Has the ECB backed German ‘reform contracts’ for the eurozone?

In a speech in London yesterday, ECB President Mario Draghi issued a call for new eurozone rules on structural reform. He discussed it at length in the speech, but the ECB’s summary captures the key points:

The governance of structural reforms deserves as much attention as enforcing fiscal rules and should be done at the euro area level.

Structural reforms need strong domestic ownership since they reach deeply into societal arrangements. But at the same time, the example of the International Monetary Fund shows that there is a convincing case to be made for a supranational body that makes it easier to frame national debates on reform. This can shift the debate from whether to how to implement reforms, Mr Draghi argues.

The outcome of structural reforms – a higher level of productivity and competitiveness – is not merely in a country’s own interest, but in the interest of the monetary union as a whole. 

In the euro area, there is therefore a case for establishing rules on structural reform at the EU-level. While a lack of reform can threaten cohesion of the union, the recovery shows us how decisive reform can strengthen it.

Despite the lack of specific details, this has rightly evoked comparisons to the German proposals for ‘reform contracts’, which were strongly pushed last autumn and which we discussed in detail here. There are lots of overlapping ideas, including the concept that eurozone rules will help encourage ownership of reforms rather than discourage it, and that this is a logical supplement to the existing European Semester.

We have always expected the reform contracts to make a comeback in some form or another, not least given Germany's strong support for the concept, and there are other reasons to think that they may gain some further traction this time around.

While the peripheral countries have previously objected to such sovereignty transfers, Italian Prime Minister Matteo Renzi has been vocally touting the idea that countries should be directly rewarded for reform efforts. The details might differ, but conceptually he has moved closer to the Germans on this point.

There is no doubt the reform contracts will remain a hard political sell, but with the ECB’s backing and the growing desire for a proper negotiation and discussion around the eurozone's fiscal rules, as well as the broader approach to economic reform, now could be the time for the idea to make a comeback in one form or another.

Why Cameron needs to make a swift decision on the UK's next EU Commissioner

In a recent briefing, we stressed that David Cameron needs to pick a 'heavy-hitter' as UK's next European Commissioner if he wants to secure a key portfolio for the UK. Our point is reinforced by a quick look at the candidates being (more or less officially) lined up by other EU member states.

If the UK drags its feet on 'declaring' its candidate, and then sends someone not considered up for the job, we suspect its chances will pretty much have evaporated.

FRANCE - Former Finance Minister Pierre Moscovici is regarded as the frontrunner. The possible alternative could be Élisabeth Guigou, who has served as French Europe Minister, Justice Minister and Employment Minister.

GERMANY - Günther Oettinger looks very likely to stay on as German Commissioner. A former Minister-President of Baden-Württemberg, he has gained influence within Angela Merkel's CDU party during his five years as EU Energy Commissioner.
 
ITALY - Foreign Minister Federica Mogherini is widely tipped to become the new Italian Commissioner. She is currently regarded as the frontrunner to replace Lady Ashton as EU foreign policy chief. 

FINLAND - Former Prime Minister Jyrki Katainen will be the new Finnish Commissioner. He has already replaced Olli Rehn, who had to take up his seat in the European Parliament. Importantly, Katainen stepped down as Finnish Prime Minister precisely because he had set his eyes on a job in Brussels.

SPAIN - Former Agriculture Minister Miguel Arias Cañete is the favourite to become the new Spanish Commissioner. He resigned in April after being picked by Spanish Prime Minister Mariano Rajoy as Partido Popular's top candidate in the European Parliament elections.

POLAND - Various names have been suggested. Foreign Minister Radosław Sikorski remains the frontrunner (despite the recent wiretapping scandal). Former Finance Minister Jacek Rostowski and former EU Budget Commissioner Janusz Lewandowski - recently elected as an MEP - are also in the race.

NETHERLANDS - The frontrunner is Finance Minister and Eurogroup Chairman Jeroen Dijsselbloem, who is one of the two big contenders for the key post of Economic and Monetary Affairs Commissioner along with France's Pierre Moscovici.

ESTONIA - Former Prime Minister Andrus Ansip, leader of the liberal Estonian Reform Party, will be the new Estonian Commissioner, according to what Jean-Claude Juncker just said during his hearing with MEPs from the ALDE group.

What is somewhat different with this lot is that it includes a range of acting or former senior ministers still very much operating on the political centre stage in their respective countries. With some exceptions, the time when countries sent to Brussels whoever the sitting government tried to 'get rid of' seems pretty much over.

Cameron better get a move on.

Out of the euro but run by the euro? The UK & ECB prepare to lock horns at the ECJ in what could be the most important case yet...

Could euro clearing be moved from the City to the eurozone?

Tomorrow will see the first hearing of the next in the line of important UK cases at the European Court of Justice (ECJ). The case in question is the UK’s challenge against the ECB’s location policy – and it could be the most important of all the cases. The case is shrouded in technical detail but, fundamentally, is whether we're moving towards a two-tier single market and an EU run by the euro for the euro.

Background
On the 5 July 2011 the ECB published its Eurosystem Oversight Policy Framework, which argued:

As a matter of principle, infrastructures that settle euro-denominated payment transactions should settle these transactions in central bank money and be legally incorporated in the euro area with full managerial and operational control and responsibility over all core functions for processing euro denominated transactions, exercised from within the euro area.

In that paper and future opinions the ECB has stressed that it will not provide central bank liquidity to clearing houses outside the eurozone but that all such institutions should have access to it.

The UK quickly challenged the policy in September 2011, calling for the ECB’s policies to be annulled, and has launched two further challenges at the ECJ, in which it updates its list of complaints, the key points of which are as follows:

• The ECB lacks powers in the specified areas, especially since it did not include the plans in a regulation to be adopted by the Council or by the ECB itself, simply decreed it in a policy paper and opinion.
• “De jure or de facto” the rules will impose a residence requirement on clearing houses which want to clear euros, meaning existing clearing houses will face a choice of moving within the eurozone or changing their business approach.
• The rules offend the principle of equality in the single market since firms incorporated in different EU member states will be viewed differently and the rules will not apply equally.
• There are less onerous methods for achieving the same goals (namely security of the financial system) cited by the ECB.

