The UK and the Eurozone cannot afford another non-solution from this weekend’s summit

Over on Conservative Home we highlight that this weekend's (and now next week's as well) EU summit is important for the UK and not just the eurozone:

In addition to dealing with important EU issues at home, the UK government will face a huge challenge at this weekend’s EU summit – it will have the chance to act as the voice of reason amongst the cacophony of empty promises and grand gestures. Make no mistake, the eurozone crisis and the policies aimed at solving it can and do affect our economy. As our recent briefing highlights, under a Greek and Portuguese restructuring and accounting for the market prices of Irish, Spanish and Italian debt (a worst case scenario), the necessary recapitalisation of UK banks could total between £21bn - £45bn – that some of this would need to come from UK taxpayers should be enough to convince anyone of the gravity of the situation.

Certainly, there is no shortage of suggestions that the UK government could make to eurozone leaders. Let us start with their plan to use the EFSF, the eurozone’s bailout, to insure some part of peripheral sovereign debt.

The thrust of the plan is that €440bn worth of EFSF funds would be used to offer a guarantee of 20% on new, mainly, Italian and Spanish sovereign debt, therefore leveraging the coverage of the fund five times. This creates a circular situation where countries such as Italy and Spain are guaranteeing their own debt, making the extra insurance almost worthless in the case of a default (exactly when it is needed). The UK government could also point out the irony in the fact that, despite making insurance of sovereign debt the foundation of their latest eurozone ‘solution’, the same leaders have just imposed extra unnecessary financial regulation on the use of credit default swaps (a valid form of default insurance).

There’s also a worrying comparison to be made between the origins of the financial crisis and many of the solutions which the eurozone is now considering. European leaders seem to have settled on ‘leverage’ as the answer to all their problems. The logic that it’s easy to institute and will ‘never really be called upon’ rings of the financial instruments that helped create the financial crisis. Furthermore, putting a fund which will hold an abundance of similar assets exposed to the same risks and will create huge unfunded liabilities at the heart of an already unstable and divisive monetary union is asking for trouble.

Given the UK’s exposure to the crisis and the knock on effects it could have on its economy, the government cannot give its support, even tacitly, to such flawed proposals. A failed solution to the eurozone crisis could have just as many negative effects for the UK as no solution at all. Increasing liabilities and continuing to shift debt around the eurozone (mainly from the private sector to the public sector) has not only failed, but looks to be the predominant cause of the growing political unrest in many eurozone countries.

As our recent briefing points out the only viable short term option for the eurozone remains a debt restructuring in Greece and Portugal and a full recapitalisation of European banks. The UK government has another opportunity to grasp this, it would do well to take it, otherwise we could end up with yet another non-solution to the crisis, which not only the eurozone but also the UK can no longer afford.

Eurozone could be insuring its own downfall

In today's City AM we argue against the possible use of the EFSF to insure sovereign debt. here is the full piece:

As eurozone leaders gear up for their umpteenth summit to solve the Eurozone crisis, they seem to have reached the conclusion that what the Eurozone needs is more leverage. Not only that, but they seem to believe that the best way to achieve this would be through using the EFSF, the Eurozone’s bailout fund, to insure shares of Eurozone sovereign debt.

The irony is that many of the same leaders just agreed to pointless regulation of credit default swaps (a valid form of default insurance), which is likely to decrease liquidity in sovereign debt markets, increase borrowing costs for some countries and hamper risk management. This hypocrisy is sadly, and expectedly, lost on Eurozone leaders, who seem intent on taking with one hand and giving with the other – fiddling while the Eurozone burns.

The thrust of the plan is that €440bn worth of EFSF funds would be used to offer a guarantee of 20 per cent on new, mainly Italian and Spanish sovereign debt, therefore leveraging the coverage of the fund five times. Let’s put aside the legal issues relating to the Eurozone’s no-bailout clause and the recent German Constitutional Court ruling for a minute and focus on the economics – which just don’t add up.

