EU 'welfare tourism' is not a big problem but that doesn't mean existing safeguards should be removed

The Sunday Telegraph's front page story about a study commissioned by the European Commission into EU migrants and access to welfare has caused a bit of a stir.

As we have pointed out several times before, we support the principle of free movement as it has the potential to boost growth and competitiveness. In addition, the ability for companies based in the UK to easily draw on a wide talent pool is seen by many firms as an advantage of EU membership. However, there is no doubt that EU migration also throws up a huge number of political challenges, such as a substantial loss of national control over who can enter the country, increased competition in low-skilled sectors of the labour market, and increased demand for public services and infrastructure.

Therefore, if public confidence is not to be lost, free movement needs to be managed with extreme care and tempered with other policies including the right of national governments to protect their welfare systems from abuse.

In recent months, the risk of 'welfare tourism' is something that has been highlighted by both national governments and the media, not just in the UK but also recently in Germany, Austria and the Netherlands. Several governments have complained that the rules need to be tightened. EU Commissioner László Andor has responded by accusing the UK of pandering to xenophobia and taking the Government to court over the ‘right to reside test’ it applies to anyone seeking to access benefits. Both sides have been talking past each other, and the result is a focus on 'welfare tourism' that is almost certainly disproportionate to the problem it poses.

The available evidence and academic research overwhelmingly suggests that EU migrants have come to the UK in search of work and not to claim welfare benefits. For example, a 2010 study found that migrants from the new EU member states are “59% less likely than natives to receive state benefits or tax credits and 57% less likely to live in social housing.” The study concluded that in the four fiscal years after 2004, these migrants made a positive contribution to the UK’s public finances. In 2008, the ONS estimated that the employment rate of these migrants was over 80%.

Nevertheless, the report cited by the Sunday Telegraph did have some important findings for the current debate between national governments and the European Commission about EU migrants and access to welfare. Much of the focus has been on the study's finding that over 600,000 “non-active” EU migrants are living in Britain. Now this doesn't actually tell us that much about the impact on welfare. For example, these people could be family members of EU migrants working in the UK, pensioners and so on. The fact the UK Government does not currently keep statistics on those who claim benefits means we do not know exactly who is receiving them or how much this costs.

However, what is relevant in this context is that the report found that the "number of job-seeking EU migrants increased by 73 per cent between 2008 and 2011" and that the number of EU migrants coming to the UK "without a job awaiting them has been increasing".

At the moment, it is unlikely that this is having a major impact on the UK's welfare system, but precisely because the UK applies its 'right to reside' test to those claiming benefits (this is an important safeguard because the UK's universalist welfare system is particularly hard to police). But logic would suggest that weakening these rules would create the wrong incentives by allowing access to benefits such as jobseekers allowance more or less from day one. It would also further undermine UK public confidence in the principle of free movement altogether. However, this is precisely what the European Commission's legal challenge to the UK's right to reside test would do, if successful. This is why the UK and other member states are so concerned.

So, in summary, no there is not a welfare tourism crisis at present, but this is no reason for the European Commission to seek to remove the UK's welfare safeguards. It is the European Commission that is moving the goalposts here.

What's happening in Germany? An update on the coalition negotiations

Which way will Angela Merkel choose?

A quick update on the German coalition government negotiations.

There has been a lot of posturing over the past couple of weeks from all sides about the willingness to do a deal and what is needed to secure one. So far though, things have basically followed our expected timeline with end of November still looking to be the likely date for a final agreement.

A grand coalition still remains the most likely outcome but a CDU/CSU and Green coalition (Black-Green) has increased in likelihood. Below we lay out the key developments in each party’s position:

CDU/CSU:

• Despite being the runaway winner of last month's elections, it has taken a relatively back seat in the recent public discussions (behind closed doors it is obviously leading things).
• Has kept the door open to formal talks with both the SPD and Greens, ensuring that the former knows it has a “serious alternative”. That said, some within the party have expressed unease about a Black-Green coalition, with CSU Chief Horst Seehofer notably saying he “would not hold talks” with them.

SPD:

• Has begun to lay out its terms for joining a coalition, focusing on higher taxes on higher incomes and a national minimum wage. Has also made overtures about renewing its push for a financial transaction tax of some form, possibly linking this to the proposed eurozone bank resolution fund.
• The spokesman of SPD’s conservative wing, Johannes Kahrs, told Die Welt it is “non-negotiable” that “the SPD appoints the Finance Minister”, although speculation over this has now gone quiet and seems unlikely to happen given how keen the CDU/CSU is to hang onto this ministry.
• There is clearly some hesitancy within the SPD however, with many still scarred by the effects of the previous grand coalition in 2009. The party leadership has also promised that any coalition deal will need to be ratified by the full party membership – this adds uncertainty to the negotiations.

