Could a different type of EU have avoided the Crimean crisis?

Over on Conservative Home Open Europe's Christopher Howarth wrote the following article:

Firstly, a disclaimer: Russia is 100 per cent responsible for its invasion of the Crimea, just as Germany a hundred years ago was for responsible for invading Belgium. Nothing dilutes these facts. However, just as historians disagree as to whether the First World War could have been avoided, it is legitimate to look at whether a better handling of the Ukraine crisis by the “West” generally – and the EU specifically – could have led to a different conclusion.

We need to understand what Russia wants. It has two aims – safeguarding its Black Sea Fleet base in Sevastopol (for emotional as well as strategic reasons) and maintaining a friendly compliant government in Ukraine willing to keep the border open to Russian trade and people. Under both Timoshenko and Yanukovych, this is exactly what Russia had.

So what has caused the current crisis? Russia’s naval base is on a lease, so for now it is protected, but Russia fears that a pro-western Ukrainian Government, joining NATO and the EU, could jeopardise its operation. These fears maybe overdone, but a more potentially serious threat comes to Russia’s trade in the form of Ukraine’s potential EU membership.

The EU is a customs union, which means that its external trade is decided collectively around an external customs wall – the crucial difference between it and a Free Trade area. But as well as being a customs union, the EU has become a political construction with a defence element including a mutual defence guarantee mirroring that of NATO – inserted via the Lisbon Treaty. So from a Russian point of view the EU no longer an economic club, but more a political and defence power block synonymous with NATO. Indeed, Russia is so impressed by the EU as a power block it has sought to imitate it in its own Eurasian Customs Union – which it had hoped Ukraine would join.

EU and candidates and Eurasia and its candidates

Looked at from the inside, the EU eliminates borders, creating an area free of customs, visas and – within Schengen – all border controls. This however comes at a price, and the price is often paid by the EU’s neighbours. We have seen this before in Moldova. Prior to Romanian EU accession, Moldovans could freely travel to Romania but after Romania joined this came to an end – Moldova was on the wrong side of the EU’s external frontier. Unsurprisingly, Russia would not wish for the same on its border with Ukraine.

Ukraine is therefore caught between two opposing power blocks. For many years, Ukraine managed to balance the competing interests and different aspirations of both its Russian and Ukrainian speakers. From Moscow’s point of view, it was working: Ukraine had leaders who accepted Russian largess in exchange for influence, renewed their lease on Sevastopol, kept trade moving and allowed Russians and Ukrainians to travel visa free – something that Ukrainian EU membership could put in danger.

It should therefore have been possible to predict that Russia would react badly to further moves by Ukraine towards the EU. Despite this, no effort seems to have been made either to dampen Russian influence by shoring up Ukraine’s finances, thus enabling them to make the jump, or alternatively to mollify and reassure Russia. We were left to watch as an EU deal with no immediate cash offering was outbid by hard Russian cash with a bankrupt Ukrainian President taking his country swerving to the east. The reaction in western Ukraine was predictable, as was the Russian reaction when protesters hostile to the Russia seemed to take control.

Even at that point, not all was lost for Russia. Ruslan Pukov, a graduate of the Russian Ministry of Foreign Affairs, points out in the New York Times that Tymoshenko was originally Russia’s favoured candidate, that her re-election in an early poll would for Russia have been a reasonable outcome – and for that pro-Russian electors from Crimea within a united Ukraine would help. Speeding up the signing of the EU’s Ukrainian Association Agreement and the pronouncements of some EU foreign ministers about Ukraine’s EU membership potential (however genuine or not) have, however, fanned the fears of those in Russia who feel that Ukraine is on route to being “lost” into an opposing and not necessarily friendly power block. Russia’s preferred option would be a pro-Russian Ukraine. If Russia annexes Crimea, it may look like a Russian victory but in reality would be an admittance of a wider failure.

It is for Ukraine to decide whether it should join the EU. If that is their settled wish, we should not shut the door just to appease Russian sensibilities. Nor should we confuse justifiable anger at corruption (often linked to Russia) with a genuine love of EU integration shared by all Ukrainians. For now, we should help Ukraine improve its standard of government, help it strengthen its economic independence (one way could be through shale gas development) and do what we can, through sanctions, to dissuade Russian aggression. But we should be aware that the makeup of the EU, the nature of its integration and enlargement, combined with ‘all or nothing’ decisions being forced on the Ukraine by both the EU and Russia, have polarised Ukrainian politics and are having consequences.

In the longer term, it is time for the EU to rethink how it deals with its neighbouring states. Those that have chosen not to join the EU or border the EU but will never join deserve better than the imposition of a hard frontier dividing them from historic partners. If the price of EU integration within is division without, someone will pay the price. If the EU was not so rigid, did not require conformity with everything and offered a genuine partnership status that could work for Ukraine without antagonising its other neighbours, it might be a form of membership that others could take up – including, someday, even Russia.

EU free movement: Denmark is in an almighty mess

After the UK, Denmark is now the country in which the intersection of the single market, social security and domestic politics looks the most complicated and contentious.

EU migration has become front-page stuff in Denmark. We're talking papers publishing a comprehensive list of the benefits EU migrants are entitled to, complete with the cost to the Danish taxpayer (2 billion Krona or €270m per year - according to Ekstra Bladet).

The reason is that Denmark has hit a bit of a perfect storm involving the complex interaction between EU law and three separate subsidies: child benefits, student grants and unemployment benefits. Basically, Denmark is accused of breaking EU law in all three areas:

Child benefits: In 2010 the then centre-right Danish government introduced a requirement for EU citizens to have worked in the country for two years before being entitled to claim benefits for their children (the "børnecheck"). The European Commission said last year this practice violates EU law, forcing the Danish minority government to seek to bring the rules in line with EU law. However, the opposition has so far refused to support a proposal to make EU migrants eligible for child benefits from day 1.

Student grant: In Denmark, students pay no tuition and are eligible for a grant while they study. In a ruling last year, the European Court of Justice said EU students must also be eligible for the grant - a very controversial ruling for various reasons (not least since few students from elsewhere in the EU seem interested in sticking around once they are done studying).

Unemployment benefits: According to figures from the Danish government, EU migrants are less likely to claim social benefits than the national average, but more likely to claim unemployment compensation (though the margins are small). The perception that EU migrants claim more of this benefit than natives is political dynamite. In response, the Danish coalition is planning to tighten access to unemployment benefits, by requiring Danish language courses, a mandatory call for availability to work and stricter requirements to be domiciled in Denmark.