First off, Spain and Italy represent 30 per cent of the EFSF guarantees. As a result, any EFSF insurance would prove ineffective, since these countries would be partly guaranteeing themselves through their membership of the fund and unable to make good on these guarantees if under threat of default – the exact moment when the guarantees would need to be called upon. Both countries could step out of their EFSF commitments (as bailed out countries already have) but this would reduce the size of the fund significantly.

This leads to a second problem – there isn’t that much money to be leveraged, even if the EFSF’s triple-A rating is abandoned in an attempt to access the full €780bn in guarantees underpinning it (which are currently needed to ensure €440bn effective lending capacity). After the second Greek bailout, around €115bn would be committed from the EFSF to bailout programmes in the Eurozone periphery. Add to this the need for a recapitalisation of European banks, which could cost the EFSF up to €200bn (as suggested by the IMF). Lastly, take into account that the guarantees of Italy and Spain along with Greece, Ireland and Portugal have to be discounted. This leaves only around €175bn to be leveraged, not exactly significant considering that Italian and Spanish funding needs amount to around €1.7 trillion over the next few years.

Thirdly, this plan offers little incentive to investors as the likely scenarios are ones of extremes – there will either be no default with no losses or significant losses under a significant default. But 20 per cent insurance falls somewhere in the middle of the two, which is rather like insuring only part of your house – and therefore unlikely to inspire much confidence. Furthermore, assuming that other countries would be able to fulfil their guarantees during a Spanish or Italian default is unrealistic, particularly given the contagion experienced so far throughout the crisis and the already fragile state of some government finances in the core of the Eurozone.

Additionally, since it looks likely only to apply to new issues of debt rather than the existing stock, it could at best only help Italy and Spain with their liquidity problems, but will do nothing to solve the underlying solvency problems in other Eurozone countries. A proposal that does not tackle the problem of contagion or existing debt levels cannot be seen as a solution. It could also encourage fiscal profligacy in those states which receive some insurance – something which the Eurozone can ill afford more of.

Even if this proposal were viable, the knock-on effects of its implementation would be undesirable. It would create a two-tiered bond market, since a large amount of new debt will involve some insurance (credit enhancement) with the aim of making it “safer”. This would introduce huge uncertainty into secondary markets, making it more difficult to price sovereign risks in the Eurozone – most would agree this is the opposite of what is needed.

Take these issues as a whole and a disturbing picture emerges, one that conjures images of the excessive leverage, unfunded liabilities and misleading credit enhancements that helped fuel the financial crisis. Putting these at the heart of the Eurozone sets the scene for another crisis. Moving forward with a restructuring of Greece and Portugal, a full bank recapitalisation and reforms to restore competitiveness across the Eurozone remains the only feasible short-term solution to this crisis. However, none of the options on offer, least of all this insurance plan, can tackle the underlying structural flaws in the Eurozone.

Meanwhile, out there in space...

We have already reported on the EU's ill-fated attempt to conquer the final frontier a number of times. But the big day has finally arrived.

Three years after the original planned launch date of the European satellite navigation system Galileo, the first two operational satellites will be launched into orbit aboard a Russian Soyuz rocket.

Galileo, intended to break the hegemony of the US GPS system, is glowingly praised in yesterday’s Handelsblatt for its ability to provide positional data with up to one meter precision, instead of the ten meter precision provided by the GPS system (to the public).

The European Space Agency (ESA) is quoted claiming that possible uses for Galileo range from investigators using positioning data in manhunts to civil engineers using it in order to size-up future buildings. Furthermore, they claim that flights will be more punctual and reliable due to having more precise approach paths to airports, so it will even contribute to fuel savings.

Sounds great, is there anything Galileo can't do, you ask?

- Be operational on schedule. This will require 18 out of the total 30 satellites to be in orbit, something which Handelsblatt notes will take until 2014, six years after the original planned start date. Considering GPS became operational in 1994, and both Russia and China have their own navigation systems, Europe clearly has fallen far behind.

- Avoid continuous cost overruns. As we noted in a report on Galileo last year, we said that the EU Commission was under-estimating the deployment cost of the project and would in fact need an extra €1.5 billion to €1.7 billion, on top of the existing €3.4 billion estimate. The Commission later confirmed that the actual cost overrun would be an extra €1.9bn for deployment. The annual operational costs have also risen from the original Commission estimates.