Greens:

• Much of the party leadership has stepped down meaning it is in somewhat of a transition phase, with senior politicians divided in terms of their eagerness to conduct negotiations with the CDU/CSU.
• The party would likely want similar agreements to the SPD on tax but also some assurances on support for renewable energy. However, given the change in leadership of the Greens and the shifts in the CDU/CSU’s energy policy, the two parties are now much closer on both of these issues.
• That said, there are plenty of areas of discord, one being immigration and asylum policy, which came to a head in the wake of the Lampedusa tragedy. Interior Minister Hans Pieter Friedrich (CSU) said earlier this week, “It cannot be the responsibility of Germany or the EU to accept all the people who are not as well of as the people here”, and went on to hit out at those immigrants who come to Germany allegedly to only access benefits. Joint leader of the Greens Katrin Göring-Eckardt hit back saying, "The rhetoric of allegedly excessive demands in view of the terrible Lampedusa catastrophe is something we cannot and will not accept”. Some have speculated that the row is in at least in part tactical, so as to provide cover in case the negotiations fail.

As for the timeline from here, the CDU/CSU will hold final informal talks with the SPD and Greens on Monday and Tuesday respectively and will decide at the end of next week who to enter into formal talks with. If it’s the SPD, as seems likely, the party leadership will seek approval from the 'small' party convention on the 20 October, after which formal talks will begin.

Meanwhile, it looks the SPD and Greens have ignored the siren calls of Die Linke to use the three parties' combined parliamentary majority to force through measures such as the minimum wage.

One final interesting point, is that these negotiations are starting to cause tremors in other countries with the Irish Independent running the front page headline this morning, “German parties battle over our corporation tax”. Clearly the lines between national and EU politics are becoming increasingly blurred in the eurozone.

Is the scrutiny of EU legislation only the preserve of the EU-critical?

Who cares about EU scrutiny?

The Hansard Society has today published a collection of essays on improving the current scrutiny of EU legislation in the UK Parliament - well worth a read. Open Europe's Christopher Howarth contributed an essay arguing for greater powers for national parliaments arguing "Scrutiny without power is not scrutiny, it is ritual" - along with a series of detailed suggestions (more on those later). Other contributors include Bill Cash MP, Chris Heaton Harris MP, Robert Broadhurst, Gisela Stuart MP and Lord Boswell and the foreword is written by none other than the Europe Minister David Lidington MP.

However, reading those names you might be struck by the absence of those on the more EU integrationist side of the UK EU debate. Surely those on all sides of the political spectrum have an interest in the EU's democratic accountability? Well here is what the Hansard Society's Ruth Fox had to say:

“A majority of the authors – though not all – might be said to occupy the more eurosceptic end of the political spectrum. We invited a wide range of politicians across all the major parties to our seminar in September 2012 but those who accepted came, in the main, from the eurosceptic perspective. Similarly, we invited a number of pro-Europeans to contribute to this pamphlet but, disappointingly, there were few expressions of interest. This underlines the concern that those engaging with the detail of European issues are drawn from too narrow a tranche of parliamentary representatives.”

So there you have it. Why are those who argue for the UK's place in Europe to remain unchanged and/or more integration so reluctant to say anything about increasing the ability of Parliament to scrutinise the goings on of the EU - what do they think they have to lose?

Row alert: Germany and the Commission clash head on over EU migration

The European Commission isn't winning many popularity contests at the moment. The Italians are furious, and the Dutch aren't happy with it either. A recent Open Europe/Open Europe Berlin opinion poll showed that, out of 13 EU and national institutions, Germans trust the European Commission the least.

As we've noted previously, one now hears more rude things about the Commission in Berlin than in London. And sure enough, Germany is now heading for an almighty row with Brussels over EU migrants' access to benefits. 

EU Commissioner for Employment and Social Affairs, László Andor last week told Der Spiegel that migration to Germany from Bulgaria and Romania "only involves benefits for both sides." The fuss over access to benefits - and potential cost to the welfare state of EU migration - is overblown, claimed Andor.