The European Commission has hit back against these changes, calling them "illogical". And to add fuel to the fire, Copenhagen may soon be forced to change its existing rules on unemployment benefits (Under Danish rules, EU citizens must have worked three of their past 12 months on Danish soil before being eligible for the "dagpenge").

In a case likely to set a precedent for Denmark, the Commission has taken Finland to the ECJ over similar rules. The Danish government this week submitted its own defence in support of Finland but diplomats in both countries think they might well lose, meaning the rules have to change.

All of this is creating a very awkward situation for Danish Statsminister Helle Thorning-Schmidt. So far she has insisted on EU law needing to be respected - but Danish voters are aware she's also eyeing a top EU job in the EU institutions later this year and cynicism is growing.

Needless to say, the Danish People's Party has had a field day, saying stuff like:

“Either our entire welfare system collapses or the EU rules are changed. I would prefer the latter.”

DPP (DF) is now at over 20% in some polls and could win the European elections. 

So what does this mean for David Cameron? Well, he can take heart in the fact that one country faces a greater legal - though certainly not political - dilemma over EU migration than he does. Logic would suggest that Denmark is a strong, potential ally to the UK in reopening, say, the EU Social Security Regulation (which regulates access to a number of benefits, including child benefits).

Worryingly for Cameron, this is not quite how some people in Copenhagen see it though. But, we must say, it would be an accomplishment for the UK government to fail to sign up the Danes' support on this issue.

The Danish situation is seriously messy. 

Book review - George Soros 'The Tragedy of the European Union: Disintegration or Revival?'

Over on his Forbes blog, Open Europe’s Raoul Ruparel provides a review of George Soros’ latest book ‘The Tragedy of the European Union: Disintegration or Revival?’ off the back of the event we hosted with him last night (the full write up of which can be found here).

The abstract of the book notes:

“The euro crisis was not an inevitable consequence of integration, but a result of avoidable mistakes in politics, economics and finance; the excessive faith in the self-regulating financial markets that Soros calls market fundamentalism inspired flawed institutional structures that call out for reform. Despite the considerable perils of this period, George Soros maintains his faith in the European Union as a model of open society.”

In his interviews Soros focuses on the failings of Europe during the eurozone crisis – specifically looking at the structural flaws in the euro and the role of Germany. Soros posits that the crisis could have been averted, or at least ended earlier, if Germany had taken the lead in the eurozone and allowed for greater solidarity through fiscal union. He also suggests the future of Europe could be marred by on-going political crises and economic stagnation if these flaws are not corrected.

Raoul argues that:

“His comments in general are interesting and for the most part accurate. However, he remained overly optimistic on the prospects for the euro despite these flaws and even called on the UK to join the single currency.”

“In particular there seems to be an inconsistency between his desire for greater centralisation and a firm grounding in democracy and an “open society” (which is transparent and responsive). It seems that behind Soros’ approach is the assumption of a European demos. However, I fundamentally believe that this is simply not the case.”

“While I do not believe the goals Soros outlines are readily achievable at this point in Europe, the one thing that comes through during the book is that this is not a policy proposal but a pitch to try to bring the reader round to his ambitious goals for Europe despite the current problems.”

One part which isn’t discussed on the blog is Soros’ view of the UK’s position in the EU. At our event he described the UK’s current position as “the best of both worlds” and called on it to rediscover its “European identity”. This comes through in the book as well, where he warns against a Brexit and accuses the UK of “blackmailing” the rest of the EU with the threat of an exit.

However, it doesn’t entirely fit with his broader view of the EU and the eurozone, which he believes needs much deeper integration. If that were to happen (and it is to some extent albeit more slowly than Soros would like) it would fundamentally change the UK’s position in the EU and the makeup of the EU itself. He seems to review the UK’s position in a much more static way than he does the EU and euro which he views as largely fluid.

This context also makes his “blackmail” comments a bit strange since part of the UK’s move is in response to the crisis. It also does not fit with his idea of an open society and democracy, given that many in the UK are keen to see a reformed EU and a referendum.

Nevertheless, it’s an interesting book and certainly worth a read if you’re looking for an overview of the current crisis and some historical factors around it as well as thoughts on the future.

Miliband’s EU pledge divides UK media – but is largely ignored in Europe

There is this much chance we will hold an
EU referendum if I'm Prime Minister

Ed Miliband’s intervention yesterday – in which he said he would only hold an In/Out referendum in the event of a new EU Treaty transferring specific powers from the UK to Brussels – has, as expected, divided commentators and media opinion in Britain.

Echoing a similar point we made in our response yesterday, the Telegraph’s leader describes Labour's new policy as a "classic fudge" and argues that:

"Effectively, Mr Miliband is offering either more Europe or no Europe... The Tories and Labour like to give the impression that they have fundamentally different policies. But they are, in truth, remarkably similar”.

Also in the Telegraph, Peter Oborne argues that the new policy is

"by far the biggest mistake of [Miliband's] leadership... [this] unforced error is a priceless gift for David Cameron because it amounts to an unequivocal vindication of the Prime Minister’s decision last year to promise a referendum on Europe after the election.” 

However, on Conservative Home, Lord Ashcroft warns that Miliband’s announcement could lure the Tories into talking only about one thing – Europe, arguing:

“the Conservative Party would not only be missing the chance to talk about the things most voters care about more, like the economy, jobs and public services. It would also, as far as these voters are concerned, be proving again the out-of-touchness (outness of touch?) of which it has for so long been accused." 

The Sun has commissioned a snap YouGov poll which found that 50% of voters disagreed with Miliband’s pledge to only hold an in/out referendum if more powers are transferred to the EU – a move he admits is “unlikely” - while 32% backed his policy but nearly twice as many people regard it as a cowardly move rather than a bold one. The Sun's leader argues that the wait-and-see approach has made Miliband “even more unpopular” with voters and the paper concluding that he'd have been better off "keeping schtum".

The FT broadly endorses Miliband's speech though echoes our caveat that “Mr Miliband’s policy does not guarantee the British people the right they should have to an in-out referendum if the bloc ultimately redesigns the way it operates in the wake of the eurozone crisis.”

In a less coherent leader, the Guardian argues that Miliband is desperate to avoid having to deal with a referendum if elected as:

"Trying to avert an "out" vote would drain all energy from anything else a Miliband government might want to do; enduring one would sink it entirely."

What about European media? Well, surprisingly, Miliband has been largely ignored. There’s almost nothing at all in the German press, though Der Spiegel's Carsten Volkery – not known for being the Tories' greatest fan – argues that:

“Chancellor Angela Merkel, French President François Hollande and the EU Commission should now secretly have their fingers crossed for Miliband. For all public expressions of sympathy for Cameron’s reforms, the British referendum seen as a massive nuisance in the rest of the EU.”

