Commission banking union plans met with scepticism

As we noted in our flash analysis yesterday, the European Commission has put forward its plans for a Single Resolution Mechanism (SRM) which would oversee the eurozone banking union, manage bank resolution and enforce the recent bank bail-in plans.

The proposal seeks to move quickly and decisively to create a strong banking union but do so within the current framework of EU treaties and domestic politics. Unfortunately, it seems to have found itself in the worst of all worlds. The mechanism is unlikely to be large enough or responsive enough in a crisis, while it will not be in place until 2015 at the earliest. Furthermore, it is based on a significant legal stretch of the EU treaties, which has already raised objections from Germany and creating concerns for non-eurozone members (due to fears that the EU's single market could be hijacked by the eurozone).

The German response was swift and hostile. At a press conference German Chancellor Angela Merkel’s spokesman Steffen Seibert argued:

“In our view the Commission proposal gives the Commission a competence which it cannot have based on the current treaties…We are of the opinion that we should do what is possible on the basis of the current treaties.”

Dr Gunther Dunkel, President of the influential VÖB (the German association of Public banks) added:

"We reject the creation of a European resolution authority for many good reasons …it is not up for discussion for us, that funds gained through the work of German banks are used to contribute to the rescue of banks in other Member States… [Furthermore] the SRM would require a change to the EU treaties to necessitate harmonised corporate, insolvency, and administrative procedural law.”

The FT cites an unnamed German official as saying:

“We would be willing to speed up the process, but then the proposal has to be realistic…The commission is behaving like a vacuum cleaner, sucking up everything into its proposal. It may be effective but it is not legally safe.”

Dutch Finance Minister Jeroen Dijsselbloem was none too keen either, suggesting (in what seems to be a veiled insult to the Commission) that the new authority had to be "decisive, effective, and impartial," adding, "It's not completely decided what that authority should look like."

All in all, a rather disappointing proposal given the numerous delays (it was due out at the start of last month) and the fact that it forms such an important pillar of banking union. The Commission’s inability to produce the full text of the proposal, making detailed analysis difficult, also provoked some understandable outrage.

There was also another interesting development on the banking front. The Commission yesterday confirmed the expected changes to bank state aid rules which will come into force at the end of this month. The rules mean that any bank receiving aid would have to present a restructuring plan in advance, likely with shareholders and junior bondholders taking losses. Any bank which accepts aid will also face strict limits on executive pay.

The move may seem innocuous but, as we have consistently pointed out, all other changes to bank regulation and supervision won’t come in for some time. This means that the new rules on state aid will de facto enforce some of these measures, in particular the move away from bailouts towards bail-ins. That at least adds some limited certainty but still leaves the banking union looking woefully incomplete.

Has Martin Schulz been receiving some good PR advice recently?

The EU institutions, and certainly the European Parliament, aren't exactly world renowned for their PR skills. Today we can't blame European Parliament president Martin Schulz for that - perhaps he has a new PR advisor?

In an interview with Dutch magazine Elsevier, asked about the Dutch government's recent 'subsidiarity review' - which concluded that the time for ever closer union in every single policy area was over - he endorses the call for the EU to give some powers back to member states and only focus on essential things:

"Do locally what can be done locally, regionally what can be done regionally, nationally what can be done nationally... I believe we are able to win back trust from citizens."

"For a start, we shouldn't call everyone who is critical a eurosceptic. I am an enthusiastic pro-European, but I think that the EU is in a catastrophic situation. In the Netherlands and Germany, people have the feeling that they pay too much and that they get nothing in return. In Greece, that they're under a foreign regime. In order to deal with this, we must return Brussels' tasks to the national states."

"The Union must concentrate on international trade, migration, tax evasion, climate change, organised crime. For these things, the EU needs to be well equipped."

Naturally Schulz adds the usual caveats that the Commission must be an 'EU government' responsible to both the European Parliament and  member states. Moreover, he has expressed similar sentiments before so we are not sure to what extent this will be followed up with concrete action. It is nonetheless interesting that such a self-avowed EU federalist feels the need to publicly make the argument that EU powers can flow both ways.

Is Italy already heading for fresh political uncertainty?

Last month, we wrote on this blog that Silvio Berlusconi's well-known 'Ruby trial' posed no immediate threat to the stability of Italy's coalition government. Instead, we noted, the real risk was the less titillating 'Mediaset trial' - where Berlusconi is accused of tax fraud and could be banned from holding public office for five years.

Recent events seem to prove us right. Italy's Supreme Court has announced that it will issue the final verdict in the tax fraud trial on 30 July - much earlier than expected. The announcement has triggered a huge backlash from Il Cavaliere's camp and is showing once again just how fragile Italy's coalition government is.

Berlusconi's party wants to suspend all parliamentary activities for three days in protest against the Supreme Court's decision, or it will pull out of the coalition - which would deprive Enrico Letta's government of its majority in parliament and potentially make snap elections a real prospect.

The impression is that, even if this immediate threat were turned down, the survival of the Italian government may be put in doubt again shortly should the Supreme Court uphold the five-year public office ban for Berlusconi - making it definitive.

In the meantime, Standard & Poor's yesterday cut Italy's credit rating by one notch to BBB, leaving it on a negative outlook and only a few notches above 'junk' level, citing concerns over economic output growth as a key reason for the decision. A gentle reminder that the country remains under market surveillance and the way out of the woods is still quite long.

A bad time to trigger a fresh political crisis.      

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

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

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

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

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

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

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

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

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

Athens strikes another bargain in Brussels, but how long will this one last?

As we noted last week on CNBC, a deal was always likely this time round in Greece:

"We've got German elections coming up in September and no one wants to have that talk of how we're going to fund Greece for the next three or four years. So they just want to kick the can down the road until after the elections…They will come to some agreement but it's clear that Greece is well behind track on its programme once again and it's only a matter of time before a new funding gap opens there."

One was eventually reached yesterday morning with details filtering out overnight.

How much will be disbursed and when?