Why is this case so important?
The case manages to combine two crucially important issues:

1. The question of maintaining the EU single market and whether countries outside the eurozone will be dominated by those inside
2. How to ensure the safety, transparency and security of the modern financial system in Europe to avoid a similar crisis to one we have barely overcome

For the UK, there are additional concerns:

• Firstly, it will once again play a role in setting the boundaries of action the ECB and eurozone can take without the non-euro members. It will also create a clearer boundary on what powers the ECB has. 
• If the ruling goes against the UK, there would be a clear split in the single market and, the precedent set, will make it harder for the UK to stay in the EU
• It would raise further questions about whether the UK can trust the ECJ as a neutral arbiter.
• It would undermine the role of the City of London as a financial centre serving the eurozone (the City remains a trading hub for a single currency of which the UK cannot take part), meaning London could lose business to Paris and/or Frankfurt.

Does the ECB have a point?
From the financial stability perspective it is easy to have some sympathy with the ECB’s stance. More and more transactions are being directed on to exchanges and through central counterparties (clearing houses) therefore it makes sense for them to have access to sufficient liquidity. Then again, the LCH Clearnet clears products in 17 different currencies without the need for central banks backstops in all of them.

Given that, and the huge political stakes, one option would be to establish a permanent swap line between the ECB and the Bank of England (or all non-eurozone central banks). Such swap lines are well tested and were used extensively during the financial crisis. In exchange, the ECB would likely require some greater involvement in terms of supervision of institutions which may receive such cash. The easiest and most practical way to achieve this would be through the existing EU institutions such as the European Systemic Risk Board (ESRB) and the European Securities and Markets Authority (ESMA).

Needless to say, the UK also has a strong case since its hard to say this will not hamper the single market at the very least. In any case, whatever the outcome there will likely need to be changes made to accommodate a new structure, hence the repercussions of the ruling will be widely felt.

On what and how might the ECJ rule?
Trying to second guess the ECJ is a hazardous business. That said, this case is interesting because there are a few different elements which the ECJ could choose to rule on or not.

Whether the ECB has competence or not? The first relates to the UK’s first point of challenge regarding whether the ECB has competence in this area. While the ECB does have control of payment systems and gave an extensive legal grounding in its original policy paper its clear that this is a very political decision. Determining who has competence should be a fairly basic question which the ECJ can rule on.

Which has primacy - ECB policy or EMIR? That said, the matter is complicated by the recent European Market Infrastructure Regulation (EMIR). In the preamble point 47 and 52, as article 85 in the main text, all stress that there must be no “discrimination” with regards to where currencies can be cleared and that nothing should “restrict or impede” clearing houses based in other jurisdictions from clearing foreign currencies. As such, the ECJ may have determine who has primacy in this area, as currently it isn’t clear which set of rules should be adhered to (although given that euros are still being cleared in London one might de facto think EMIR is winning). If the ECJ is swayed by the non-discrimination provisions in EMIR, the UK Treasury should be given some credit for pre-empting the ruling - which Open Europe also has recommended.

Does the ECJ actually have anything to rule on? As with the Financial Transaction Tax decision, the ECJ has shown itself reluctant to rule on issues it sees as hypothetical. Given that the rules that the UK are challenging are actually not in place, the ECJ may rule that the challenge is somewhat premature. Obviously, the risk here is that this would be self-fulfilling and act as a catalyst for changes to happen. It would also leave many questions (not least those above) unanswered.

What happens next?
The oral hearing will take place tomorrow. After that the Advocate General will produce an opinion and a ruling will follow, both most likely in a few months’ time.

It’s possible the ECJ could rule on only part of the UK’s claims or support some and dismiss others. It will also be important to see what happens with regards to the primacy of a regulation over the ECB in this particular area which could itself be an important legal precedent (not least because the ECB is becoming increasingly powerful).

It's also still possible that this will be 'settled out of court', given the stakes involved and the risks of unintended consequences.

We'll watch this one closely.

Juncker: The next Economic and Monetary Affairs Commissioner will be a Socialist

UPDATE (14:15) - One possibility we have not considered in our original blog post is that European Commission portfolios can change. They can be split, broadened, and so forth.

However, at this stage it is quite hard to know whether and how this will happen. Hence, our reasoning is based on the existing portfolios.

ORIGINAL BLOG POST (13:15)  

Pieces are falling into place with regard to the composition of the next European Commission. Jean-Claude Juncker, who is waiting to be confirmed as new Commission President by MEPs in a vote next Tuesday, has just said that the next EU Commissioner for Economic and Monetary Affairs will be a Socialist.

Given the recent debate over EU fiscal rules and their 'flexibility', this sounds like a key pledge from Juncker to secure the backing of centre-left MEPs - since the Economic and Monetary Affairs Commissioner is responsible for enforcing such rules.

Now, two candidates for the post spring to mind instantly: former French Economy Minister Pierre Moscovici and Dutch Finance Minister Jeroen Dijsselbloem, both from their respective countries' centre-left parties. The decision will likely also depend on what happens to the Presidency of the Eurogroup of eurozone finance ministers - with Spain making no secret of its interest in the job.

Scenario 1 - Dijsselbloem becomes the new EU Economic and Monetary Affairs Commissioner

This looks very likely to happen if Spain secures the Presidency of the Eurogroup. German Chancellor Angela Merkel would not be keen to see Mediterranean countries holding the posts of ECB President (Italy), Eurogroup President (Spain), and Economic and Monetary Affairs Commissioner (France) at the same time.