German politicians have responded with an unusual degree of fury. The CDU/CSU faction’s spokesman for interior policy, Hans-Peter Uhl, labelled the claim “an outrageous denial of reality” and a “first-class frivolity.” In case people didn't get the message, he added that some Commissioners are as far removed from reality “as the moon from the earth” (which is about 384,000 km, so a considerable distance).

German Interior Minister Hans-Peter Friedrich also weighed in, telling Die Welt that

freedom of movement is not the freedom to change country because of higher benefits...The Commission needs to take this concern seriously.

Following a meeting of Interior Ministers this morning, interestingly, Friedrich has now demanded

a clear statement from the European Union whether we can send back those people who come to Germany to surreptitiously obtain benefits and also to prevent their re-entry

There are similar noises coming out of the Netherlands - and of course the UK. Issues related to free movement of persons are on Interior Ministers' agenda this afternoon. Expect this one to run and run.

Behind the rhetoric is Clegg preparing the ground for accepting an EU referendum?

 

Nick Clegg in a speech today sheds some light on his party's Europe policy and more specifically on his thoughts on an in/out referendum. He says:

We are no longer asking if Britain will have a referendum on continued membership, we are asking when Britain will have a referendum on continued membership.

 

The parties differ on the timing. The Conservative party want one in 2017, regardless of what’s happening in Europe at that time: it’s a date chosen for internal party management as much as anything else. The Liberal Democrats believe it will be far better to have the referendum when a serious change to Europe’s rules, affecting the UK, next arises. But we all agree that it will happen at some point or another...

If you want to know my position, it's very simple: yes to staying in Europe; yes to reforming the EU and improving our relationship with it; yes to a referendum when the time is right.

On the face of it that is not a change. The Liberal Democrats have in the past promised in/out referendums on the EU to be held at the next treaty change. Cynics would point out that when the last major Treaty change came, on the Lisbon Treaty, the Liberal Democrats were less than enthusiastic on having a referendum. But, the wording here looks like a change in emphasis, opening up the possibility of future support - in turn perhaps also opening up for another coalition with the Tories.

What else is new? Nick Clegg has also made some welcome moves in other areas. For a former MEP and supporter of the Lisbon treaty's transfer of powers to the European Parliament he is refreshingly honest about the need to reinforce the powers of national parliaments in the EU decision making process. He says:

I want to see a much more active role for national parliaments in scrutinising EU decisions and policing the principle of subsidiarity. We're still not fully exploiting the provisions made for this under the Lisbon Treaty.

Beyond this his speech has some of the normal party political aspects. For instance he accuses the Conservatives of wanting a "unilateral renegotiation of Britain’s relationship with the EU", when what most are suggesting are EU-wide solutions - but he does rather half heatedly admit that:

Of course a future British Government will be able to cobble together a package of reforms with Germany and other member states with likeminded views on European competitiveness and so on.

 Good, that is a start, so lets get on with it...

  

Richard Benyon set an example for how to achieve EU reform and decentralisation

As part of the latest cabinet reshuffle, Richard Benyon is leaving his post as UK Fisheries Minister:

As he returns to the backbenches, it's worth highlighting how Mr Benyon - with the support of MPs on the EFRA Committee, who also produced some substantial work on this issue - played a pivotal role in one of the first cases of EU decentralisation and reform, with responsibilities flowing from Brussels to member states. By leading the way in reforming the EU's Common Fisheries Policy (CFP) - until recently possibly Brussels' silliest policy of the lot - he did show that it's possible for the UK to forge alliances and achieve real change.

As a quick reminder, the reformed CFP is due to enter into force on 1 January 2014 - following final approval from national governments and MEPs. The most significant changes include:

• A ban on discard of unwanted fish, which is to be gradually enforced between 2015 and 2019. This means fishermen will be obliged to land all the fish they catch and count it against their fishing quotas - and will go a long way to end the ridiculous practice whereby fishermen in some cases threw back 90% of the fish caught. 

• Greater regionalisation of decision-making. Basically, member states bordering a certain sea basin will sort out day-to-day technical issues among themselves, based on broad principles decided in Brussels. However, the allocation of fishing quotas will remain a centralised process (so there's still scope for some reform here).

• From 2015, and by 2020 at the latest, EU fishermen will not be allowed to catch more than a given fish stock can reproduce in a given year - under the Maximum Sustainable Yield (MSY) principle.

• Annual allocations of fishing quotas will have to be consistent with longer-term management plans for individual fisheries. The rationale behind this is to try and avoid, or at least reduce, the yearly squabbling between national fisheries ministers in Brussels.

