen a shift back towards the centre with the centre-left Social Democrats (PvdA) overtaking the Socialists (SP) to become the main challengers to Prime Minister Mark Rutte’s VVD party (centre-right).

According to the latest Ipsos politieke barometer (8 September) the VVD and PvdA are neck and neck on 35 seats each. The Socialists (21) and Geert Wilders’ PVV (19) are vying for third place, with the Christian democratic CDA (13), left-liberal D66 (11), the Christian Union (CU) (6) and GreenLeft (4) all expected to figure.




Therefore, the most likely outcome remains a centrist, pragmatic coalition, which clearly is the preferred option in Brussels and Berlin. The Dutch elections are therefore unlikely to radically change the immediate political dynamics of the eurozone crisis. The country is likely to continue to oppose more bailout cash for Greece or any topping up of the eurozone’s bailout funds and remain a steadfast supporter of austerity in the struggling eurozone economies.

In the medium to long term, however, the Netherlands could well be on the path to becoming a more assertive – and far more complicated – EU partner. With future decisions on potential eurozone debt pooling to come and the prospect of more EU powers over national budgets (including the Netherlands’), Dutch public opinion and the more or less EU-critical parties such as the Socialists and Geert Wilders' PVV are likely to shift the country in a more sceptical direction.

The traditional parties of the centre have also increasingly taken on aspects of Wilders’ narrative on Europe. Neither VVD nor the PvdA are uncritically in favour of everything European, with the VVD making several critical interventions: refusing a penny more to Greece, on the need to limit EU powers in some areas and reduce the EU budget. A huge question will be if these two parties will see an electoral advantage in becoming more EU-critical in light of more potential bailouts, a stalling economy and an ever vocal EU-critical fringe.

You can read the whole thing here.
 

While everyone is talking bond-buying: Here's the first proposal for an EU banking union (leaked)

That ECB, it's so hot right now.

While everyone is watching and reacting to the ECB announcement from yesterday, the Commission's highly anticipated proposal for an EU Banking Union, due to be released on 12 September, has leaked (courtesy of Italian daily Il sore 24 ore). The full document can be read here.

It's the first chance to analyse the first document in its entirety (though snippets have leaked in various media reports over the last week or so - more to come for sure, that will add to this proposal) and below we highlight some of the key points. We’re still going through the main doc and will update this blog with anything else that catches our eye, but this is what we got so far:

• As expected, the Commission proposes that the ECB should supervise all banks, as the document notes: “recent experience shows that smaller banks can also pose a threat to financial stability. Therefore, the ECB should be able to exercise supervisory tasks in relation to all banks”.

• National supervisors will continue to assist the ECB with preparation and implementation of its new role as necessary, but the ECB will have final authority in most areas (a major change).

• Paragraph 25 of the preamble notes that: “In order to ensure consistency between supervisory responsibilities conferred on the ECB and decision making within the EBA, the ECB should coordinate a common position amongst representatives of the national authorities of the participating Member States in relation to matters falling within its competence.”

• The ECB will have to power to wind down banks if necessary, as well as grant or remove banking licences within the eurozone.

• The ECB will work with the Commission and the ESM to recapitalise ailing banks (this could be a hint that the ESM could form the future resolution mechanism and financial backstop).

• Paragraph 10 of the pre-amble says that “In view of the close interlinkages and spillovers between Member States participating in the common currency, With a view to maintaining and deepening the internal market, and to the extent that this is institutionally possible, the Banking Union should also be open to the participation of other Member States.”

• Paragraph 18 highlights that the ECB has the power to increase capital buffers if deemed necessary under its macroeconomic surveillance.

• Paragraph 41 states that: “Given the globalisation of banking services and the increased importance of international standards, the ECB should carry out its tasks in respect of international standards and in dialogue and in close cooperation with supervisors outside the Union, without duplicating the international role of the EBA. It should be empowered to develop contacts and enter into administrative arrangements with the supervisory authorities and administrations of third countries and with international organisations, subject to coordination with the EBA while fully respecting the existing roles and respective competences of the Member States and the Union institutions.” 

The relationship outlined between the EBA and the ECB is vague but interesting. The ECB (eurozone countries) will be represented as a single bloc in the EBA from now on, meaning, under the voting procedure of simple majority (applicable to settlement of disagreements and breaches of EU law) , the ECB will always have a majority. Also under the new voting weights coming into force in 2014 / 2017, the eurozone will have permanent majority under QMV (applicable to technical standards and some other issues).  Even though the eurozone often voted cohesively previously, the fact that it will now be represented by a single voice and will always vote as a cohesive bloc looks worrying for the UK in future negotiations on financial supervision and regulation.

It is also concerning, from a UK/non-euro point of view, that the ECB will be able to develop international relationships on supervision. This could undercut the wider EU poisition on negotiating international standards such as the Basel III (bank capital) rules and other such issues.

The point in paragraph 10 is interesting as the Commission seems to draw a direct link between a Banking Union and the ‘deepening’ of the single market – which involves all 27 member states – which again raises huge questions over where regulation at the level of all 27 member states ends, and supervision involving 17+ begins.

This ties in with the plans to allow the ECB to increase capital buffers above EU-wide standards, which could see a blurring of supervisory and regulatory powers. It also increases the incentive for the euro countries/ECB to set the agenda in international forums, such as Basel, and in future regulations adopted at the EU level.

Update 07/09/12 16:45 - 
A key discussion – and no doubt one of the key issues that will be subject to intense negotiations once the Commission has tabled all its docs - will be whether the voting weight within the EU financial supervisory structure (ESAs) will change (if the ECB does indeed get involved in votes in, say, the EBA). Will the ECB essentially control all 17 eurozone member votes or condense it into a single vote, or will it simply be a matter of soft coordination. How will non-euro countries ensure that the Eurozone isn’t using an inbuilt majority to basically push through euro-tailored measures? Decisions in the ESAs are taken by a simple majority vote or QMV meaning that anything more than mere ECB coordination, might require rewriting the ESA voting rules and even the standard procedure for calculating weightings (based on population, GDP etc.). Presumably, there should be a safeguard for non-Eurozone countries.