This would also mean that France will push to secure another key economic portfolio for Moscovici: Internal Market, Competition or Trade. This would not be ideal from David Cameron's point of view, although the UK would be likely to get whichever of the bigger briefs France did not get.

Scenario 2 - Moscovici becomes the new EU Economic and Monetary Affairs Commissioner

This would probably mean that Dijsselbloem will stay as Eurogroup President. At that point, Spain could be 'compensated' with an important portfolio in the new Commission. According to the Spanish media, Miguel Arias Cañete - a former centre-right Agriculture Minister who is widely tipped to be appointed Spain's new Commissioner - would be interested in the Trade brief.

Under this scenario, the UK would possibly have a greater chance of securing the Internal Market or the Competition portfolio (both very relevant, as we explained here) - not least because France would no longer be a contender. That said, as we pointed out above, Germany is probably wary of this scenario. And the UK may well be concerned about France controlling the brief which has the most impact on the issue of the balance of power between euro 'ins' and 'outs'.

One to watch for the UK: Finland's Jyrki Katainen  

One more thing to bear in mind. Until today, former Finnish Prime Minister Jyrki Katainen was seen as a strong candidate to succeed his fellow national Olli Rehn as Economic and Monetary Affairs Commissioner. However, it now seems he will have to go for another portfolio. This could have important implications for the UK. Under a positive scenario, reform-minded Finland along with the UK could secure the Internal Market brief as well as the Competition portfolios. Indeed, France getting the Economic and Monetary Affairs portfolio could increase the chances of this happening. 

This is all quite speculative, and based on wishes Juncker expressed during his hearing with the centre-left S&D group in the European Parliament. National governments will play an important role when the time to assign portfolios in the new European Commission comes.

At the moment, there is still a decent chance of the UK securing a good porfolio despite the Juncker débâcle. One thing is clear, though: most other EU countries have already settled on high-profile candidates (note the numerous mentions of both former and acting finance ministers and prime ministers above), while the UK is yet to even decide on a clear shortlist of candidates. It is time to kick it into gear on this front.

European Parliament committees: more secret ballots and backroom deals?

EU democracy at work?

The European Parliament has announced the composition of its Committees, with MEP groups hard at work negotiating the final deals to see who will be Chair and Vice-Chair of the different bodies.

These Committees vary in importance, from the powerful ECON and IMCO committees which deal with Economic and Monetary affairs and the single market respectively - to more niche Committees such as the 'Petitions' Committee.

Looking through the lists of MEPs appointed, the first thing that strikes us is that all the Committees are gigantic - the Committee on Foreign Affairs has a ludicrous 71 members (almost 10% of the entire parliament)! It's not immediately clear why this is, but we can't help but wonder if the possibility for significant travel abroad is not a factor. But even the more serious Committees are of an unwieldy size - Trade (also with some travel perks) has 41 members, which is perhaps more justifiable as the EP now has a veto over free trade deals. It is worth remembering that under Parkinson's "coefficient of inefficiency" a committee of more than 20 members is less likely to make good decisions.

Secondly there are some interesting appointments:

• German neo-Nazi MEP Udo Voigt will sit on the European Parliament's Civil Liberties, Justice and Home Affairs Committee.
• AfD leader Bernd Lucke is to be nominated as vice chair of the ECON committee - in charge of monetary union. Combine this with the fact that the Chair is likely to be an Italian Socialist MEP and some eurozone members might be concerned about this committee.

Under the EU's favoured D'Hondt formula, the different groups are allotted committee chairs according to their relative weights. The ECR group for instance, has secured an additional chair due to its increased size; it has gained Security and Defence on top of its existing Internal Market chair.

However nothing is settled in the EP until you have had the mandatory secret ballot. One potential secret upset could be an attempt to deprive the UKIP/M5S EFDD group of it sole Committee chair - the Petitions committee. Under a secret ballot it is entirely possible for the larger groups to block the EFDD group from chairing a committee.Whether or not you agree with their politics, there is no doubt that they are entitled to such a role, and even the Greens have come out saying as much. Another stitch up here would once again expose a lack of democracy and transparency at the heart of the European Parliament - and surely only play into the hands of those who want to leave the EU.

Flexibility and sloppy translations: Could the discussion on EU fiscal rules still endanger Juncker's election?

The Bundesbank attacks Renzi: "He tells us what to do". This is today's front page headline of Italian daily La Repubblica. According to Italian media, Bundesbank President Jens Weidmann yesterday had a go at Italian Prime Minister Matteo Renzi for telling everyone else in Europe what they have to do.

Well, that's not quite what Weidmann said. The full speech is available here. And the exact quote is:

Italian Prime Minister Matteo Renzi, for instance, likens the EU to 'an old, boring aunt, who tells us what we should do.'

In other words, Weidmann was simply quoting Renzi. Quite different from what has been reported by Italian papers, although Weidmann did say in his speech that structural reforms "should be implemented, not only announced" - a Bundesbank Leitmotiv.

A case of 'lost in translation'. Still, Renzi hit back less than an hour ago during his joint press conference with outgoing European Commission President José Manuel Barroso in Rome:

#Renzi: The task of the Bundesbank is not to take part in the Italian political debate.
— Vincenzo Scarpetta (@LondonerVince) July 4, 2014

Sloppy translations aside, this episode highlights that there are some unresolved issues when it comes to what different eurozone countries mean by the 'flexibility' of EU fiscal rules. This may well spice up the European Parliament vote on the appointment of Jean-Claude Juncker as European Commission President, scheduled for 15 July.

A couple of Italian MEPs from Renzi's Democratic Party have said they want "clarity" from Juncker before supporting him. Similarly, the leader of French Socialist MEPs Pervenche Bérès told French daily Le Monde:

We are in a difficult equation. We criticise the [economic] policies of the right. But if we reject this candidacy, we will have no influence on the re-orientation of the policies that Juncker must pursue.