The European Commission - DG Maritime Affairs and Fisheries - should be given some credit as well since it actually had the courage to table a proper reform proposal. This is also an example of where Berlin and London hooked up to outflank the Mediterranean bloc.

So UK ministers, Brussels, Berlin and everyone else - take note.

Berlusconi virtually out of Italian parliament, but clearly not yet out of Italian politics

The Italian Senate's Immunities Committee has recommended that Silvio Berlusconi be ousted from parliament as a result of his recent tax fraud conviction. The Committee will now submit a motion to the full Senate for approval within the next 20 days. The final plenary vote is supposed to be a mere rubber-stamping exercise, so we wouldn't expect any surprise. 

A couple of quick thoughts:

• The expulsion from parliament would certainly be a hard blow for Berlusconi, but wouldn't mean the end of his political career. With all due differences, comedian Beppe Grillo has shown that it's fully possible to lead a party from outside parliament. 

• Most importantly, Berlusconi's large public support is unlikely to evaporate overnight. In the eyes of many Italians, Il Cavaliere remains the example of a successful self-made entrepreneur - and the victim of a conspiracy of left-leaning judges.

• Indeed, once the process to expel him from parliament is completed, Berlusconi will find himself with a couple more trials under way - and no more parliamentary immunity. However, he remains unlikely to spend any time behind bars because of his age.

• That said, the key aspect at this stage is perhaps what will happen to Berlusconi's party in the near future. As we noted in our previous blog posts, the confidence vote in the Italian Senate earlier this week triggered a mutiny that ultimately forced Berlusconi to an unexpected U-turn. Things seem to have cooled down a bit, but the risk of a party split off the back of Wednesday's rebellion remains. This would be a bigger setback than the loss of a seat in parliament.

• On a more general note, one of the reasons why Berlusconi still looks likely to remain a rather influential figure in Italian politics is the lack of an obvious substitute to take the lead of Italy's centre-right forces. So far, Berlusconi has to a large extent, either by hook or by crook, been able to keep his side of the political divide together. The day he leaves the stage, we may well witness the fragmentation of that side of the Italian political spectrum. The impact of such a split on the country's political stability is difficult to predict at this stage.

Handelsblatt asks, "Where is the inflation?"

That’s today’s front page of German daily Handelsblatt, with the headline asking “Where is the inflation?”

A stark reminder of what remains a key issue in German (and therefore European) politics. We could barely ever imagine such a front page in the UK, particularly when annual inflation is running at only 1.6% (August 2013).

Inside the paper there is a ten page section discussing the issue. Essentially, Handelsblatt is questioning why, when there has been such significant money printing and low interest rates in the eurozone, is there yet to be inflation. This is put in context with a comparison to the hyperinflation of the 1920’s Weimer Republic, another reminder that this episode in the country’s history continues remains firmly embedded in the German psyche.

The discussion itself is obviously hugely technical, but the paper’s explanations for why inflation is (yet) to show up is quite telling about the debate in Germany.

• Central banks only measure consumer prices – the paper essentially suggests that the usual metric of inflation, the Consumer Price Index (CPI), does not fully capture the real inflation rate since it does not include things such as asset prices and house prices.

• The increased money supply is not feeding through to the real economy – the suggestion here is that, although money supply is being increased significantly, it is not feeding through to the real economy because banks are not lending out and because people and companies are saving more. It could also be down to the fact that banks, companies and the government are deleveraging (paying off debts and reducing their size) in order to become more stable in the wake of the crisis. For these reasons, the money created has stayed within the financial system rather than leaking to the wider economy and hitting inflation – at least not yet.

• Still too early to fully judge the impact of the ECB’s policies – this seems to be linked to the argument above but the paper suggests that the low interest rates and other non-standard measures which the ECB has undertaken (such as unlimited long term loans) are yet to have their full impact. The suggestion seems to be that, as the economy recovers, the true impact of the policies will become clear.

• So, what will happen? The paper concludes that these policies are likely to have some impact and that inflation will show up at some point.

Although this is clearly just the view of one paper, the tone and line of argument here is quite telling.

Clearly, there is still concern that inflation will show up and even that it may already have and be going unnoticed. This fits with recent concerns raised by the Bundesbank that low interest rates and loose monetary policy can pump up financial bubbles and set the scene for the next crisis.

This debate is here to stay in Germany and Europe. As the ECB considers further long term lending operations (LTROs), how to deal with actions of other central banks and the large divergence in growth between Germany and some struggling countries, it could come to the fore once again. 

