Italian elections: The scandal-watch

Election season means scandal season in Italian politics. Less than two weeks to go to the elections, and a number of scandals are surfacing on the Italian peninsula (not entirely coincidental we think) which could undercut support for the 'establishment' parties in particular - and possible give comedian-cum-politican Beppe Grillo a boost.

Support for the centre-left Democratic Party has been dropping over recent weeks in part due to the big derivatives scandal involving Italian bank Monte dei Paschi di Siena - an institution with historical links with the local government in Siena, in the hands of the centre-left for years.

Two more scandals erupted over the past two days. Raffaele Fitto, a former Italian minister and a top member of Silvio Berlusconi's PdL party, has been sentenced to four years in prison for corruption, illegal financing of political parties and abuse of authority. This is a big blow for Berlusconi and his party, given that Fitto topped the list of PdL candidates in Italy's Southern Apulia region - of which he had previously been the Governor.

Separately, the CEO of Italy's defence giant Finmeccanica, Giuseppe Orsi (see picture), was arrested yesterday over bribery allegations relating to the sale of twelve military helicopters to India. The allegations cover the period from the awarding of the contract in 2010 - when Orsi was the CEO of Agusta Westland, owned by Finmeccanica - until December 2012. The Italian government holds about 30% of Finmeccanica's shares, and the question is whether someone within Mario Monti's cabinet knew what was going on, but failed to take appropriate action.

Orsi is also close to Lega Nord - Silvio Berlusconi's main ally. Last October, Italian daily Il Fatto Quotidiano published the transcript of a phone call between Orsi and Lega Nord leader Roberto Maroni, during which Orsi thanked Maroni for backing his appointment as CEO of Finmeccanica. Maroni has moved swiftly to deny any involvement in the story - and has threatened to sue anyone who claims otherwise. But this might still hurt Lega Nord in terms of votes.

It remains unclear if, and to what extent, these scandals will impact on the final election results. But one thing is clear: the Italian election campaign is heating up. Follow us on Twitter (here and here) for all the news and updates from Italy!    

The EU budget: an updated break-down

With the Council side of the EU budget negotiations firmly wrapped up, we've updated our figures on the comparison of the current EU budget and the one proposed for the next seven year period - based on the final European Council agreement. We still say proposed since it of course still needs approval by the European Parliament...:

Every little helps: The reintroduction of EU civil servants' "special levy" is small step in right direction

The reintroduction of the EU's special levy tax is good news

In all the discussion of the EU budget for 2014 - 2020 there is one small item that has been overlooked - the welcome reintroduction of the special tax levy on EU officials' pay. In 2012 this was set at a rate of 5.5% on post taxed income but this lapsed in 2013. It will now reappear in 2014 as a part of measures that are hoped will keep the costs of the EU's bureaucracy under control.

 

The European Council Conclusions here say that "the new solidarity levy will be reintroduced at a level of 6% as part of the reform of the salary method. These measures will have a significant impact on the cost for pensions in the mid- and long-term."

This is welcome news, although, even with the reintroduction of the tax, EU civil servants will still pay far less tax than the EU citizens they serve. Let us hope that MEPs do not seek to show their own type of solidarity by attempting to remove it. Over to you Mr Schulz.

The French Court of Auditors publishes its annual report: Little good news for Hollande

The French Court of Auditors has published its annual report this morning. It is an absolutely massive document, but we have dug out a few interesting findings and recommendations - many of which do not exactly make for happy reading for French President François Hollande and his government:

• According to the Court, France's public deficit for 2012 will "in all likelihood be close" to the target of 4.5% of GDP. However, the report warns that "important uncertainties remain" over the final figure, which is only due to be disclosed at the end of March. Therefore, "a deficit higher than 4.5% of GDP cannot be ruled out."

• Unsurprisingly, the Court stresses that the government's growth forecast for 2013 (+0.8%) is much more optimistic than those made by the IMF, the European Commission and the OECD - which all agree on 0.3%. The 0.5% difference, estimates the Court, could mean 0.25% of GDP increase in the deficit by the end of 2013.

• Crucially, growth forecasts have an impact on revenue estimates as well - especially when it comes to tax and social security deductions (which the French call prélèvements obligatoires, compulsory deductions). The French government is betting on a 2.6% increase of this type of revenue for this year - again, far too optimistic. Tax and social security deductions, the Court explains, are closely linked to how much the economy grows, and have a significant level of 'elasticity' - meaning that they may well be lower than expected even if (and it's a big if by now) the French economy were actually to grow by 0.8% in 2013.

• The Court concludes that the structural deficit targets (which are relevant under the fiscal treaty and the so-called Excessive Deficit Procedure) are "attainable". However, the nominal deficit target of 3% of GDP for 2013 is "very weakened" by the slowing down of the economy. 

• On the recommendations side, the Court notes that the French government's deficit reduction effort has relied too much on tax hikes. Therefore, the Court argues, "Stepping up the efforts to rein in spending in the public administration as a whole is now the absolute priority. In fact, the structural [deficit reduction] effort for 2013 is unbalanced: it relies on public spending control for less than 25%, and over 75% on increases in mandatory deductions." 

Some fairly damning assessments then, and we have only scratched the surface of the report. This is also not the first time Hollande has faced this type of criticism from the Cour de comptes. The French Economy Ministry has responded to the report, saying the government sticks to its targets for 2012-13, but will "reappraise" its growth forecast in the new stability programme, due to be submitted to the French parliament in mid-April. Could this be the first step towards a public admission that France will miss its 2013 deficit target?           

European press on the EU budget deal: Behold the birth of the Anglo-German axis

The agreement on the next long-term EU budget (which we analysed here) has been extensively commented on by newspapers across Europe. The main political story was clearly German Chancellor Angela Merkel siding with David Cameron, rather than French President François Hollande - which ultimately made the balance swing towards the group of member states calling for further cuts to EU spending. 

We have written about the need to cultivate the Anglo-German axis (particularly in light of Hollande's election as French President) several times in the past - see our recent analysis of David Cameron's EU speech, this letter we wrote to the FT, several articles in the Telegraph - and many other places. While Merkel's decision to side with London shouldn't be overstated - this is a pendulum after all - it was interesting to note the reaction in the European press.  

Let's start from Germany.