Walter Oppenheimer, London correspondent for Spanish daily El País, writes that Miliband's decision not to hold an EU referendum:

"It is, however, a very calculated risk: it can cost Miliband some votes – and who knows whether those votes can cost him the election – but leaves his hands free if he manages to get into Downing Street."

The French press has almost nothing bar news agency write ups, ditto in the Italian and Spanish press, although Miliband got a couple of hits in Switzerland. The speech was picked up by the Polish Press Agency but they focused on the immigration/access to benefits angle and completely ignored the wider referendum issue. The Nordics are quiet too, despite Swedish Foreign Minister Carl Bildt trying to weigh in on the debate yesterday.

We won’t pass judgement as to why Europe has so profoundly ignored Miliband.

Ed Miliband confuses with a new EU referendum lock he says is "unlikely" to be triggered

Ed Miliband will today set out the Labour Party's position on an EU referendum. Previewing his speech in today's FT, Miliband says:

"I am announcing that the next Labour government will legislate for a new lock: there would be no transfer of powers from the UK to the EU without a referendum on our continued membership of the EU."

So, unlike the existing 'referendum lock' put in place by the Coalition, it would not simply be a referendum on a specific transfer of power to the EU or treaty change but would mean that any proposed transfer of powers to the UK would trigger a straight In/Out vote.

It is not entirely clear whether Labour would therefore repeal the existing referendum lock and replace it with theirs. If not, we might be faced with the strange situation of two referendums - one on the specific treaty change and one on whether to remain in the EU altogether - with no guarantee that they would go in the same direction. If they do replace it, then we could be left with a much blunter instrument, where any transfer of power requires an In/Out referendum. Far from ideal if you wish to stay in the EU but also want to push for reform or dislike the transfer of power on offer.

Miliband himself notes that it is "unlikely" that his referendum lock will be triggered, emphasising that "there are no current proposals – from either the EU or any member state – for a further transfer of powers from Britain. Therefore it is unlikely there will be any such proposals in the next parliament." However, what would happen if, for example, the fiscal compact were to be incorporated into the EU treaties as is envisaged? This would not be a transfer of powers per se but would potentially alter the UK's relationship with the EU substantially.

In the rest of the article Miliband is keen to stress his reform credentials, saying that:

"I know the reputation of the EU is, with reason, at a low ebb. If Britain’s future in Europe is to be secured, Europe needs to work better for Britain. And Britain needs to work more effectively for change within the EU."

Labour has so far been rather vague about its proposals for reform. The Labour leader cites three main areas in his article. On economic competitiveness:

"Europe must do more to address common economic challenges by improving competitiveness, tackling youth unemployment and building an economy that better promotes prosperity."

On EU migration:

"A Labour government would work with our EU partners to lengthen the existing transitional arrangements for countries joining the EU so that their citizens have to wait longer before gaining rights to work here. There should be reforms to rules allowing people to claim child benefit or child tax credit when their children live abroad. And we should look at ways to make it easier to deport people who have recently arrived in this country when they commit crime."

On the democratic deficit:

"The agenda for change, however, must address people’s concerns about how power is exercised in the EU. This means giving back more control to national parliaments. And it means responding to concern that the EU is intent on an inexorable drive to an ever closer union. I am clear this is not Labour’s vision for Europe."

These proposals all sound very much like what David Cameron, and others, have been saying on EU reform.

But, on Labour's conditions for a referendum, it remains to be seen what political impact it will have. On the one hand, Miliband has raised the prospect of a vote (presumably in an attempt to avoid accusations of denying people a say). But, with the other, he is saying that the likelihood of his conditions ever being met is very small. What will the British electorate and other EU governments make of that?

Irony alert: Farage could be the biggest loser if Le Pen and Wilders manage to form a new anti-EU group in the European Parliament

Belonging to a group in the European Parliament matters. Groups receive money on top of individual MEPs' allowances and are given additional group staff. It also boosts chances of representation on committees (where EU laws are discussed and amended before they are put to a vote in the plenary).

Therefore, the prospect of Marine Le Pen, the leader of France's Front National (FN) and Geert Wilders, the leader of the Dutch Freedom Party (PVV), forming a new anti-immigration, anti-EU group in the next European Parliament is causing some distress around Europe. When this was last attempted - with the so-called Identity, Tradition, Sovereignty (ITS) group - it quickly fell apart. The Greater Romania Party (PRM) didn't quite approve of Alessandra Mussolini - the granddaughter of you-know-who - labelling Romanians "habitual law-breakers" and thus withdrew from the group. Rather telling.

So will Wilders and Le Pen succeed to unite parties that, per definition, don't always like each other? According to EU rules, 25 MEPs from at least a quarter (seven) EU member states are needed to form a group.

By our count, at least four more parties from as many EU countries look willing to join forces with FN and PVV: Italy's Lega Nord (who currently sits in the same group as UKIP), Belgium's Vlaams Belang, the Austrian Freedom Party (FPÖ) and the Sweden Democrats (whose leader today said they are considering joining). This leaves FN and PVV only one party and country short.

This could be filled by, for example, the Slovak National Party (SNS) - which is pretty hardcore, and currently sits with UKIP. Bulgaria's Ataka would probably also be quite keen to join, though Le Pen recently called the party "the real extreme right" (not meaning it favourably). Greater Romania may struggle to reach the 5% national threshold needed to win seats in the European Parliament, but could be another possibility.

The Danish People's party has said it won't join the group, while Greece's Golden Dawn and Hungary's Jobbik seem to be off-limits for everyone.

So this might come down to the wires. An interesting twist, though: if Le Pen/Wilders succeed, this could mean problems for Farage. UKIP currently sits in the Europe of Freedom and Democracy (EFD) group - which includes 31 MEPs from twelve different countries, but:

• Farage could lose several MEPs from Italy, with Lega Nord joining FN and PVV, and the other Italian, Magdi Cristiano Allam, standing for re-election with a different party (Fratelli d'Italia);
• The Slovak National Party might join the Le Pen/Wilders group in the end;
• The (True) Finns are talking to the European Conservatives and Reformist (ECR) group, where the UK Conservative Party sits;
• The two Greek MEPs in UKIP's group are from LAOS - a party which is currently polling below the national threshold of 3%. This means their re-election is not certain;
• In addition, seven out of twelve EU countries in UKIP's group are currently represented by only one MEP.

So Farage could need both new parties, additional MEPs and more countries to be able to set a group after May's European elections. And if not managing a group of his own, where will he go? Will he reconsider his decision not to join forces with Marine Le Pen, something he ruled out in the past  when he said UKIP and FN are from "completely different political traditions and background"?