Are the Irish more optimistic about an austerity cure for Europe than the Germans?

A new Gallup poll for Debating Europe has asked peple all over the EU, except Luxembourg for some reason, about their views on austerity.

Now, of course, 'austerity' is rather a nebulous concept, particularly as different member states have had different experiences, while deficit cutting and structural reform all fall under the same term. Nevertheless, there are some interesting results.

The table above (click to enlarge) shows that across Europe as a whole, 51% said austerity is not working, while 34% said it is working but will take time, and 5% were sure it is already working.

Clearly, there are differences across the member states. No surprises that Greeks (80%) and Cypriots (64%) are the most sceptical about the merits of austerity. Portugal and Spain are also towards the right hand, anti-austerity side of the scale.

But look at Ireland. According to this poll, more Irish respondents (53%) think that austerity is working than Germans (42%), Finns (40%), or Dutch (39%)  - whose governments are considered to be the eurozone's most hawkish.

It is also striking that people from the new member states in central and eastern Europe, albeit outside the eurozone, have the most trust in austerity policies. The Baltics (Latvia, Lithuania and Estonia) in particular were subjected to significant austerity in the aftermath of the financial crisis yet many in these countries still support such an approach.

It is not clear what exlpains Irish optimism about austerity. It is likely to be a mixture of the fact that, so far, the Irish economy has made relatively good progress (although fears about the banks and property market still remain) and a general cultural disposition - as we noted in a paper last year, of all the struggling eurozone countries Ireland has the economic and social setup and history most likely to fit with the austerity approach.

But taken as a whole, this poll highlights the political and social scale of the challenge the eurozone faces with its current policy approach, particularly among the populations of Southern Europe.

The war on EU red tape: Will this time be any different?

The headlines above speak for themselves. From time to time, the European Commission makes an announcement that it will make EU business rules "lighter", "simpler" or "smarter". But it deliberately stays away from the terms "deregulation" or "less regulation". They are usually a mixed bag, ranging from measures with real impact to irrelevant to even involving more regulation. To date, none of these initiatives have come anywhere close to achieving less, but better EU regulation across the board, that we and many businesses are calling for.

The European Commission has now unveiled the first results of REFIT - or its Regulatory Fitness and Performance Programme. Based on a 'screening' of the entire stock of EU legislation, the Commission has set out what it's planning to do (or not do) to make EU law lighter.

So will this time be different? Well, yet again, the proposal is a mixed bag.

The good stuff:

The Commission lists a number of proposals it has already put out, and are pending approval from member states and MEPs. Some of these would have a positive impact, including:

• Making EU public procurement rules more SMEs-friendly, mainly via the reduction of the paperwork needed to bid for contracts;
• Making it easier for professional qualifications to be recognised in different member states;
• A one-stop-shop for clinical trials.

The Commission also stresses it is already carrying out (or will do so in the near future) thorough evaluations of EU regulations in a dozen policy areas. These include:

• All EU rules on health and safety at work (no less than 23 separate Directives at the moment) - though the evaluation would only be published by the end of 2015;
• EU rules on temporary agency workers (which cost the UK economy around €2 billion a year);
• The Renewables Directive, which is dated and ridiculously micro-managing.

These rules are in desperate need of revision, so well done Commission for identifying them.

The not-so-good stuff:

Dropping proposals that are dead in the water: The Commission is offering to scrap proposals that are pending and unlikely to be adopted, which of course has no tangible impact as they haven't been adopted yet. Some of the proposals identified (e.g. a Directive simplifying VAT obligations or a Regulation on the statute of a European private company) have been pending for ages and were unlikely to ever come to pass.

Turning several rules into one rule:  The Commission also puts forth several ideas for the 'codification' and the 'consolidation' of existing legislation, meaning turning different sets of rules into one set of rules. As we pointed out in the past, if you merge ten existing directives into one, you definitely make the acquis more user-friendly, which has value in itself. However, if the substance of the rules remain, the impact on business will also remain pretty much the same, so this is of limited value on the ground.

More EU harmonisation: Somewhat cheekily, the Commission has also snuck in a proposal for more EU integration in a contentious area by presenting a Common Consolidated Corporate Tax Base as an example of simplification. Now, there may be a business-case for a CCCTB, but this also seems like back-door 'harmonisation' - which is a very different thing from 'simplification'.

In conclusion, so far there are some positive steps in here, but whether it will turn into a serious, de-regulatory exercise - with real impact on businesses - will very much depend on what comes out of the Commission's review and level of follow through.
     