• The eurozone will provide €2.5bn this month and €500m in October, while eurozone central banks will provide €1.5bn and €500m at the same time by releasing profits from their holdings of Greek government bonds. This should give Greece enough cash to cover costs and payoff the €2.2bn of government debt maturing in August.
• The IMF will hold a meeting later this month where it is expected to agree to release its next €1.8bn share of the bailout.
• The staggered pay-out of this €6.8bn will allow the eurozone to enforce more conditionality, meaning it could delay the future tranches if Greece does not stick to its reform programme.
• Once this round of funding is complete, Greece will have received around €208bn out of a total €246bn committed.

What does Greece need to do?

• The bargain comes with strict conditions on Greece (as always), particularly in terms of civil servant cuts on which Greece seems to have fallen far behind. Greece must put 12,500 civil servants in the labour mobility scheme within the next few weeks (where they receive reduced pay and are sacked within a year if they do not find a new position).
• This must be doubled by the end of the year, while 15,000 must be laid off by the end of 2014.
• Greece must also work to step up reform of the tax system, tackling evasion and improving collection of back taxes. This is obviously easier said than done and has been a target from the beginning, no details yet as to how this time round will be any different.
• Must close the funding gap in the healthcare provider EOPYY which totals around €1bn. Again no details as to how and when exactly this will be closed.

Unanswered questions

• On top of the ones hinted at above, the key unanswered question remains, how will Greece fund itself once the bailout runs out? The eurozone has already further committed to €11bn in aid (unlikely to be in the form of direct funds) in 2014 and 2015 although it is yet to identify where this will come from. Eurogroup head Jeroen Dijsselbloem dismissed such concerns saying, "If there is a financing gap it will be at the end of 2014, which will allow us plenty of time to deal with it," which provides little comfort given the delays in dealing with other eurozone problems.
• Can the government actually push through all these measures with its slim majority? We expect it will probably be able to (just), but it will be the first real test for the new coalition and will provide a good bellwether of how it will fair in the coming months.
• What is happening to the closed state broadcaster ERT? This remains unclear. This is important not just for political reasons (still has the potential to expose divisions in the coalition) but also since the 2,600 employees could provide a big boost towards meeting the targets for civil servant cuts (the real reason behind the closure in the first place we suspect).
• Another key aspect of the recent funding gap was the reluctance of national central banks to rollover their holdings of Greek bonds (thereby reducing the amount Greece has to pay off). It’s not clear whether this has been done or will be done, although comments from officials this morning suggest it may not yet be finalised.

Another bargain very much along the usual lines of cash-for-reforms. Questions over Greece still loom large, it is not clear that they will be able to push through these public sector reforms having failed many times before. Given the lukewarm comments from the Troika it seems that even they expect another funding gap to open soon. Meanwhile as the end of the bailout approaches the fundamental issue which the eurozone has been avoiding for some time – how to fund Greece for the next decade – will need to be dealt with.

Theresa May to announce EU crime and justice opt-out this week

In January 2012, we published An unavoidable choice: More or less EU control over UK policing and criminal law. A year and half later, and it looks like decision time has arrived.

According to the Sunday Telegraph, Theresa May will announce this week that the Government plans to take its 'block opt-out' from around 130 EU crime and justice laws - negotiated as part of the Lisbon Treaty by the previous government - and then apply to opt back in to those considered of vital national interest.

The opt-out boils down to this: In the first instance, the block opt-out is a choice between accepting all the laws and rejecting all of them. Accepting them also means accepting the full powers of the European Court of Justice over them for the first time. The decision to opt-out or accept the ECJ's jurisdiction has to be made by June 2014 and will take effect in December 2014.

However, once the block opt-out is taken, the rules allow the UK to apply to opt back in to individual EU laws. Opting back in also means accepting full ECJ jurisdiction over the law concerned and the UK cannot opt back out again in future.

In our 2012 report, we concluded that:

Open Europe recommends that the Government should invoke the 2014 block opt-out, which would allow it to consider the following options post-2014:

- Remain outside the EU crime and policing laws it has opted out of.  

- Opt back in to selected EU laws of particular importance, which would need the approval of the EU institutions and mean accepting the ECJ’s powers over the laws it opts back into.  

- Or, seek to negotiate a new arrangement (a variant of Denmark’s position) whereby the UK could cooperate with other EU member states on crime and policing but outside the EU legal framework and therefore without the jurisdiction of the ECJ.

It looks overwhelmingly likely that the Government will take the second option. Given the constraints of the existing EU treaties (option 3 would require EU treaty change) and the Coalition (the Lib Dems have been fighting the opt-out tooth and nail), this is the pragmatic decision to make.

Significantly, and symbolically, it would be the first time that powers flowed back from the EU to the member states - which is a good thing. However, it is also true to say that by opting back in to some measures the UK will be accepting the power of the ECJ over thee laws. The key issue will be the European Arrest Warrant - the likelihood is the UK will seek to opt back in to a 'reformed' Arrest Warrant, but the question is whether there is genuine reform - some things can be done domestically but more fundamental reform requires negotiation with other governments and the European Parliament.

In our view, in the long-term, one of the priorities for David Cameron’s reform and renegotiation strategy should be to return to a system of bilateral, practical crime and policing cooperation with EU partners, which does not involve ceding control to the EU institutions (option 3).

A ComRes poll for Open Europe in May found that just over 30% of respondents selected “Allowing the UK to have control over police and criminal justice laws” as one of their top four priorities in any UK-EU renegotiation, the fourth most popular option. A subsequent poll for Sky News found that 45% of respondents specified policing and criminal justice powers as an area of EU policy that they wanted returned to the UK, the second most popular option after immigration.

No one is opposed to practical co-operation between Europe’s law enforcement authorities. But the UK does not have to cede the same level of national control in order to cooperate with other important non-EU security partners around the world. Therefore, imposing EU-federalist solutions on an increasingly sceptical public simply increases the chances of the electorate throwing the baby out with the bathwater – rejecting the EU entirely.

EU Referendum: Now a question of when not if?