Draghi: Germany's new bogeyman?

As a follow up to our previous blog outlining the unprecendented level of anger in Germany to the ECB's decision to purchase government bonds,  we have picked out a couple of the headlines in the German press today:

Die Welt's front page went with: "Slippery slope: ECB buys government bonds indefinitely"

The rest of the paper was also full of articles with rather more provocative headlines.

The ever entertaining Bild went for: "Blank cheque for debt-states? Has Draghi killed the euro?"

What is striking is that this must be one of the most unified media backlashes against a policy decision (certainly by a central banker!) in recent history. We wonder how things will progress once large bond purchases actually begin or if the ECB were ever to face losses.

The death of the Bundesbank? Germans come out swinging against ECB bond-buying

Although Jens Weidmann may have been alone on the ECB executive board in opposing yesterday’s ECB decision to buy government bonds, he looks to have the full-force of German public and media opinion right behind him. Over the last 24 hours, the German media, with surprisingly few exceptions, has fired a broadside against the ECB. No holds barred. Mario Draghi may have pleased markets, but he now has a very frustrated Germany – whose taxpayers are implicitly underwriting his institution (and the euro) – on his tail.

One of the most interesting reactions came from the Bundesbank itself, which unusually issued a public statement which ran directly contrary to the ECB’s decision. A Bundesbank spokesperson said:

Weidmann regarded the bond purchases “as being tantamount to financing governments by printing banknotes,” adding, “The announced interventions carry the additional danger that the central bank may ultimately redistribute considerable risks among various countries’ taxpayers.” 

Süddeutsche Zeiting’s Marc Beise has a blistering piece, crediting “Weidmann’s persistent opposition” as the reason why the ECB is ‘only’ buying short-term debt. But, goes on to argue, “Saving the euro is worth a lot of effort but there are two important limitations. A euro rescue at any price can be a disaster economically, that is the red line that must not be exceeded. The other limit is the law: never in a rules based community can the end justify the means. A Euro-community based on breached contracts will always be based on fragile foundations. On Thursday, the ECB has unfortunately crossed both these red lines.”

Meanwhike, Die Welt led with the headline “Financial markets celebrate the death of the Bundesbank”, adding, “For Germany, the nightmare begins. There it was: the word that everyone was waiting for: unlimited…ECB President Draghi brazenly breaks with the principles of German monetary policy.” Bild runs with a similarly eye-catching headline, warning against "Draghi's blank-cheque for debt-states".

FAZ's editor-in-chief Holger Steltzner also took a strong line, saying, “In the eurozone there isn't any division any more between monetary and fiscal policy…We should be curious to hear what the German Constitutional Court thinks about that.”

The warning on the German Constitutional Court is an interesting one (a topic we’ll discuss in future posts) but some politicians went even further, with Hessen Europe Minister Jörg-Uwe Hahn of the FDP and CDU’s Klaus-Peter Willsch (already the initiator of one of the ESM complaints to the German Constitutional Court) calling for the German government to seriously consider taking the ECB to the European Court of Justice for violating its legal mandate.

The ECB wasn’t the only institution on the receiving end though, with the German government and Chancellor Merkel also taking flak. Handelsblatt's deputy editor in chief, Florian von Kolf wrote, “Today is a black day for democracy…Merkel is silent…seemingly happy to have been partly relieved from her here Sisiphus task to save the euro”. DPA reports that SPD parliamentary leader Frank-Walter Steinmeier argued that the ECB’s decision is the “documentation of Chancellor Merkel’s failure...[while Weidmann] protests but Merkel gives the green light”, while the Green party decribed the CDU and FDP opposition as “hypocritical” since it was their failure to take any significant decisions on the crisis which forced the ECB to act.

We’ll continue to cover reaction throughout the day on the blog so stay tuned, but we can’t help but recall all those times we warned that saving the euro at any cost could drive a wedge between countries rather than bringing them closer together…

Has Draghi really saved the universe?

So it continues.

During a highly anticipated press conference, ECB head Mario Draghi - the man tasked with saving the universe after eurozone leader's consistent failures - announced today that the ECB will buy 'unlimited' government debt, albeit short-term.

So the central bank that once wouldn't touch government debt with a bargepole, has now said it's willing to underwrite governments, in theory indefinitely. In fairness, we're talking short-term, sterilised bonds from countries who enter an EFSF/ESM bailout programme - so there are several catches. Still, this is a big move, which is why markets have reacted positively.

How long it'll last is, as ever, an open question. You can read our full take on the decision (and all the technical details) here. The key concerns / questions:

• Purchases of short term debt don’t tackle the rising cost for Spain and Italy of refinancing long-term debt, and may force countries to focus more short term funding, making them more susceptible to higher borrowing costs.
• Despite all the talk of conditionality, can the ECB really cut off bond purchases from a country when it is already in trouble? We doubt it, at least not without causing huge problems in the markets (which the policy is meant to avoid).
• The sterilisation (removal of the money created) is almost irrelevant given the already unlimited lending provided by the ECB.
• Although it claims to no longer be senior to other bondholders, would the ECB really take losses, meaning that it crosses the mark for directly financing governments, if push came to shove?
• With the interbank lending market still dead and buried will a few sovereign bond purchases really restore monetary policy to ‘normality’?
• These purchases tackle a symptom not a cause of the crisis, lack of competitiveness, poor growth prospects, unsustainable debt and undercapitalised banks still weigh down the struggling countries.

The markets might be buoyed, but this one will drag on for much longer.

Cheap ECB cash could prove to be the worst form of bailout

Over on Telegraph blogs, we argue:

Stemming the crisis through cheap central bank money sounds so easy. The logic goes: Italy and Spain have economic problems which cause markets to push up their borrowing costs, which now have reached "irrational" levels as fear has taken hold. If left unchecked, this could threaten the Eurozone and Europe’s economy. The European Central Bank, it is said, has "unlimited" ability to create credit or cash and act quickly. Hence, it must “stand behind the currency” and save the euro – and Europe.