Die Welt's Foreign Editor Clemens Wergin says that even though the EU budget has been reduced for the first time in history, the big chunk of money earmarked for farm subsidies "remains the symbol of the backwardness" of EU spending. He also notes, "The UK does not stand on the margin of the EU anymore, but proved to be an important ally of the Germans."   

Süddeutsche Zeitung's Brussels correspondent Martin Winter points out that the fact that other EU leaders made an effort to satisfy Cameron's demands show that "the EU wants to keep the British at its centre."

FAZ's Brussels correspondent Hendrik Kafsack argues that the new EU budget "does not deserve the attribute 'modern'", as most of it's still spent on agriculture and structural funds in Southern member states.

Die Welt's Brussels correspondent Florian Eder and Silke Mülherr note that together "Cameron and Merkel were able to enforce an austerity budget [on the EU]", while the paper's London correspondent Thomas Kielinger says that "Angela Merkel is the trump card in the British hands."

Der Spiegel Online's Carsten Volkery describes the deal as "a triumph for the budget hawks" noting that "the [German] Chancellor backed Cameron and covered him against attacks" from Hollande and other leaders.

A very interesting comment from the Netherlands. Dutch journalist Fokke Obbema writes in De Volkskrant,

"French President Hollande explicitly positioned himself as the leader of Southern Europe [at the EU summit]. That makes it even clearer why it would be undesirable for the Netherlands if this other historic event - the exit of an EU country - were to happen. Without Great Britain, the balance of power between North and South within the EU would be disturbed."

From a French perspective, Cameron and Merkel fighting side-by-side in Brussels is far from good news - as it means that the Franco-German axis is under pressure. Le Figaro's Brussels correspondent Jean-Jacques Mével says David Cameron hit a "master stroke" at last week's summit. He writes,

"A man can take credit [for the cut in the next long-term EU budget]: David Cameron, whom many saw as already marginalised within the EU, following his decision to ask the British by 2017 whether they want to stay in the [European] Union or not. On the contrary, he goes back to 10, Downing Street, as a winner – for the frustration of French and Italians."

Interestingly, he also notes that the talks have confirmed the "paralysis" of the Franco-German axis. 

An editorial in French business daily Les Echos argues,

"Budget talks have been held hostage by a country, the United Kingdom, which is not sure that it will still be part of the [European] Union tomorrow. David Cameron had come to sabotage Europe’s general interest – and he managed to do so. Noted. But, in this case, let’s get to the bottom of things: given that the club at 27 is doomed to powerlessness, strategic reflections need to happen at the eurozone level. Yet, one would need to repair [France’s] relations with Germany for that. Because this is the other lesson from the Brussels drama: the Paris-Berlin axis is not responding anymore." 

The Anglo-German couple didn't go unnoticed in other Mediterranean countries either. Italian Professor Mario Deaglio writes in La Stampa,

"The pro-rigour Germans, in agreement with the British for once – the Berlin-London axis has in fact replaced, at least on this occasion, the traditional Berlin-Paris axis – and with the help of some Nordic countries, have pushed through the principle that the EU budget can be cut too. The word 'austerity', so far unknown, will start hovering over Brussels [EU] buildings."

Claudi Pérez, Brussels correspondent for El País, writes,

"The EU seems distracted. It walks between the old and the new regime…In the midst of this paralysis, Berlin (with London’s support) accumulates power, and a withdrawal towards the national or the intergovernmental [level] is noticed. And austerity policies remain firmly installed in the driving seat."  

And now a voice from Poland. According to Dziennik Gazeta Prawna, the outcome of the EU budget summit is proof of "a substantial shift in the balance of power in Europe", with France, once the most influential country of the Union, "finding itself on the defensive". Interestingly, the paper argues,

"The Union will head towards the free trade zone dreamed of by the British and supported by the Germans rather than the 'solidarity-driven federal structure' wanted by Paris...There is no doubt that, by imposing cuts, Germany has shown its economic strength. Berlin's dictate will be even harsher, while abundant transfers from Brussels may turn out to be only a nice memory if the Franco-Spanish-Italian-Polish club fails to improve its competitiveness."

EU budget debate sees rare outbreak of consensus in the House of Commons

Seasoned House of Commons watchers will be well used to the 'robust' nature of exchanges between MPs and government ministers, even those belonging to the same party. This confrontational approach is typified by the weekly shouting match at Prime Minister's Questions, while polite, consensual exchanges are very rare, usually limited to instances where the subject matter is solemn.

It is therefore worth flagging up, especially to international readers, how extraordinary this afternoon's debate about last week's EU budget summit was. The deal was welcomed by Labour leader Ed Miliband (who had teamed up with disgruntled Tory backbenchers to demand Cameron pursue a cut rather than a freeze in the negotiations), even if he made a point of not congratulating the PM in person:

"At a time when so many budgets are being cut at home, this House voted for a real-terms cut last October and it was right to do so. No doubt it was just an oversight that in your statement you forgot to express your thanks to members on your own side and this for giving you such a strong negotiating mandate."

Miliband also added that while the relative drop in CAP funding was welcome, this area of the budget was still far too big given the relative importance of agriculture to the EU economy. Cameron also received praise from Lib Dem MPs including Deputy leader Simon Hughes who said that:

"Both my colleagues here and our members of the European Parliament are supportive of the deal." 

Cameron also received praise from many Tory MPs, with Peter Lilley congratulated him for "demonstrating that when a British leader takes a resolute, reasoned and constructive approach on what is good for Britain and good for Europe, we can succeed in carrying other people with us". Significantly, Cameron even attracted praise from rarely pacified better-off-out backbenchers, highlighting how impressive his EU budget deal really is - even if there is still far to go on the substance.

EU budget talks: The dust has settled - and they all won!

We've been listening to the national press briefings of several EU leaders following the deal on the EU budget (which we analyse here). And you got it - they all won! (well, almost). Here goes:

David Cameron (UK)

• The British Prime Minister said, "I think the British public can be proud that we have cut the seven-year credit card limit for the European Union for the first time ever." 

• He went on, "The only way you can best protect the British taxpayer is to keep overall spending down, and that’s what we’ve done, and also to keep what remains of the rebate, and it is completely untouched." 

• On the possibility of MEPs staging a secret ballot vote on the next long-term EU budget, Cameron said, "Of course the European Parliament has a role, and we should respect that. But I don't really understand secret ballots. Parliaments and votes should be open, should be transparent, people should be accountable for how they cast their votes."