Today’s Commons debate on whether to hold an EU referendum in 2017 – brought forward by James Wharton MP through a so-called private members bill - was interesting as much for what was said as for what was not.

As expected, Conservative MPs came out in droves to proclaim their commitment to an in/out referendum if re-elected. Shadow Foreign Secretary Douglas Alexander criticised 2017 as “an arbitrary date”, although he yet again appeared not to categorically rule out an EU referendum under a Labour government. So that door is still left ajar. He also reiterated Labour’s commitment to EU reform, proving how entrenched this concept now is across the political spectrum.

Interventions during the debate showed that within the Labour Party there is now a spectrum of opinion on the EU referendum, although in fairness Labour and Lib Dem participation was limited (see picture). There are those against a referendum because of a long held attachment to the EU; those like Keith Vaz MP who want the UK to remain an EU member but also want a referendum to strengthen democratic legitimacy; and those, like Kate Hoey or Dennis Skinner who have long been opposed to the EU and want the UK to leave altogether. In addition, there are many on the Labour benches who see the entire issue as a valuable party-political stick with which to beat the Conservatives.

Labour has so far managed to avoid a divisive public debate on the issue but with the Conservatives – who now appear relatively united – having put them on the spot, a familiar question reappears: if polls are close leading up to the 2015 general election, will Labour gamble on being seen as the ‘pro-status quo anti-referendum party’ – or will it pull the trigger?

Clearly, there are powerful voices within the Labour party who are feeling increasingly worried about such a prospect. So what will the endgame look like? Several different scenarios are emerging:

Tory majority: If the Conservatives win the next election outright it is now inconceivable they would avoid a referendum.

Continuity of Tory-Lib Dem coalition: Lib Dems are unlikely to promise a referendum in 2017 so the question would then become whether David Cameron insists on a referendum as a the price for a renewal of the Coalition. Cameron has been less than clear on this point. He has said “if I am Prime Minister” there will be a referendum, but the official write up says “if a Conservative Government is elected in 2015, they would... hold an in-out referendum to let the British public decide.” Would Nick Clegg block it (assuming he is even still the leader then).

Tory minority government: With a more stable economy both the Tories and Lib Dems could decide not to formally renew the coalition, with the former instead ruling as a minority government. Depending on the exact parliamentary arithmetic, a Tory referendum in 2017 could gain sufficient support from Labour and Lib Dem rebels and Northern Irish MPs.

No Labour pledge followed by a Labour victory: Only chance for a referendum would be if the “referendum lock” is triggered as part of an EU treaty change that transfers powers from the UK to Brussels – Labour has pledged to keep the lock in place. Perhaps they can somehow elevate that into an In/out referendum, and get around the pickle they’re in that way (there’s talk about this in Labour circles).

No Labour pledge followed by a Lib-Lab coalition: As previous scenario – both Labour and Lib Dems are in favour of the referendum lock.

Labour pledge followed by Labour majority: Question would then be on what terms (a straight In/Out vote or something else) and when (immediately after the election or mid-term). 

Labour pledge followed by a Lib-Lab coalition: That would depend on the Lib Dems and whether Labour sees it as a deal breaker. It’s easier to Labour ditching the referendum pledge in coalition negotiations than the Tories. However, a Lib-Lab Coalition Government might end up with a referendum anyway due to cross-party backbench cooperation by Labour and Conservative MPs.

Labour throws back the ball in Tories’ court: As has been floated, Labour could seek to amend James Wharton’s bill, to suggest a referendum before 2017 – some have floated 2014, at the same time as the European elections. This would be extremely awkward for Tory MPs, many of whom would feel obliged to vote for such an amendment so as not to be seen as anti-referendum. The Tories are also vulnerable to criticism that 2014 is no less of an arbitrary date than is 2017 (are we confident that all the changes in Europe and in the UK-EU relationship will have taken place by 2017 so the British public would have the choice of two clear alternatives?)

Regardless, there was a feeling when listening to today’s debate that a referendum on Europe is now not a matter of if – but when. Disappointingly, the debate largely ducked a question just as fundamental as the referendum debate itself: whoever wins the next election will have a series of European challenges in its intray: a Europe that desperately needs reform, a changing Eurozone with bailout programs running out, a series of pending EU court cases, potential treaty changes and more.

These challenges transcend party politics.

EU referendum: So who's cup of tea will it be?

Doves dominate as central banks show the way ahead in Europe

While the US has its Independence Day, Europe looks to be having its Forward guidance day.

Bad puns aside, it’s actually been quite an interesting day in the world of central banking in Europe.

First we had the new Bank of England Governor Mark Carney surprising the markets somewhat suggesting that the increase in rates which had seemingly been priced in was premature. Essentially, providing forward guidance that the BoE would keep monetary policy loose.

More interesting for us though, was that the ECB took a similar despite not much being expected to come out of today’s meeting. Below are the key points from ECB President Mario Draghi’s press conference:

• “The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time.” This is essentially forward guidance (forecasting what policy will be in the future). It’s not full because there is no clear date set but still it is a big change from Draghi’s previous line of “we never pre-commit” (this has also been the line of the ECB generally since its inception). He also added at the end, “all in all we said our exit [from loose monetary policy] is very distant”.

• Draghi also stressed that the decision on this form of ‘forward guidance’ was unanimous (numerous times in the Q&A). Again surprising since the Bundesbank has previously warned against the problems of loose monetary policy, so one might expect Bundesbank President Jens Weidmann to be wary of committing to it for an extended period.

• When quizzed about whether the ECB was now simply reacting to the US Fed’s talk of tightening its monetary policy (the much maligned ‘taper’ which has sparked market volatility) Draghi insisted that the ECB takes its actions independently of those of any of the central bank. Behind the rhetoric though it seems fairly clear that the Fed’s policy has had an impact on European and global markets and the ECB felt the need to compensate for that. Draghi also said it was simply a “coincidence” that the BoE took a similar policy approach on the same day.

