Abandon Ship: Time to stop bailing out Greece?

We've put out a new briefing on the potential second Greek bailout and the cost of a Greek debt restructuring this morning. See here for the full report, but here are some of the key points:

- EU member states have in total amassed quantifiable exposure to Greece of €311bn (via their banking sectors, the bail-out packages and the ECB’s liquidity programme). France and Germany have exposure of €82bn and €84bn respectively, while the UK only has €10.35bn exposure (in direct exposures).

- In a best case scenario, to carry Greece over until 2014 a second bail-out would have to cover a funding gap of at least €122 billion. This includes Greece receiving the full amount of the original bailout as well as meeting its deficit targets and privatisation commitments. If these fail the funding needs could rise to €166bn, potentially requiring Greece to make a third request for external aid.

- The cost of restructuring will also increase with time, as Greece’s debt burden will only rise over the next few years. To bring down Greece’s debt to sustainable levels today, half of it would need to be written off. In 2014, two-thirds of Greece’s debt will need to be written off to have the same effect, meaning a radical increase in the cost to creditors. Put differently, each household in the eurozone today underwrites €535 in Greek debt – by 2014 and following a second bailout, this will have increased to a staggering €1,450 per household. This makes a second Greek bail-out far more politically contentious than any of the existing rescue packages, given the likelihood of debt write-downs with taxpayers footing a huge chunk of the bill.

- Unfortunately, this is a debt crisis and someone will have to take losses. We estimate that the first round effects of a 50% write down on Greece’s debt would cost the European economy between €123bn - €144bn (uncertainty regarding the ECB’s exposure accounts for the range). However, these are only first round losses. It cannot be emphasised enough that the main cost from a debt restructuring comes in the form of contagion and the knock-on effects of losses throughout the European banking system. Although this is a substantial cost, we estimate that in 2014 following a second bailout, a haircut of 69% would be needed, equal to €175bn, to reach the same debt level.

These graphs clearly illustrate why a second Greek bailout is such a difficult political sale. Basically: banks out, taxpayers in. Seriously, does anyone think that this is in any way sustainable?

The Greek Crisis: What next?

With the Greek and eurozone debt crisis showing no sign of easing, let's try to assess the state of affairs - and what could happen over the next few weeks:

• Last Friday, French President Nicolas Sarkozy and German Chancellor Angela Merkel made clear in a joint press conference that they were both calling for a "voluntary" participation of private investors in a second Greek bail-out, removing a stumbling block to an EU agreement on a second Greek bail-out (Germany had indicated that it wanted some sort of mandatory involvement from creditors);

• Greek Prime Minister George Papandreou confirmed over the weekend that a new loan "roughly equal" to the €110bn one agreed last year was being discussed;

• However, after an emergency meeting and hours of endless discussions, eurozone finance ministers have agreed to delay any decision on Greece until next month. In other words, Greece will get a new rescue package and the next instalment of its first bail-out only if the Greek Parliament adopts the new austerity package, worth €28bn.

So what next for Greece? Here are a couple of key dates you should really write down in your calendar if you want to stay on top of the Greek crisis:

• Tomorrow, the Greek Parliament will vote on the new cabinet. It's a vote of confidence, and if Papandreou and his ministers don't win it, early elections may be called. This would delay the approval of the new austerity package;
  

• On 23-24 June, EU leaders will meet in Brussels. They are expected to confirm that Greece must commit to a new round of austerity measures if it wants to receive fresh aid. More details of the second Greek bail-out will be decided, particularly in regards to the way in which private creditors will contribute to a second bail-out;

• On 28 June, another key vote will take place in the Greek Parliament. This time, Greek MPs will vote on the €28bn austerity package which will allow Greece to get fresh money from the EU/IMF and avoid a default. The outcome of the vote is far from certain, as Papandreou's government currently holds a tiny 5-seat majority in Parliament;
  

• On 3 July, eurozone finance ministers will hold another emergency meeting to take stock of the situation in Greece. By then, they hope that the Greek Parliament will have given the go-ahead to the new austerity package. If this is the case, they may decide to unblock their share of the payment of the next instalment of the first Greek bail-out loan, which together with the IMF's share is worth €12bn;
  

• On 11 July, eurozone finance ministers are expected to make their final decision on the second Greek bail-out.
  

So expect EU leaders and markets to remain on the edge of their seats over the next few weeks. As ever, it's a race against time. Greece has some debt repayments to make by mid-July and will be forced into bankruptcy if it fails to secure further EU/IMF financing.

Tomorrow, we will publish a new briefing on the implications of a second Greek bail-out and a likely default. Stay tuned.

Staring into the abyss

The situation in Greece has shifted in the last few days (admittedly a massive understatement), previously the disagreement between the ECB and Germany over a second Greek bailout was the main threat, but with the IMF now agreeing to release the next tranche of the original Greek bailout funds, the main engine pushing Greece towards an imminent default is now the domestic political chaos.

As we've argued before, EU leaders' gamble on the viability of the eurozone was always two-fold: first, that economic forces could be contained (which we all knew they couldn't) secondly, when a crisis hit, taxpayers and citizens would go along with whatever crisis-solution that EU leaders came up with, be it bailouts, EU-backed austerity measures or closer fiscal union.

On the economics side - as we've argued since the idea of eurozone bail-outs were first being discussed last year, a one-off rescue package for Greece was not going to work. In a paper published in February this year,we argued that:

"Greece’s situation is simply unsustainable. This year, Greece needs to find at least €53 billion just to avoid increasing its already massive debt. Even in a best case scenario and with the help of foreign taxpayers, Greece is set to fall short of these targets. The numbers simply do not add up and some sort of restructuring – or additional help – therefore seems inevitable."

This is where the second big gamble kicks in - how far can you push electorates in both debtor and creditor countries, before something gives in? Media across Europe is now awashed with images from the Greek protests and stories about the political chaos that has hit its governing class with with full force. Like any other gamble, the outcome of EU leaders' bet on social, democratic and political forces being possible to contain is shrouded in uncertainty.

So what about the options on the table? Well, next week, Open Europe will publish a briefing detailing the EU's exposure to Greece (through various channels) and the potential costs and implications of a second bail-out. Again, as we've argued for a longer time than most, a full debt restructuring is emerging as the only viable option.

At the moment, two options are being discussed for involving the private sector in the second bailout, although neither goes far enough and looks unlikely to make any long term difference:

Bond rollover - Offers private bondholders, who hold debt maturing in the next few years, the chance to purchase new longer term debt. This option is backed by the ECB and France since it is completely voluntary and would not be viewed as a default by the rating agencies. The main problem is, why would any bondholders agree to this? It comes down to whether they believe that the EU/IMF will let Greece default if they do not take part. Even if a substantial number of bondholders agreed, it would only relieve the pressure for a short amount of time.