Angela Merkel (Germany)

• As usual, the German Chancellor - the power-broker - did not give away too much during her presser. She said, "The effort was worth it…in my view this agreement is good and important." 

• She also warned that "the negotiations with the European Parliament won't be easy".

François Hollande (France)

• The French President, a bit sulky, said this was "the best deal" on offer given the circumstances.

• He repeatedly stressed that the UK wanted payment appropriations to be lower than €900bn over seven years, while France was insisting on €913bn (see here if you are not familiar with the commitments vs payments distinction). According to Hollande, given that the final compromise was reached at €908.4bn, "Everyone will say who made the bigger step" - a way to suggest that David Cameron had given up more than he did.

• According to Hollande, France will also save some €140m a year on its financing of the various rebates. On the rebates, the French President made his most interesting remark (see here, around 16:00 in). He said, "I knew that there was no possibility to put into question the British rebate, because you know that it is provided for by the [EU] Treaties [which, by the way, is incorrect]. Therefore, it is immutable" at least until the Treaties are re-opened for negotiations. The British, he added, "should keep this in mind, including when they demand treaty changes." If this is not a threat, then what is?  

• He said that funding for agriculture has gone down overall, but he has made sure that aid to French farmers will remain at the same levels as in 2007-2013. Now, that's what you call 'solidarité', right?

• Finally, the French President admitted that the UK was not on its own in these negotiations, as "other countries wanted more for themselves and less for Europe".  

Mario Monti (Italy)

• The (caretaker) Italian Prime Minister hailed a "particularly significant improvement" in Italy's net position compared to other big net contributors to the EU budget.

• He said Italy has secured an extra €3.5bn in funding compared to the compromise proposal on the table at the November summit.

• Furthermore, Italy will save around €600m a year on its financing of the various rebates.

Mariano Rajoy (Spain)

• The Spanish Prime Minister said the deal is "very good for Spain". Contrary to expectations, Spain will remain a net recipient from the EU budget over 2014-2020 - which is huge. 

• Rajoy was particularly pleased by the fact that Spain "will get almost 30%" of the new fund for youth unemployment included in the next long-term EU budget. 

Mark Rutte (Netherlands)

• The Dutch Prime Minister opted for a lower profile. He said, "Of course you never completely get it your way with 27 member states, but I think that we as the Netherlands can be satisfied." 

• He described the deal as a "sober" budget, and said that the Netherlands "worked well together" with Sweden, Germany, Denmark, and the UK.  

Helle Thorning-Schmidt (Denmark)

• The Danish Prime Minister said her country "came here with three priorities, and we satisfied all of them", pointing out that she had secured an annual rebate of €130m.

Fredrik Reinfeldt (Sweden)

• The Swedish Prime Minister said the deal was "a surprisingly good result".

• He argued that, contrary to fears that Sweden's contribution to the EU budget would increase, it is, in fact, set to drop slightly.

Donald Tusk (Poland)

• The Polish Prime Minister spoke of "a huge success" for his country, stressing that Poland's receipts will increase by €4bn despite the long-term EU budget facing a €38bn cut from the previous seven-year period.

• He went even further, claiming today was "one of the happiest days of my life". Wow!

Werner Faymann (Austria)

• The Austrian Chancellor was less enthusiastic than many of his counterparts. He said the deal struck this afternoon is "presentable" for Austria - which managed to secure a rebate, although it will be phased out by 2016 (see the final deal here).

Petr Necas (Czech Republic)

• The Czech Prime Minister was pleased about his choice to threaten a veto. He said, "If the Czech Republic had not seriously threatened to block the negotiations, then it would not have been possible to negotiate a better outcome."

What does the EU budget deal mean for the UK and Europe?

We've just published a new Flash Analysis outlining our thoughts on the final deal on the long term EU budget. See below for the key points:

Key points

 - For the first time, the EU’s long-term budget will be cut in real terms. The UK government and its allies should be given credit for securing this - especially since this budget will be for 28 rather than 27 countries.

 - The final deal shows that compared to the current long-term EU budget (2007-2013), so-called ‘commitments’ will be cut by €34bn and ‘payments’ will be cut by €35bn. This represents a 3.4% cut and a 3.7% cut respectively (in real terms). The unusually large gap between these two amounts – needed to secure a deal – could potentially cause issues down the line.

- The UK’s gross contribution is likely to fall (as a share of UK GNI) but the net contribution could still increase as more money will be channelled towards the new EU member states – such spending isn’t covered by the UK rebate. However, it’s in the new member states that regeneration cash in particular can have the most comparative impact, so the UK government has done the right thing and this should not be seen as a “defeat”.

- The European Parliament could still scupper the deal and, in a very odd move, some MEPs have called for a “secret” ballot, although they can only approve or reject the deal, not amend it.

 - In the final proposal, direct payments under the CAP have fallen €62.5bn in real terms - a positive development. However, just under 40% of the budget will still be spent on farm subsidies, and as a whole, the EU budget will remain largely inefficient and out of date.

Also for a idea of the difference between the this budget and the current one see this handy table (click to enlarge):

Would the UK's contributions still increase under a new long-term EU budget?

Aside from the headline figure, where it looks as though David Cameron will get his cut, in terms of domestic politics, the next most important aspect of all of this is how the UK's contributions to the budget will be affected. In other words, will the UK still be forced to send more cash to Brussels?

As we predicted back in October, the net contribution was always set to go up - so that isn't really news (though we appreciate that not everyone follows this issue on a daily basis...)

Here are the details:

Net contribution:

Despite securing a real terms cut to the EU budget, the UK’s net contribution (what it pays in to the EU after the cash it gets back and rebate are taken into account) is still likely to go up under this proposal (see our earlier detailed explanation of this effect, which was with an earlier budget proposal in mind, but the broad dynamic still applies).

Essentially, because the share of the EU budget going to the new member states – the ones that have joined the EU since 2004 – will increase, and since the UK gets no rebate on this spending, the UK's net contribution will go up. As we've argued, this isn't a bad thing as it's in the new member states that this cash can make a difference. Still, this could prove politically sticky for the UK Government when explaining the figures to MPs and the Opposition in the months to come – though David Cameron is likely to heap the blame on Tony Blair (with some justification) for giving up part of the rebate in 2005.