What is clear is that the formation of political groupings in the European Parliament will be a messy affair - and then we haven't even begun to discuss the ECR...

EPP manifesto: EU migrants should be allowed to access benefits only if they've worked in the country where they live

At its Congress in Dublin on Friday (which also saw U2's Bono delivering a speech), the European People's Party (EPP) officially nominated Luxembourg's former Prime Minister Jean-Claude Juncker as its leading candidate for European Commission President.

More importantly, the EPP also adopted its manifesto for the upcoming European Parliament elections. You can read it in full here. We would just like to draw your attention on the following paragraph:

Free movement of people within the European Union is one of our greatest achievements together, and we are committed to ensuring it remains so [...] However, we are against social fraud - social benefits for EU citizens should only be available if they have worked in the country where they live.

This shows how, once a clear distinction between free movement of workers and free access to other EU member states' welfare systems is made, many are in favour of the former - but many are also wary of the latter.

The EPP includes over 70 parties from 40 different European countries. This suggests the UK is far from alone when it comes to a desire to reform the rules on EU migrants' access to benefits - or at the very least when it comes to admitting there is an issue at hand. Whatever the outcome of the European elections, this will be one topic that will not go away. The next European Commission and Parliament would do well to tackle it head-on, rather than skirting the issue. 

ECB stands firm but looks to wider measures

Over on his new Forbes blog, Open Europe’s Head of Economic Research Raoul Ruparel lays out his take on why the ECB decided to stand firm despite the apparent deflation threat,

“My feeling is that there are two broad reasons. The first being that the flow of data is mostly positive, and the second, more important factor, being that none of its tools are economically, politically or legally suited to tackling the low inflation environment in the eurozone.”

He concludes,

“All in all then, the tools at the ECB’s disposal are far from suited to helping push up inflation in the struggling countries and boosting lending to the real economy to help economic growth. This is not to say the ECB would never use them, but that are better suited to a deeper more acute crisis (such as a break-up threat) than the chronic long term malaise which the eurozone currently finds itself in.”

These are themes we’ve explored plenty of times on this blog so won’t rehash here.

But there were a couple of other interesting points to come out of ECB President Mario Draghi’s press conference though.

The first being his mention of a new dataset which the ECB is looking at, specifically the “the high degree of unutilised capacity” in the eurozone economy. This refers to the ‘output gap’, i.e. the amount by which GDP in the eurozone has fallen below potential GDP. As you might imagine, estimating such a gap is fraught with difficulty and estimates are notoriously revised retrospectively (for example before the crisis few economies were seen performing above potential despite huge financial, real estate and debt bubbles).

Why is this important? Well, it could be the first step towards a more firm GDP target on the part of the ECB. Admittedly, it’s a small step and a full GDP target is unlikely but it could be an interesting shift for the ECB which has traditionally focused more on inflation, money market and private sector survey data (such as the PMIs). As Draghi himself said, it also shows that monetary policy will stay looser for longer, even if the data improves, due to the large gap between actual and potential GDP. It will be interesting to watch how this one develops over the next few meetings and whether the ECB decides to put any more emphasis on this measure.

UK Govt migration report: So does immigration have an impact on jobs?

Open Europe's chosen title for migration was
"tread carefully"

The UK Government has (finally) published its review of evidence on the effects of migration on the jobs of "UK natives." (Note this is not the long-awaited Balances of Competences report on EU free movement, which has yet to be published).

This report focused purely on the labour market. Clearly migration has a wider ranging impact such as lowering prices for consumers, potentially boosting economic growth, placing greater pressure on public services, and posing the challenge of integration within communities.

So what does today's report conclude?

Well, unsurprisingly, it found that the effects of migration are very difficult to determine - the review is more a summary of existing research than an attempt to come to a hard conclusion. When we looked at EU migration, we also found it difficult to come to decisive conclusions but it is clear that the impact of migration on the labour market is much more complex than the intuitive view that there is a fixed number of jobs in the economy.

There are some interesting findings in today's report. In general it found:

"There is relatively little evidence that migration has caused statistically significant displacement of UK natives from the labour market in periods when the economy is strong."

 With regard to EU migration specifically, the Government's report concludes that:

"To date there has been little evidence in the literature of a statistically significant impact from EU migration on native employment outcomes, although significant EU migration is still a relatively recent phenomenon and this does not imply that impacts do not occur in some circumstances."

This is consistent with the view in economic theory that: "In the long term, it is argued that there is no negative impact on wages or employment of native workers as, over time, economies find ways to adjust to a stable equilibrium." But this overall impact can however mask temporary impacts or impacts on sections of the labour force. They argue for instance that:

"Where displacement effects are observed, these tend to be concentrated on lower skilled natives".

And their evidence also points to variations in impact at different points in the economic cycle suggesting:

"that the labour market adjusts to increased net migration when economic conditions are good. But during a recession, and when net migration volumes are high as in recent years, it appears that the labour market adjusts at a slower rate and some short-term impacts are observed."

So was Theresa May wrong to claim UK natives' jobs were lost due to migration? There has been a lot of discussion about the veracity of the Migration Advisory Council (MAC)'s analysis the Home Secretary relied on to claim 23 UK natives' jobs were lost for every 100 non-EU immigrants. Today's report interestingly includes what is politely called "additional testing" of the MAC results to see if this was indeed true. The additional testing "revealed that the main result remains robust to a number of tests." But they found that: "When data from part of the period of economic downturn (2009 and 2010) were omitted, the impact of non-EU migration was not found to be statistically significant."

This corresponds to a low point in the economic cycle and bears out an observation we made in our report that, when jobs were being lost in the economy during the recession, UK natives lost out disproportionately but that otherwise the effects of migration are probably about neutral. This could perhaps be due to the places where jobs were being lost in the downturn (finance and traditional industries) and created or retained (other service industries).

So was Theresa May right? In the narrow sense, yes. The study highlighted that migration can disrupt the labour market in the short term. And it is this issue - that the neutral or positive long-term aggregate effects of migration can mask short-term losers, such as those who face greater competition in a recession or specific groups such as the low skilled - that continues to make migration such a politically sensitive issue across the entire political spectrum.

Could Ukrainian shale gas break Ukraine's dependence on Russia?

Could Ukraine's shale gas turn the tables on Russia?

Ukraine is currently both dependant on Russian gas imports (60% of Ukrainian gas comes from Russia) and a major transhipment route for gas to Russia's export markets in the EU. This has historically put Ukraine in a weak position vis-a-vis its eastern neighbour. A fact underlined in the last few days when Gazprom increased the price it charged following the change of government in Kiev, forcing Ukraine to seek emergency finance from the west.