Bond swap - Offer private bondholders the chance to swap out their current bonds for those with longer maturities (7yrs has been discussed). Originally viewed as voluntary but rating agencies have made it clear that this would be judged as a default. Same problem as rollover, why would bondholders commit? Also significant disadvantages from being judged a default (no more ECB liqudity for banks etc).

Although the reversal by the IMF is welcome in the sense that it avoids Greece defaulting in a disorderly manner next week, the underlying problem remains. A second bailout will not solve any of Greece's problems but will merely delay the problem and will mean that when the eventual restructuring happens more debt will be in official hands (EU/IMF/ECB), furthermore it will simply be renewing and extending the massive gambles which the EU took with the original bailout, clearly that lesson has not be learnt.

And the situation is getting tenser. This morning, Swedish Finance Minister Anders Borg - whose country just like the UK and virtually any other economy (apart from perhaps North Korea) will take hits should Greece default - said that the Greek opposition's refusal to enter a national unity government borders on “criminal irresponsibility.”

Responding to the ECB...again

So, the frank exchange of views with the ECB over our recent research into the ECB’s exposure to peripheral Eurozone countries rumbles on (albeit indirectly for the most part).

(See here for our previous response to the ECB)

Yesterday, the WSJ Real Time Economics blog covered comments by ECB Governing Board member Lorenzo Bini Smaghi suggesting that estimates such as ours were based on a "misunderstanding of the Eurosystem and its risk provisions" (we recommend reading the blog in conjunction with this post to make sense of it all).

Bini Smaghi makes three key points, which we try to address here: that the ECB’s revaluation account can actually absorb any losses it faces, that its stream of seigniorage from printing money adds to its financial strength and that only a default would really threaten the ECB’s balance sheet.

This seems to be a classic example of an EU institution trying to hide behind its own complexity. Frankly, we've seen it all before, and we're not overly impressed.

So here we go (excuse some of the technical language, we’ll explain it all further down).

Default assumption:

Bini Smaghi notes that both the bonds the ECB holds and the collateral it has taken on would only face losses if there was a default. Well, as you will know from reading our research, this was the very premise of our paper. Pretty much everyone, outside of the ECB and some Eurozone leaders, believes that Greece will need to default, in some form, in the near future. The ECB can continue to preach this line but we, along with plenty of others, believe they are living in a dream world. (Also stay tuned for an upcoming piece of research from us on the Greek crisis which should support this argument)

Revaluation account:

Firstly, the revaluation account was set up to help protect against losses on foreign reserves (including gold and dollar denominated holdings) resulting from changes in prices or exchange rates. As the value of these holdings changes any gains or losses are shifted to the revaluation account while the assets themselves remain listed at original prices. The idea is that these changes could be temporary and so it is financially prudent to add in this extra buffer (we agree on this point). Accepted, since the revaluation account is now over €300bn it is unlikely that all of this would be needed to buffer against price or exchange rate risks. However, it is not clear why, after being used for this purpose for over a decade, the ECB would switch to using it to account for broader credit and collateral risks. This also explains why we did not include it in our paper, since it is not defined as part of the capital base and was not created for the purpose now being suggested. Hence we stick by our comment that it would take only a 4.25% decrease in the value of assets to wipe out the ECB’s capital base (defined as capital and reserves, the standard definition).

More importantly though, this means that any money inside the revaluation account is unrealised (meaning it only exists on paper until the underlying assets are sold). Therefore, in order to cover any losses which appear in the ECB’s profit and loss account (realised losses) the ECB would need to sell some of these assets. So, the ECB would essentially be deleveraging to help cover its losses, a process which we’d expect might startle financial markets. This also means that Bini Smaghi is including the potential sale of assets as part of the capital base calculation, which seems far from normal. Including this money in capital and reserve buffers is very confusing since the revaluation account is listed as a liability while the actual holdings are listed as assets. These points seem to make it difficult for the revaluation account to be judged as a real backstop against the potential losses from a Greek default.

Additionally, since these gains are unrealised and the assets would have to be sold off for the revaluation funds to be tapped, the liquidity of the assets must also be considered. Given that demand for gold and dollars remains strong this may not be such a problem. However, these holdings will always be slightly constrained by their liquidity and will involve some transaction costs.

Furthermore, if Greece was to default we’d expect there would be significant turmoil in the financial markets, with money rushing out of the Eurozone and towards the 'safe haven' of the US. This would ultimately cause a massive drop in the value of the euro, likely wiping out a part of the revaluation account.

Seigniorage:

This is a highly technical issue, so bear with us. Seigniorage is essentially the income which the ECB and Eurosystem devise from being able to print money. Since they control the size of the monetary base now and into the future this income represents a significant financial strength, this is undeniable. However, it does have its limitations, particularly under a Greek default scenario. Firstly, it is dependent on the demand for currency, the interest rate and the inflation rate. These are all currently low, mostly due to the sluggish recovery in parts of the Eurozone, meaning that the level of seigniorage is limited. A paper published through the ECB last year notes that this income dropped to around €787m in 2009, and even at its peak was only around €2bn, not massive amounts considering our loss estimates of between €44bn - €66bn.

The ability to control future money production is important, but our point is more that the immediate hit which the ECB and Eurosystem will take from a Greek default would be passed through to taxpayers. Even with a large future potential income from printing money this cannot really be overcome without printing money immediately, which would be inflationary, as we suggest. Furthermore, if the ECB did draw on future incomes it could undermine the future financial strength of the ECB. Ultimately, our point was that the immediate hit which the ECB would take under a Greek default could cause it to need to be recapitalise or ramp up its printing of money (above the point where it is non-inflationary) and these costs would be passed onto taxpayers.

If you’ve stuck with us until now, thanks for hearing us out. Our research into the ECB was an attempt to scratch the surface on what is an incredibly opaque and complex issue. Once again, given its response, the ECB appears to remain in a state of denial over the problems it faces.

Update 16/06/2011 8pm:
As a keen observer has pointed out, the weakening of the euro would in fact increase the revaluation account. This is because the assets, such as gold or dollars, would be able to be sold or exchanged for a larger amount of euros. There might be an inflationary aspect to this, as with any devaluation, although we doubt that it would be large enough to have much impact. An admitted mistake on our part, though certainly not a vital part of our argument in any case.

House of Lords isn't getting with the programme

Almost entirely unnoticed by the UK media (with the exception of the Guardian), the House of Lords is doing its best to rip the heart out of the Government's EU Bill and accompanying "referendum lock". The Government last night suffered its third and fourth defeats on the Bill in a week, with peers voting by 242 to 209, to modify the Bill's "sovereignty clause" and by 209 to 203 to introduce a "sunset clause", which would see the entire Bill lapse at the end of this Parliament.