Gross contribution:

This is rather more complicated. Under the deal that looks set to be agreed, the budget is falling in real terms, hence the UK gross contribution should fall in real terms. However, there are two potential issues to be aware of:

Firstly, the likely new payments ceiling of €908bn is higher than the actual payments that have been made under the current budget (i.e. the UK's base-line of €886bn based on an extrapolation of 2011 payments, which we explain here). Historically, 'actual payments' fall short of the 'payments ceiling'. But if, under the new budget, the actual payments hit the ceiling, it is possible that the UK's actual gross contribution could top the ones seen under this budget framework (€908bn is higher than €886bn) - it seems unlikely but is possible. Again, this is nothing new, but a function of the Government's starting position.

Secondly, because this would be the first time the budget has been cut, and because of the way the budget (MFF) is structured into 'commitments' and 'payments', there could be unexpected effects.

As we explained here, actual payments 'trail' commitments (or promises to pay). In the context of an ever-increasing budget, this doesn't present a practical problem, because extra funds can always be pledged to meet previous commitments. But now we have a situation where payments are falling well below the level of the commitments that the EU is able to make under the current budget, potentially creating a deficit. The current compromise is also predicated on deeper cuts to payments than to commitments.

But, as the Commission is always at pains to point out, the EU's bills need to be paid - under the current budget this has already led to so-called 'amending budgets' (albeit within the MFF ceilings) to increase payments to match previous commitments. How much of an issue this might be in the next budget period, remains an uncertain question as it depends on the 'commitment profile' (i.e. what/when has the EU promised to pay for specific projects).

In theory, the MFF payment ceilings that are being agreed now cannot be altered unless there is unanimous agreement, as it essentially means re-opening the MFF. For example, in 2011, funds were 'redeployed' to fund a shortfall for the International Thermonuclear Experimental Reactor (ITER), although, in this case, this didn't mean increasing the payment ceiling. The current rules say that ceilings can be revised by 0.03% of EU GNI for 'unforeseen' expenditure. More than this would seem to require unanimity.

Therefore, this second tension between commitments and payments described above, could potentially lead to immense pressure to increase the payment ceiling further down the road. In this hypothetical, albeit not implausible scenario, the UK's ability to block this could be one for the EU and FCO lawyers to thrash out.

Europe’s Fiscal cliff? Hardly.

MEPs - or at least some of them - aren't exactly doing themselves any favours at the moment.

European Parliament President Martin Schulz has been waxing lyrical about how devastating a cut in the EU budget would be.

"We want a modern EU budget…As far as we can tell, however, the proposal on the table today would be something very different, namely the most backward-looking financial framework in the history of the EU."

“I won’t sign a deficit budget…Europe, like the U.S. a few weeks ago, is heading for a fiscal cliff.”

Wait. What? Did he just compare a real terms cut in the EU budget to the US Fiscal cliff?

Frankly, this a ridiculous comparison. As Schulz-types themselves are keen to point out, the EU budget amounts to around 1% of EU GNI while the US Federal Budget amounts to around 15% - 20% of US GDP (and has historically been even higher than that).

The fiscal cliff would have amounted to tax rises and spending cuts worth almost $600bn. The current proposal sees EU budget commitments falling by €34bn in real terms (increasing in nominal terms). This is 0.3% of EU 2011 GNI. The US fiscal cliff could potentially have caused US GDP to fall by 4% - 5% in a short space of time; the cut in the EU budget will barely register, especially in comparison to the other problems in the European economy.

The EU budget has important implications for the politics of the EU and can provide some useful funding in certain areas (which it often fails to do by spending so much on the CAP) but will this type of stuff make taxpayers around Europe take Schulz more seriously?

Exclusive: How is the new EU budget shaping up - latest draft!

EU leaders look to be closing in on a deal on the 2014-2020 budget (MFF). We will be updating this blog throughout the day.

UPDATE - 10:58am: Talks set to resume at 12pm GMT. Van Rompuy will table another compromise proposal. It seems Romania, Bulgaria, the Czech Rep and Latvia were unhappy with the proposal circulated this morning, which we have analysed below. Austria's rebate has also been scrapped, which could be another stumbling block.

10:00am: We have obtained the latest draft that is being circulated, and it appears there is tentative agreement on the headline figures, and it's looks very close to what we predicted.

The headline figures are:

€999.56 including off-budget items
€959.96 in commitments
The figure for payments is less clear but the figure €908bn has been widely cited.

As we can see from the graph, this would represent a real terms cut compared to the current 2007-13 MFF - the first time that a cut would have been achieved. So, David Cameron can plausibly claim to have lived up to is promise of coming away "with at best a cut, at worst a freeze."

It's worth noting that the gap between commitments and payments has increased (see here for more details on this). As we have noted before this could potentially mean payments increase in 2020-2026 budget period to cover the amount of money already committed. The scope to potentially increase payments through QMV during the budget period could also be problematic although it would be a unprecedented move. 

On the UK rebate and other 'corrections', the current draft says:

"The existing correction mechanism for the United Kingdom will continue to apply."

So, Cameron remains on solid ground.

The current draft also includes lump sum rebates for the Netherlands, Sweden and a new rebate demanded by Denmark. Germany, the Netherlands and Sweden would benefit from caps to their VAT-based contributions. It appears Austria's rebate would be scrapped. This could still flare up as an issue with Austrian Chancellor Werner Faymann previously stressing his country would not be the only one to give up its rebate.

Policy heading breakdown

This is how the current draft would distribute the cash among the EU's policy areas, compared with the current budget and the November Van Rompuy proposal:

As we can see in the graph, the latest proposal cuts spending on "competitiveness and growth" (Europe 2020) by €27bn - not exactly a positive, as this includes R&D and energy infrastructure, foe example. At the same time spending on the CAP has increased by €9bn while spending on regional and cohesion funds has gone up by €15bn, both compared to the proposal in November (presumably split between new and old member states). As we have said before, this locks in the worst parts of the EU budget in terms of outdated and potentially growth destroying spending.

The UK’s net contribution could still increase 

Despite, securing a real terms cut to the EU budget, the UK’s net contribution (what it pays in to the EU after the cash it gets back and rebate are taken into account) would still go up under this proposal.