This could however change. Ukraine has two large shale gas deposits, one (the Lubin basin) in the Ukrainian speaking west and another (the Dniper-Donets basin) in the Russian speaking east. The eastern one has, according to the energy consultancy Advanced Resources International, nearly 76 trillion cubic feet (Tcf) of potentially recoverable gas, the western basin shared by Moldova and Poland another 72.5 (Tcf). For context, the same consultancy suggests there are 26 Tcf in the UK and 136.6 Tct in Poland.

Ukraine is in the middle of Russia's export pipe line to the EU

These deposits are therefore sizeable and close to existing pipelines making both production for domestic consumption and export possible. If Ukraine could attract investment to develop these fields then it could measurably improve its energy and economic independence from Russia.

However, Ukraine should not get its hopes up quite yet. Although large in themselves the deposits are small by US standards (they have 1,161 Tcf  of technically recoverable shale) and for that matter Russian (285 Tcf). It is also unlikely they could come on stream in the near future.

The eastern gas deposit falls within
Ukraine's Russian speaking regions

The larger, more obvious problem is political instability. The eastern basin falls exclusively in the Russian speaking part of the country and until the impasse with Russia is broken it is unlikely international energy companies would want to sink the investment needed into an unstable political environment. So if energy independence could help Ukraine escape from Russia's orbit and calm the political crisis, it cannot do so until it has settled its current dispute with Russia. Of course Russia knows this too and Ukraine's shale reserves therefore present another factor in this deeply complicated and difficult geopolitical standoff.

Will EU leaders agree on sanctions for Russia?

EU leaders have arrived in Brussels to discuss the situation in Ukraine, the details of the €11bn aid package announced by Barroso yesterday and how to respond to the Russian occupation of Crimea. At PMQs yesterday, Cameron said that the EU should "display a unity of purpose" and "speak with a clear voice". So what are the prospects for that? We look at the positions adopted by the key players below:

UK: Although it appeared that the UK was ruling out taking supporting strong economic sanctions on the basis of a leaked memo on Monday, since then both Nick Clegg and David Cameron have all said that no economic and diplomatic measures would be off the table. Foreign Minister William Hague indicated yesterday today that "we can’t make progress on that, then of course there will be costs and consequences [for Russia]". Interestingly, he added:

"I think the UK and France are very closely aligned. The Prime Minister has held discussions with President Hollande and with Chancellor Merkel over the last couple of days by telephone."

Germany: As ever the one to watch. The government has hinted that sanctions could be on the table but Foreign Minister Frank-Walter Steinmeier has stated his preference for a political solution and warned against "adding even more fuel to the fire." There is a lot of resistance to sanctions in Germany, and not just in the SPD which has traditionally been seen as favourably disposed towards Moscow. Senior CSU MP Peter Gauweiler, said that:

“If Germany and Russia had a good relationship, then that would be good for Europe. We are looking for a partnership with Kiev, but just as much with Moscow too." 

The German Chambers of Commerce and Industry (DIHK) has warned against sanctions on Russia, saying they “could significantly harm Germany”. Germany's relatively strong dependence on Russian energy sources (30% of its gas and 35% of its oil) as well as its strong exports to Russia (€76.5bn of trade between the two countries annually) give it a strong incentive to avoid wide-reaching economic sanctions.

France: President Hollande has said that, “Russia has taken the risk of a dangerous escalation” – and spoke of the possibility of sanctions, but did not specify what kind, although Foreign Minister Laurent Fabius said they could be "significant".

Italy: Italian Foreign Minister Federica Mogherini has said “the option of a military solution doesn't exist”, but the government's official position is that violations of Ukraine’s sovereignty and territorial integrity “would be totally unacceptable for Italy”. In principle, Italy would back targeted sanctions on Russia. Similar to Germany, though, the approach is more doveish due to higher dependency on Russian gas.

Spain: Spanish Foreign Minister José Manuel García-Margallo said today that Spain would support targeted sanctions, given that it endorsed the conclusions of the meeting of EU foreign ministers on Monday. Then he added, “I said and I say that we wish that the situation calms down and the de-escalation happens” – so the EU is not obliged to resort to sanctions.

Poland: Along with Sweden, Poland has taken the toughest stance on the Ukraine issue. Speaking in parliament yesterday afternoon, Prime Minister Tusk did not pull his punches; he demanded that the EU uses all the tools it has at its disposal, in effect calling for wide-ranging sanctions on Russia, adding that Poland was prepared for this eventuality having stockpiled significant gas reserves. He also made a pointed reference to Europe's "catastrophic" experiences with appeasement in the past.

Tusk: EU needs to be determined and use all its available tools not in order to escalate the situation but in order to de-escalate it
— Pawel Swidlicki (@pswidlicki) March 5, 2014

It now appears likely that some measures will be taken against Russia, the question is how wide ranging these will be. We assess the likelihood of a number of options in the table below:

What is clear so far is that there remains several different views among EU governments on how large a stick they should wield. The upshot is that the US will probably be forced to take the lead role in confronting Russia.

ECB preview - ECB may take limited action but shy away from serious intervention

As we noted last month, a lot has been pinned on the March ECB meeting, with the release of new data potentially facilitating further easing action.

But on the eve of the meeting, analysts remain split, although the sense is that the pressure for significant action is easing. February’s inflation data came in above expectations, with core inflation (removing the effect of short-term moves in energy and food prices) actually at 1% - still very low but well above expectations. We’ve also seen positive PMIs (indicators of private sector business activity) across the eurozone and in some of the struggling countries, although France remains behind the curve.

With that in mind, it looks as if the ECB will shy away from taking a major decision on Quantitative Easing or a negative deposit rate. These remain drastic actions which the ECB is clearly unsure about, and with good reason. It’s not clear what the side-effects would be of such action or that it would actually feed through to tackling low inflation in the periphery or boosting lending to the real economy (and therefore economic growth).

There are a few other options on the table. Another, more targeted long-term lending operation (LTRO), or purchases of private sector assets, probably packaged bank loans (asset-backed securities). These are possible and more likely than the above, but for reasons discussed before, would also be quite a big step by the ECB.

The most likely options remain a token rate cut (i.e. one without an accompanying cut to the deposit rate), a further extension of the unlimited fixed rate liquidity provision and the end to ECB sterilisation of the Securities Markets Programme (SMP) bond purchases. We have outlined before that, at this stage, a rate cut makes little difference as the transmission mechanism is broken, at least to the areas where the impact of the cut would like to be felt. Extension of the liquidity provision is also broadly inferred and was always expected to go on as long as is needed, in line with the forward guidance given.