We have always felt the sovereignty clause the less important aspect of the Bill compared with the referendum lock but the latter, designed to give Parliament and voters a say over any significant future transfers of power to Brussels, has now been attacked and severely mauled by peers.

On Monday, peers voted to restrict the issues on which referendums should be held to only three: joining the euro, the creation of a "single, integrated military force", and changes to border control. This would leave the public without a say over several important issues such as whether a future UK Government could sign up to the creation of a new European Public Prosecutor or give up arguably the UK's most important veto of all: it's right to veto the multi-annual EU budget.

And, in the words of Foreign Office Minister Lord Howell, these amendments completely "undermine the direct and frank and honest commitment that we wish to make to the British people...I really would suggest that the public can be trusted to determine what is in their own interest."

As we've noted before, there is a certain irony in the fact that it is an unelected body, the House of Lords, which is displaying such great suspicion and hostility to giving people a greater say over their country’s relationship with the EU - and peers have given us some unintentionally hilarious quotes during the often bizarre debates on the Bill (we'll give you a few samples shortly). But the fact that it is being allowed to do so completely under the political radar is probably even more worrying.

"Nothing can stop us - we will never pay!"

If you'd happened to pass by Syntagma Square in Athens this Sunday - the site of various protests over the last few weeks - you would have had the chance to reflect on the various chants from the Greek protesters frustrated with their government's/the IMF's/the EU's harsh austerity measures.

From the most basic “THIEVES! THIEVES! THIEVES!” (‘kleftes’ in Greek), which according to the Greek media was the most prominent chant a few weeks back, the protesters are now becoming rather more creative in expressing their frustration.

For example, “We’re not going on holiday, we’re not going to the beach, we’ll be here every single day on the Square” (which rhymes in Greek apparently), could be heard around the Square last Sunday.

So could the catchy, “The junta didn’t end in ’73, we’re the ones who’ll bury it in this square”, a reference to the dictatorial Colonel’s regime ruling Greece from 1967 to 1974 (In Greek, “73” rhymes with “square” so was the natural choice for the protesters, despite the slight historical inaccuracy). “Their Parliament will become their prison!” was another popular one, although it's not exactly clear who "they" refers to. For those wanting to get straight to the point, the "Nothing will stop us - we will never pay" chant was another option. Happily, protesters seem to have dropped a previous minority favourite - "Politicians! Politicians! Come out, we are going to eat you!" - which, despite possessing a certain immediacy, might be a bit over the top (especially in translation).

According to recent reports, there were fewer protesters around than on previous Sundays, but, according to the protesters themselves, this was due to heavy rainfall. Others point to the fact that yesterday was a Bank Holiday Monday in Greece, and many people chose to enjoy the 3-day weekend away from the city.

After all, austerity protests or otherwise, a holiday is a holiday.

Remember AIG?

The Bank of International Settlements - the go-to source for checking the exposure of one economy to another - published some new data last week.

As always, it makes for interesting reading. In particular, we were fascinated by this: while European financial firms have huge direct exposure to Greece, Ireland and Portugal (since they own most of the bonds issued by these countries), it is American firms that have sold a substantial portion of the insurance on this debt (in the form of credit default swaps). This means that if, for example, Greece was to default the Americans would take a pretty hard hit since they would have to pay out on the insurance they have provided against a Greek default.

So if this reading is correct, a surprising number of American firms that have taken the opposite side of the bet on a Greek default.

AIG anyone?

Another broadside from Frankfurt

No, we're not talking about the ECB, but the Frankfurter Allgemeine Zeitung. Following the stinging attack from its Vienna editor last week on the current direction of the EU, it was today the turn of the paper's Economics Editor, Rainer Hank, to launch his own broadside.

With the eurozone bail-outs his main target, Mr Hank notes that,

"The EU could just let Greece crash because in paragraph 125 of the EU treaty it says: 'The Union shall not be liable for or assume the commitments of central governments' (…) It will never come that far because, one year ago, European politicians founded the 'euro rescue club' which has had plenty to do ever since. It started with €110 bn for Greece, continued with billions more for Portugal and Ireland and now we are back to Greece again even though the IMF, the ECB and the EU have predicted Greece’s bankruptcy in official statements."

He argues that,

"No doubt: Europe’s rescue started with a breach of law. And, as with Adam and Eve’s breach of law in paradise, one sin leads to many others."

...which is all too true.

He then goes on to make the very crucial point that the bail-outs are pretty much against the ECB's and the IMF's rules as well - an argument that plenty of German economists will readily subscribe to.

He goes on:

"The result of European solidarity is disappointing: Millions of euros and dollars are gone, Greece is still not rescued and Europe is severely damaged... Where you find losers (democracy, the constitutional state and public support) you will also find winners. These are the centralists.”

For you German speakers, we strongly recommend reading the whole article - there's plenty of thought-provoking stuff in there.

ECB blues

The Open Europe team has spent a couple of weeks delved into the books of the European Central Bank. Trying to get to the bottom of what's actually on the ECB's books is a bit of a mission, given that the institution is so opaque that it would probably violate the EU's Transparency Directive on virtually every single point.

In any case, last week we published a report cataloguing the exposure of the ECB to weaker eurozone economies. We estimate that its exposure to Portugal, Ireland, Italy, Greece and Spain has now reached €444 billion - €190 billion of which is to Greece. The point being that this is a hidden potential cost to taxpayers of trying to save the euro (as the ECB is underwritten by taxpayers).

The findings stirred things up a bit - and we got plenty of feed back (overwhelmingly positive for trying to shed some light on what is a dense and poorly understood area). Below are some clarifications and remarks in regards to some of the feed back we got - it's a bit long-winded but please bear with us.

• "The ECB's losses will be shared between national central banks so it won't be a cost to the ECB itself." We heard this from a couple of people but it's actually not countering anything that we're saying. In fact, we're making the very same point in the report. Any losses will always be shared out between national central banks (particularly as it is national central banks that accept the collateral for banks in return for giving credit). There are, however, a few possibilities for how such losses will be shared in practice (either the ECB's reserves can take the hit directly, meaning it will most likely need to be recapitalised, or NCBs will take the hit directly with the ECB technically only shouldering 8% - see p.9 of the report for a discussion on this). But regardless, the cost will ultimately be passed on to taxpayers.

• "The ECB should be able to withstand losses arising from a sovereign default, even if it needed further recapitalisation by its NCBs." Related to the above, this is the conclusion that an article in last week's Economist, citing our report, seemed to draw. In other words, a Greek default would not wipe out all of the ECB's reserves. Again, as we argue in the report, this is true but is sort of missing the point we're making. "Even" in that sentence is the crucial part. A recapitalisation from NCBs would effectively constitute a cost to taxpayers - which is precisely what we're trying to flag up in the briefing.