• As for the rest of the press conference, it was much as expected (more of the same). Draghi continued to stress the need for structural reform and for the creation of a clear banking union with a working resolution mechanism to recapitalise banks in the event that ECB find capital shortfalls when it does its asset quality review (stress test) next year. Draghi also distanced the ECB once again from action to boost lending to small and medium sized enterprises.

It seems all this caught markets somewhat unawares with stock markets rallying and both the pound and the euro weakening in response.

This suggests that central bankers may have a trick or two still up their sleeve, although the response is likely to be short lived. Ultimately, this is not a sea-change in the policy of the ECB, the fundamental challenges facing Europe remain.

Frenchelon: Is France really shocked it might be spied on?

I am shocked to find that the US has been spying

Earlier in the week President Hollande was calling for the EU USA trade talks to be broken off following allegations of US spying.

Today Le Monde reports on "Révélations sur le Big Brother français" which details the French Direction générale de la sécurité extérieure (DGSE)'s world wide spying network nick named 'Frenchelon' which includes their own version of the US system PRISM, which, according to Le Monde, includes a giant computer storing data gleaned from phones. Interestingly their network also includes a base at Mutzig conveniently close to the German border!

So what do we make of this? Well obviously, unless they are very poor spies, the French and US/UK operations know what each other are up to. So why call for the trade talks to be stopped? Well perhaps you never wanted them in the first place... Will Hollande now go quiet?

French ship: Dupuy de Lôme - giant golf anyone?

Portugal's coalition fights to keep its head above water

UPDATE (17:15) - First reports of an agreement to keep the coalition alive. Stay tuned for more details.

UPDATE (16:40) - Portuguese Prime Minister Pedro Passos Coelho and Foreign Minister Paulo Portas have just come out of another (swift) round of talks.

The outcomes of their third meeting in less than 24 hours are still unclear. Passos Coelho is now heading to the Belém Palace - where Portuguese President Aníbal Cavaco Silva is waiting for him.

UPDATE (14:45) - The second meeting between Portuguese Prime Minister Pedro Passos Coelho and Foreign Minister Paulo Portas is over. It was "very positive" - according to the Prime Minister's office - but inconclusive. Negotiations over a new coalition agreement will therefore continue.

According to the Portuguese media, Portas may backtrack on his resignation. If he did so, he would reportedly be appointed Deputy Prime Minister (the post is now vacant after former Finance Minister Vítor Gaspar quit) and Economy Minister (which in Portugal is a separate portfolio from Finance Minister).

More interestingly, a source quoted by Diário Económico suggests that a revamped coalition agreement would involve discussing "a new compromise with the [EU/IMF/ECB] Troika" - so potentially a relaxation of Portugal's deficit and reform targets.

ORIGINAL BLOG POST (11:25) 

As we noted in yesterday’s flash analysis, tensions in the Portuguese coalition reached critical levels over the past few days. They have eased off somewhat overnight, but there is still plenty of uncertainty around.

Key developments:

• Despite tendering his resignation from his post as Foreign Minister, the leader of junior coalition member CDS-PP, Paulo Portas, now seems to be backtracking somewhat. This is down to both internal pressure from his party, which is clearly not keen to be seen as bringing down the government, and external pressure from markets and eurozone partners over fears of snap elections which would delay the implementation of key reforms in Portugal.

• Portas already met Prime Minister Pedro Passos Coelho, with another meeting due later this morning. The two will also meet Portuguese President Aníbal Cavaco Silva this afternoon.

What are the potential outcomes?

• Portas is reportedly seeking a renegotiation of the coalition agreement. At the moment, it's not entirely clear whether his desire is more power for his party or less focus on austerity - or both. The former seems possible, although his party is significantly smaller (Passos Coelho's Social Democratic party controls 108 seats compared to 24 for CDS-PP). The latter seems less likely. The government has very little scope to adjust its economic policy due to the bailout requirements, while, as we noted yesterday, austerity and structural reforms need to continue with the country already falling behind in terms of implementing its programme.

• It is, of course, still possible that no agreement is reached and the CDS-PP confirms its withdrawal from government. However, the Portuguese media seem to agree that, even in that case, CDS-PP would keep granting parliamentary support to the government (an arrangement the Portuguese call incidência parlamentar).

• No matter the outcome, the divisions within the coalition are clear and present. There are likely to be some tough votes to come, particularly on labour market reform and further budget cuts. Whenever these take place, the spotlight will be on the coalition to see if it holds up under pressure.

We will continue to update this blog throughout the day with developments and news as we get them.

MEPs reject plans for controversial fund managers' bonus cap

The European Parliament has voted down a controversial proposal put forward by German Green MEP Sven Giegold to introduce a bonus cap for managers of UCITS investment funds. Mr Giegold wanted to curb bonuses so that they could no longer exceed managers' basic salaries.

However, UK Conservative MEP Syed Kamall brokered an amendment with the European People's Party (EPP) and the Liberals (ALDE) to scrap the bonus cap. The amendment was passed this morning. It establishes that bonuses

"shall be considerably contracted where subdued or negative financial performance of the management company or of the UCITS concerned occurs, taking into account both current compensation and reductions in payouts of amounts previously earned."

MEPs will now wait for EU member states to agree on a common position on the new UCITS rules. After that, negotiations will start.

Mr Giegold has called today a 'schwarzer Tag' (a 'black day'), but the truth is the bonus cap would have been a bad idea for a number of reasons:

• Unlike banks, investment funds haven't received a penny from taxpayer-backed rescue packages. Therefore, although one can agree with the need to align pay with performance in the financial services sector, it would have made little sense to impose on fund managers a harsher bonus cap than the one recently introduced for bankers.

• The cap would also have undermined the competitiveness of the UCITS industry, which currently accounts for over 70% of net assets managed by the entire European investment fund industry.

• Perhaps most importantly, such a largely ideological measure could have made the City of London more eurosceptic at a time when the debate over the future of UK-EU relations is at a crucial stage.

So, good news from Strasbourg, although similar proposals on remuneration in the financial services sector are likely to come up again sooner or later - especially from the European Parliament.