It is too early to tell how this story will end. Juncker is due to meet the centre-left S&D group on Tuesday precisely to discuss the priorities of the new European Commission. We will probably have a clearer idea after that. Indeed, one would assume that, if Renzi or François Hollande told their MEPs to vote for Juncker, MEPs would follow their leaders' instruction. Furthermore, the German and Italian governments are both playing down tensions.

That said, looking at the vote on Juncker in the European Parliament, the three groups expected to back him (EPP, S&D and ALDE) have 479 MEPs in total. The UK Labour Party already said it would vote against Juncker. If French, Italian and maybe Spanish centre-left MEPs did the same, along with the 12 Hungarian centre-right MEPs from Prime Minister Viktor Orbán's Fidesz party (who sit in the EPP group), support for Juncker would suddenly shrink to 389 MEPs.

The required majority is 376, so we would be looking at a much tighter vote. And it's going to be a secret ballot, which adds to the uncertainty. Time for Juncker to get worried? Maybe not yet, but he has already got a quite difficult job on his hands in pleasing everyone when it comes to using the 'flexibility' in the EU's Stability and Growth Pact to its full extent.

Ukraine update – Russian sanctions come to the fore again

We’ve been overdue an update on the situation in Ukraine. Over the past few weeks, as anyone following the news will have seen, the situation on the ground has remained very volatile. The attempted ceasefire was widely disregarded, leading to the Ukrainian government to launch a significant counterattack once it expired.

On the international level though, there seemed to have been some de-escalation: Russia drew back troops from the Ukrainian border, the Russian Parliament removed the government’s right to military intervention in Ukraine (at Russian President Vladimir Putin’s request), Putin welcomed the new Ukrainian President and government and generally softened his tone.

However, in recent days, events seem to be taking a different turn, with several reports suggesting a potential widening of economic sanctions on Russia. Much of this seems down to the fact that many believe Russia has allowed its border with Ukraine to be deliberately permeable and may have directly helped to resupply the pro-Russian separatists both with arms and personnel.

Importantly, Germany has hardened its position on sanctions, earlier this week German Chancellor Angela Merkel said:

“Regarding sanctions against Russia, we have so far reached level two and we cannot rule out having to go further.”

Deputy Chairman of the CDU/CSU Michael Fuchs added:

“If the Russians were to go further on the road which they have recently taken [towards escalation] then we must thoroughly consider whether there should be other sanctions . . . The best sanction is to take less [Russian] gas . . . You don’t even have to call it sanctions, but just don’t buy so much.”

In the meantime, the EU has also completed much of the technical work behind imposing wider economic sanctions, particularly sector specific ones. While, Russia has previously brushed off such threats the WSJ reports today that, according to a leaked document from the Russian Finance Ministry, it is quite concerned. The document argues:

[While Russia] has adequate reserves to compensate (for) the majority of the economic losses caused by sanctions…[they could still have a] substantial impact.”

“The imposition of sanctions on individual sectors of the Russian economy could lead to a worsening of their financial condition, borrowing terms, a rise in the risk premium and an increase in the capital outflow.”

As we noted in our very first report on all of this, sector specific sanctions would certainly hurt Russia, especially in the longer run which is looking increasingly worrisome from an economic perspective.

But while Russia is right to be concerned, as we noted in our Dove/Hawk scale, the EU is incredibly divided over deeper sanctions. While some countries have hardened their stance – notably Germany and the UK – others remain quite opposed, in particular Italy (which fears a restart of economic uncertainty) and France (which remains keen to conclude its military dealings with Russia before any further talk of sanctions). As such, it seems that any clear EU decision on this remains someway off.

On top of this, the standoff over gas supplies to Ukraine continues. Russia continues to insist that all gas from now on must be pre-paid and is demanding an immediate payment of $1.95bn out of a claimed $4.5bn in unpaid bills. Ukraine is refusing to give in, not least because its worsening economic situation means such upfront costs will be very difficult to stomach and may well have to be funded by European bailouts. So far this has avoided blowing up into a Europe-wide issue since transit of gas to Europe has continued but as Ukraine’s reserves dwindle and it seeks to import gas back from the rest of Europe (something Russia said it would prohibit) it could easily quickly spiral into a very serious continent wide problem.

In other areas there have also been renewed tensions. Ukraine finally signed the long awaited Association Agreement with the EU – the factor which essentially started all of this off. Russia remains concerned by such action and has already retaliated against Moldova, with bans on certain imports, which signed a similar deal. Meanwhile, new Ukrainian Defence Minister Valeriy Heletey stressed that the army would retake Crimea, promising, “There will be a victory parade... in Ukraine's Sevastopol.” Whether or not this has publicly manifested itself yet, you can be sure such comments and actions are antagonising Putin and Russia.

The situation in Ukraine remains very fragile but more worryingly little real progress seems to have been made. Russia, Ukraine and the EU remain at loggerheads over the association agreement and gas supply. Ukraine and Russia continue to disagree over the future for eastern Ukraine and Crimea. Despite these longstanding disputes which intermittently flare up and recede, Europe as a whole seems no closer to finding a clear stance or unified position on how to deal with what is happening. 

Which Commission post should the UK push for (clue: not energy)?

When it comes to EU top jobs, if you snooze you lose, as
Gordon Brown discovered to his cost in 2009

In a new briefing published this morning we argue that after the row over Jean-Claude Juncker’s appointment, David Cameron can regain the initiative by sending a heavy-hitter - and not simply someone who happens to be available - to Brussels with the view to securing a top job in the new European Commission. But here is the crucial question - what job should the UK push for?

Here are the key points from our briefing:

• Even though conventional political wisdom says that it’s impossible for the UK to bag the internal market portfolio, this is precisely what David Cameron should ask for, not least given that Germany, in particular, may want to give the UK a quick win in order to reduce the risk of Britain leaving the EU.

• To boost the chances of this happening, financial services could be split off from the internal market portfolio. However, in this scenario, the key is for this portfolio to go to a country that actually has a meaningful financial services industry, or the strategy could backfire.