• "The central bank in the country that defaults will take most of the hit". This is what ECB executive board member Lorenzo Bin Smaghi said in an FT interview the other week, seemingly suggesting that the Greek central bank would take most of the hit from a Greek default. As we've argued here, this is implausible. How would the Greek central bank, backed by the country's cash-strapped national treasury, be able to absorb such huge losses? And if it had to face such losses, then bail-out money would have to take up the slack, which again would take us back to taxpayers. And as we note in a letter to today's FT, Bin Smaghi's claim has been contradicted by Dutch executive board member Nout Wellink, who told Dutch television last month that Dutch taxpayers were on the hook for €4bn via the ECB should Greece default (using this as an argument against Greek restructuring). This suggests that the losses would indeed be shared out amongst NCBs. Incidentally, Wellink's projections line up almost exactly with our higher-end estimates for how much a Greek default would cost the ECB (we estimate €65.8bn in total under with the Dutch central bank would be on the hook for €3.9bn).

• The ECB's "vehement objections to a restructuring may be as much about credibility as its assessment of the risks it faces". This is from the same Economist article cited above and is also probably true, though as we argue in the report, it's difficult to separate the two. As a paper from the ECB (published right before the ECB started to buy governments bonds), notes:
  

"The perceptions of a central bank’s financial strength have an impact on the credibility of the central bank and its policy. If it is expected that the central bank is not capable of or willing to incur losses, then costly objectives and policies are not credible and the target cannot be achieved or only at a higher cost to the economy. Financial strength helps the central bank to protect its independence, which is a crucial component of credibility."

• "Other central banks are even more leveraged than the ECB". This is, in essence, what Commission President Jose Manue Barroso said when presented with our findings. Barroso is actually correct. Both the Bank of England and the Fed are leveraged around 50 times (which is itself a bit concerning - but that's a different discussion), compared to the ECB's 23 times (though other central banks such as the Swedish and Swiss ones are only 5-6 times leveraged). The ECB's leverage itself is not as controversial as what's actually behind it, and differs from that of the Fed and the Bank of England in some vital respects. In particular, the ECB's acceptance of risky paper, such as Greek bonds, is effectively transferring risk from investors to taxpayers, and from weaker, debt-challenged euro-zone economies to the richer economies, like Germany's. This isn't what the ECB should be about.

• "The ECB also bails out banks and governments in a third way". This relates to the discussion regarding the Eurosystem's Target2 system, which some economists, head of the Ifo institute Hans-Werner Sinn in particular, have argued constitutes a separate stealth bailout from the German central bank to peripheral central banks. The impact of the Target2 system is far from clear but we are of the view that it is, at most, looking at the same problem from a different perspective. The argument that these Target2 imbalances have been crowding out lending in the core or funding peripheral current account deficits also seems misguided. This debate will likely rumble on, but ultimately Target2 is a settlement system and as the interbank lending market in Europe recovers these imbalances should retreat (although this could take some time). In the meantime, any losses would still be shared out amongst Eurosytem members as we laid out in our paper. The real risk is still best represnted by the extensive loans which the Eurosystem has made to peripheral banking sectors and the dodgy collateral it has accepted in return.
  

The prize for the strangest response to our report, however, goes to the Brussels correspondent of Spanish financial daily Cinco Días who (in addition to suggesting that we want to ban Brussels sprout) concluded that the reason for us publishing the report on the ECB's exposure was because....wait for it...we have invested in a massive amount of Credit Default Swaps on Greek debt. In other words, should Greece default, we'd be rich.

Now, if only that was true.

Is your MEP in favour of EU taxes?

One of the main effects of the Lisbon Treaty was that MEPs were given a lot more power over EU decision-making, at the expense of national governments and parliaments (since the Treaty also transferred substantial powers away from member states, and therefore national parliaments.) This was an element of the Treaty which governments clearly didn't think through properly. In practice, the European Parliament has its own logic, its own cycle and its own agenda, which doesn't really correspond to public opinion in member states. In short, to give so much power to cheerleaders of further EU integration at a time when further EU integration is the last thing most citizens want was a pretty silly idea.

National governments are now paying the price.

If you want a clear example, consider MEPs' vote this week on the shape and size of the EU's next long-term budget (likely to run between 2014 and 2020). The Lisbon Treaty gave MEPs full co-decision powers over the long-term budget, meaning an effective veto over anything national governments decide.

In the vote this week, MEPs voted 468 against 134 (with 54 abstentions) for the 'big three', defying what many national governments had called for:

• An increase of at least 5% to the EU budget over its 2013 level
• A direct EU tax to fund the EU budget
• A phasing out of all national rebates, including the UK's.
  

The phasing out of the rebate is politically complicated as it pits net contributors that have a rebate from the EU budget (such as the UK) versus the net contributors without a rebate (such as Denmark and France), so let's leave this one for a sec. However on the first two, you'd be hard pressed to find support amongst citizens (at least in those states that have to cough up) for any increase to the EU budget or an EU tax (for a whole range of reasons). As we've repeated so many times that it's getting old, MEPs are doing themselves no favours by constantly churning out their demands for more - ranting like this is hardly going to score them many points with citizens either. Their biggest hurdle, we suspect, will be Germany (which will contribute the most to the EU budget by far post-2014).

So, how did the UK MEPs vote? The table at the bottom gives a break-down of their votes on key amendments.

From the looks of it, Lib Dem and Labour MEPs voted in favour of an EU tax, while Lib Dem MEPs seem to have voted against an amendment calling for national rebates to be maintained. So if Lib Dem MEPs had their way, both the UK's gross contribution (under the 5% increase) and its net contribution (because the rebate would be scrapped) would increase pretty significantly.

We also note that the Lib Dems stated in their election manifesto for the European elections in 2009 that

"We do not see the need, in the current context, for any significant growth in the budget’s size, nor the abolition of the British rebate."

The Lib Dems' voting record this week doesn't suggest that they honoured this pledge - or are we missing something (i.e. was there any other amendment to the same effect that they voted for instead?).

Anyway, check out the table to see how your MEP voted (click to enlarge).

FAZ: the EU has become "a demon, uncontrollable, impossible to vote away"

This is some forceful stuff from the Vienna correspondent for the Frankfurter Allgemeine Zeitung, Dirk Schümer. In a piece published in Monday's paper under the headline "Back to the nation", Mr. Schümer takes a long, critical look at the current state of the European Union - and he takes no prisoners.

The subtitle of the article is an indication of where he is heading:

“The EU was the best thing that has happened to Europe since the fall of the Roman Empire. Throughout the years it has however turned into a demon, uncontrollable, impossible to vote away.”