This is because the share of the EU budget going to the new EU member states – the ones that have joined the EU since 2004 – will increase. Since this share is not covered by the UK rebate, Britain gets no cash back for its share of the money spent there. This could prove politically sticky for the UK government when explaining the figures to MPs and the opposition – though it’s likely to heap the blame on Tony Blair for giving up part of the rebate in 2005. However, at the same time, more money (though not nearly enough) will be invested in poorer member states, where it can have the most impact, rather than being recycled unnecessarily between rich member states, at a huge administrative and opportunity cost.

It's also worth noting that, due to the payment ceiling being much lower than expected and there being a large gap compared to commitments, it is possible that actual payouts (especially in later years of the budget) go above the payment ceilings. This again could prove problematic for the UK to communicate.

Will the UK's gross contribution go up? 

The UK gross contribution should be falling in real terms since the budget is falling in real terms. However, due to the fact that actual payments may top the payments ceiling (as we explain above), it is hypothetically possible that the UK's actual gross contribution could occasionally top the ones seen under this budget framework - this seems unlikely but is uncertain.

As we explained here, payments 'trail' commitments. In the context of an ever-increasing budget that didn't present a practical problem, because extra funds would always be pledged to meet previous commitments. Now we have a situation where payments are falling well below the level of commitments that the EU is able to make under the current budget, potentially creating a deficit. As the Commission is always at pains to point out, these bills need to be paid. The obvious answer is to increase payments, which would impact on the UK's gross contribution. How much, remains an uncertain question.

Own resources/revenue

One interesting thing to note is that a commitment to continue working on a direct stream of VAT revenue to the budget, to replace the existing VAT contributions to the budget. There is also a vague commitment to examine using the enhanced cooperation FTT as revenue for the EU budget in the future. However, this would not affect non-participating member states or the UK rebate.

Some potential obstacles to a deal remain, but this seems to be a positive starting point for a deal. The UK can plausibly say it has received a decent deal if something close to this proposal comes into force. Unfortunately, the budget as a whole will remain poorly targeted and outdated.

Could the EU budget be cut for the first time?

The rumours are flying in thick and fast from Brussels regarding the latest EU budget numbers and the likelihood of a deal. The range estimates we laid out in our briefing still stand up, with several suggestions that Herman Van Rompuy's latest proposal will be for €959bn in commitments and as low as €913bn in payments. In terms of figures this would represent a significant victory for the UK and other states that want to see budgetary restraint. Below is how such a deal would compare to Van Rompuy's November proposal, and more importantly, the current long-term EU budget (MFF).

Of course there are still plenty of twists and turns to come in the negotiations, not least how the headline figures above are distributed across the different headings such as the CAP, structural funds, administration etc. Follow us on twitter for the latest developments.

Another positive step for Ireland?

Well we finally have a deal on one of the longest running sagas in the eurozone crisis – the Irish promissory notes deal.

See here for some good background on the whole issue.

Key points of the deal (from Irish PM Enda Kenny’s speech):

·         Last night the Irish Bank Resolution Corporation (IBRC, formerly Anglo Irish bank) was liquidated. The loans it had taken from the ECB through the Emergency Liquidity Assistance (ELA) were therefore terminated and the Irish Central Bank (ICB) took control of the €25bn in promissory notes and the €3.4bn for the most recent interest/principal payment.

·         The Irish government has agreed to swap these notes for 40 year Irish government bonds.

·         The principal repayments will take place between 2038 and 2053. The average interest rate will be 3% compared to 8% on the promissory note.

·         The Irish National Treasury Management Agency (NTMA, which owns NAMA and formerly IBRC) will see its borrowing requirement over the next decade fall by €20bn. The Irish government deficit will be reduced by approximately €1bn a year.

Essentially then, the IBRC was wound down, allowing/forcing the ICB to take control of the promissory notes which were used as collateral for the ELA which it had been providing, in turn allowing the IBRC to continue servicing its bondholders, depositors and any other obligations. It was then agreed to swap these notes for the longer dated lower interest ones.

It seems to be a fairly reasonable idea and a good work-around of a tricky situation. It certainly provides a reduction in the burden with a much lower interest payment and no principal payment for some time.

The main ECB concerns were: monetary financing if the collateral was allowed to be swapped for lower value (longer dated collateral), the further write-down of bondholders and setting a bad precedent for other eurozone members. Most of these have been addressed, although there are a few issues outstanding:

The first issue was mainly a concern while IRBC existed. That said, if the ICB took control of the bonds when the ELA was terminated as the IBRC was liquidated, why were they suddenly willing to exchange them for the new bonds? Surely, these longer dated lower interest bonds have a lower net present value than the previous promissory notes? This may be because the ICB and the Eurosystem tend to hold such assets at nominal value, but it’s hard to argue that the ICB hasn’t taken a loss in some terms.

The second seems to have been dodged as the remaining liabilities will be covered by the Deposit Guarantee Scheme and Eligible Liabilities Guarantee Scheme (see FT Alphaville here for more details) and transferred to NAMA. That said, the role of NAMA now that the ELA has been terminated isn’t clear. Will it still finance these liabilities, if so, how? Surely, it would need to use the new bonds to borrow from the ECB to finance the remaining IBRC liabilities. This isn’t an issue as such, but needs clarification since it impacts: who is holding the new bonds, what interest is being paid and who it is paid to.

On the third issue, the ECB seems to accepted that this is a fairly special case and that setting a precedent is not much of a concern – or is at least less of a concern than the consequences of not giving Ireland a deal on the promissory notes.

A few remaining issues then, but nothing major and no deal breakers – although the monetary financing issue could potentially flare up in our view.

Ultimately, some deal was needed on this front both to reduce the impact of financing the Irish bank bailout on the Irish budget and to maintain political support for the extensive reform programme being undertaken in Ireland. Another positive step in the recovery of the Irish economy it seems. That said, the deal does not succeed in significantly reducing the overall cost of the Anglo Irish Bank bailout and the cost of the bank bailout will continue to weigh on Irish debt - i.e. plenty of challenges remain.

CFP reform: Credit where credit is due

The Common Fisheries Policy (CFP) has been arguably the most dysfunctional of all EU policies. So bad that even EU Fisheries Commissioner Maria Damanaki has not shied away from criticising its damaging impact, especially on the long-term sustainability of fish stocks.