We’ve yet to discuss the end to sterilisation, so we lay out a few points below.

As a recap, the SMP was a programme launched in 2010 to purchase government bonds on the secondary market and bring down borrowing costs for certain countries (which were hampering the transmission of monetary policy). The sterilisation process sees the liquidity introduced by these purchases absorbed by the ECB, through the issuance of corresponding amounts of one week fixed-term deposits with an interest rate of 0.25%.

ECB SMP sterilisation total amount (€m)

Why take this measure?

• The idea is that ending the sterilisation would free up the €175bn in liquidity currently pledged to the ECB. This will counteract the recent decrease in excess liquidity in the eurozone and should encourage banks to lend this money out rather than simply posting it with the ECB.
• From a political perspective, this is also one of the least controversial actions since it has been endorsed by the Bundesbank and should be fairly easy to get support for at the ECB Governing Council.

Will it have any impact?

• It is unclear, but we are not overly hopeful. As the chart to the right (courtesy of Commerzbank) highlights, the earlier tensions in money market rates have eased. This means the impact will be limited.
• Ultimately, it depends on what banks decide to do with this money. The ECB deposits were a very safe investment with a decent return given the ultra low rates around at the moment. Our feeling is that banks will want to continue to search for equally safe assets rather than take on much more risk for a similar return over a short period. This could actually acerbate the demand for quality short term assets, particularly core ones, in the eurozone.
• Despite some failings in the sterilisation (shown by sharp deviations in the graph) demand has been fairly solid, although whether this is due to demand for safety or a decent return is unclear.
• The fixed-term deposits are also eligible as collateral for the ECB’s lending operations. It’s not clear if they have been used for this purpose, but if they were, this could further limit the impact in terms of boosting liquidity.

Ultimately, ending SMP sterilisation would be a token compromise measure. Its greatest use is probably as an indicator of an on-going willingness to ease if needed, and of the ability to compromise on the issue from the Bundesbank side. 

European Commission gives Germany a slap on the wrist for its current account surplus, but shirks stronger action

The European Commission has today published its in-depth review of EU member states' macroeconomic imbalances. The European Commission's full memo is here.

This is the follow-up to the report which caused quite a stir back in November, as pressure from the Commission and the US mounted on Germany over its significant current account surplus.

This report had been billed as the arena for the Commission to finally rip into Germany for feeding the imbalances in the eurozone and hampering the periphery’s chances of recovery (although, as we noted back then, to us this is not quite the case in reality).

So, what has the Commission done? Well, it seems to have backed away from this somewhat and given Germany more of a slap on the wrist.

The Commission does say that German imbalances require “policy action” but notes:

“The current account has persistently recorded a surplus at a very high level, which reflects strong competitiveness but is also a sign that domestic growth has remained subdued and economic resources may not have been allocated efficiently.”

Not exactly the strong wording some might have been hoping for. Crucially, it also appeases Germany by suggesting:

“The current account surplus does not raise risks similar to large deficits”

Plenty, including some peripheral eurozone countries and the US, might disagree with this assessment, but it’s clear the Commission has been very careful in how it phrases its criticism.

It does go on to outline the need for “sustained policy action” to boost domestic demand and rebalance away from export led growth. But then it also accepts that this is already happening and that the current account surplus Germany has with the rest of the eurozone has been “receding” since the onset of the crisis. There are few specific policy recommendations in there and the general tone is balanced but with a bit of edge to warn Germany of the need to focus on boosting the domestic economy.

As such this assessment may disappoint those who were looking for a strong position, but to us it is in keeping with the current data and evidence. All that said, there might be a double whammy in there for France and Italy as they come in for some surprisingly strong criticism.

France has dodged being moved to the group of countries with excessive macroeconomic imbalances this time around, but the European Commission’s assessment is far from optimistic. France is losing competitiveness for a number of well-known reasons: high labour costs (primarily driven by high payroll taxes), an “unfavourable business environment”, a “low level of competition” in the services sector and “rigidities in the wage-setting system” resulting in “difficulties for firms to adjust wages to productivity”. Compared to the vague comments on the German economy this is a pretty specific series of sectors which need specific policy action.

France’s public finances are another source of concern, since public debt is on the rise and the European Commission expects Paris to miss its deficit targets “over the entire forecast period” – that is, at least until 2015. This seems to confirm that France is obliged to deliver on economic reform this year. Otherwise, being ‘downgraded’ to the club of countries with excessive macroeconomic imbalances will be hard to avoid.

Italy also gets a pretty damning assessment, and joins the club of countries experiencing excessive macroeconomic imbalances – and potentially most exposed to the risk of fines. According to the Commission,

“Reaching and sustaining very high primary surpluses – above historical averages – and robust GDP growth for an extended period, both necessary to put the debt-to-GDP ratio on a firmly declining path, will be a major challenge."

This assessment, along with the Commission’s repeated hints at Italy’s “chronically weak growth”, paints a pretty clear picture of the size of the challenge facing Matteo Renzi and his government – essentially reversing Italy’s recent economic history and trying to ensure surpluses for decades to come.   

We would also like to pick up on the comments on Finland – a new running theme on this blog, you might have noticed. The report highlights similar issues to ones we did, in terms of some big challenges facing Finland, notably, “industrial restructuring”, “deterioration in competitiveness” and a “declining working age population”.

But it is not bad news for everyone. The Commission, for instance, gives Spain a pat on the back by removing it from the group of countries with excessive macroeconomic imbalances. This because, according to Olli Rehn and his team, “The adjustment of the imbalances identified last year as excessive has clearly advanced, and the return to positive growth has reduced risks.” In practice, this means Spain does remain under surveillance from Brussels – but is no longer at immediate risk of sanctions.

The fallout over the next day or two will be interesting, especially with the German media today reporting that internal German government documents admit some problems with the current account surplus (see our press summary and we’ll have more in a blog post soon).

The Dutch EU reform agenda - a primer

In previous we've described the Dutch as 'thought leaders' on EU reform. The Dutch Government's 'subsidiarity review' and the Tweede Kamer's report on the role of national parliaments, with its proposals for 'red', 'green' and 'late' cards, all spring to mind.