And then off he goes:

"The idea after 1945 was simple (…) at the moment when all Europeans pay for the same goods with the same coin, then Europe would encounter 'eternal peace' (…) The dream of a peacefully unified Europe has become true - in judicial and administrative terms it is now the strongest economic area in the world. There are no internal conflicts, no mass poverty and no dictatorships (…)"

But now, he says, "Now Europe is finished.”

“The single currency crashes and a small group of desperate bankers and politicians turn it into monetary waste paper by giving out emergency loans.”

Harsh but true.

With the European Project coming under strains on so many fronts, the open border policy and the bailouts for example, is it surprising, he asks, that "anti-EU politicians get rewarded with 20% of the votes?....actually it is surprising that the 'enough-is-enough' group remained so small up until now.”

Warming to his subject, Mr. Schümer goes on:

“In the beginning it was all about steel, the leftovers of war and the isolation of dangerous German Nazis. Then about a vote over coal transportation. Then about electricity production. Then about traffic routes. Then about agriculture. Then about customs. Then about the judiciary. Then about the currency. And now about everything.”

Then he makes a crucial point:

“No citizen was ever asked. Had anyone asked the French for their opinion in the 1960s if they agreed to have a common jurisdiction with the detested “boches”, or had anyone proposed to the Dutch to abolish border controls at Venlo, or had anyone demanded an extraordinary tax for Italian farmers from the Luxembourgers – the rejection surely would have been higher than 90%. Today all of it is perfectly normal."

Showing no signs of slowing down, he goes on:

“By this ordinance Europe turned into a historically unknown demon: No federal state, no federation, no democracy and no dictatorship. It is a bureaucracy that no one understands and no one can vote away.”

It is not a coincidence, he says, that the only consistent democracy in the world, Switzerland, is incompatible with the EU.

And then the grand finale:

“Europe has no common public and it shows that democracy cannot exist without discourse...It is doubtful that there is a way out of the euro and the Schengen area without a collapse. A Europe with new internal conflicts, increasing hatred, barbaric struggles for economic resources, decreased welfare states and mass migration to central Europe - such a Europe, where political lunatics and their doctrines of salvation would have a chance, is not simply a horror scenario but the real result of a failed, uncontrollable and unloved, EU.”

“Europe can only be solved if the overly complex engine in Brussels is stopped. All decisions must again be taken democratically on a national, regional or local level.”

Really strong stuff. In fact, this is one of the most critical analyses of the EU that we've seen come out of mainstream Germany.

And MEPs (with some notable exceptions) - who yesterday voted for a 5% EU budget increase and EU taxes, while insisting on keeping their own expenses secret - still think that the UK is the main obstacle to their vision of a federal Europe.

Party pooper?

The long awaited tenth birthday of the euro is almost upon us, as January 2012 will mark 10 years since the introduction of euro banknotes and coins. For some it’s a dream come true, but for others, it certainly won’t be time to celebrate.

The euro, it seems, has matured rather earlier than expected. As at ten years old, it will have already left behind its heady years of youthful fun. Gone are the days when it leapt ahead, leading the world’s currencies. Gone are the days of dreamy idealism when political and media commentators whispered on, “you can be anything you want to be”. Indeed, for the euro, the noughties will always be remembered fondly.

Like all youngsters these days, the travails of the modern world have brought adolescence down on the euro’s head with a bump, and growing up has proven tough. Life in the ‘real world’ is not quite as simple as it initially seemed, and living up to certain people’s expectations appears virtually impossible. The euro has come to learn that its apparently ‘reckless’ behaviour will not be tolerated, neither by voters nor markets. Instead they now whisper, "the party's over, it's time to clean up". Strange really, considering that no-one seemed to mind the wild parties of the noughties...

Anyway, enough of that introspective nonsense. Despite some growing pains, there are those intent on carrying on the celebrations.

Cue the European Commission….

For those who wish to remember the day for years to come, what could be better than a special commemorative coin? Better still, a coin designed by its nearest and dearest – the eurozone citizenry.

Yes that’s right, in March, the European Economic and Financial Affairs Commission launched a competition to design the 2012 commemorative coin. Five designs have already been chosen and you can vote for your favourite here. (you won't be surprised to learn that none of the shortlisted contributions draw inspiration from the placards that have featured in various euro related anti-austerity protests lately). The winning coin will be issued in all eurozone countries.

So keep your eyes out for the coins in January next year. In years to come they could be a valuable collector’s item, or perhaps even a relic of the past.

He’s back

Negotiations over who will take part in the next Finnish government have proven sticky. Six weeks after the elections, a deal still hasn’t been struck, meaning that Finland is still stuck with a caretaker government. The negotiations have now entered a new phase, following the Green Party's departure from the talks (it seems that forming a government with so many right-wing parties proved a bit too much for them).

So, following some twists and turns, the True Finns are now back at the negotiation table. Remember that the True Finns threw in the towel after they failed to reach a compromise on Finland’s participation in the Portuguese bail-out - an issue which the party vehemently opposes and which it won many votes on.

Without the Green Party, National Coalition leader and government negotiator Jyrki Katainen will need the True Finns’ support to achieve a majority in the Finnish parliament. According to Yle, the Centre Party is taking part in the negotiations on the condition that the True Finns are also included (the reason for this is unclear to us).

Soini, seemingly happy to be back, said that he is ready to restart negotiations but first wants to make sure that the True Finns' demands on the EU are met. “At this point, the three other big parties are on the same footing as we are”, said Soini today, without spelling out exactly what he means. He did, however, add, “I’ve been right all this time...In Europe, the criticality of these [bail-out] packages is increasing each day”.

The True Finns are expected to clarify their demands later this week. Interestingly, things have moved on considerably since the last discussions, as in addition to the controversial Portuguese rescue package, a second Greek bail-out has been added to the mix. How will Soini tackle Finland’s participation in a fresh rescue package for Greece, knowing that there’s a huge risk that a substantial chunk of the cash lent stands the risk of never being paid back to Finnish taxpayers (as Greece is likely to default in 2013-2015)? Soini said today: "We will not vote for bailout packages. But will that stop us from entering the government? That remains to be seen."

Add that to Slovakia’s resistance to activating the EFSF (the eurozone only bail-out fund for Greece) and it appears that the EU's headaches just got worse. (Incidentally, the return of the True Finns also increases the risk of the EFSM, the EU-wide bail-out fund for which the UK is partly liable for, being activated.)

Just when you thought the eurozone plot couldn't get any thicker….

How much uglier will this get?

As we noted yesterday, EU-IMF mandated austerity is beinging things close to boiling point on the streets of Athens.

Portuguese sources are reporting this morning that Chairman of the EuroGroup Jean-Claude Juncker has received "death threats" from Greece.