Why Barroso’s pessimism about achieving EU decentralisation is sort of irrelevant

The Open Europe team is back from the UK party conferences and, when it comes to the UK’s attempt to reach a new settlement in Europe, by far the most common comment we get is: “The EU Commission won’t allow it.” Particularly true amongst the Tory grassroots. European Commission President Jose Manuel Barroso’s interview today with the Telegraph will no doubt have served to reinforce this view.

He said the only way to reform the EU was to review the EU’s body of legislation, the acquis, on a case-by-case basis:

“The other one is to have a fundamental discussion about the competences of the EU, even in terms of renationalisation. I think the second approach is doomed to failure…Britain wants to again consider the option of opting out. Fine, let's discuss it but to put into question the whole acquis of Europe is not very reasonable…What is difficult, or even impossible, is if we go for the exercise of repatriation of competences because that means revising the treaties and revision means unanimity.”

Barroso is sort of misrepresenting the UK position - the debate has moved away from unilateral opt-outs, but let’s not split hairs. In addition to that, there are two reasons why you can take these comments with a pinch of salt: first, Barroso is gone in a year. Secondly, if it came to it, the Commission has a very limited role in the negotiations over brining powers back anyway.

The European Council has to “consult” the Commission and it also has limited representation in a so-called European Convention (needed for a full-scale treaty change, as opposed to a limited one), but that’s pretty much it. Still, it’s very good to have the Commission on-board of course, for a whole range of reasons (some of the stuff the UK wants outside EU treaty change will require a Commission proposal) but an antipathetic Commission is probably not a deal-breaker.

An antipathetic Barroso certainly isn't.

Italian PM Letta survives key confidence vote: What's next for Italy?

What looked like an imminent political crisis has just been defused in Italy. As we anticipated in our previous posts (see here and here), Italian Prime Minister Enrico Letta has managed to survive a vote of confidence in the Senate - the upper chamber of the Italian parliament where his Democratic Party doesn't hold a majority.

In a last-minute U-turn, Silvio Berlusconi has decided that his party would support the government after all - turning a potential showdown into a mere formality. Nonetheless, what just happened in the Italian Senate does have consequences for the future of Italian politics. Here are a couple of thoughts.

1. Letta stays on, but uncertainty remains over what his government can deliver

The first, and most obvious, immediate consequence of today's vote is that Enrico Letta can stay on as Italian Prime Minister and maintains, at least on paper, his overwhelming parliamentary majority. However, it remains to be seen what Letta and his cabinet can deliver in terms of bold, concrete measures to get Italy going again - not least because some fundamental differences between the parties forming Italy's ruling coalition will remain.

One may argue that, faced with a party mutiny ahead of today's vote, Berlusconi would have finally learnt his lesson and would think twice before triggering new crises in future. But we wouldn't rule out new coalition rows. Berlusconi is famous for his CEO-style handling of his party, and he tends to take all the big decisions on his own - which makes him a very unpredictable coalition partner.    

Another important issue is: how long will Letta stay in office for? It's no secret that both him and Italian President Giorgio Napolitano would like the current government to continue at least until after Italy's rotating EU Presidency (July-December 2014) - and then perhaps go to early elections at the beginning of 2015. This would still be much earlier than 2018, when the current parliamentary term is supposed to end.

Questions will also remain over whether, if the crisis deepened once again, Italy would really be able to gain access to the ECB’s bond-buying programme, the OMT. As we mentioned above, Letta has clearly won the day - but uncertainty remains over his government's ability to push through unpopular measures.

Crucially, the ECB has made it clear that any country accessing the OMT must have a credible government in place to enforce the necessary conditionality attached to bond purchases (very likely to involve significant structural reform and budget cuts).

2. This is not the end for Berlusconi, but he's just been dealt a hard blow 

There's another reason why today's confidence vote is significant. Looking beyond the appearances (and the last-minute coup de théâtre) Silvio Berlusconi has, in substance, seen his plan to bring Letta's government down disrupted by a rebellion from within his own party. Last weekend's decision to pull his ministers out of cabinet has therefore proved a miscalculation, and will have at least two consequences:

• Berlusconi's threats to bring the government down if he's voted out of parliament as a result of his recent tax fraud conviction are no longer credible; 

• 25 senators from Berlusconi's party have this morning announced the creation of a breakaway group in the Italian Senate, irrespective of how the rest of the party would have voted. Though far from certain at this stage, today's defectors may well decide to follow up and quit Berlusconi's party - which in turn may reduce Il Cavaliere's electoral strength.