Yesterday, MEPs approved by 502 to 137 votes a set of measures to reform the CFP in what has been widely described as a 'landmark' vote. And rightly so, given that the CFP is re-opened for negotiation only every ten years. The measures adopted by MEPs include a number of positive things:

• A timetable for the enforcement of an EU-wide ban on discards of fish. Under the new rules, all fish caught will have to be landed. If enforce propoerly, this should encourage better and more selective fishing techniques.

• From 2015, and by 2020 at the latest, EU fishermen will not be allowed to catch more than a given fish stock can reproduce in a given year. For lovers of Brussels acronyms, this is called the Maximum Sustainable Yield (MSY).

• Annual allocations of fishing quotas will have to be consistent with longer-term management plans for individual fisheries. This is expected to avoid, or at least reduce, the yearly squabbling between national fisheries ministers in Brussels.
   
•  Most importantly, management of fisheries will be largely carried out at the regional level - i.e. member states surrounding a certain sea basin will sort out day-to-day issues among themselves, based on broad principles decided in Brussels.

Now that both national governments and the European Parliament have adopted their negotiating positions, talks will resume. There are still some issues that need to be ironed out. For example, MEPs wants to give the European Commission more power to intervene when member states struggle to reach an agreement among themselves on day-to-day management. The UK and other governments are suspicous that this could lead to more Commission power, not less. Also, MEPs want to be "present" when decisions about quota allocations are taken in the Fisheries Council.

But if one looks at the bigger picture, the reforms adopted yesterday, albeit decades late, are clearly a step in the right direction. And prove that shifting from Brussels-centric micro-management to a healthier and more logic regional-based approach is fully possible when there is the political will to do so.  

George Soros: The euro is "bound to break up the European Union"

In an interview with Dutch TV programme Nieuwsuur (about 28 minutes in), prominent investor George Soros has warned that, "I am terribly concerned about the euro potentially destroying the EU. There is a real danger that the solution to the financial problem creates a really profound political problem."

Asked what kind of change is needed, he said,

"Germany needs to realise that the policy it impose on the euroarea - the austerity programme - is counter-productive. It cannot actually succeed. At the moment they [the South] is being pushed - unwittingly, not with bad intentions, but the effect is that they are being pushed into a long lasting depression and that is what is happening to Europe. And it may last more than a decade, in fact it could become permanent, until the pain is so big that eventually there may be a rebellion, a rejection of the EU, and that would then be the destruction of the EU, which is a terribly heavy price to maintain to preserve the euro, which is meant to be just a servant of the EU."

On whether the euro will survive, he said,

 "It could last quite a long time, the same way as the Soviet Union, which was a very bad arrangement, lasted for 70 years. However, I think that eventually, it is bound to break up the European Union. The longer it will take, and it may take generations, those will be lost in terms of political freedom and economic prosperity. The solution is to me a terrible tragedy for the EU. And it's happening to the most developed open society in the world. To me it's a terrible tragedy. It doesn't have villains, because I don't think that Germany is doing it with bad intentions but its happening out of a lack of understanding of very complex problems."

Strong stuff...

The accounting details that could make or break the EU budget

Ahead of tomorrow’s EU summit, which will see the resumption of the tricky long term EU budget negotiations, we put out a briefing laying out our thoughts and expectations. See here for the full piece.

One issue that we did note only in passing in the briefing, but could prove significant: on top of cutting €20bn from his previous proposal in November, European Council President Herman Van Rompuy may also choose to widen the gap between the ‘commitments’ and ‘payments’ headings of the EU budget in the proposal he will submit tomorrow - a move which could help facilitate a compromise. Van Rompuy has kept his cards very close to the chest on this one, so it's difficult to say exactly how it'll play out.

This is all very techy but, for a quick recap, there are effectively two budgets, which are called 'commitment appropriations' and 'payement appropriations': 

• Commitments refers to amounts that can be authorised in a given year but which are often actually paid out later or over several years - some refer to it as the credit card limit.

• Payments refer to the amount of funds which will actually be paid out in a given year. This is traditionally what interests national treasuries in the short term - and particularly now the UK - as it is this figure that has an immediate impact on their contributions to the budget.

EU leaders will tomorrow be negotiating ceilings for both commitments and payments for the next budget period (2014-2020). The difference between the commitments and payments in the current 2007-13 budget is close to 5%. Some gap will remain due to projects which were scrapped and ones which are yet to be completed, but an artificial increase in the gap will always be closed somewhat over time (for the reasons below).

So what could an increased gap between the two mean?

-          As a handy Commission doc points out, "The level of commitments determines the payment level for the upcoming years", essentially payments simply "trail" commitments. "Controlling the level of commitments therefore assures control over the future level of payments."

-          For example, increasing the difference between commitments and payments in the 2014-2020 budget period could require higher payments in 2020-2026 period – and therefore just delays the eventual pay-outs and budget increase.

-          More critically, the annual payment ceiling can also be increased through a QMV vote in the European Council and a majority vote in the Parliament. This may be unusual but does present an avenue to increase payments to a level closer to the higher commitments headline.

-          It is worth noting that expenditure is limited by the Own Resources Ceiling (1.23% of EU GNI), which is the revenue side of the budget. However, this could still leave a significant margin. The difference between the own resources limit and the forecast payment ceiling can often amount to tens of billions – leaving scope for a sizable increase if the Council and EP so choose (for example see figures on the current budget period).

In any case, under the current proposals reportedly doing the rounds, the level of commitments will be reduced compared to the current period, which is good news. But, our point here is that, payments will inevitably catch up with commitments one way or another. So, if the level of payments is well below the level of commitments, this is more about finding a neat way of presenting two sets of figures to different audiences in the short term, particularly since the framework leaves scope for future adjustments. Let’s hope the government is aware of these subtleties ahead of tomorrow’s negotiations...

From Amsterdam to Brussels with love?

Events may have conspired to prevent David Cameron from delivering his Europe speech in Amsterdam as originally planned but it has still managed to create political waves in the Netherlands.

It is rare for statements from foreign politicians to be the focus of parliamentary debates but last night the Dutch Parliament held a debate specifically on Cameron's speech. Halbe Zijlstra, the parliamentary faction leader of PM Mark Rutte’s VVD party argued that “Cameron’s speech is a more extensive version of the European chapter of the Dutch coalition agreement.”

The relevant section of the Dutch coalition agreement reads:

"The Netherlands asks the European Commission to inventarise, on the basis of subsidiarity, which policy areas can be transferred to national authorities and will put forward such proposals itself."