And the German tabloid Bild today reports that a delegation of German MPs who visited Greece in May were threatened by Greek socialist MP Maria Skrafnaki, who said that "if you don't support our country (...) then your countrymen will know the same fate as those during the second world war in Crete". If accurate, it's hard to get any harsher than that. CSU MP Michael Hennrich told the newspaper that "Greek Parliament Speaker Philippos Petsalnikos has insulted us in the same way", which was denied by the latter.

Apparently, the WWII reference was not translated for the German MPs at the time, and only surfaced recently, which is why it took so long for the story to come out.

With further austerity on the way in the form of a second Greek bailout, things may sadly get even uglier. Again we pose the question, what is the political breaking point?

Close to boiling point?

According to some reports, between 80,000 and 100,000 people took to the streets of Athens yesterday in the 12th day of protests against the government’s ongoing austerity drive, as dictated by the EU and the IMF.

Crowds have pledged to continue protesting until the government reacts, but with a second bailout under design with even harsher austerity conditions set to come, the government’s room for manoeuvre is limited, at best.

Kathimerini reports that a group of protestors last week blocked 60 Greek and foreign parliamentarians in a restaurant. The MPs had to be escorted away from the restaurant by police on a boat. While some Hellenic hell raisers are to be seen with banners dipicting the the European flag with a swastika set between the twelve stars.

And Greece is not alone. The past few months have seen protesters take to the streets in countries across Europe. Austerity is usually an unpopular move, especially when it’s imposed from above, by officials people have never voted for and can't vote out of office. And even more so when the policies may not even work (i.e. the bail-outs).

On 15 May the Movimiento 15-M, otherwise known as the Real Democracy Now movement, saw some 25,000 protest in 50 cities across Spain. With youth unemployment reaching 40% and an economy trapped in the euro's uncompetitive periphery, there's little prospect of any improvement soon - though Spain is doing some things right. The next big rally is planned for 19 June.

And people in Portugal and Ireland aren't exactly happy either.

So far, EU leaders have been gambling on these protests being manageable. But with the eurozone facing a long, hot summer of discontempt, the question on everyone’s lips is how much more can the people take? And what happens if they reach the boiling point?

Trichet: I have a dream (an EU finance minister)

Jean Claude-Trichet is reaching the end of his term as ECB President, which is probably the reason why felt able to say this today:

"In this Union of tomorrow, or of the day after tomorrow, would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the Union?"

In a provocatively political speech in Aachen, Trichet set out some ideas on what 'fiscal union' inside the eurozone might actually look and feel like, particularly for eurozone governments that call on their neighbours for financial help in future.

Trichet argued that there should be a "second stage" - a point at which recipients of bailouts are no longer able/willing to implement prescribed conditions, such as austerity - where other member states i.e. those stumping up the cash for the bailout "take themselves decisions applicable in the economy concerned":

"One way this could be imagined is for European authorities to have the right to veto some national economic policy decisions. The remit could include in particular major fiscal spending items and elements essential for the country’s competitiveness."

Given that a growing number of people are realising that the mid-to-long-term future of the eurozone is likely to require the 'twist or bust' choice between some form of fiscal union or some countries exiting, the question for the likes of Trichet is how do you sell 'fiscal union' to the general public.

Trichet dressed up his core message with various quotes from European philosophers and 'fathers of European integration' but this is unlikely to cut the mustard with the ordianry voters in Athens, Lisbon, Munich, or Amsterdam. As the FT's Martin Wolf noted this week, "How will the politics of these choices now play out? I truly have no idea. I wonder whether anybody does."

You Don't Hear This Every Day...

We learn from Bloomberg that Mario Draghi will effectively face a 50% pay cut when he takes over the ECB Presidency from Jean-Claude Trichet in November. In fact, as the Governor of the Italian Central Bank, in 2010 he earned almost €758,000, while the annual salary for the ECB's top post is fixed at around €368,000.

It's not the same as asking for a pay cut, and €368,000 isn't exactly pocket change. But Draghi could have decided to stay at the Italian Central Bank, earn twice as much and face much less stress. Though Italy is not the best performing eurozone economy, we don't envy the person charged with taking the ECB out of the mess it has got itself into. (We're soon to publish a paper on the ECB, catalouging just how messy the situation is, so stay put).

In any case, this is one of the few cases we've come across involving someone actually taking a hefty pay cut when moving to an EU job.

Greece leaving the EMU: From taboo to fashionable?

First it was the idea of eurozone bail-outs, then it was restructuring, now another eurozone taboo has been completely smashed: Greece leaving the Single Currency. In fact, over the past few days, it appears as if arguing in favour of Greece leaving the eurozone has become almost fashionable.

The speculation really kicked off when Der Spiegel revealed that a "crisis meeting" had been called in Luxembourg, following rumours that the Greek government was considering leaving the eurozone (although the main topic on the agenda for that meeting was probably restructuring and another bail-out package).

Despite the usual round of denials ("there's no meeting", "Greece is just fine", "Elvis is alive" etc) people are now falling over themselves to be candid. Greece's EU Commissioner, Maria Damanaki, for example. Becoming the first EU official to speak the unspeakable, she said,

The scenario of Greece's exit from the euro is now on the table, as are ways to
do this. Either we agree with our creditors on a programme of tough sacrifices
and results...or we return to the drachma. Everything else is of secondary
importance.

Clearly an attempt to put pressure on her countrymen to get on with business, but a bold statement nonetheless. And the last few days have seen a slew of politicians and commentators following suit. Writing in De Telegraaf, former Dutch Finance Minister Willem Vermeend argued that "Greece should leave the euro", given that it will never be able to pay back its debt.

In an interview with Handelsblatt, German FDP MP Frank Schaeffler - the standard bearer of the German no-bail out movement - said,

As long as Greece hasn't privatised a single cent worth of assets, increasing
the aid would be absolutely the wrong signal. At the same time governments must
help with an orderly eurozone exit.

(Schaeffler has been arguing this for a while, it should be said, in April 2010 - before the Greek bail-out was even agreed - he said that Greece should be prepared to "voluntarily leave the eurozone").

An increasing number of academics and commentators are now also suggesting that Greece should take a hike - be it temporarily or permanently. Harvard Economics Professor Martin Feldstein, for example, who this week argued,

A temporary leave of absence from the eurozone would allow Greece to
achieve a price-level decline relative to other eurozone countries, and would
make it easier to adjust the relative price level if Greek wages cannot be
limited.

In the WSJ, Editor of German weekly Die Zeit Josef Joffe wrote that,

Greece faces default no matter what it does, but only abandoning the euro
would give it a chance at growth.

And in today's FT, columnist John Plender chimes in,

If a package is agreed in June, which seems probable, the challenge will be to bring Greece to a primary budget surplus where revenue exceeds costs before interest payments. At that point, it would be sensible for Greece to bow out of the monetary union and take advantage of currency devaluation. For that to work, though, European banks would need in the interim to have bolstered their capital. And the execution risks are phenomenal. This is policymaking on a wing and a prayer.