• The second best outcome for the UK would be to secure the competition portfolio. competition is by far the most powerful DG, with the power to impose multi-million euro fines, prevent mergers and restructure banks. The portfolio would allow the UK to ensure a business-friendly environment and ensure fair competition within the single market by preventing discrimination against non-euro member states. It also establishes a political link to eurozone - it’s impossible for eurozone leaders not to engage with the Competition commissioner.

• The Trade portfolio is often mooted as a good one for the UK, and on substance it certainly is. Being able to conclude the EU-US free trade deal (TTIP) would be a great scalp. However, it is important to remember that Commissioners’ ability to impact EU policy is not limited to their own briefs; many policy proposals are debated within the College of Commissioners offering every Commissioner the opportunity of raising any concerns at an early stage. Just as the EU’s High Representative for Foreign Affairs – currently held by Baroness Ashton - the Trade Commissioner is often absent from Brussels, thereby limiting the UK’s overall influence.

• The energy portfolio would be a relative disappointment for the UK. Yes, energy is a hugely important issue for Europe – and liberalised single market could help tremendously in both boosting energy security and keeping cost down. The Energy Commissioner could also play a key role in keeping the EU out of shale gas regulation – a key UK objective. However, the big push needed to change the political culture in Europe for this to happen won’t come from the European Commission and will take a long time to achieve anyway. This battle will first need to be won in national capitals. Taken together though, the Competition Commissioner probably has more sway over the EU energy market by being able to strike down attempts at creating national champions and new forms of intervention – as illustrated by the current stand-off between Germany and the Commission over Berlin’s rebate for energy intensive industries from its domestic renewable surcharges.

• Arguably, the social affairs brief would be better than the energy portfolio given how hugely important the rules on access to benefits for EU migrants are for the wider debate in the UK.

Just as important as the UK’s portfolio is the distribution of other key portfolios among reform-minded countries like the Netherlands and Sweden. Cameron needs to be far cleverer than Gordon Brown was in 2009, when France got internal market and Romania agriculture. This won’t be easy though. Having lost out on one of the three ‘top jobs’, France could push for either the competition or internal market brief. However, if France keeps the internal market, financial services should be split off as well.

Finally, the appointment of the new President of the European Council will also be crucial – in some ways just as significant as that of the Commission President – given that this will be the person in charge of brokering Cameron’s negotiations with other heads of state and government.

It's certainty all to play for.

Renzi highlights Europe's 'UK problem'...or UK's 'Europe problem'

Speaking in the European Parliament, Italian Prime Minister Matteo Renzi has just outlined the priorities of Italy's rotating EU Presidency. It is no secret that Renzi would like to see a 'United States of Europe' - and today he made much of the need for Europe to "find its soul".

A couple of points from Renzi's speech could be interesting from David Cameron's perspective. He said:

"Europe without the UK would not just be less rich. It would be less Europe, less itself."

"We will do everything [...] to affirm that these values of investing on a different Europe need to be brought together to unity."

"Different ideas are a positive thing that make us proud, [they do] not irritate us."

On top of this short bit specifically devoted to the UK's situation, Renzi also spoke of the need to achieve a "smart Europe" and of the importance of making EU institutions "simple". He also stressed how badly the EU needs to boost its economic competitiveness, because "the rest of the world is [currently] running twice as fast as Europe." 

The challenge here, for Cameron as much as the Italian Prime Minister, is to reconcile Renzi's vision of a 'United States of Europe' with his professed desire to keep the UK in the EU. His predecessor, Enrico Letta, spoke about EU treaty changes designed to settle UK concerns.

It is progress, of sorts, that EU leaders are able to identify the issue. However, now there needs to be progress on finding solutions that work for everyone.

If Carlsberg did consolation prizes for 'losing' a 'Presidential' election...

Advocates of Pan-European Democracy, foremost among them the Socialist's 'Spitzenkandidat' Martin Schulz MEP wished to turn the recent European Elections into a quasi-'Presidential' election. The idea was that the 'winner' would be the 'lead candidate' from the leading political group. That turned out to be Jean-Claude Juncker, who is now the President-elect of the European Commission.

In the manner of a US presidential election, Schultz 'conceded' defeat. It might therefore come as a surprise that the self-proclaimed loser in the election has now been rewarded for his defeat by being given one of the other powerful EU presidencies - that of the European Parliament. Schulz was yesterday re-elected as EP President for the next two and a half years with the support of 409 out of the total 751 MEPs.

It's not entirely easy to find an equivalent to the EP President in national democracies: the position involves elements of the "Speaker" role, which exists in the UK, Sweden, Poland and Germany. Notably, the Speaker in these countries come from the largest group or is based on a nomination from the largest group (in the case of John Bercow, a Tory backed by Labour).

However, the EP President has far more power, due to the way 'executive' and 'co-legislative' functions are distrubted in the EU between the Commission, Council and EP. Schulz effectively wields the EP's co-legislative power in talks with other institutions, over issues such as the EU's long-term budget for example. Such positions are most definitely associated with the "winners" in elections.

So if Schulz was a loser on both these counts, why is he still running the European Parliament?

The answer: transnational "democracy". The vote follows the formation of a ‘grand coalition’ within the European Parliament between the centre-right EPP, the centre-left S&D and the Liberal ALDE groups. In other words, in the spirit of pan-European democracy, some representatives from the main groups agreed amongst themselves who should become EP President. In the spirit of transparency, the vote was then put to the full European Parliament via a secret ballot (so we're afraid we can't tell you who actually voted for Schulz).

Yet another reason why the Spitzenkandidaten process has turned out to be a charade. This is Brussels politics, business as usual.

Handelsblatt: Britain a key driver of EU Reform

Britain: The critical voice of reason?