Berlusconi has shown his resilience several times, so we are unlikely to be witnessing the end of his political career just yet - even after he's ousted from parliament. Let's not forget that polls suggest he maintains quite large public support, with the help of his control over a large swathe of the media. We wouldn't expect him to take this challenge lying down. That said, his leadership of Italy's centre-right forces has today unequivocally been put into question.

These are our preliminary thoughts. We'll continue monitoring the situation in Italy very closely, so keep following us on Twitter @OpenEurope and @LondonerVince for all the updates.

Things looking rosier for Italian PM Letta, as Berlusconi faces potential mutiny

As we argued in our post yesterday, it was "not unrealistic" for Italian Prime Minister Enrico Letta to win tomorrow's vote of confidence in the Italian Senate, even if, on paper, he didn't have the numbers to do so.

A potentially key development now seems to confirm our first impression. Carlo Giovanardi, a centre-right Senator and a senior member of Silvio Berlusconi's party (see picture), has just confirmed earlier rumours that a new pro-Letta group of 'rebel' centre-right senators is to be formed, and will support the government tomorrow.

Giovanardi said,

"We do have the numbers [to form a new group], we are even more than 40, and we firmly want to maintain the balance of the government. This is why we will give [Letta] our vote of confidence." 

Clearly a game-changer. If this new group comes through with the votes, then Letta will have a much bigger chance of winning the vote of confidence and staying in power.

Equally significantly, if Berlusconi keeps pushing for a showdown but Letta ends up winning the confidence vote thanks to defectors from Il Cavaliere's party, this will almost inevitably have consequences for the future of the centre-right in Italy.  

Keep following us on Twitter @OpenEurope and @LondonerVince for real-time updates.

Italy plunged into fresh political turmoil: End of the line for PM Letta?

UPDATE (18:15) - Silvio Berlusconi has just come out of a meeting with MPs and Senators from his party. According to reports in the Italian media, he has outlined the following roadmap: a quick vote on the 2014 budget and a couple more economic measures (Berlusconi apparently said this can all be done in one week), followed by snap elections.

Not sure this can represent a good basis for a potential compromise with Enrico Letta's centre-left Democratic Party - not least since Berlusconi's strategy seems to imply a return to the polls without changing Italy's controversial electoral law first. We explained in our original blog post from this morning why this could be a huge gamble.

UPDATE (15:45) - Italy's Minister for Relations with Parliament, Dario Franceschini (from Enrico Letta's party) has just confirmed that the Prime Minister will address the Italian Senate on Wednesday morning and the Chamber of Deputies on Wednesday afternoon.

However, Mr Franceschini also stressed that a confidence vote after the debate is "very likely", but will ultimately "depend on how the debate will go". We think there are two possible interpretations here, depending on whether one wants to see the glass half full or half empty:

1) Mr Letta is still confident Berlusconi could backtrack on his plan to bring the government down;

2) If, based on the statements made by the various political groups during the debate on Wednesday morning, Mr Letta were to deem the confidence vote in the Italian Senate absolutely impossible to win, he may decide to skip it and tender his resignation straight away.

ORIGINAL BLOG POST (9:30)  

For regular readers of this blog (see here, here and here), Silvio Berlusconi pulling the plug on Italy's fragile coalition government was just a matter of time - especially after his conviction for tax fraud. On Saturday, Il Cavaliere ordered ministers from his party to resign and called for snap elections.

The official reason for doing so was the Italian government's inability to scrap a VAT increase planned by the previous technocratic cabinet led by Mario Monti, due to kick in tomorrow. However, it would be naïve to see no correlation with the fact that Berlusconi is to be ousted from parliament within the next few weeks as a result of his tax fraud conviction. 

So what happens next? The moment of truth will be on Wednesday, when Prime Minister Enrico Letta will seek a vote of confidence in both chambers of the Italian parliament. The key vote will be the one in the Senate, the upper chamber, where Mr Letta's centre-left Democratic Party does not command a majority on its own.

Scenario 1 - Letta survives the confidence vote in the Senate

Tough, but definitely not unrealistic. Letta needs around 20 Senators from either Berlusconi's party or Beppe Grillo's Five-Star Movement to break ranks and support him. Over the past few days, politicians from both parties have hinted at possible defections. Crucially, after tendering their resignations, four of Berlusconi's ministers have expressed reservations over their leader's decision to open a new political crisis at this stage. All this suggests Letta does have a chance of winning the vote in the Italian Senate, and staying in power with a different, albeit thinner, parliamentary majority (and after a rather substantial cabinet reshuffle).