And you know where we stand - the eurozone, in its current shape and form, is simply unsustainable (see here, here, here and here for example).

Labour's bail-out confusion

The Guardian yesterday reported that Labour MPs are considering working "with parliamentarians from any party" to limit Britain's involvement in future eurozone bail-outs, in what appears to be an invitation to Tory eurosceptics. Although its demands remain unclear, Labour seems to have in mind some sort of stronger assurance that the UK will be excluded from the permanent eurozone bail-out mechanism (the ESM) and not implicated in further bail-outs from now until 2013 (when the temporary eurozone-only mechanism, the EFSF, expires, alongside the EU-wide EFSM, though the latter's expiration is actually not in writing anywhere).

In essence, it is an attempt by Labour to cause some problems for the Coalition, although, if this involves some Labour MPs genuinely wanting to push the Coalition to take a more proactive approach in Europe, that's probably good news. We don't doubt that many Labour MPs are genuinely starting to worry about where the EU is heading.

But Chris Leslie, the shadow Treasury spokesman responsible for Europe, seems to have got his figures slightly wrong (and the Guardian doesn't seem that interested in getting to the bottom of the issue). This is how the Guardian writes it up:

"Chris Leslie, the shadow Treasury spokesman responsible for Europe, told the Guardian: 'We will be quite prepared to work with parliamentarians from any party to make sure the funds to protect eurozone members is not drawn disproportionately from funds to which Britain contributes. We have already provided more than our fair share.

'We will also work with anyone to make sure the government acts more quickly to introduce a permanent mechanism that draws on only eurozone members.'

He claimed the EFSM had shouldered a third of the bailout costs, even though it was due to provide only 12%."

Leaving aside that it was the former Labour government that actually signed up to the bail-out fund which involves all EU members (the EFSM) - albeit after having consulted the current Chancellor - the 12% seems to have been plucked from thin air. Does Leslie mean that the EFSM (worth €60bn) amounts to roughly 12% of the total eurozone bailout funds, which including the eurozone-only EFSF (€440bn) total €500bn? If so, we're not aware of any rule, written or otherwise, that states that the EFSM is to be used in a way that mirrors its size relative to the EFSF. In any case, combined with the money from the International Monetary Fund (one third of whatever the EU puts up), the 12% figure makes even less sense.

Or Leslie could perhaps be referring to the UK's liabilities under the EFSM (which according to some accounts are around 12%). In fact, this figure varies as it's based on the UK's share of the EU budget which alters annually (the most recent figure we got from the Treasury is nearer 14%). Again, this makes no sense as the figure refers to a liability specific to the UK, not the EFSM as a whole.

So, either Labour is spinning pretty heavily or it doesn't quite grasp the figures.

Why does this acronym-heavy discussion matter? Because a) far too few people who should know better actually understand what's going on, b) with a potential second Greek bail-out looming, there's a growing risk that the bail-out mechanisms are being used to fund governments that will have to default anyway, meaning that loan guarantees turn into losses for taxpayers. If European politicians don't understand the dynamics at work, they're in for an unpleasant surprise (at a time when populism is on the rise in Europe) and c) to say that the EFSM was ever limited to a specific share of the bail-out is to misunderstand the crucial point: the EFSM is decided by majority voting, meaning that it can take on a life of its own. The lesson here is don't give up EU vetoes.

ENP Reform: Better But Still Not Looking At The Bigger Picture

EU Foreign Minister Baroness Catherine Ashton yesterday presented the Commission’s proposals for a revamp of EU aid to post-Communist countries, North Africa and the Middle East under the European Neighbourhood Policy (ENP). This review was certainly due: the recent upheavals in Tunisia, Egypt, Libya and Syria have unmasked several failures in the EU’s current approach, which we looked at in detail in a recent report.

To be fair, the Commission has some sensible ideas for ENP reform (some of which we also recommended), although it steers well clear of several “sensitive” big-picture issues that we think should be addressed as a matter of priority. But let’s start with the encouraging parts of the Commission’s proposals.

As we pointed out, the EU should put greater emphasis on “negative” conditionality when making decisions about funding. Aid must not only be frozen when a major crisis breaks out, such as in Libya. On the contrary, the Commission must make clear that it stands ready to pull the plug if a country fails to make progress on agreed democratic reform and human rights. The Commission states that, from now on, “for countries where reform has not taken place, the EU will reconsider or even reduce funding.” The question remains how this would operate in practice, as it will almost certainly face opposition from member states with vested interests in North Africa and the Middle East, notably France, Italy and Spain.

The Commission also says that “a stronger link” will be established between its annual “Progress Reports” and the amount of money these countries are granted. Again, this looks like a sensible suggestion. We show in our report that, previously, the Commission consistently increased its aid to countries like Egypt and Tunisia despite noting limited or no progress on human rights or democratic reform.

The EU will "suggest to partners that they focus on a limited number of short and medium-term priorities." We noted that the effectiveness of several ENP projects is undermined by the EU’s tendency to "attempt too much." Concentrating on a smaller number of priorities offers a far greater chance of success and, just as importantly, European citizens will find it easier to gauge the EU’s performance.

From our point of view, the most interesting part of yesterday’s communication is the Commission’s commitment to more closely monitoring its use of budget support. It is now pledging to take into account the "overall country situation regarding democracy, accountability, the rule of law and sound financial management." The fact this needed to be spelled out is of course rather shocking but better late than never.

The inappropriate use of budget support is a point we have consistently stressed: providing funding directly to the coffers of regimes, such as those in Tunisia and Egypt, which were clearly corrupt is no way to spend European taxpayers’ money.

However, despite some steps forward, the Commission has once again chosen to remain silent with regard to our suggestion of making EU member states’ contributions to the ENP voluntary. We have consistently argued that voluntary contributions would give an instant boost to the transparency and accountability of EU aid funding.

The Commission’s proposals on trade are also disappointing. Along with the over-used reference to the creation of a “Deep and Comprehensive Free Trade Area” with its neighbours, the Commission also says that “the EU will step up efforts” to conclude ongoing negotiations on the liberalisation of trade in agricultural products. This sounds way too vague and neglects the fact that much of this has to do with EU policies beyond the confines of the ENP. To truly honour this commitment would require a far greater openness to trade and an end to the distorting effects that the Common Agricultural Policy has on developing countries.

And, with their new powers gained under the Lisbon Treaty, MEPs are likely to continue prioritising the interests of European farmers – as they’re currently doing by withholding a free trade agreement on agricultural products with Morocco.