We've been monitoring how the British Europe debate is being received across the continent throughout the Juncker episode (here and here), and already noted how large parts of the German commentariat have come out fighting for the UK to remain in the EU, especially because it is in Germany's long-term strategic interest.

Today's Handelsblatt features a joint op-ed looking at the pros and cons of British membership of the EU, with the paper's political editor Jan Mallien writing:

"The British question [EU] bureaucracy, fight against agricultural subsidies, and ensure that any transfer of power to Brussels is discussed critically. Thus, they provide important impulses -- and make themselves unpopular. In a shared house, they would be in charge of the cleaning-rota. Of course, one can kick-out the person who is charged with the cleaning rota from a shared household. But it would be an illusion to think that the others would never have to clean again."

He continues:

"With their critical attitude, the British are a key driver of reform. Some German newspapers insinuate that Cameron is on an anti-European course. Those who say something like that are simplifying matters: The Brits are in favor of another [vision of the] EU. In many ways, they are fighting the correct battles."

Mallien concludes:

 "Sure, there are some issues where agreement would be easier without [the Brits.] The Financial Transaction Tax, for example. However, these are mainly symbolic issues. The EU is not much better-off with a Financial Transaction Tax. But without the British an important drive for reform will be missing. A Brexit would therefore make the EU poorer -- and not just economically."

On the other side of the fence, Handelsblatt columnist Désirée Linde says:

"Why all the whining about the nightmare scenario of a British EU-exit? If the British want to get out of the EU, continental Europe should let them go. Because, contrary to suggestions of doomsayers and EU-haters, it would not spell the beginning of the end for the EU. Yes, it would be a shock, but one that provides an opportunity for the EU. The cost of a Brexit for the EU is undisputed. Great Britain is one of the EU's biggest net contributors paying over €7bn per year."

She continues that while a Brexit would be “uncomfortable for the EU,” it would be “fatal” for the UK, and concludes:

"From the outset, the British lacked commitment to integration... Brexit would not build a way back to the European Community for the British. So it is up for all of Europe's friends in the UK to perceive this as a cleansing thunderstorm and develop a whole new enthusiasm for Europe. The fact that Europe is not just a customs union, but also a political project is something that the British have not yet understood...It is time that the UK learns. And if it must be, the hard way."

Linde buys into the whole German "pro-integration" rhetoric. However, as we have noted repeatedly, one of the greatest ironies of the German-Europe debate is how to square the need for more integration, especially in the eurozone, with Germany's national interests. This is lost on Linde. 

As a post-script, it's not only the Germans who are coming out in favour of Britain. The French  commentariat has been speaking out too, fearful of the imbalance a Bexit would cause in the European club. In today's Le Figaro, French columnist Renaud Girard describes the appointment of Jean-Claude Juncker as new European Commission President as “an unnecessary affront” to the UK, and argues:

 “It is irresponsible to push London on the slippery slope of EU exit… As far as France is concerned, it has no interest in finding itself head-to-head with Germany.” 

The Juncker-episode has shown that the moment of truth on the UK's future in Europe is drawing closer - and it also appears to be focusing minds across the Channel that an EU without Britain may not be in anyone's interest.

Sarkozy held in custody: A blow to his mooted comeback and a gift to Le Pen?

Nicolas Sarkozy has been detained for questioning by the French judicial police this morning, over allegations of influence-peddling (trafic d'influence). No formal charges have been brought so far, but prosecutors are investigating whether Sarkozy had promised to help a high-ranking French judge get a lucrative job in Monaco in return for insider information about other investigations relating to the financing of Sarkozy's presidential campaign in 2007.

This story emerged from the wiretapping of phone calls between Sarkozy and his lawyer, Thierry Herzog, that French prosecutors had started last year as part of a separate case - the alleged financing of Sarkozy's presidential campaign by the Gaddafi family.

According to the French media, the conversations revealed that Sarkozy and his lawyer were not only receiving confidential information on the on-going investigations, but were even aware of being wiretapped - given that Sarkozy had reportedly bought a new mobile and was using it to talk to his lawyer under the pseudonym Paul Bismuth.

We will see how the investigation evolves, but it could have important implications. Over the past few months, Sarkozy's political comeback has looked increasingly like a matter of when, not if. A few of his closest allies seem to think the former French President is the only one who can preserve the unity of the centre-right UMP party.

Indeed, Sarkozy could decide it is time to come back precisely in light of this scandal - engaging in a Berlusconi-style crusade against politicised judges. But it is far from clear whether the French electorate would buy this.

In the meantime, Front National leader Marine Le Pen is waiting in the wings, and could come out as the big winner. France's last two centre-right presidents, Jacques Chirac and now Sarkozy, have both been hit by legal scandals. It could be a great argument to persuade disaffected voters to shift to Front National. 

Would Cameron have been able to block Juncker if the Tories were members of the EPP?

No major party in the UK backed Jean-Claude Juncker, or any other 'Spitzenkandidat'. It is therefore fair to say that the UK electorate had no influence over the course of what some describe as an 'election'.

The counter-charge is that David Cameron is to blame because he 'left' the main centre-right group - the European People's Party (EPP).  Former Lib Dem leader Charles Kennedy made this point yesterday in the Commons - which was also alluded to by Labour MPs. If Cameron was a member, so the argument goes, he could have blocked Juncker's appointment as the candidate and then had some say over the 'election campaign' and associated deals. Critics are zooming in on the meeting of EPP-affiliated leaders in Dublin in early March, at which Juncker was selected (behind closed doors no less).

It may not be that simple though:

• The Conservative Party was never a member of the EPP. It was a member of the European Democrats (ED) that was linked to the EPP in the so-called EPP-ED. As such, the Tories didn't have offical 'voting rights' and therefore David Cameron would not have had a vote over Juncker's appointment. 
• It's also worth noting that the Labour Party, although being a member of the S&D group failed to block Martin Schulz as their group's Spitzenkandidaten.
• Likewise the Liberal Democrats failed to block Guy Verhofstadt as the ALDE candidate

There's an argument that Cameron could have used the political influence and clout garnered from being associated with the EPP to stop Jucnker, even absent a formal vote. However, other EPP leaders had limited influence on the EPP candidate. Sweden's Moderaterna were opposed but were over-ruled. Berlusconi failed to attend and Hungary's Orban was hostile.