However, today's vote shows that the UK is indeed listened to in Europe when it comes to financial regulation (although it also helped that a lot of UCITS funds are based in France). It's all about having a clear negotiating strategy and moving early enough in the EU's law-making process.    

Governo em risco: Portuguese government at risk of collapsing after Foreign Minister resigns

UPDATE (18:15) - We thought it would be useful to explain quickly how things work in Portugal when a government crisis occurs. If the Prime Minister resigns, the Portuguese President is the one who decides when and if parliament has to be dissolved.

Under Portugal's electoral law, new elections must be held at least 55 days after parliament is dissolved. This would mean almost two months with a caretaker government at a rather unfortunate time for Portugal. 

ORIGINAL BLOG POST (17:45)

One day after the resignation of Finance Minister Vítor Gaspar, the Portuguese government has just lost another one of its key players. But the impact could be a lot bigger this time.

Paulo Portas, the country's Foreign Minister (see picture), has resigned because he disagreed with the appointment of Maria Luís Albuquerque as new Finance Minister.

Portas is also the leader of the People's Party (CDS-PP), the junior coalition partner of Prime Minister Pedro Passos Coelho. If the party pulls out of the coalition (which looks likely in light of Portas's resignation) Passos Coelho will lose his majority in parliament. So this is critical as it can potentially trigger new elections. 

Passos Coelho will make a TV statement tonight. We'll keep you posted. In the meantime, it's worth keeping in mind the economic and social challenges Portugal faces - which we outlined here.

Why is Berlin so outraged over spy claims? Because they evoke nightmarish memories in Germany

The 'Big Brother State' is a sensitive issue in Germany

The allegation that the US allegedly spies on the EU and its member states - and the related allegations that the UK also tapped German calls and internet traffic - has caused a huge scandal and plenty of anxiety in Germany.

More than in any other country, as details of US whistleblower Edward Snowden’s leaks become public, German politicians are lining up to condemn America for treating Germany like a "third-tier partner" (apparently Germany was spied on quite a lot), while press headlines are bristling at the indignity of it all.

This has pitted the "Anglo-Saxon" world against the, in this case, Berlin-led continental block in a most unfortunate way. As we pointed out yesterday - even before Hollande made it 'official' - this incident is now putting a dark cloud over the fledling EU-US free trade talks.

But beyond the spectacular headlines what, exactly, lies behind the deep-felt German unease about the entire episode? Well, it's a fascinating study into national sensitivities - and incidentally an illustration of just how difficult it is to move towards a common justice system in Europe.

Germany suffers from a lingering memory of the 'Big Brother State' in two of its nastiest forms:  under the Nazis and the former East Germany (GDR). Any hint at massive data collection or snooping always evokes a sharp backlash in Germany.

The systematic collection of data by the state, as witnessed under the Nazis in the 1930s-1940s, was not only used to identify and systematically exterminate groups such as the Jews or Gypsies, but also to keep others in check by infiltrating every aspect of life.

And the surveillance and collection of data was even more intrusive in the GDR. By time the Berlin Wall came down, the Stasi had some 91,000 full-time staff, in addition to a huge network of informants who provided information on their friends, colleagues and families.

The suggestion, then, that the Obama administration is amassing swathes of  personal data indiscriminately makes Germans extremely nervous. (And these fears won’t have been soothed by the comments from Wolfgang Schmidt, a former Stasi honcho who said the magnitude of the purported US surveillance would have been “ a dream come true” for the Stasi.)

Symptomatically, Germany still hasn't implemented the EU's Data Retention Directive due to concerns over privacy and arbitrary data collection (there's also a constitutional discussion involved - despite the fact that one part of the Directive was supposed to be implemented in 2007, the other in 2009.)  This has lead to the European Commission taking Germany to court.

Germans are reserved, coalition-building and and tempered in international affairs (too tempered some would say), but given the country's recent history, this is one area global partners should tread carefully around if they want to keep Berlin happy.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

China launches official investigation into EU wine subsidies

Trade-war back on.

Well, in fairness, we’re not sure it ever went away. It did seem like relations were improving, however, with EU Trade Commissioner Karel de Gucht saying (following a meeting with his Chinese counterpart):

“I believe that both sides have now engaged in a sincere way to work towards an amicable solution. That is the good news…Let be me very clear again here today in Beijing: Europe wishes for an amicable solution.”

The rest of the speech continued in much the same way, striking a very conciliatory tone. For his part, Chinese Minister for Commerce Gao Hucheng said that the talks had been “positive”.

This all helped raise hopes that a deal could be reached ahead of the August deadline meaning the EU tariffs on solar panels could be (largely) avoided and Chinese retaliatory tariffs on wine would never be more than an empty threat.

Unfortunately, that no longer looks to be the case. The Chinese government has now officially accepted the complaint from its wine industry regarding illegal dumping and subsidies from the EU to its wine producers, saying:

"China's investigation department will strictly abide by China's relevant laws and regulations and meet the demands of relevant World Trade Organization rules…In the investigation process, the Ministry of Commerce will follow the principles of openness, fairness and transparency, fully respect all parties' legal rights, and make a fair ruling based on objective fact and the relevant laws and regulations."

We’re not sure that will provide much comfort to France and other countries which fear the imposition of tariffs.

Needless to say then, it seems whatever talks have been going on behind the scenes have not been fruitful. This spat looks set to escalate, not least because the WTO is likely to turn into a battleground with two of the largest economies trading blows and trying to garner support. With the August deadline just over a month away hopes for an “amicable solution” look to be fading.

I-spy: EU-US trade talks under threat?

To what extent have the latest leaks harmed the EU-US trade talks?

Fugitive whistleblower Edward Snowden’s leaks just keep giving.

First there was Prism, then Tempora. And now, as reported by online by German magazine Der Spiegel over the weekend:  the US has allegedly been spying on EU missions and institutions on both sides of the Atlantic.

Here's a round-up the European response at the national and EU levels:

National

The leaks have caused the most outrage in Germany, which was allegedly monitored more than other countries, leading the Federal government to respond on Monday.