So when the ECB today announces that it will intervene further in the crisis, probably by buying up short term government debt, many bankers and politicians will love it. Bankers because it avoids losses (at least for a bit), politicians – including British ones – because it might just save their skins at the polls.
But for Europe’s long-term economic future, this is also why large-scale ECB intervention is so risky. Europe has for decades lived beyond its means and needs to adjust if it wants to thrive in this century and the next. Faced with economic reality, there’s still hope that over a number of years (if domestic politics allows it – a big if admittedly) countries like Spain and Italy will finally push through much-needed reforms and achieve the 20-30 per cent internal devaluation needed to become reasonably competitive with Germany inside a currency union. And Europe as a whole would be better off.

But bailouts – whether by government or the ECB – can, at best, buy time. At worst, however, they act as an outright disincentive for necessary reforms. This risk was eloquently highlighted by Professor Leszek Balcerowicz – former Polish Finance Minister (and central bank head), famous for implementing the Polish structural reform plan following the fall of communism – at an Open Europe event last week. All bailouts, he said, come with "moral hazard". But if mishandled, ECB bond-buying could actually turn out to be the worst form of Eurozone bailout, as it completely de-links the bailout cash from reforms needed, creating a moral hazard problem of massive proportions (in addition to creating a number of other problems such as undermining the rule of law and making ECB susceptible to political influences). We’ve seen the signs already. As ECB board member Jörg Asmussen noted recently, "There cannot be a repeat of the mistakes with Italy in the summer of last year, when the ECB bought Italian sovereign bonds and the time was unfortunately not used for necessary adjustment measures".

And ECB money doesn’t come from a magic tree. From June 2011 to April 2012 its exposure to weaker Eurozone economies increased by 106 per cent, from €444 billion to €918 billion, and has only continued to rise since then. If ECB head Mario Draghi acts on his promises of unlimited intervention, this exposure could increase exponentially. At the end of the day, someone has to pay for this. Whether taxpayers (who ultimately back central banks) through write downs and losses (and resulting recapitalisation of the ECB) or savers through higher inflation in the stronger parts of the eurozone economy (bound to happen sooner or later).

As the ECB itself knows, it’s very difficult to counter these risks. Once the ECB taps are opened, it’s incredibly hard to turn them off without causing huge market distortions and creating an even graver crisis than the one that the original intervention was meant to stave off. That is why the ECB is right to insist on countries committing to reforms (through an intergovernmental decision) before it bails them out. Perhaps that mix could work for struggling Eurozone countries. But there's also a huge risk that Europe, in the long-term, will pay a very high price for what is only (at best) a short-term fix.

A new eurozone parliament?

This morning, Handelsblatt is reporting that EU Council President Herman Van Rompuy, Commission President José Manuel Barroso, Eurogroup chief Jean-Claude Juncker, and ECB President Mario Draghi's plans to redesign the architecture of the economic and monetary union include the prospect of a new 'eurozone parliament'.

The details are understandably vague but, according the German daily's report, the new parliament, in which both MEPs and national parliamentarians would sit, would have powers over eurozone members’ fiscal and economic policy. Whether the EU will need yet another building for this is yet to be addressed...

Nevertheless, the proposal, if it ever sees the light of day, will be hugely controversial with both euro and non-euro members and would of course require Treaty change.

In addition, Van Rompuy and Barroso need reminding that they represent the 27 member EU and not simply the eurozone and that any brief to restructure the eurozone needs to square this with the EU as a whole and the requirements of the single market. Additionally, as we have argued, the UK must ensure that any grand eurozone plans such as these are a quid pro quo for establishing a space in Europe for those countries not intent on joining the single currency, and also for those that may choose to leave.

This might then provide a new form of membership that the UK could live with in the long term.

EU ironies: The Troika meets the Working Time Directive?

Oh the irony. The EU/ECB/IMF troika are now working their ever living tails off to push the Greeks and Portuguese towards more flexible labour markets, and less top-down regulation – and the European Commission is, in parallel, putting pressure on Italy and Spain to do the same. Simultaneously, however, the same European Commission is clinging on like a leech to the most top-down piece of labour market law imaginable (well almost): the EU’s Working Time Directive (WTD).

Well, these twin efforts might now be heading for a clash. Reports floating around yesterday suggested that the EU/IMF/ECB troika wants Greece to do more to flush out its rigid labour market by, amongst other things, raising the maximum number of working days per week to six. The reports are still sketchy - supposedly from leaked emails – so should be taken with a pinch of salt. Still, it paves the way for a pretty weird situation.

The leaked plans suggested the troika would demand the following to boost flexibility of labour arrangements:

• Increase the number of maximum workdays to 6 days per week for all sectors.
• Set the minimum daily rest to 11 hours.
• Delink the working hours of employees from the opening hours of the establishment.
• Eliminate restrictions on minimum/maximum time between morning and afternoon shifts.
• Allow the consecutive two week leave to be taken anytime during the year in seasonal sectors. 

Now the Working Time Directive:

• A maximum working week of 48 hours
• A rest period of 11 consecutive hours a day
• A rest break when the day is longer than six hours
• A minimum of one rest day per week 

In addition, a range of ECJ cases have extended the scope of the WTD even further (sick days spent on holiday can be reclaimed, doctors who sleep on-call are actively working etc).

The latest Troika plans, if true, would not break the WTD it seems, but they’re clearly taking Greece to the limits of what is permissible under EU law – lest they want to push Greece to seek a UK-style opt-out from the WTD (leading to a bizarre scenario, whereby the Commission urges an opt-out from its own rules). One step further and the acquis communautaire would get in the way. In addition, a hardworking Greek who wants to follow the Troika’s recommendations by putting in a six day working week, better be sure to clock out right on time, after eight hours have gone by, or he would be engaging in activities illegal under EU law.

This raises a second question: if the Troika was tasked with working out a competitiveness plan for the entire EU, would the WTD – and many other onerous EU regulations, and the EU budget for that matter – survive?

We suspect not.

What does the reshuffle mean for Europe (clue: police and crime)?