In any case, we will never know.

The reason the Conservative Party left the EPP-ED is because they did not agree with the EPP's push for further integration. The wider problem for the UK political parties - and reform-minded parties in other countries too - is that their views are grossly under-represented in the main groups. This, in turn, links to to the fundamental problem with the European Parliament itself (as we argued here).

Note:

For the record this is how the EPP delegates voted to adopt Juncker, so Cameron's vote would have made little difference - but again, we won't know:

EPP delegate votes to adopt Juncker as candidate

Is Cameron the greatest pro-European of all EU heads of state and government?

As we've noted, the Juncker-hangover is already taking hold in parts of the German commentariat. In a hard-hitting piece, Lisa Nienhaus, the Economics Editor of Frankfurter Allgemeine Sonntagszeitung argues that the EU "needs more Cameron, not less".

"Hang on a minute, how exactly [was Cameron's opposition to Juncker] a mistake? He only said publicly what many think. Juncker may well be a jovial, cheerful bloke, but he is also an example of political mediocrity, who represents more of the same, a lack of ideas. Whoever wants to change Europe, and above all the opaque, hyper-bureaucratic European Commission, needs someone else in that post."

"Cameron did exactly the right thing. He did not only win the hearts of Brits but also of citizens in many other countries who worry about what will ultimately remain of the European Union, a bureaucratic entity that offers occupational therapy and valediction opportunities for veteran politicians. In this sense, Cameron is the greatest pro-European of all the heads of state and government."

She continues that Juncker did not enjoy a democratic mandate from the German people, and that Angela Merkel made a mistake by backing him:

"The Germans, for example, did not vote for the European People’s Party (of whom Juncker was the leading candidate) but the CDU. Juncker did not feature on the posters, it was Merkel. It is not the case that voters would have driven crazy if Merkel had ultimately arranged that someone else would have become the Commission President. In doing so, she would have shown that she takes this post seriously. Now she has only shown that she doesn't really care who takes this job."

As we have been arguing as well, Nienhaus adds that the European Parliament (EP) does not have more democratic legitimacy than the European Council, and the appointment of Juncker is effectively a power grab by the Parliament. She calls on Germans who share this view to support the UK:

"The heads of state and government are ultimately at least as democratically legitimised as the European Parliament. After all, they won national elections in their respective countries." 

"We can only hope that Angela Merkel does not take offence at [Cameron's] 'No’. We need the Brits in Europe, also for other reasons. The belief of the Brits that freedom is good for the economy, and that not everything has to be regulated by the state, is exactly that what the EU is currently missing."

Nienhaus concludes that the UK is vital for the future of the EU, and that the EU debate is missing some of the UK's beliefs:

"The suspicion among the Brits that the powers that have won want to initiate a redistribution of powers and favour a super-powerful state is widespread. That does not appeal to the liberal Brits. Those in Germany who share this view – and there are many – has to support the UK playing a greater role in the EU. We need more Cameron, not less."

Neinhaus's line is not universally accepted in Germany of course. Others have been sticking the boot into Cameron. Nonetheless, Berlin will be aware that last week’s EU summit is a foretaste of what life in the EU could be if the UK were to leave. Without Britain in the EU, Germany would face a bigger risk of being cornered by a block of Southern eurozone countries lead by Italy and France: something that is absolutely not in its long-term interests.

After the row: is Germany bringing the flowers and chocolate?

The dust from last Friday's extraordinary EU summit - the first at which an EU leader was actively outvoted over the appointment of the European Commission President - is starting to settle. As strong emotions recede, pragmatism is coming to the force both on the UK side - with David Cameron saying he is ready to put aside his differences with Juncker - and also on the continent and particularly in Germany.

Significantly, both German Finance Minister Wolfgang Schäuble (CDU) and German Vice-Chancellor Sigmar Gabriel (SPD) warn about the impact of a UK exit and stress the importance of the UK to the EU.

Here is Schäuble in today's FT:

“The EU without the UK is absolutely not acceptable, unimaginable. Therefore, we have to do everything, so that the interests and the positions of the UK find themselves sufficiently [represented].”

And, perhaps more surprisingly, here is Gabriel writing in today's La Repubblica:

"If we don’t manage together, over the coming years, to modernise Europe, make it less bureaucratic, respect national, regional and municipal responsibilities, then a large bourgeois majority of Britons – pushed by UKIP – will vote against Europe…The UK’s exit from the EU would signal the beginning of the end of the European project."

Interesting coming from Gabriel whose actions and rhetoric over Juncker could well have been designed to force the UK towards the exit door. Meanwhile, today's editorial in French daily Le Monde - not a natural supporter of Cameron - claims that:

“It is not an insult to [Juncker] to note that he doesn’t have the profile of a new man in Brussels…One of the priorities for Mr Juncker must be to repair the relationship with London. And to show, by innovating, that it’s no longer business as usual in Brussels.”

These comments show that - as we argued in our instant response to the Juncker appointment - it's all still to play for when it comes to EU reform.

Will there be a post-Juncker Brexit bounce?

The Mail on Sunday had the first poll (by Survation) following David Cameron’s summit defeat over Juncker’s appointment as European Commission President. The top line is that 47% of Britons want to leave the EU, with 39% in favour of staying in. Given the recent trend of polls finding majorities for 'In', this is quite a striking change.

However, a YouGov/Sunday Times poll (note that the fieldwork was conducted before the summit) showed attitudes to Brexit more or less unchanged, with 39% in favour of in, unchanged from a week ago, and only 37% in favour of out, actually down from 39% last week.