"If it is confirmed that diplomatic representations of the European Union and individual European countries have been spied upon, we will clearly say that bugging friends is unacceptable...We are no longer in the Cold War", said a government spokesman in Berlin. He added that Chancellor Merkel will soon be speaking to President Obama about the matter.

Other German politicians that had been clamouring for a US explanation include German President Joachim Gauck (who quoted Benjamin Franklin: "Those who give up liberty to gain security will lose both'"), Vice-Chancellor Philipp Roesler and Justice Minister Sabine Leutheusser-Schnarrenberger. The SPD, the Greens and Die Linke had also been agitating for Chancellor Merkel to intervene.

France isn't happy either, with French President François Hollande calling for an "immediate" end to the alleged spying if the EU-US trade negotiations are to continue. "We cannot accept this kind of behaviour between partners and allies...There can be no negotiations or transactions in any areas until we have obtained these guarantees, for France but also for all of the European Union, for all partners of the United States."

French Foreign Minister Laurent Fabius added the reports were "completely unacceptable," if corroborated, while his colleague, Christiane Taubira, the Justice Minister,  called US actions “an act of unqualified hostility.”

Italy’s Defence Minister Mario Mauro weighed in this morning, saying that US-Italian relations would be “compromised," if the reports are true. "If we are allies, if we are friends, [then] it’s not acceptable that someone in this relationship behaves like the Soviet Union used to behave towards its satellite states,” he added.

EU

EU officials, political groups and MEPs are miffed too.

Catherine Ashton, The EU's foreign policy chief said the EU is seeking  “urgent clarification." Meanwhile Martin Schulz, President of the European Parliament, said he was “deeply worried” by the reports, and warned of a “severe impact” on EU-US relations if they are true (remember, the EP's role in EU trade talks was enhanced under the Lisbon Treaty).

Schulz told French radio station France 2 that the US had crossed a line,"I was always sure that dictatorships, some authoritarian systems, tried to listen ... but that measures like that are now practiced by an ally, by a friend, that is shocking, in the case that it is true."

This was echoed by Viviane Reding,  the EU justice commissioner: “Partners do not spy on each other,” she said. “We cannot negotiate over a big transatlantic market if there is the slightest doubt that our partners are carrying out spying activities on the offices of our negotiators."

“How should we still negotiate [a free trade agreement with the US] if we must fear that our negotiating position is being listened to beforehand?” said Elmar Brok, the chairman of the European Parliament’s Foreign Affairs Committee.

In an interview, Czech MEP Libor Roucek, the deputy chairman of the S&D group for Foreign Affairs and Transatlantic Relations, said he "can't exclude the option that [he's] being monitored by the US secret services."
 
Some went further, calling for a suspension of the US-EU trade talks altogether. This included the European Parliament's Green Group, and MEPs like the Dutch social democrat Thijs Berman: "[The] US spies on EU diplomats. That's not how we can negotiate a free trade deal. Suspending is logical step," he tweeted on Sunday.

Press
 
The revelations have caused an uproar in the European press (Le Parisien’s ‘hammy’ front page of Obama ‘listening in' captures the general drift), and most of all in Germany. 

Spiegel Online published a commentary today that not only criticised America, but also the lack of action by the government.“The federal government has failed to protect Germans from America’s spy-attacks. This is unacceptable to citizens," it says, calling for an “independent education”  for the US from the German Constitutional Court and a European Committee.

Meanwhile, Austrian Daily Der Standard published a commentary that diverged from the general thrust of European media feeling. Spying is to be expected says the piece: "It would be surprising indeed if the opposite were the case. Being spied on by an ally is about as normal as the systematic surveillance of political opponents."
  
Perhaps Der Standard is right that much of this skulduggery does go on, even amongst allies. But, still, although this is unlikely to deal a fatal blow to EU-US trade talks, the political consequences could well be that certain European countries dig their heels in a little firmer in the negotiations.

On a more general note, for individuals concerned about their privacy and civil liberties, this type of issue only heightens fears that the increasing amount of personal data shared among EU governments isn’t safe and that the protections are inadequate.

In recent years the EU has been developing more and more data sharing databases, and it is not always clear to the general public what happens to their data – this will only fuel ‘big brother’-type fears that is open to misuse, abuse or simply could be accessed by anyone.

Hyped and almost always misunderstood: the curious case of 'Thatcher's rebate' from the EU budget

Our Director Mats Persson writes on his Telegraph blog:

I once gave a talk at a “high-level” seminar on UK media and the EU, attended by various British and European commentators and journalists. They weren’t exactly natural Sun readers, if you get my drift.

After about an hour of complaining from the participants about how ill-informed the UK media was about Europe, I posed a simple question: can somebody in this room please explain to me how the UK rebate from the EU budget works?

Nervous laughter. Awkward silence. Then the attempted explanations. No one got it right.

Few issues relating to the UK and Europe are so hyped and symbolic as the rebate – the very cost of Margaret Thatcher’s funeral was even justified on the basis that she famously won the rebate in the 1980s. Defending the rebate is now the vocation of virtually every UK politician – and grasping it is vital to understanding the UK's leverage in Europe.

Despite this, I reckon that only about 50 people in all of Britain actually get how it works.

Last week, EU leaders clinched a deal that will see an historic cut to the EU’s long-term budget (to run from 2014 to 2020). Headlines in the British press the day after read that David Cameron had successfully defended the rebate from a vicious last-minute French attack, while the rest of Europe read that the UK had threatened to hold up the budget deal to protect its rebate.

The reality is that both are a stretch, just as stories ahead of that crucial February EU summit – when Cameron managed to muster a group of allies in favour of a cut – claiming that the UK was “outgunned” or “would lose out the most” absent a deal were based on a fundamental misunderstanding of how the rebate works. The deal reached in February protects the rebate, so any change was not driven by the UK anyway.