Indeed Rutte has himself quipped that what will take Cameron two years (i.e. the FCO's Balance of Competencies Review), will take the Dutch Cabinet 6-7 months. Last week, in a joint letter together with Finance Minister Jeroen Dijsselbloem, Rutte also reiterated the VVD/PvdA coalition’s desire for member states to have the right to opt out of individual EU policies, such as the Schengen zone and the eurozone, or from the EU altogether.

Yesterday, in an effort to apply pressure on the coalition in this area, Sybrand van Haersma Buma, the leader of the centrist Christian Democratic Party (currently in opposition but historically a party of government), claimed that “Europe is indulging too much in all kinds of over-detailed rules”, and put forward his party’s own detailed list of areas in which Brussels should not be involved:

- Nitrates Directive
- Air Quality Directive
- European Soil Framework Directive
- Home Energy Labels
- Freedom of the press
- Occupational Pensions Funds Directive
- Income limit for social housing rent
- Family reunification for immigrants (point system)
- Internet cookies regulations
- Public procurement of small building projects
- Maternity leave
- Ministry of Transport tests
- Female quotas on EU company boards

This is going much further than Cameron, who did not present a ‘shopping list', only mentioning general policy areas such as social and employment law and environmental legislation. Interestingly though, many of the above fall into those two categories. Specifically addressing Cameron's position, Buma said:

"He's right…let's go back to what Europe was originally all about...What I want is for several countries to decide together that [certain] matters can better be regulated domestically. A Europe à la carte isn't a good idea…We must get rid of the idea that if you want less Europe, it means you're against Europe from the start."

This is set to increase the pressure on the VVD-PvdA coalition which will try to agree in the coming months on their own list of policy areas which should be dealt with nationally, and which the government can use as the basis for any negotiations in Brussels. PvdA MP Michiel Servaes reacted by saying that Buma was only “following the line set out earlier by the cabinet", but that Buma's list was "a big leap" which ought to be carefully considered and discussed with other countries.

Meanwhile, on his Elsevier blog, Dutch Professor Afshin Ellian, a well-known political commentator, described Cameron's stance as "a third, more pragmatic way between europhobia and europhilia", while in a letter to NRC Handelsblad, nine prominent Dutch professors and academics argued that in order to bridge the gap between EU centralisation and EU citizens, the Netherlands should also have a referendum on its future in the EU, an option supported by 52% of Dutch citizens according to a recent opinion poll.

As we suggested in our analysis ahead of last September’s Dutch elections, in the medium to long term the Netherlands “could well be on the path to becoming a more assertive – and far more complicated – EU partner.”

Scottish independence and EU accession: tricky to pull off in one manoeuvre?

The SNP Scottish Government has today released its 16 page plan for independence in which it envisages an independent Scotland within the EU. The document does show they have attempted to address earlier criticisms and grapple with the myriad of legal questions Scottish independence throws up, but troubling issues of EU law remain. So what are the potential problems?

The SNP's new plan is based on its belief that "negotiations will be required in advance of independence with the European Union to agree terms of an independent Scotland's continuing membership."

However this would seem to contravene EU law. The EU has a clear process for EU accessions set out in Article 49 of the Treaties as follows:

"Any European State which respects the values referred to in Article 2 and is committed to promoting them may apply to become a member of the Union. The European Parliament and national Parliaments shall be notified of this application. The applicant State shall address its application to the Council, which shall act unanimously after consulting the Commission and after receiving the consent of the European Parliament, which shall act by a majority of its component members. The conditions of eligibility agreed upon by the European Council shall be taken into account."

 

So to apply to be an EU state you must firstly be a state, (i.e. not a pre-independent state) and that, once an application is received by the European Council, all EU states would have to agree to membership. There seems to be little room for ambiguity and is helpfully explained on the EU's own website here.

And if this was not enough, the EU, under Article 4, has a responsibility to "respect the equality of Member States before the Treaties as well as their national identities...including ensuring the territorial integrity of the State." It is difficult to see how negotiating with Scotland pre-independence would conform with that duty. Something Spain would probably point out even if the UK did not.

Even if informal negotiations were opened, could the EU conclude any of the negotiating chapters with a non candidate non state (probably not), could Scotland prove it has the capability to live up to its EU responsibilities prior to independence (again probably not) and how long would the negotiations take - probably years.

But this comes to the biggest problem for Scotland. They would need to get all 27 states' approval. Unfortunately for Scotland some states have a strong principled opposition to succession. Spain, Romania, Cyprus and Greece (and the EU) for instance still do not recognise Kosovan independence. Scotland's potential case is obviously very different, being based on consent, but the principled opposition, from other member states, could be the same. There are also unexpected bilateral issues that any EU state (apart from the UK) may wish to bring up, fish is perhaps the obvious one (and troubled Norway's accession negotiations) but for the sake of argument the sovereignty of Rockall could be another. It is difficult to tell -  Croatia's EU bid was held up for years by a dispute over maritime access with Slovenia.

And that is even before Scotland raises the question of opt-outs to the euro, Schengen, fish and issues surrounding the UK rebate, budget and the number of MEPs it might want...

Of the 27 states that need to agree a number are wary of breakaway regions:

Should we feel sorry for underpaid EU civil servants?

A tale of woe? 

The European Parliament has published a helpful graphic to explain the terrible conditions that EU civil servants have to endure. EU civil servants have to work 37.5 hours a week (i.e 9 - 5:30 with a merger hour for lunch) and retire at the age of 65 on a potential 70% of their final salary.

Not all EU civil servants are overpaid, some (for instance some contractors) are not, and many work hard but there are some interesting omissions in this particular public information advert, such as:

Number 1) An average EU yearly salary is approx £67,693 (€78,503).

Number 2) An average EU yearly salary is approx £78,524.23 (€91,064) if you claim the tax free 16% expatriate allowance (an estimated 70% of EU staff do this).

Number 3) EU officials pay tax at their own specially low rate. On an average EU salary + expat allowance of around £78,524.23 you would pay only £12,610.40 in EU tax (16.06% in total). Whereas in the UK you would pay £26,201.54 in tax (i.e. 33.36%).

And this is before going into the arcane details of travel expenses, household allowances and free school fees....we will leave it up to you as to whether these area really such bad working conditions.