In any major Government-led event, there’s always a Europe sub-story. The Government reshuffle today is no exception. So what does this mean for the Coalition’s EU policy? Well, there’s one area to look out for: EU police and crime law. With respect to Europe, here are the significant moves so far:

• Europe Minister David Lidington stays (as expected – the speculation that he was going to replaced was mostly bogus).
• At Justice, Ken Clarke is replaced by hard-line EU reformer Chris Grayling, which could prove significant for the 2014 ‘block-opt’ out from EU police and crime laws, and also struggles over the ECHR.
• Owen Paterson – also with strong views on the EU - has moved to DEFRA, taking responsibility for EU-dominated Fisheries and Agriculture.
• Baroness Warsi replaces the veteran Lord Howell as FCO spokesman in the Lords
• Both Cabinet Treasury Ministers remain.
• No EU-related game-changing movement on other areas under heavy EU influence such as environment, energy or business.

By accident or design, the most significant move is Chris Grayling, as it sets up the Coalition to take the 2014 EU JHA block opt-out, perhaps announcing it at the October Conservative Party Conference. Indeed, as we’ve argued before, this is precisely what David Cameron should do in order to get some much-needed credibility on Europe. To recap: this opt-out, included in the Lisbon Treaty, means that the UK must decide before June 2014 whether to remain inside 130 EU Crime and Policing measures, including the European Arrest Warrant (EAW), and transfer the ultimate jurisdiction over them to the European Court of Justice (ECJ), or whether to opt out of them altogether – which would significantly reduce the EU’s influence over policing and crime law in the UK. The Government then will have the chance to opt back into these laws on case-by-case basis. 

In other words, this is a huge choice between a lot more, or a lot less, Europe. Expect a dog fight. Cameron will no doubt come under pressure from the Police and Liberal Democrats to stay inside the lot or, at least, opt back into as many laws as possible, no questions asked, including the EAW, Eurojust and measures on data sharing, for example. Chris Grayling could well add a lot of weight in opposing such moves (contrast and compare to Ken Clarke) and could perhaps argue for a deal whereby the UK opts back into some vital measures if the EU agrees to give the UK an exemption from ECJ power over this sensitive area. Grayling could also add momentum to Tory demands to restrict the jurisdiction of the ECHR, in particular prisoners' votes. The Government has to announce by November how, exactly, it intends to implement the ECHR's ruling, so this is another imminent issue.

This could work out for the best: As we argued in a report published in January – a recommendation which drew backing from 100+ MPs - David Cameron should take the block opt-out and only opt back into the absolutely vital laws on a case-by-case basis. And the party conference would be the perfect place to announce this.

The second most important move is Owen Paterson’s transfer to DEFRA. Paterson is one of the most trenchant EU reformers and a supporter of some sort of EU-related referendum. He has now been given responsibility for two policy areas – fishing and farming – which are almost entirely decided in Brussels. Paterson was the shadow fisheries minister under Michael Howard, when he called for the repatriation of the Common Fisheries Policy. This could set Cameron up for a second announcement at the conference – or at least an attempt to show his party that the Coalition is achieving EU reform – since, as we speak, the Common Fisheries Policy could, possibly, be moving in the direction of more ‘regionalisation’ , i.e. neighbouring member states being given more discretion to sort out quotas amongst themselves. Still a long way off from Patterson’s proposals though and amongst backbench MPs and the grassroots, it is likely to be perceived as a fairly minor concession in any case.

On Common Agricultural Policy Reform, currently part of the negotiations over the EU’s next long term budget (to run between 2014 and 2020), despite his strong views, Paterson is unlikely to be able to change the direction of travel. The UK is pushing for an overall freeze to the EU budget, meaning that the CAP will largely stay unreformed (see here, here, here  and here for detailed discussion). In addition, Paterson may not want to rock the tractor, so to speak, given that his constituency is pretty rural, while the brief is led by the FCO and the Treasury anyway. Paterson also has a climate change-sceptic streak which may have an impact on how he handles the environmental side of the DEFRA brief and when this crosses over with EU policy (though DEFRA is more biodiversity than emissions).
 
That the re-shuffle won’t bring in people who will shake-up the Coalition’s EU budget policy is a shame, since the EU budget doesn’t only need to be frozen but also radically reformed on substance – as we’ve shown repeatedly and comprehensively.
 
Other less significant moves are Baroness Warsi’s replacement for a retiring Lord Howell as FCO spokesman in the Lords. Lord Howell, another EU reformer with a great personal commitment to the Commonwealth, carried out his role with charm and expertise and will be a hard act to follow. It’ll be interesting to see how Warsi will work out in that role.

So Bankia is still a viable bank...?

Spain announced its plans for cleaning up its banking sector earlier. With the full legislation only just released, we are still looking through it and will bring you the pertinent points in due course. But there was also another interesting development with regards to the ailing lender BFA-Bankia.

The Spanish government announced this afternoon that BFA-Bankia will receive an "immediate capital injection" from Spain's bank restructuring fund (FROB). Nonetheless, Spain has decided not to request the early disbursement of part of its €100bn bank bailout package. This is despite the fact that €30bn had been set aside for emergencies, as the Eurogroup noted in a statement issued earlier this afternoon. The funds will therefore be paid out in advance by the FROB and will be eventually incorporated into the Spanish bank bailout when it is fully dispersed.

This raises a couple of interesting questions. Firstly, why is Spain so keen to avoid tapping the €30bn kept in reserve? The money is there for just such an occasion, and in fact it was fairly obvious that this exact situation would arise. What's more, the money will be folded into the bailout anyway. Therefore, we can only imagine that the Spanish government is keen to avoid some kind of negative stigma – although this seems slightly strange since the bailout is already confirmed. It is worth keeping in mind the constraints of the EFSF vs. ESM funding (which we covered here), so it is possible that Spain and the eurozone have decided they want to wait until the ESM is fully operational before tapping the funds.

Reading the press release, it is also clear that this is a restructuring of BFA-Bankia, meaning it is still viewed as a viable bank. This seems almost outrageous for a few reasons:

• Bad loans held by Bankia jumped by 44% (to 11%) in the past six months alone
• The group just posted a loss of €4.45bn, compared to a slight profit a year ago
• In the past six months the banking group has lost a staggering €37.6bn in client funds, a massive 28% fall. 