The rebate effectively involves the UK getting back two thirds of the difference between what it puts into the EU budget and what it gets back. But this mechanism only covers farm subsidies to EU-15 (those countries that joined before 1995) and some farm subsidies to the new member states (the so-called Pillar II of CAP), in addition to the so-called structural funds going to EU-15. This means that the UK gets nothing back on what it spends on the EU institutions, for example, or regeneration cash and a majority of farm subsidies to new member states.

To complicate matters further, the Netherlands, Sweden, Austria and Germany have their own rebates. Unlike the UK’s, however, these correction mechanisms expire at the end of every long-term EU budget.

All of this has three major implications:

• First, the UK rebate is an exceptionally strong bargaining tool. Not only is it always protected by a veto (which is why the alleged French attack was overblown), it’s also the only permanent correction mechanism around. In case EU leaders can’t agree on a new long-term budget, the previous year’s is rolled over (plus 2 per cent to account for inflation). Britain keeps its rebate, whereas other net contributors may have to renegotiate theirs.  

• Second, the more cash that goes to the new member states, the less the UK rebate will be worth. It so happens that the new long-term EU budget deal will see proportionally more cash to central and eastern Europe (rightly in my view), meaning the rebate will drop. This means that though the EU budget is cut, the UK’s net contribution is likely to go up. Claims that Cameron’s managed to increase the rebate by some £200-300m in recent talks are therefore incorrect on multiple levels. 

• Third, the consequence of the above is that in a no deal, rollover scenario, the new distribution wouldn’t materialise. Therefore, in net terms the UK would actually be a winner – again, meaning the UK was more relaxed about a “no deal” scenario in these talks than most other EU countries. 

Those on the continent who think the UK is selfish should think about this one. In EU budget talks, London has actively pushed for more cash to new member states as that is where it can have the most comparative impact – even though that means a net loss for the Treasury. 

So a lot of people at home and abroad have homework to do.

Cameron tasks new new business body with sweeping away EU red tape

Will Cameron's new body cut through EU red tape?

David Cameron has just announced that he’ll set up a new “task force” consisting of some of the UK’s best business leaders. Their task is to identify EU rules and regulations that are currently holding back business and growth, which should therefore be scrapped.

We’re told it’s a government initiative rather than a Tory initiative, and it’ll be led by Business Minister Michael Fallon MP.

Apparently, the idea is to complement the balance of competences review – looking at individual rules from a business perspective rather than overarching EU powers.

Now, this will no doubt be met with cynicism. Politicians often blow smoke about cutting bureaucracy and promise to set light to “bonfires of red tape” but somehow the flames never materialise. Meanwhile, such 'taskforces' have a mixed record in terms of results to say the least. Will this time be the same?

In truth, it depends. If it’s an initiative meant to merely distract or fill a rhetorical vacuum, then No 10 will no doubt be called out – and the whole thing will backfire. But if it’s genuinely set up to get down to the real, practical EU rules holding back business – and more importantly is followed up by a very strong push in Europe, rather than attempts at getting quick headlines – then this is a most-welcome initiative. This will also depend on the actual people on the task force, and whether they’re closet status quo enthusiasts or genuine reformers. We’re told the following will be on the panel – we’ve included a summary on anything that’ve said on Europe:

Ian Cheshire, CEO, Kingfisher
Writing in the FT, a few days ago Ian Cheshire argued that “As an international retailer, Kingfisher wants Britain to remain in the EU – but a reformed EU… We enjoy the certainty of a single rule book across the EU but not at the cost of an ever increasing regulatory burden, which must be resisted”.

Paul Walsh, former CEO, Diageo Plc 
Speaking to the BBC’s Today programme, Paul Walsh has said "I support the fact that our prime minister said we should stay in Europe. We are a trading company. We must stay in Europe, we must position Europe for the future, which is more competitive, less regulation."

The others have not said anything in detail about the EU per se but also have considerable business experience in cross-border trade.

Marc Bolland, Chief Executive M&S

Has driven the opening of stores in Paris and other EU capitals, likely making him familiar with the constraints of expanding British business in Europe.

Dale Murray, Angel Investor 2011
Launched Vodafone New Zealand in 1992. Co-founded Omega Logic in 1999. Lots of experience as an entrepreneur and as a business investor. Experience in telecoms which is becoming a hot topic in terms of single market integration and trade.

Louise Makin, CEO, BTG

BTG has offices in Germany and previously President of Strategy and Business Development Europe at Baxters so she has solid background in conducting business across the EU.

Glenn Cooper, Managing Director, ATG Access

ATG Access is the worlds largest manufacturer of security bollards and vehicle barrier systems, currently exporting to over 42 countries.

So the jury is still out. But with the group set to provide its first concrete recommendations as soon as September we'll soon see, and given the huge importance of scrapping and improving EU rules and regulations we’ll give No 10 the benefit of the doubt on this one.

Finally a deal on the EU long-term budget?

On Wednesday, European Parliament President Martin Schulz wrote to Irish Deputy Prime Minister Eamon  Gilmore warning him that the latest compromise on the long term EU budget agreed by EU leaders in February would be rejected. Yesterday morning, however, a deal was struck between the two negotiating teams. So had member states suddenly given in to all MEPs’ demands?

Although not all the details are fully clear, it looks as though MEPs have not secured anything substantial above and beyond the compromise they rejected last week.

Retaining unspent funds and ‘flexibility’ – A decent win for MEPs; member states have agreed that rather than taking back unspent funds as before, these can be rolled over to next year’s budget – although a) in recent years there has not been much of a surplus and b) while unlimited unspent funds can be rolled over at the start of the seven year period, this is capped towards the end. There is also scope for moving some cash around between budgetary headings.

Topping up the 2013 annual budget by €11.2bn – A big win for MEPs who demanded payment in full of the additional €11.2bn requested by the Commission to retroactively top-up the 2013 budget (although this is less down to MEPs themselves and more down to the fact that annual budgets are decided under majority voting). So far €7.3bn has been committed despite the UK voting against. This leaves €3.9bn outstanding and Martin Schulz has already warned that if member states renege on this, after MEPs have approved the budget, they will hold hostage the 70 or so individual pieces of implementing legislation for the EU's long-term budget.