Despite this sorry history, earlier this year, EU Industry Commissioner Antonio Tajani (pictured) had the temerity to claim that 'savings' (some €300-500m) had been identified in order to bring an additional 6 satellites into operation by 2014. In the face of such huge cost overruns, amounting to billions, describing this as a 'saving' in the overall context of the project strikes us as slightly disingenuous, to put it mildly.

- Attract private investors. Originally the intent was for private investors to fund approximately 66% of the cost of construction and the first 20 years of operations, however, partly due to lack of commercial prospects (other competing systems) private investors pulled out, and taxpayers have been asked to fund the project for the last decade.

-Generate profits. The ESA still maintains that “Galileo is facing a market with huge opportunities for growth in the next few years.” A German government report from 2010 paints a gloomier picture however, saying "All in all, it is assumed, based on the currently available estimates, that the operating costs will exceed direct revenues, even in the long term.”

But fear not, Galileo has, however, provided Commissioner Tajani and some selected journalists with a reason to charter a plane to fly to French Guiana and back in order to witness the launch first hand, Europaportalen reports.

Update 12:30pm Reuters reports that due to technical problems, specifically an anomaly detected during the fueling of the Soyuz launcher, the launch has been postponed until tomorrow. Given Galileo's track record so far, this really doesn't come as a huge surprise...

A chance to get rich off the eurozone crisis...

No, unfortunately we don't have some secret inside info which you could trade on and make bundles of money (not that we're willing to release on our blog anyway). But there has been an interesting development in the (booming) world of eurozone research in the last few days with the announcement of the new Wolfson Prize.

Lord Wolfson, Chief Executive of Next, has launched an economics prize offering £250,000 to the person who comes up with the best plan for winding up the euro in an orderly way (reportedly making it the second biggest prize in economics after the Nobel Prize).

Lord Wolfson explained his rationale for creating the prize, saying:

“Currently there is only one plan: deeper fiscal integration that gives EU central authorities greater control over tax and spending in member states. But this does little to cure structural deficiencies in the eurozone…if the economic merits of deeper integration are questionable, political failure is a greater risk…So we need the world’s brightest economists to devise Plan B, by which the euro can be safely dismantled.”

There is no doubt that this is an area that needs much greater examination. As we have said for a long time, denying that a eurozone break-up is a possibility is of little help. Letting it happen in a disorderly fashion would be far worse than the alternative of considering how it could be instituted if it became necessary. As such this prize could definitely help shed some much needed light on a massively complex issue and we for one look for to reading and analysing the entries (naturally we will air our thoughts and musing through our blog).

Interestingly, there is no guarantee that the prize will be dispersed, if no viable plan is found. That, as Lord Wolfson pointed out, would in itself be “quite revealing”.

No way out? Short term options for the eurozone

The window of opportunity for stabilising, or even saving, the eurozone is closing quickly. As EU leaders gear up for a series of key meetings this week, Open Europe has published a new briefing looking at the short-term options available to the eurozone for tackling the most immediate crisis.

Open Europe argues that Greece should default on 60% of its debt through a managed restructuring, and that the planned second Greek bailout should be scrapped altogether, replaced by a limited transition fund designed to control the default. This would radically reduce the burden on taxpayers. Portugal should simultaneously take a 25% write-down on its debt.

Alarmingly, however, Open Europe estimates that 65 banks across the EU would fail serious stress tests, falling below an 8% tier one capital ratio, meaning they require a substantial recapitalisation. To withstand a Greek and Portuguese default, combined with marking Irish, Italian and Spanish debt to market prices, the EU banking system would need to be recapitalised by between €260bn and €372bn. The briefing sets out a three-pronged strategy for how this can be achieved, including a role for the eurozone bailout fund, the EFSF, but with strong conditionality attached.

However, using the EFSF to insure a percentage of Spanish and Italian debt against default – a proposal which is currently being discussed – would merely create a new set of unfunded liabilities, which markets are likely to question sooner or later.