Finally, there's the question of migration. On this point, the Commission looks more than a bit confused. Ashton's report says that the EU will "pursue the process of visa facilitation for selected ENP partners and visa liberalisation for those most advanced." However, only a day earlier, EU Home Affairs Commissioner Cecilia Malmström put forward proposals for a "safeguard clause" allowing for the temporary suspension of the visa-free travel arrangements that the EU has in place with a number of third countries. Added to the current row over the border-free Schengen zone, the EU cannot credibly claim to have a coherent migration policy, which makes Ashton's proposals look like they will only create false hope.

Ultimately, until the EU comes up with a comprehensive strategy, which includes immigration, trade and reforming the CAP, reform of the ENP will remain a detail.

MEPs: always pragmatic, sensible, and firmly in touch with the real world

MEPs on the "Policy Challenges Committee" have agreed on their proposals for the next multi-annual EU budget period, to run from 2014-2020. When it comes to EU budget negotiations, this is the big one - these talks will set the overall "envelope" for each annual budget within the period.

Crucially, every national government has a veto. With negotiations expected to last around 18 months, expect plenty of horse-trading among European capitals, in addition to the various demands of the European Commission and Parliament. The context, remember, is the UK, France, Germany and others' call last year for "restraint" and the EU budget to rise no faster than inflation between 2014 and 2020.

So these looming negotiations are where reform-minded EU politicans and governments have the chance to dig in and get something done - hopefully achieving a far better and prudent deal for taxpayers in these times of austerity.

But, in what has happened too often now to come as a surprise, MEPs seem intent on pushing as many 'hot buttons' as they can. Their proposal includes:

- a 5% increase in funding. This doesn't sound much like "restraint".

- an end to all "rebates, exceptions and correction mechanisms". Yes, that would mean the UK's rebate, worth billions over a seven year period.

- a "system of real own resources". Also known as a new direct EU tax.

- no reform of the EU's wasteful farm subsidy regime nor the practice of recycling "cohesion" money amongst some of the richest countries on the world (also known as the structural funds).

Good to see everyone's starting on the same page then.

EU Fisheries Commissioner won’t let Greece off the hook.

Greece’s representative in the European Commission – EU Fisheries Commission Maria Damanaki – made some interesting comments about the Greek crisis earlier today, essentially becoming the first Greek or EU official to openly admit that even Greece’s membership of the euro is in doubt (despite the fact she is under pressure to toe both the EU and the Greek government line of complete denial). She said:

"The scenario of Greek withdrawal from the Eurozone is now on the table, as is its implementation. I am compelled to speak openly. We have a historical responsibility to see the dilemma clearly: either we agree with our lenders on a program of harsh sacrifices that will yield results, thus taking responsibility for our past, or we go back to the drachma. Everything else is secondary in these current conditions."

Pretty strong stuff for an EU official, I’m sure you’ll agree.

Representatives from Greece and the EU moved quickly to dispel the rumours, as always, suggesting that only the Greek Prime Minister, George Papandreou, can speak on behalf of Greece.

On a completely separate issue…

Cross party talks in Greece failed to yield a consensus on the new austerity measures giving rise to talks of a possible referendum on the issue or even a snap election. Clearly, it's not just Damanki who questions whether Papandreou is the only one that should be allowed to speak on the country's behalf…

We can't help it: the Greek government has looked all at sea these past couple of weeks.

"Euro-realism" on the march...even in Belgium

In De Standaard, Bart De Wever (photo), leader of Flemish nationalist party N-VA - Belgium's biggest party – has defended his decision to give an introduction to a speech made by Czech President Václav Klaus during a Belgian state visit. Klaus, as you know, isn't exactly the most popular head of state in Brussels circles.

But De Wever writes:

"Whoever expresses criticism of the europhile mentaility of the political elite is being labelled an ideological ally of the far right.

In an infamous speech at the European Parliament in 2009, Klaus committed the cardinal sin by sharply criticising the lack of democracy at the EU level, even comparing the EU to the Soviet Union. When someone who has physically experienced the struggle for political freedom and sovereignty of the people, speaks about Europe in such a way, we should at least be expected to take his criticism seriously. Instead of taking advantage of an opportunity to engage in a big debate on the European project, Klaus was being dismissed as a political pariah."

De Wever concludes:

"whoever honestly believes in European integration, will need to learn to listen to its critics. Lashing out at anyone who doesn't believe in the europhile dream of a United States of Europe, advocated by smooth statesmen and journalists, really doesn't cut it any longer if we wish to convince public opinion. In order to counter the opinion of Klaus and to avoid the European project from turning into something resembling not much more than a free trade area, we need euro-realist answers. And we need grands messieurs et mesdames willing to sell those ideas."

Not the usual stuff coming out of Belgium, to say at least.

Hague and Lidington raising the stakes?

The last few days have seen some tough talk from the UK's Foreign Office on the size and role of Catherine Ashton's External Action Service. Following a meeting of EU foreign ministers yesterday, Europe Minister David Lidington used uncharacteristically undiplomatic - albeit justified - language, describing Ashton's demands for a 5.8% increase to the EEAS' budget next year as "somewhat ludicrous", adding “They’ve got to get real as far as the budget is concerned.” (indeed)

He also made a point of underlining how the FCO is now keeping a watchful eye on the EU's 136 embassies around the world, saying that “William [Hague] has sent out instructions to all our posts around the world to be vigilant about any risk of competence creep,” referring to the ever-present risk of the EEAS taking on an increasing number of responsibilities that should belong to member states.

And, in case anyone in Ashton's bureaucratic machine hadn't quite got the message, the man himself (Hague, that is) used an interview on the Today Programme this morning to fire a couple of warning shots of his own. On the proposed budget increase for the EEAS, he said,

"I don't think it is necessary to have such an increase at a time where diplomatic services across the world, certainly across Europe, are tightening their belts, becoming more efficient. We are expanding our diplomatic network in the world but we are doing that by saving GBP100 million of administrative costs."

On the risk of the EEAS' incrementally increasing its power, he noted,

"We will always guard against mission creep. We are very clear about what's a UK responsibility and what is an External Action Service responsibility. I am certainly giving a pre-emptive warning. Where we have seen one or two instances of it, we have dealt with that but we will always be vigilant about that."

Then he went on to make, possibly, the most important point of all - which we highlighted in our recent paper looking at the need to overhaul the EU's North Africa and Middle East policy (which to be fair, is a view that the Commission/the EEAS is coming around to as well):

“Where more money is needed…is the much bigger project, and it’s one much in line with what the United States is seeking, of a bold and ambitious approach to change in the Middle East and North Africa - Europe providing a magnet for positive change; the resources that will help small and medium sized enterprises to grow in these countries and bring economic stability. And that is the big issue rather than the administrative budget of the External Action Service."

This is a pretty robust - but more importantly a sensible - line from the Foreign Office. More please.