It’s been clear to most for some time that Bankia is no longer viable. The latest government plans for dealing with the banking sector provide for an “orderly resolution” of unviable banks and a template for splitting up its assets and winding down the institution. It is not entirely clear why this is not being applied here, although protecting retail investors could be part of it. In the end, though, investing further public funds into a failing institution will do everyone more harm than good.

Catalonia's bailout request is a test of Rajoy's mettle

In today's City AM we look at what Catalonia's decision to request a bailout from the Spanish government means for Spain, its Prime Minister Mariano Rajoy, and the eurozone. Here it is:

Catalonia's decision to seek a bailout from the Spanish government was just a matter of time. With over €5.7bn (£4.5bn) of debt maturing before the end of the year, Spain’s wealthiest – but also most heavily indebted – region had very little chance of paying its bills without some form of external assistance. The request is going to be a huge test of Prime Minister Mariano Rajoy’s mettle.

Despite asking for a loan of over €5bn – that is, almost one third of the money the Spanish government has earmarked to help all 17 of the Comunidades Autónomas – the Catalan government has so far shown no signs of graciousness towards the central government.

In fact, a Catalan government spokesman provocatively told the press that Catalonia will not even say “thank you” to the Spanish government for its help. The logic being that the money the region is going to borrow was Catalan taxpayers’ money in the first place – previously confiscated in order to pay for transfers to the rest of Spain. Most importantly, Catalonia has said it will reject any “political conditions” and has no intention to make further cuts to meet the deficit target imposed by the central government for this year.

The upcoming negotiations over the details of the bailout will therefore turn into a key credibility test for Rajoy, on two fronts. Domestically, his government simply cannot afford to display any weakness throughout the talks with the Catalan leaders. If Rajoy rolls over for Catalonia, other regions will feel encouraged to claim their share of cash from the central government, with little or no strings attached.

This will raise questions over whether the €18bn in the bailout fund set up by the Spanish government to help cash-strapped regions is going to be enough. At this stage, half of the money in the pot has already been committed, with only three of the 17 regions deciding to tap the fund, so far. 

At the European level, the Spanish government desperately needs to prove that it is capable of reining in the regions’ spending. As European Council president Herman Van Rompuy recalled during his visit to Madrid earlier this week, internal problems resulting from the way the Spanish state is organised are not Brussels’s, but Madrid’s. In other words, domestic inter-regional Spanish politics will not be considered a valid justification for Spain missing its EU-mandated deficit targets once again. 

With the markets broadly expecting Spain to ask the Eurozone’s temporary bailout fund, the European Financial Stability Facility, to start buying Spanish bonds in a bid to reduce its unsustainable borrowing costs, the Spanish government needs to make sure that it comes out of the negotiations with Catalonia in a position of strength.

If, on the other hand, Rajoy is shown to be unable to exert control in his own backyard, his negotiating position in Brussels will surely be weakened – and his Eurozone counterparts will be increasingly reluctant to take his promises of reform and fiscal consolidation seriously.

Draghi's incomplete vision for the future

ECB President Mario Draghi had a long and interesting op-ed in Die Zeit yesterday morning, titled ‘The future of the euro: stability through change’. Interestingly, the piece seems specifically targeted at gaining support in Germany, not unlike Greek PM Antonis Samaras' charm offensive last week. For example:

“Countries must be able to generate sustainable growth and high employment without excessive imbalances. The euro area is not a nation-state where persistent cross-regional subsidies have sufficient popular support. Therefore, we cannot afford a situation where some regions run permanently large deficits vis-à-vis others.”

“Yet citizens can be certain that three elements will remain constant. The ECB will do what is necessary to ensure price stability. It will remain independent. And it will always act within the limits of its mandate.” 

The main thrust of the piece is that Draghi dismisses the option of a United States of Europe as well as the prospect of returning to the previous setup. Instead, Draghi focuses on a 'third way', a slightly vague proposition built upon combined economic and fiscal policies and greater financial oversight – again a picture which is likely to appeal to the traditional (ordo-liberal) German economic approach. Draghi sees the political and economic developments moving in tandem over time rather than through giant leaps and grand agreements.

There are a couple of key issues that Draghi fails to address:

• There is no real explanation of how his proposed 'third way' would address the internal eurozone imbalances he correctly identifies as a cause of the crisis, other than some loose talk of competitiveness, (i.e. there is no mention of fully-fledged fiscal union that goes down so badly in Germany).
• How will the eurozone find the time to make the piecemeal changes he suggests? Greater fiscal and financial oversight takes time to set up and organise. He also fails to mention the political/democratic implications of pooling greater economic powers at the eurozone level. Again no mention of potential ECB spending or bailouts to buy time for these changes.
• Ignoring these issues makes the prospect of a eurozone solution without a political union sound easy, but in reality ensuring that conditions are enforced and that money is well spent may well require such a set up. This also avoids the thorny questions of democratic accountability which follow on from political union.

Ultimately, Draghi's unwillingness to put a price tag on any of his suggestions or explain how they can be delivered in a democratic manner makes them hard to believe. The German public deserve better 'solutions' than this.

A new EU treaty, a December summit… Déjà vu anyone?

A key question for the future institutional arrangement of the Eurozone is whether further integration will happen at the level of all 27 member states, within the framework of the EU treaties, or whether the Eurozone will simply press ahead with an ‘inter-governmental’ deal, circumventing the acquis communautaire and non-eurozone members.

This is critical for the UK as under the latter option, Britain will have little to no leverage over future Eurozone integration, whereas under the former it’ll have a solid veto, which it can use to extract all kinds of concessions in pursuit of its national interest. Following Cameron’s veto to an EU-27 treaty change last December – which resulted in the intergovernmental fiscal treaty - a host of eurosceptics and status-quo defenders alike now tend to argue that the precedence has been set; Eurozone members can do whatever they want inter-governmentally, they say, and use the EU institutions at that. Britain has been reduced to the role of a spectator. The plot has been lost and the goose has been cooked.