The briefing also concludes that EU leaders should rule out forcing the ECB to act as the eurozone’s lender of last resort by buying hundreds of billions of government bonds – an option favoured by many. The ECB is already taking on risky assets at a worrying rate, and now has an exposure of around €590bn to PIIGS, up from €444bn only this summer, in turn undermining its independence and credibility.

See here for full briefing.

What’s another trillion euros these days?

Compare and contrast these headlines:

Guardian: France and Germany ready to agree €2 trillion rescue fund

FT Deutschland: Schäuble ready to leverage bailout fund to €1 trillion

Conflicting reports emerged yesterday evening as to exactly what would be agreed at Sunday’s meeting of EU leaders regarding the increase of the lending capacity of the eurozone’s bailout fund, the EFSF. FT Deutschland exclusively claimed, following a tip-off from an FDP MP, that earlier in the day German Finance Minister Wolfgang Schäuble had broken the news to coalition MPs that he would propose leveraging the EFSF to up to a maximum of €1tr through guaranteeing the first 20% or 30% of bondholders’ losses on newly issued eurozone debt. Meanwhile the Guardian got slightly ahead of itself in exclaiming that France and Germany had in principle agreed to boost the EFSF to double that amount.

Given the sensitivity of this issue in Germany, and for the FDP in particular, any increases in German taxpayers’ liabilities on eurozone sovereign debt are unlikely to go down well, which is why Schäuble was keen to emphasise that Germany’s EFSF guarantees of €211 would not increase. Although the leaderships of the coalition parties have apparently agreed in principle, it is not difficult to imagine there will be significant dissent among ordinary party members, after all 15 voted against increasing the effective lending capacity of the EFSF last month (a substantial dissent given the coalition only has a majority of 19).

In view of this, it is difficult to see where the Guardian, which cryptically cites “EU Diplomats” as its source, found the additional trillion euros. We appreciate that during the financial crisis banding around enormous sums of money has become commonplace, but surely a trillion euros still makes a big difference?

Eurosceptics Anonymous?

BBC Radio 4 last night featured quite an interesting debate about 'euroscepticism' across the political spectrum, and in the Conservative party in particular. The main point was that while euroscepticism remains a broad concept, it has settled into more recognisable forms. In the context of the Labour party, this has resulted in hostility towards the free movement of labour and capital within the EU, which we explored in greater detail here. For the Tories, this has evolved away from what might be described as a fixation with sovereignty in the abstract sense towards a more practical critique of Brussels’ tendency for wasteful spending and over-regulation, which resonate better with the man and woman on the street.

However, what really caught our attention is the notion that, apparently, many Tory MPs are shy about criticising the EU too openly. The programme even featured a couple of contributions from MPs who only spoke on the condition of anonymity, with actors reading out their comments, which led presenter Ed Stourton to compare them to persecuted dissidents in an authoritarian regime. Really? It's probably true to a certain extent - as described by one of the anonymous MPs - that UK outright withrawal is “the love that dare not speak its name" too openly in certain Tory quarters. But seriously, it really isn't that difficult to find Tory MPs who will go on record to have a go at the EU, or to call for re-negotiating.

It felt a bit, well, fabricated.

Ed Stourton did make some astute observations, however, when summing up the programme:

In formal terms Britain will have a veto over any changes which need to be agreed by the full EU rather than just the Eurozone members. And in diplomatic terms Britain often has more clout than at first appears; it is just too big a player for other members of the EU to ignore altogether.

The fact is that the dabate is evolving on to one of how to secure UK influence and safeguards against unwarranted intrusions into the Single Market or financial services, for example, should the eurozone integrate further and start acting as a block. The UK would be in a strong political and moral position to ask for safeguards and/or powers back, should eurozone leaders change the basic rules of EU integration.

A shame over a 30 minute programme, although touching on it briefly, the BBC didn't devote more time to looking at how the evolving situation in Europe is changing the parameters of the UK debate.

Even ECB staff think it overstepped its mandate...