Many of these ideas were discussed at a seminar in The Hague in January, organised by the Dutch Cingendael and Brussels CEPS think tanks. A short report on the outcome of the meeting is available online and lists over 30 potential reforms to improve democratic legitimacy and accountability. Some are more concrete than others but here are a few of them:

• Give one of the European Commissioners a subsidiarity portfolio.
• Negotiate a political agreement between the Council and the Commission (possibly involving the European Parliament as well), determining certain domains or certain issues where the European institutions will refrain from further initiatives. A closely related alternative is the idea of a moratorium, agreeing not to present new proposals in a specific area for a certain period.
• Establish a separate subsidiarity court to monitor EU legislation.
• Encourage a proactive approach by EU and national legislators to prevent unintended interpretation by the European Court of Justice.
• Ensure that the European Parliament, taking advantage of its role in selecting the next Commission President, does not dictate the agenda to the Commission.
• Introduce ex post subsidiarity control on existing EU legislation to demonstrate whether subsidiarity was respected and to justify the necessity of EU legislative acts on a case-by-case basis. Both member states and the EU institutions should be involved.
• Introduce an informal ‘red card’ for national parliaments, by proposing the political agreement that the Commission will use its discretion to withdraw legislation if one-third of national parliaments raise subsidiarity objections.
• Introduce a ‘late card’, giving national parliaments the opportunity to voice their concerns at a later stage of the ordinary legislative procedure.
• Introduce a ‘green card’ for national parliaments, which would give them the option to table a joint legislative proposal if a substantial number of member states’ parliaments support it.

There are plenty of good ideas here that the Dutch government in particular has been increasingly vocal in supporting. There are many other proposals that we would throw into the mix, from reforming the EU budget by repatriating regional spending to the wealthiest member states to introducing greater legal safeguards for non-eurozone countries.

As our pan-European reform conference showed, there is growing momentum for change in the EU that extends beyond the UK.

EU sanctions on Russia: Who would they hurt most?

EU sanctions on Russia: Who holds the key?

EU foreign ministers are meeting today to decide what pressure to put on Russia. However, although trade and economic sanctions have been discussed in the US, the EU is less than enthusiastic. Under the EU treaties trade sanctions are decided unanimously, so all EU states will have a say - and for those wishing to take a harder line, the EU does not hold all the cards.

On paper the EU has a strong hand with Russia. Russia is the third largest trading partner of the EU and the EU is the largest trading partner of Russia and runs a large deficit.


Germany accounts for a large proportion
of the EU's trade with Russia (Eurostat 2013)

Of this EU/Russia trade, Germany is the most important accounting for 30% of the EU's exports to Russia. In addition, there are some states such as Finland who for historical and geographical reasons conduct a large proportion of their trade with Russia, making them vulnerable to an East/West showdown. Through their banking systems, Cyprus and the UK also have important financial and investment links with Russia and Russian individuals.

However, there is another important factor that counts against the EU. For although the EU is a large trading partner, 80% of the EU's imports from Russia are energy. This dependancy is particulay acute for gas - as you can see from the chart below, the Baltic States, the Finns, Czechs, Slovaks and Bulgarians are, according to Eurostat, 100% dependant on Russian gas. A mild winter and a relatively large European stockpile of gas means this risk is perhaps less critical than it might have been in previous years, but it could still cause them severe problems if this dispute were to escalate.

Eurostat (Oct 2012)

So will we see trade sanctions? Well probably not for the practical reasons above, but other sanctions are possible, arms embaragoes are not decided en masse so could be implemented swiftly by the UK, France and Germany. Targeted economic sanctions on individuals are also possible.

So on sanctions, an EU-US good cop/bad cop routine has an element of European self-interest to it.

Merkel sagt 'Jein': German reactions to Merkel's speech

Merkel's big speech yesterday was being trailed in the UK media almost a week in advance while the German media only began to cover it the day before. Its fair to say it didn't completely dominate the news in Germany yesterday - not with the conclusion of the trial of former German President Christian Wulff - but it nonetheless attracted a lot of coverage, comment and analysis. Here is our round-up of key German responses:

#Merkel beendet Rede vor Parlament in London. Betonte mehrfach die starke Rolle Großbritanniens. Cameron dürfte insgesamt zufrieden sein.
— Stefan Lange (@st_lange) February 27, 2014

Bundeskanzlerin #Merkel hat bei ihrem #London-Besuch #Großbritannien dazu aufgerufen, in der #EU zu bleiben. http://t.co/thgGlonvaX
— Berliner Zeitung (@BLZonline) February 27, 2014

#Merkel lässt #Cameron hängen http://t.co/YAXkvsgoYz
— Politik bei n-tv.de (@ntvde_Politik) February 27, 2014

Besuch in Großbritannien: #Merkel beschwört die Rolle Londons für eine stabile EU. http://t.co/MJQ2RZ0Rkr
— Tagesspiegel.de (@tagesspiegel_de) February 27, 2014

In terms of the speech itself, German media and commentators broadly picked out Merkel's call for the UK to stay in and help shape the EU, although N-TV went with “Merkel leaves Cameron hanging”. Today's headlines and comment pieces make for interesting reading; FAZ headlined their write-up with ‘Chancellor Jein' - Jein, for those who haven't worked it out already is a combination of Ja & Nein. Süddeutsche Zeitung goes with “Merkel’s lecture in Europe realism” adding that “she didn't close doors but remained vague”. Die Welt says “Merkel meets the Queen and resists Cameron”.

In terms of the comment pieces, Handelsblatt's EU correspondent Ruth Berschens argues that:

“The UK and Germany share a staggering amount of common ground... the list of common interest has now even been extended by a very important point: both Germany and the UK want to readjust the institutional structure of the EU... [However] even if the Chancellor wanted to she could not give Cameron a special status [for the UK in the EU]... Merkel has offered a limited EU treaty change for the Eurozone and that the EU Commission will voluntarily commit to stay out of specific policy areas. Now the ball is in the British court.”

Die Welt columnist Alan Posener writes in the Guardian that:

“Cameron will get his treaty changes sooner or later. In return, he should learn to walk the European walk and talk the talk – as Merkel does, while pushing a German agenda.” 

In a separate comment piece in Die Welt, Posener argues that a more integrated eurozone but with the possibility of other powers flowing back to member states would

“not create a Europe of ‘two-speeds’, but a freer Europe of differences and choices. Those who want more integration should be able to go down that path; those who prefer a looser European ‘dress’ should not have to leave the EU for that”.        

Süddeutsche Zeitung’s Foreign Affairs editor Stefan Kornelius points out that:

“Those, like the British Premier David Cameron, who hope for a herculean reform effort of the EU, including comprehensive treaty change, do not understand the EU. Europe moves cautiously, step by step, fittingly like the German Chancellor, with or without crutches.” 