From there, some eurosceptics reach the conclusion that Britain should withdraw altogether, whereas the status quo defenders say Britain should hop on the train towards more integration (at which point they cease to be status quo defenders and turn into brave souls advocating that Britain signs up to a euro superstate).

So has the goose been cooked?

Well, this week’s Spiegel magazine splashed with the news that the German governmet is pushing for a new EU treaty that will consolidate and expand Eurozone budget oversight powers – referred to in Germany under the euphemism of ‘political union’ - under a firm legal framework. Chancellor Angela Merkel is reportedly pushing for a convention – comprising representatives from national governments and parliaments, the European Parliament and the European Commission – to be formed by the end of the year, with a first meeting to be agreed at an EU summit in December. If the article is accurate, a ‘convention’ would be about a ‘full’ Treaty change, not the limited one agreed in December 2010.

One of the main changes sought is the provision for the ECJ to rule if national budgets comply with the EU's fiscal rules, with the option of credible sanctions for non-compliance, something Merkel failed to secure in the inter-governmental fiscal treaty last year – courtesy of French nervousness over loss of souveraineté.

It’s difficult to gauge how credible the story is – speaking on ARD Merkel said that “I am not calling for a convention… that’s not the point”. Though politicians’ denials count for zero these days, it’s probably right that December is not realistic as a start date for a new EU treaty. Apart from everything else that needs to be sorted first, EU leaders still remember how long it took to push through the European constitution/Lisbon treaty – which Europe’s citizens didn’t like that much (as for being a ‘crisis’ this was of course a mere prelude to what has come to pass since). And unlike the Lisbon treaty, codified central fiscal controls would be about decisions over taxation and spending – the bread and butter of national politics. Also, non-euro member states – such as Poland - oppose a new treaty at this time on the basis that it would widen the euro/non-euro divide with a negative impact on the single market.

But while it is clear that there is no great enthusiasm for it, it is difficult to escape the conclusion that at some point in the near future, the eurozone will need a new set of rules if it is to stay together in the longer term. As good as the EU is at fudging it, ploughing on incrementally with economic and fiscal integration is politically unsustainable. So the question for Britain’s leverage in Europe really becomes, how bad does the Germans want to anchor Ordnungspolitik in EU law. Well, as we argued in the Telegraph back in February:

 “The Germans in particular – ever conscious of their Constitutional Court– know that the current arrangement involving an ad hoc euro treaty is legally dubious. As long as the Germans feel uncomfortable, Cameron maintains his leverage.” 

This is key. For a range of reasons (see here, here and here), the Germans don’t have that much confidence in Eurozone inter-governmental arrangements, as it leaves them more at the mercy of the ‘Club Med’ and creates a grey zone between EU law and the German ‘basic law’ which is just too awkward to bear for many Germans. Sooner or later, there will be an attempt at EU treaty changes.

Does the UK know what it wants?

Germany faces some tough decisions on the ECB

As the next ECB meeting approaches on 6 September, the debate about potential ECB intervention is heating up. This past weekend was particularly interesting with two key German players weighing in with their views – even more importantly these views turned out to be increasingly divergent.

German ECB Executive board member Jörg Asmussen (on the right of the picture) revealed more details on potential ECB intervention yesterday, saying, “Under the framework of the new programme, the ECB will only buy bonds with short maturities,” adding the caveat that, “The whole discussion will be led by the requirement that any concerns about treaty-violating state financing are dispelled. We will only act within our mandate.” Asmussen also stressed that he would like to see any ECB intervention initiated in tandem with use of the eurozone bailout funds, saying, “The error with Italy…must not be repeated,” seemingly referring to the Italian government's failure to take full advantage of the time bought by the ECB over the past year.

Meanwhile, Der Spiegel has a lengthy and interesting interview with Bundesbank President Jens Weidmann, the other German on the ECB’s Governing Council, in which he renews his opposition to any greater intervention by the ECB, warning, “We shouldn't underestimate the danger that central bank financing can become addictive like a drug,” adding that proposals for ECB bond purchases were "too close to state financing via the money press”.

Together, these two men represent Germany at the ECB, so for them to strike such different tones is rather surprising (although it has been hinted at previously). Asmussen remains much more positive and supportive of Draghi’s position, while Weidmann takes a more traditional German stance against any prospect of monetary financing of government debt (a position which has garnered significant support with the German public).

The real question though, is who has the support of German Chancellor Angela Merkel? That remains unclear, particularly with both having previously been close advisors to Merkel. The Spiegel article suggests that Merkel has become somewhat impatient with Weidmann's strict ideological stance, especially as it begins to hamper a potential path to crisis resolution (at least in her eyes). However, last week Handelsblatt suggested Merkel had in fact decided to side with Weidmann over Asmussen.

If this divide continues, the issue will likely come to a head leading to some tough decisions for all involved – in fact any decision to sanction greater intervention would make Weidmann’s position in particular quite difficult. Choosing who to support will be a difficult political decision for Merkel which goes beyond just figuring out how best to solve the crisis – she must weigh the public response at home and abroad, the market impact, her relationship with ECB President Mario Draghi and her support within her own party and the broader German coalition. Asmussen also has to tread a careful line as, despite being independent, he risks seeing his influence and support within Germany decline rapidly. Weidmann, whom many have suggested has already become isolated, risks a similar erosion of support, although abroad and within the ECB rather than Germany. If greater intervention comes to pass, as seems increasingly likely, the spectre of his predecessors Weber and Stark, both of whom resigned from the ECB Council in protest, will undoubtedly loom large.

As we have noted countless times before the role of the ECB cuts right to the heart of the German approach to the eurozone. Expect plenty more developments on this front in the near future.

While everyone is talking about Greece...

It may sound incredibly obvious, but the eurozone crisis is not only about Greece. Yes, Athens may be facing its "last chance" (Juncker dixit) to save its euro membership. And yes, the diplomatic offensive launched by Greek Prime Minister Antonis Samaras (see picture) to obtain a two-year extension to the EU-IMF adjustment programme clearly deserves attention.