However, this would only be a temporary fix. With his new majority, Letta could try and address a couple of urgent issues (a reform of Italy's tortuous electoral law and the budget for 2014 are the most obvious) - and perhaps plan for early elections at some point next year.  

Scenario 2 - Letta loses the confidence vote

If Letta loses the confidence vote, he will have to resign. As we explained several times, the ball would then be in Italian President Giorgio Napolitano's court. Napolitano would have to hold talks with all the political parties and then make a decision: task Letta himself or someone else with forming a new government, or dissolve parliament and call new elections.

New elections in Italy can take place no less than 45 days after parliament is dissolved. The risks of a quick return to the polls are obvious. Voting again with the same electoral law may well lead to another inconclusive outcome - meaning that Italy could be facing a few months of political paralysis at a time when the country can least afford it. As if things were not complicated enough, the electoral law is currently also being examined by the Italian Constitutional Court, with a ruling expected in early December - and is at risk of being declared at least in part unconstitutional.

This is where we are at. Clearly, none of the two scenarios would provide the medium-term political stability Italy needs to get its act together - which in itself is not great news for both the country and the eurozone as a whole. Everything will depend on how Wednesday's vote of confidence goes.

Follow us on Twitter @OpenEurope and @LondonerVince for all the updates. 

Almost a third of Austrians set to vote for anti-euro parties

Chancellor Werner Faymann (R) & Frank Stronach (L)

Chancellor Werner Faymann (R) & Frank Stronach (L)

Hot on Germany’s heels, Austria is up with its national election on Sunday.

Austria is currently governed by a ‘grand coalition’ of Chancellor Werner Faymann’s centre-left social democrats (SPÖ) and the centre-right People’s Party (ÖVP) lead by Michael Spindelegger. Polls put SPÖ at about 27% and the ÖVP 23% –  theoretically enough secure a return to office.

But it’s not going to be an easy ride. Posing a significant challenge, for example, is the euro-critical and anti-immigration Freedom Party (FPÖ), which is polling at 21% – in the last parliament it got 17% of the votes. Meanwhile, the Green party  is polling at 14% and the newly-formed free market, anti-euro ‘Team Stronach’ is polling at 7%. The BZÖ, a far-right split-off of the FPÖ, polls at about 2 - 3%, and in the last election won a staggering 10.7% of the vote (see table below).

Party	Share of vote in 2008 national election (%)	Current polling projection (%) (Karmasin/Profil Poll, 24.09.13)
Social democrats (SPÖ)	29.3	27
People’s Party (ÖVP)	26	23
Freedom Party (FPÖ)	17	21
The Greens (GRÜNE)	10.4	14
Team Stronach	N/A	7
Alliance for the Future of Austria (BZÖ)	10.7	2

Most election-watchers believe a continuation of the current coalition is the most likely oucome. (One Austrian polling analyst gives this a 76% chance). But the result will also be dependent on how many of the smaller parties make it over the 4% parliamentary threshold. The two main parties could also turn to the Greens to prop up their coalition. Having said that, the Greens oppose the EU's Fiscal Treaty, which may throw a spanner into the works.

So the more interesting element of this election, then, is that about 30% of Austrians are projected vote for the FPÖ, Team Stronach and the BZÖ: all parties who officially support the break-up of the eurozone .

More about their policies below:

The FPÖ, supports an Austrian exit from the eurozone and a referendum on the eurozone bailout fund ESM.

The BZÖ, supports Austria leaving the euro and joining a Northern eurozone with Germany, France and the Netherlands.

Team Stronach, founded by Austro-Canadian billionaire Frank Stronach a year ago, has done some flip-flopping on the euro. It initially floated the idea of eurozone countries having their own currencies, with the euro as a parallel currency. But now, the party's manifesto states that it wants to “revise, abolish or reconstruct” the euro. In its own words, it has an "explicitly eurocritical position,” and that “the artificial unification of Europe has failed.” It’s won over 10% in regional election – not so bad for a newcomer.

Similar to Germany, a grand coalition government would mean no big shift in Austria’s eurozone policy. So the real significance of this election, then, is that in Austria –a nation whose economy is key to underpinning the euro –  almost a third of voters want to leave it behind –  or at least vote for a party that does.

For additional analysis on the Austrian National Election see a blog post by our partner organisation, Open Europe Berlin.