A mid-term review: It looks as though MEPs have secured their demand for a compulsory review mid-way through the seven year budget but crucially it seems all but certain that this will take place under unanimity, not majority voting as MEPs had demanded, a scenario which could potentially have seen the spending limits increased. Intriguingly, this could coincide with a UK referendum should David Cameron still be in Downing Street.

Direct EU budget taxes – A big defeat for MEPs who pushed for a complete overhaul of the “own resources” system which would have seen the introduction of direct EU taxes and the scrapping of the UK and other rebates. This issue is completely left off the Commission’s press release and at a press conference following the agreement, the parliament’s negotiator only mentioned further “debate” on this issue. This was a clear red line for member states.

Extra help for youth unemployment – MEPs have also secured an additional €2.5bn to help combat youth unemployment, although this will be reallocated from existing funds, so it is not new money. Member states will also be able to voluntary commit additional funds in this area if they chose to.

So, despite a huge amount of posturing, overall the threat to veto the agreement proved to be an empty one and many of the MEPs' key demands were unmet - as we predicted at the time. They will now get two votes on the long term budget – a non-binding one next week and then a binding one come September or October. A lot could still happen between now and then, especially if MEPs decide they want another stab at obtaining further concessions or if member states refuse to pay more money into this year’s budget.

Even though the UK would not have been in a bad position had the parliament vetoed the agreement, politically it is better for David Cameron to be able to point to a concrete cut (as has already been proposed for the 2014 budget) as this adds credibility to his argument that he is able to secure a better deal for the UK in Europe.

Is the UK rebate still under threat?

There’s been a lot happening on the EU budget front in the last couple of days – the 2014 draft budget was proposed yesterday and this morning a deal was finally struck between the European Parliament’s negotiating team and the Irish Presidency on the EU’s long term budget (more on that later).

Meanwhile, David Cameron has arrived in Brussels for the EU summit pledging to protect the UK rebate, with PA reporting that France is allegedly pushing for a change in the way the rebate is calculated so that it does not cover the rural development part of the CAP, a move which could reduce it by around 10%. 

Cameron said that “It is absolutely essential that we stick to the deal we reached in February and that we protect the British rebate, and I will make sure that we do that”, adding that he wants it “locked down”.

For context – EU leaders agreed in 2007 that the UK “shall participate fully in the financing of the costs of enlargement, except for agricultural direct payments and market-related expenditure, and that part of rural development expenditure.”

This issue first came up in November when Herman Van Rompuy proposed reducing the UK rebate in this way, and David Cameron rejected it out of hand. We flagged this up here and calculated that it would reduce the UK rebate by €3.5bn (11%) over the seven year budget period (Although it should be noted the rebate is likely to fall anyway as a result of greater expenditure in the new member states). The conclusions of the February summit, where the deal was finally struck, clearly state that “the existing correction mechanism for the United Kingdom will continue to apply”.

Given that the rebate is embedded within the EU’s so called “own resources” regulation, which is decided under unanimity and therefore protected by UK veto, it would appear France's demands could only be met by unpicking the entire budget deal agreed in February, for which there is no appetite among other countries. It is therefore difficult to see how this is a credible threat, although it does make for good publicity for both Cameron and Hollande.

Is video of MEPs slapping reporter being censored?

The plot is thickening.

On Tuesday Open Europe posted on its blog and YouTube account a video of  GeenStijl reporter @TomStaal being pushed about and slapped by MEPs after he confronts them for allegedly 'signing on and sodding off,' or for collecting a €300 daily allowance from the European Parliament without actually doing any work.

The video since went viral, getting thousands of views in only a few hours. But this morning, we were surprised to discover that the video had been blocked and removed. Reason? Copyright infringement claim.

Screenshot of our 'Sign In Sod off' video being blocked on YouTube for copyright reasons by R.T.I.

But the story gets stranger. It’s not GeenStijl that’s behind the removal – quite the contrary, in fact –  Geenstijl wants maximum exposure. Instead it's Italian mass media company R.T.I.

Tom Staal has confirmed to us that Geenstijl has absolutely no affiliation with R.T.I, and that they have no idea why their video is being blocked –  and Staal isn’t happy.

So what in the world is going on here? Well, we’re baffled, and plead for help from any savvy readers informed about copyright issues. But here’s a theory. R.T.I’s chief executive is Silvio Berlusconi's son, Pier Silvio.

The R.T.I  copyright claim happens at the precise moment where the face of Italian MEP Raffaele Baldassarre appears. And it also happens happens that Baldassarre is a member of Silvio Berlusconi's 'Il Popolo della Libertà' party.

Geenstijl has responded on its blog and it's not mincing its words:

Just precisely what is going on we don’t know...but that ***** of a Silvio Berlusconi has apparently succeeded in removing Tom Staal's report from Brussels from YouTube...Uploaders which have submitted a copy of the video on their channel are all suffering from bizarre vague copyright claims. There are even copies circulating where only the scene of the aggressive Raffaele Baldassarre is being blocked. That’s all very coincidental. Hey Silvio Berlusconi, stay clear off our internet! A very big vaffanculo! 

Coincidence? You decide.

Update 18.45: Tom Staal tells us that Martin Schulz, European Parliament President, may be launching an investigation against him and Daniel van der Stoep (@Dvanderstoep), the Dutch MEP who took him into the EP.

Update 19.50: From @BrunoBrussels :

'I'm not aware of investigation' into @tomstaal says @MartinSchulz who defends rights of camera crews to film in EP
— Bruno Waterfield (@BrunoBrussels) June 27, 2013

Update 10.00 (1 July): We contested R.T.I's copyright claim to the 'sign in, sod off' video on our YouTube account, on the basis that it is owned by Geenstijl who gave us permission to use it. The block on the video was subsequently removed.

Update 14.00 (1 July): Geenstijl has formally written to Martin Schulz, President of the European Parliament to complain about the behaviour of the MEPs in question.