There's an interesting article in FT Deutschland today, highlighting a survey of ECB staff. According to a survey conducted by the ECB's trade union IPSO recently, 55.1% of ECB staff believe that current ECB President Jean-Claude Trichet has overstepped the ECB's mandate with his actions (implicitly referring to the ECB's purchase of government bonds under the so-called Securities Markets Programme). We've questioned the ECB's actions in the past, but have always pointed out that it has been put in a near impossible position by the lack of action on the part of eurozone leaders and the structural flaws in the eurozone set up. Interestingly, it seems that the ECB staff feel the same way, with only 35.6% willing to condemn his actions.

Overall, it might be fair to say that Mario Draghi - Trichet's successor - is about to enter a fairly hostile environement. His early actions will likely set the tone for much of his tenure.

In other ECB related news, Juergen Stark, ECB Governing Board member, who recently announced his resignation for 'personal reasons' (read objections to ECB bond buying programme) gave an interesting speech to the European Parliament yesterday. Not only did he have a lot to say in favour of stronger economic governance (clearly a shot across the bow of those profligate economies which forced the ECB's hand) but also argued vehmently against eurobonds (he is still German after all). Most interestingly though he told the Parliament that he will "most likely" make a full statement when he steps down at the end of the year.

Now that should make for an interesting speech...

Hague can't ignore prospect of treaty change for much longer

Speaking on Andrew Marr's show yesterday, William Hague repeated his view that there is no "immediate prospect" of repatriating powers from Brussels. "The repatriation of powers, which is something I support by the way, is not an immediate prospect because no countries are proposing widespread treaty change," he said.

"That may change, but at the moment, that is not what they are proposing..."

But as we've said before, this is all moving much faster than the UK Government is letting on or perhaps would like. Contrast Hague with German Foreign Minister Guido Westerwelle's rather more urgent tone in an interview with the FT last week. He said that Berlin wants to persuade other members of the EU to draft changes to the bloc’s founding treaties at a new 27-nation convention (or IGC) that would take place in 2012.

The Convention should be given a clear mandate and a one-year time limit to deliver results by mid-2013, when the eurozone’s permanent €500bn rescue fund – the European Stability Mechanism – is supposed to come into effect, he said. "We need treaty changes to overcome the shortcomings of (European) construction."

He added that the Convention should consider whether the European Court of Justice would be used to enforce budgetary discipline, and if a “stability commissioner” for the euro should be appointed, suggesting “Probably both are necessary.”

These are clearly "widespread treaty changes" that Hague seems to suggest are far off on the horizon but 2012 is less than two months away. Yes, the actual process of negotiating Treaty changes takes years. But, which the UK govenrment should know from experience, getting in early and getting with a clear agenda, is absolutely vital if a country wants to influence the outcome.

It's time the Government picked up the pace.

Silvio The Survivor?

In less than an hour, Italian Prime Minister Silvio Berlusconi will face a vote of confidence in the lower house of the Italian parliament. As we argued before (see here), surprises are always around the corner with Il Cavaliere. And in fact, several reports in today's Italian newspapers suggest that he will win today's vote. The man seriously has nine lives (though in Italy a cat is said to only have seven lives - we're not entirely sure what accounts for the difference).

Lega Nord leader Umberto Bossi said yesterday that he had been "convinced" by Berlusconi's speech, while former minister Claudio Scajola - who is leading a faction of 'rebel' MPs and Senators from Berlusconi's party - announced that he (and presumably his followers) will support the government in today's vote.

So what's going on here? By all accounts Berlusconi should be toast, given that his popularity is close to zero and he's involved in more court cases than we can count. Well, in all fairness, Silvio played his cards well yesterday, especially when he warned that, should he lose the confidence vote, he would oppose any sort of “transitional government”, therefore triggering immediate elections. This means that:

• A significant number of MPs from his party have suddenly seen their seats in danger. In light of Berlusconi’s shrinking popularity, many of them seriously risk not being re-elected if a vote were to take place in the following weeks/months;

• And sadly, perhaps most importantly, this is the first parliamentary term in which new intake MPs need to remain in office for the entire five years in order to be entitled to their generous pensions. The world economy may be staring into the abyss, but don't mess with politicians' pensions.
  

Two powerful incentives to vote ‘yes’, don’t you think?