Other results form the Mail on Sunday poll would suggest that the Juncker episode has had a limited impact: 60% said Juncker's appointment would not change how they plan to vote in an In/Out referendum, while only 30% said it made it more likely they would vote to leave and 10% said they would be more likely to vote to remain.

Interestingly, the extent of German influence in the EU has not gone unnoticed. Asked who would have more influence over how the EU is run over the next few years, 50% said Angela Merkel, just 9% David Cameron, 11.5% Jean-Claude Juncker, and just 1.6% Francois Hollande.

It will be interesting to see further post-summit polls to see if the rise of the Brexit vote is an outlier or whether things have changed (even if only temporarily).

Italy claims "great victory" over "looser" eurozone fiscal rules

UPDATE (11:30am) - In a separate interview with Quotidiano Nazionale on Saturday, Mr Del Rio explicitly speaks of a "great victory" for Italy at the EU summit.

Here's the full quote:

"The green light to flexibility is the great victory [...] One needs to acknowledge that, thanks to Italy, the work of the summit was not focused on names, but on what to do to move from the time of austerity [rigore] to the true implementation of the [EU's] Stability and Growth Pact. We really won a substantial battle."

ORIGINAL BLOG POST (9:50am)

It was bound to happen.

The battle to make EU fiscal rules more 'flexible' was one of the key issues on the table at last week's European Council summit. Italian Prime Minister Matteo Renzi and French President François Hollande were seeking to make their support for Jean-Claude Juncker conditional on a de facto loosening of the rules. So what was the outcome? Well, depends on who you ask. If you ask Renzi's people, this weekend saw a watering down of the rules.

Graziano Del Rio, Renzi's top aide (see picture), claims thus in an interview with today's Corriere della Sera:

Q: Italy comes back from Brussels with the rule of the 'best use' of the flexibility already provided for [by the EU Treaties]. Isn't that too little to speak of a Europe that abandons austerity and of a victory of the Renzi government?

A: No, it's not too little because it is precisely the lack of use of flexibility that has caused our most serious problems.

Q: So, during its semester of [rotating] EU Presidency, Italy won’t ask to raise the [EU's] deficit limit, the famous 3% of GDP? 

A: I don’t think that’s a rule set in stone forever, but we don’t want to be the ones who move it onto sand. No, we won’t ask to raise the 3% [deficit/GDP threshold]. That’s also to avoid suspicions and titters in Europe, keeping in mind that there are other countries that glaringly breach that limit – and even Germany has done it during a certain period of time.

Q: Excuse me, but what does this greater flexibility mean then?

A: It means that, when deficit is calculated, part of the spending is not taken into account, or, better, it is considered as flexible. The [EU’s] Stability Pact effectively becomes looser. It can be done for co-financing, that is the money Italy is obliged to spend to use EU funds. We’re talking about a figure around €7 billion a year. But there’s also the investment clause, that would allow [us] to leave out of the calculation spending with a high social impact […] We’re talking about a figure around €3 billion. In total, flexibility could be worth €10 billion a year, although it can’t be taken for granted that these two items can be added together.

Of course, everyone is talking about 'interpretation', and no-one will say the rules have been formally re-written. Still, this looks as if the Italian government is claiming they have managed to loosen EU fiscal rules, via a new interpretation. Spin or otherwise, Berlin and Frankfurt won't be entirely pleased.

The Juncker row: Were there any concessions to the UK and what happens next?

The UK suffered a major defeat this afternoon when it was outvoted over Juncker becoming the next president of the European Commission. However, this isn't the end of the road for reform – not even close – but it certainly has strengthened the risk of Britain leaving the EU. See here for a our full analysis of this.

So did the UK get any early concessions? In his press conference, David Cameron took his defeat on the chin and said it would make his reform strategy harder:

“Today’s outcome is not the one I wanted. And it makes it harder, and the stakes higher…This is going to be a long, tough fight and sometimes you have to be ready to lose a battle to win a war. It has only stiffened my resolve to fight for reform in the EU, because it is crying out for it.”

Cameron was asked whether much more of this kind of thing would prompt him to recommend an ‘Out’ vote in a referendum. He declined the offer but did make the point that:

“And at the end of 2017, it will not be me, it will not be the House of Commons, it won’t be Brussels who decide about Britain’s future in the European Union. It will be the British people. It will be their choice, and their choice alone.”

 There were three nods to the UK in the Council conclusions:

• “The UK raised some concerns related to the future development of the EU. These concerns will need to be addressed.”

• “The European Council noted that the concept of ever closer union allows for different paths of integration for different countries, allowing those that want to deepen integration to move ahead, while respecting the wish of those who do not want to deepen any further.” 

• “Once the new European Commission is in place, the European Council will consider the process for the appointment of the President of the European Commission for the future, respecting the European Treaties.”  

Any of this significant? It’s the basis for a conversation but can mean anything and nothing at the moment. It falls way short of compensating for the defeat inflicted on Cameron. As we argue, it all depends on what happens next.

There were also this on the role of national parliaments:

"In line with the principles of subsidiarity and proportionality, the Union must concentrate its action on areas where it makes a real difference. It should refrain from taking action when member states can better achieve the same objectives. The credibility of the Union depends on its ability to ensure adequate follow-up on decisions and commitments. This requires strong and credible institutions, but will also benefit from closer involvement of national parliaments."

Again, hardly earth-shattering. So what happens next?

Well, in the short-term, there are three things to watch:

1. Will there but further nods to Cameron over the next few days and weeks? There’s already talk of Merkel, Hollande and Cameron doing something jointly. 
2. Who will become the European Council President? This is in many ways the person who will broker the agreement between EU leaders that will decide whether the UK will stay in the EU. This will be decided at an EU summit on 17th June. 
3. The other portfolios in the European Commission and who will become the UK’s candidate. Surely, Cameron must now respond by sending a big hitter to secure a top job?