However, while everyone is talking about Greece, quite important (and not necessarily good) news is coming out of other eurozone countries - of which, as usual, we also offer a comprehensive overview in our daily press summary.

In particular:

• According to sources quoted by Reuters, the Spanish government is in talks with its eurozone partners about the eurozone’s temporary bailout fund, the EFSF, buying Spanish bonds – but has made no final decision over whether to request the assistance. Unsurprisingly, the European Commission said that there are no negotiations under way, and a bailout request from Spain is not expected "any time soon". Right...

• According to a high-ranking official at the Portuguese Finance Ministry quoted by Jornal de Negócios, Portugal (the 'forgotten man' of the euro crisis) will not be able to meet the EU-mandated deficit target of 4.5% of GDP for this year unless new austerity measures are adopted. The main reason seems to be the sharp fall in tax revenue: -3.6% during the first seven months of the year, as opposed to the 2.6% increase the Portuguese government was betting on for 2012. The alternative, the Portuguese press suggests, would be asking the EU-IMF-ECB Troika to relax the target. Boa sorte with that one, especially since in September we will hit the point where Portugal is within one year of being expected to return to the markets. Remember how the IMF's requirement for a country to be funded for twelve months played out in Greece... 

• A Cypriot government spokesman told reporters yesterday that the island's public deficit at the end of the year will be around 4.5% of GDP – significantly higher than the 3.5% of GDP initially forecast. Clearly not good news, as this will almost certainly increase the EU-IMF bailout Cyprus is currently negotiating. Another headache for the Troika, which is due to visit the island again shortly (although no clear date has been specified yet).

• New figures published by the Irish Central Bank show that €30.5 billion or 27.2% of the €112 billion outstanding in owner-occupier mortgages at banks in Ireland was in arrears or had been restructured at the end of June, up from €29.5 billion (26%) in March. Furthermore, German Finance Minister Wolfgang Schäuble told the Irish Times that he will oppose any debt-relief plan for Ireland that “generates new uncertainty on the financial markets and lose trust, which Ireland is just at the point of winning back.”

Add the German Constitutional Court ruling on the ESM treaty along with the Dutch general elections (with the EU-critic Socialist Party led by Emile Roemer ahead in the polls) into the mix and it really looks like there will be little room for boredom in September.

'Communication problems' between Angela and François?

A bit of mystery ahead of this evening's meeting between German Chancellor Angela Merkel and French President François Hollande. A French diplomatic source told AFP yesterday that, before their working dinner, the two leaders will make a short statement to the press, but will take no questions from journalists.

However, the source went on to suggest that Hollande was quite keen to hold a proper press conference, since he "has not talked about Greece for a long time and wants to communicate." But apparently his request fell on (Merkel's) deaf ears.

Needless to say, the diligent Steffen Seibert - the German Chancellor's spokesman - moved swiftly to clarify that the decision not to open the floor for questions had been made "by mutual agreement". Hollande's office also stressed that the chosen format mirrors the one used during Merkel's previous visit to Paris at the end of June.

Mystery solved? Maybe, but the fact remains that Hollande has reportedly planned a separate press conference at the French Embassy in Berlin after his dinner with Merkel. 

Will a common position on Greece be easier to agree on than the format of a press conference?

A Dutch election primer

Emile Roemer, leader of the Dutch Socialist Party

On 12 September, elections will take place in the Netherlands. Due to the country's traditional role as an ally to Germany in monetary affairs, they will be watched with close attention (and by coincidence the German Constitutional Court is due to rule on the ESM Treaty the same day).

What do the opinion polls say?

The latest opinion poll shows that caretaker Prime Minister Mark Rutte’s right-of-centre-liberal VVD party and the EU-critical left-wing Socialist Party would get the most votes, with each obtaining 34 seats in Parliament. Sniffing around third place are four parties: the social democratic PvdA (21), the Christian democratic CDA (16), Geert Wilders' PVV (14) and the left-liberal D66 (13). The Christian Union, which sits with the Tories in the ECR-group in the European Parliament, would get around 7 seats, and GreenLeft 4.

What are the coalition options? 

There are broadly two possibilities:

- Firstly, a centrist coalition might emerge from the VVD, PvdA and CDA. However, the polls suggest this currently falls a few seats short of the necessary majority. This coalition could be expanded to include D66, which would make for a eurofederalist formation, but this might not be convenient in the face of an EU-critical, although disparate, opposition composed of the Socialist Party and Wilders' PVV.  Alternatively, the seats of the moderately EU-critical Christian Union might be sufficient but then the government would only have a narrow majority, if the current poll results materialise.

- A second option, the preferred solution of the Dutch social democrats (PvdA), would be a government with the Socialist Party, CDA, and GreenLeft. This would only narrowly obtain a majority and probably also need the support of D66. While the CDA would need to be convinced, it is questionable whether a government led by what many consider a far-left party is a viable political option in the Netherlands. The Socialist Party started off as a Maoist formation (a bit like the current European Commission President) but has moderated its tone and could now be described as left wing populist. Its current leader, Emile Roemer, who vehemently opposes the fiscal pact, has repeatedly warned that he won't pay any EU fines for breaching budget deficit limits, saying he would "put his body on the line".

Other options are theoretically possible, but unlikely: the divisions between the VVD and Socialists look too deep, while it's unlikely that the VVD would choose a new deal with Geert Wilders, after the previous  Dutch government fell due to Wilders' opposition to austerity. The most likely outcome remains some kind of centrist government, possibly after several months of negotiation (last time around, it took four months to form a government).

What are the campaign themes?

Unavoidably, Europe is high on the list. The last government fell over EU-imposed austerity and it is no surprise that Socialist leader Roemer has raised it as an issue. Roemer has also warned that any transfers of power to the EU would need to be agreed by referendum (in a similar vein the UK's 'referendum lock'). Things have been moving in a more EU-critical direction for a few years now. Only 58% of Dutch voters are currently in favour of EU membership, a stunning drop from 76% in May 2010. Two thirds of Dutch voters want to see less of their cash going to the EU budget. Last, but certainly not least, there is general discontent about the eurozone bailouts, with  at least half of Dutch citizens saying in May that they wanted to see a stop on money being sent to Greece and a majority opposing the eurozone's permanent bailout fund, the ESM.