Detail - Number of EU officials: 

Detail - EU tax:

If an EU official has a monthly salary €6,938.38 [€83,260.56 per year] – he / she would pay EU tax of €1,292.53 per month [or €15,510.40 per year], the same as an annual UK salary of £67,693.3 and paying only £12,610.40 in tax (a marginal rate of 45% but an actual rate of only 18.6%).
 

However in the UK tax system an annual salary of £67,693.3 would set you back £21,652.55 in tax and National Insurance (i.e an actual rate of 32% and a marginal rate (inc NI) of 42%).

Many EU officials however claim a tax free expatriate allowance. If you add the 16% these EU officials can claim for not living in their own state then have an effective EU ‘salary’ of £78,524.23 with still only £12,610.40 paid in tax (16.06% in total). Whereas in the UK you would pay 26,201.54 in tax + NI on a salary of £78,524.23 (i.e. 33.36%).

In this case a tax saving of £13,591.54.

Italian elections: Il Cavaliere goes all-in

With the Italian elections only three weeks away, Silvio Berlusconi has gone all-in with a number of big electoral pledges. The most eye-catching are:

• Refund Italians for a levy on first homes (IMU) re-introduced by Mario Monti's technocratic government. Berlusconi had already pledged to scrap the tax, but has now raised the stakes further. 

• Scrap Italy's Regional Tax on Productive Activities (Irap, which is levied on businesses) within the next five years.

• Launch a full tax amnesty.

• Finalise a bilateral agreement with Switzerland allowing the Italian government to tax Swiss-based financial activities of Italian citizens. Berlusconi claims this would grant a one-off revenue of €25-30bn, and some €5bn a year.

• Scrap public financing of Italian political parties.

• Halve the number of parliamentarians (there are currently 630 MPs and 315 Senators).

• Cut public spending by a total €80bn in five years.

Responses have been mixed. After comparing Berlusconi to the 'Pied Piper of Hamelin', Mario Monti has this time likened him to a "snake charmer" - a clear reference to Il Cavaliere's poor record when it comes to keeping electoral promises. Giulio Tremonti, who served as a Finance Minister several times under Berlusconi (although the two did not always get along particularly well, see our blog from August 2011), also noted that the tax refund pledged by Berlusconi would create "objective problems" with Italy's public finances. Incidentally, Tremonti is not a great fan of the agreement with Switzerland either.

But there is only one reaction Berlusconi is interested in at this point in time: the Italian electorate's. And his populist rhetoric seems to be paying off on that front. According to the daily opinion polls carried out by Tecnè for Sky TG24, Berlusconi's PdL party continues to gain ground and is now on 20.4%. Crucially, these polls also show that the gap between the centre-left coalition led by Pier Luigi Bersani and Berlusconi's centre-right coalition has narrowed to only 4% (the two blocs are on 32.9% and 28.9% respectively). Tecnè will tomorrow release the first survey conducted after the big promises we listed above. We wait with interest.

In the meantime, the Italian stock market and borrowing costs seemed to have begun pricing in the potential for a Berlusconi victory - along with the broad added uncertainty of a close election and the recent bailout of Banca Monte dei Paschi di Siena. The FTSE MIB fell 4.5%, while borrowing costs edged up to 4.47%. With another three weeks before the elections, we could yet see a few more days like this.

Spain's slush fund scandal: This is not going away soon

New interesting details have emerged on the slush fund allegations involving Spanish Prime Minister Mariano Rajoy and his Partido Popular (PP). The party has said that it will take El País to court, because the 'secret' accounting books allegedly held by PP's former treasurer Luis Bárcenas are fake. However, the paper today reports that a couple of senior members of Rajoy's party have admitted that they did receive the payments registered in the books under their names.

A spokesperson for Pío García Escudero, the speaker of the Spanish Senate, said that Escudero actually asked the party for a 5 million pesetas (some €30,000) loan in 2000. He needed the money to repair his house in Madrid, which had been destroyed by an attack from Basque terrorist group ETA. Escudero says he paid the loan back in instalments of 1 million pesetas each, and stresses that he never dealt with Bárcenas personally.

Similarly, people close to Jaume Matas - a former Environment Minister and President of the Balearic Islands region - have confirmed that the party agreed to pay him some sort of 'transition allowance' between when he quit the cabinet and when he became PP's candidate for President of the Balearic Islands. Now, El País notes that Matas stepped down as Environment Minister in March 2003 and was elected as President of the Balearic Islands in May 2003. Perhaps just a coincidence, but the €8,400 payment to Matas is dated 2 April 2003 in the books.

Interestingly, during her press conference yesterday, the Secretary General of PP María Dolores de Cospedal (pictured) was asked about Escudero's admission. She said that specific payment "may be true", but this does not automatically validate the documents, because "some people ask for money in advance, this happens in all companies. It's no extra pay." Not an entirely convincing answer.

One last aspect is worth flagging up. El País stresses that, according to the Spanish law on the financing of political parties in force from 1987 to 2007, donations larger than 10 million pesetas (around €60,000) were forbidden. Therefore, 70% of the donations disclosed by the paper would have been illegal at the time when they were made - potentially quite a strong incentive to try and hide them in 'parallel' accounting books. 

Rajoy has convened a meeting of top members of his party, scheduled for tomorrow - but has yet to announce when (and if) he will speak to the press on this issue. Meanwhile, hundreds of Spaniards protested outside his party's headquarters in Madrid yesterday and called for him and his cabinet to resign immediately. This story is getting increasingly interesting, and is not going away anytime soon.  

Dutch PM and FM reiterate the Netherlands' desire for flexible Europe

The concept of a 'flexible Europe' seems to translate across borders. In a joint letter to the Dutch Parliament, Prime Minister Mark Rutte and Finance Minister Jeroen Dijsselbloem have reiterated the government's position that it wants countries to have the right to opt out of individual EU policies, such as the Schengen zone and the eurozone, or from the EU altogether.

Here are the relevant bits from the letter:

"Following the request by member Schouten to the Finance Minister and the Prime Minister (issue number 2013Z01025) for a letter about the exit from the eurozone, we report as following.  

The cabinet introduced in its coalition agreement that it should be possible under mutual consideration to exit from the community arrangements (Schengen, eurozone, European Union). This requires in the case of the eurozone and Schengen a treaty change as the current EU treaty does not foresee this possibility."