He adds that Merkel’s speech understandably left a lot of questions unanswered such as

“What are the concrete plans for the strengthening of the economic and monetary union? Should governments agree on a common economic policy or does this competence go to the [European] Commission? Above all in terms of the Commission: which of Cameron’s complaints about Brussels are justified? Where do competences have to be checked and be trimmed back?”

In conclusion the broad response of the German media is much as we argued yesterday - Merkel did not give much away but left the door open to reform.

Merkel's speech: far too early to jump to conclusions

Chancellor Angela Merkel has delivered her much hyped and anticipated speech to both Houses of Parliament - so what conclusions can we draw and was it good or bad news for David Cameron's EU strategy?

In short, Merkel delivered a very statesmanlike speech but there was little new here.

The Chancellor was never going to set out a definitive list of reform proposals or endorse/reject Cameron's EU reform agenda. She made the point explicitly in (perfect) English that her speech would disappoint both those who hoped it would "pave the way for a fundamental reform of the European architecture which will satisfy all kinds of alleged or actual British wishes" and those who expected she would "deliver the clear and simple message that the rest of Europe is not prepared to pay almost any price to keep Britain in the European Union".

Here are some of our key observations:

• Merkel opened with a long passage about Britain's role in both world wars and its commitment to Europe's democratic values. She emphasised that "the UK has no need to prove its commitment to Europe". This was a clever gesture of diplomatic goodwill that she didn't necessarily have to make. She also highlighted Germany's view that the EU remains a vehicle to ensure stability across the Continent.
• There were few specifics but she made it clear that in order to strengthen the eurozone the EU treaties will have to be adapted in a “limited, targeted and swift” manner, adding that if the UK and Germany show they are serious about reform, they will find the legal mechanisms to make it happen. 
• In terns of EU reform generally, she stated that that Europe had to change to adapt to new realities - a clear acknowledgement that the status quo is untenable. She said the EU policies needed to be evaluated by all member states. "For all EU member states it is essential that all EU policies – whether energy and climate, shaping the single market or external trade relations – have to be measured by whether they contribute to the European economic strength or not," she said.
• Merkel reiterated her statements on the need to cut red tape and ensure the EU is competitive.
• She emphasised the benefits of the four freedoms of the single market and that they are inseparable, but added that "it is also true that, to maintain and preserve this freedom of movement and gain acceptance for it from our citizens... we need to muster the courage to point out mistakes and tackle them" - a clear hint at the possibly of reforming the rules around EU migrants' access to benefits. She further expanded on this in the press conference by pointing out that free movement could not involve unrestricted access to benefits and that this was as much of a concern in Germany as in the UK.
• Merkel called on the EU to be more outward looking, particularly given that 90% of global growth over next five years will take place outside EU, despite it occupying 25% of the global economy. She was clear on the need for the EU-US free trade deal (TTIP).
• She also argued that the principle of "subsidiarity must be respected more in Europe".
• She stressed the importance of the City of London to the EU economy - a nod to those who fear that the City remains in Brussels' sights.
• While Merkel stressed the need for the EU to change economically and politically, the was little more on addressing the EU democratic deficit, which Cameron has been keen to emphasise.

In summary, Merkel's speech was a statesmanlike address. The rhetoric reflected Germany's cultural and historical affinity with the EU but, without being specific, Merkel was equally clear about the need for the EU to change. She added, "Our ideas of how the future European Union ought to look like may vary on the details but we, Germany and Britain, share the goal of seeing a strong, competitive European Union join forces."

Her pitch to Cameron could be summed up with her comments that "we need a strong United Kingdom with a strong voice inside the European Union. If we have that, we will be able to make the necessary changes for the benefit of all." As we noted in our briefing, there is ample scope to translate these shared principles into concrete reforms which would attract a lot of public support in both countries. It is also worth remembering that when it comes to reforms, Merkel is a believer in a more gradual, step-by-step process as opposed to the huge all-encompassing package that many UK observers are looking out for.

It is now up to David Cameron to put forward concrete policy proposals, not only to the German Chancellor but to the wider EU negotiating table.

New OE poll shows Merkel and Cameron should have plenty to talk about

We’ve put out a new poll this morning in conjunction with You Gov ahead of German Chancellor Angela Merkel’s visit to the UK tomorrow. The results make for some interesting reading and suggest there are plenty of areas of agreement between the Brits and the Germans. Whether this can translate into a new Anglo-German bargain and wider EU reform remains to be seen, but it provides a good basis for discussions.

The results suggest that Germans are split on the future development of the EU. While 38% say they’d like a more integrated Europe with more decisions taken at the European level, 31% say they’d like a less integrated Europe and 9% favour complete German withdrawal. 14% favour the status quo.

Among British respondents, a less integrated Europe with more decisions taken nationally or locally, is by far the most favoured option (37%). 24% want complete British withdrawal, 15% favour the status quo and only 10% would like more integration with more decisions taken at the European level. This illustrates that rather than a straight in or out choice, the British public has a clear desire for reform. It is now up to the UK Government to deliver a clear reform programme.

While more German than British respondents were sympathetic towards the prospect of more EU integration, a majority in both countries think that national parliaments rather than the European Parliament should be the ultimate check on new EU laws (see graph above, click to enlarge).

In the UK, 55% believe that every country’s national parliament should have the right to block new EU laws and 18% believe that a group of national parliaments working together should have the power to block EU laws – a total of 73%. In Germany, 36% favour a veto for the Bundestag over new EU laws and 22% are in favour of a group of national parliaments being able to block EU laws – a total of 58%. Only 8% of Britons and 21% of Germans think the European Parliament, rather than national parliaments, should have the right to block new EU laws.

 

Furthermore, in four out of six key policy areas – EU migrants’ access to benefits, police and criminal justice laws, employment laws and regional development subsidies – a majority in both countries said that decisions should be taken at the national rather than at the EU level (see table above).

 

Of the EU’s three flagship projects – the single market, enlargement and the euro – the single market was considered to be beneficial by the biggest share of voters in both countries. 52% of British voters said the single market is beneficial while 26% said it is not beneficial and 23% are undecided. 74% of German voters said it was beneficial, while 19% said it isn’t, and 8% said they don’t know.

Both British (55%) and German (48%) voters tend to view the impact of EU migrants on their country negatively. A smaller share of voters in both Britain (42%) and Germany (42%) said EU migrants negatively impacted on them personally, while a larger share in Germany (41%) than in Britain (30%) feel that EU migrants have a positive impact on them personally.

Plenty of scope for agreement then, but we’ll end on a note of caution. Merkel remains keen on a step by step approach and is somewhat hamstrung by her new coalition partners. Cameron will have to secure a much wider base for reform than just her, while she is also more likely to publicly back him if he has formed other alliances.