Another important issue is pensions, following reports that cuts very likely will need to be made. Dutch pension rules are also under threat from upcoming EU initiatives such as Solvency II, which are being fiercely opposed by the Dutch government.  

Economic policy is, as always, high on the agenda. Dutch PM Mark Rutte entered the campaign this week, promising tax cuts in order to reward those who work, in a bid to present his party as the alternative to voters who are scared of the SP and draw left vs. right battle lines.

What's the political context?

Much of what's happening in the Netherlands today is still seen in the light of the murder of Pim Fortuyn in 2002. The Pim Fortuyn List, certainly started to break down the consensus in Dutch politics on issues such as immigration and the EU. Of course, a lot of has happened since: a range of unstable coalition governments, the no-vote in the referendum on the European Constitution in 2005, the rise and influence of Geert Wilders.

The sluggish Dutch economy also appears to have become somewhat decoupled from the German economy. There is particular concern about the housing market.

What will be the consequences for the EU and the euro?

Dutch daily De Volkskrant ran an article earlier this month noting that the current Dutch government has increasingly been playing EU hard-ball behind the scenes, under the headline "European patience with the annoying Dutch is almost up". An EU diplomat was quoted as saying, "the problem is not that the Netherlands is obstructing, the problem is that the Netherlands is almost always obstructing".

Given that around a third or more of the Dutch electorate now seem prepared to vote for more or less EU-critical parties, that isn't going to change anytime soon. Still, it will make a big difference whether the Socialist Party will make it into government or not, and perhaps more symbolically, whether it will become the biggest party in the country. Both remain uncertain.

However, it is clear that the consequences could be far reaching, especially for Chancellor Merkel if one of her most loyal allies starts to make things even more politically fraught at the level of the eurozone.

What lies behind the Government’s renewed interest in the Severn barrage?

A lasting monument to the EU's renewables targets

It has been reported that David Cameron’s attention has fixed on the old idea of building a Severn barrage to provide renewable energy. Much of the reporting puts this in the context of the politics of infrastructure spending; however there may be another reason that we have previously highlighted for his renewed interest. That being that he has little choice if his own desire to comply with the UK’s EU target of producing 15% of its energy form renewable sources by 2020 is to be met.

Background
The EU’s renewable target, (agreed by Tony Blair in 2007) requires the UK to shift from just 1.3% of total energy from renewables in 2005, the baseline year under the EU Directive, to 15% by 2020 – the largest proposed increase of any member state (see graph below). The Government predicts that this will come at a net cost of £66bn to the UK over 20 years. This is a huge cost given that the UK already faces a major energy generation challenge – a quarter of existing power plants in the UK are due to close by 2020 – and that Britain should be in the enviable position of being one of the EU’s top energy producers, largely due to North Sea oil and gas, which makes it far less reliant on traditional energy imports than other member states.

The consensus is that the 15% target is likely to require the UK to produce 30-35% of its electricity from renewables by 2020, because it is far harder to source energy for transport or heating from renewables. The UK currently has one of the lowest proportions of electricity generated by renewables in the EU, illustrating the scale of the challenge.

So why do EU rules make the barrage almost a certainty?Article 5(2) of the original proposed renewables directive (requested by Britain) made it clear that the UK would have to build the controversial Severn Barrage in order to meet its EU renewables target.

The proposed article stated that:

“Member States may apply to the Commission for account to be taken, for the purposes of paragraph 1, of the construction of renewable energy plants with very long lead-times on their territory under the following conditions:

(a) construction of the renewable energy plant must have started by 2016;

(b) the renewable energy plant must have a production capacity equal to or in excess of 5000 MW;

(c) it must not be possible for the plant to become operational by 2020;

(d) it must be possible for the plant to become operational by 2022."

Given the extremely specific description (something five times more powerful than a large nuclear power plant which will be built between 2020 and 2022), this can only realistically have refered to the barrage.

Expensive stuff given this was possibly all based on a "mistake"
In 2008, the UK Government's former chief scientific adviser, Sir David King, suggested that Prime Minister Tony Blair and the other EU leaders did not understand what they were committing themselves to when agreeing the target:

"I think there was some degree of confusion at the heads of states meeting dealing with this. If they had said 20% renewables on the electricity grids across the European Union by 2020, we would have had a realistic target but by saying 20% of all energy, I actually wonder whether that wasn't a mistake."

Tony Blair thought he had signed up to  increase this: 15% of electricity from renewables

But he actually committed the UK to this: 15% renewable share of all energy by 2020

Leaving this: A UK renewables gap even the barrage might not fill

Source: Open Europe: The EU Climate Action and Renewable Energy Package: Are we about to be locked into the wrong policy? (2008)

But the whole idea was rather muddled in any event

Focusing on renewable energy from a climate change point of view sounds good but the 2020 rush to renewables is illogical as it ignores and actually diverts resources away from the easier and cheaper CO2 reduction wins to be gained from all other technologies (clean gas, clean coal, CCS, reducing consumption or even renewables that are at an earlier stage of technological development).

Several aspects of the EU’s climate change policy (forgetting the UK’s own self-imposed targets) are also self-defeating, including the competing and complex nature of the individual policies: the Emissions Trading System (ETS), which is essentially meant to be a market-based carbon pricing framework, and the aforementioned renewables target, which is essentially designed to change the energy mix of member states, often through subsidy.

In practice, forcing electricity generators towards prescribed renewable technologies, such as wind, through the 2020 target and government subsidy lowers the carbon price under the ETS because firms are being subsidised to meet the cap. This undermines the ETS’ carbon pricing function, which is meant to be the driver of investment in the cheapest low carbon alternatives.

A similar conflict can be seen between the EU’s initial push for a biofuels target, and the subsequent move to sustainability criteria, and additional production costs, due to the previously unforeseen impact certain biofuel production had on food prices and land use. All told, this policy mix is unlikely to be the best value for money option in reducing CO2 emissions.