However, according to forecasts, the government should get 316 votes or even less - which is not exactly a comfortable majority and in some cases may not be a majority at all, given that 630 MPs sit in the Camera dei Deputati (although some of them will be absent today, which will bring the majority threshold down). In other words, we strongly recommend that you stick with us on Twitter @OpenEurope, as we will follow the vote real time.

Why you should think twice before criticising Slovakia

In today's Wall Street journal, we look at Tuesday's vote in Slovakia - here's the full piece:

Richard Sulik has emerged as Brussels's public enemy number one. As leader of Slovakia's Freedom and Solidarity party, or SaS, Mr. Sulik has consistently and vocally opposed euro-zone bailouts. SaS parliamentarians' refusal to back changes to the European Financial Stability Facility led to the collapse of the Slovak coalition government on Tuesday—a powerful illustration of the far-reaching political impact of what some still think is only an economic crisis.

Mr. Sulik's opposition to paying for what he describes as other people's mistakes led Germany's Handelsblatt this week to label his anti-bailout movement a "central European tea party." Yesterday Slovak lawmakers reached a deal to pass the EFSF expansion in a fresh vote before the end of the week. But at what cost?

There are strong arguments in favor of approving the changes to the EFSF, especially if it will be used to strengthen Europe's banks. But consider this: In 2010, Slovakia's GDP per capita was €11,692, while Greece's was €19,822. Going into this crisis, average earnings in Slovakia stood at €8,700 per year, while in Greece they were around €23,900. Meanwhile, the average Slovak pension was €250 per month, compared to €830 a month in Greece. True, the Greek government has made efforts to adjust the country's entitlement culture, but you can see why sympathy for Athens is in short supply in Bratislava.

There is another and arguably more compelling reason why Slovaks should question the need to cough up in the name of so-called European "solidarity," though. Certainly, Slovakia has benefited from euro-zone membership and from EU funds, largely financed by taxpayers in countries such as Germany, Finland, the U.K. and the Netherlands. But Slovakia has also paid a price. Over the last two decades, the country has undergone painful structural reform on the path from communism to a market economy, and later to EU and euro-zone membership. By streamlining its tax code, labor market, social welfare and pension systems, it reduced unemployment, attracted foreign investors and created a base for long-term economic growth.

The immediate effects of reform have not always been easy to swallow. Between 1999 and 2001, the liquidation and restructuring of Slovakia's publicly and privately owned banks cost the economy between 11% and 15% of GDP, leaving the banking sector almost completely in the hands of foreign owners. But for the most part it worked, and Slovakia's financial system emerged stronger than it was before.

Having walked this difficult road, Slovakia is now being asked to provide loan guarantees to bail out countries that failed to enact similar reforms. You don't have to be a paid-up member of the Austrian school of economics to see the potential for moral hazard on a huge scale.

First, banks in several triple-A economies, including Germany, continue to live under the protection of sovereign bailouts and ECB liquidity. They have not been forced to restructure and recapitalize, even though this is an absolutely necessary part of any long-term solution to the crisis. Second, the sovereign bailouts have transferred private-sector risk to the books of taxpayer-backed institutions. In combination with the cheap and plentiful liquidity that the ECB has provided to European banks, this has created perverse incentives, possibly leading banks to chase profits through higher yields on peripheral sovereign debt and thereby increasing their exposure to the crisis. The toxic mix of moral hazard and political failure has left Europe fighting for survival on two fronts, facing both a systemic banking crisis and an increasingly desperate fiscal crisis.

Are sovereign governments learning these lessons? In an ironic twist, the Slovak parliament rejected the EFSF amendments on the very same day that the EU and the International Monetary Fund signaled that Greece would receive the next tranche of its original bailout, even though the country has clearly failed to meet its austerity and deficit targets. Although this is probably necessary to avoid a disorderly Greek default, we desperately need to move away from a situation where assistance trumps reform.

Moving forward, it is encouraging that euro-zone leaders are now considering ways to manage a hard Greek default, while finally looking at ways to recapitalize euro-zone banks. But as EU leaders look for clever ways to leverage the EFSF, possibly quadrupling it in size, without increasing the existing loan guarantees, and as the euro zone reluctantly moves towards more fiscal integration, it must keep one vital lesson in mind: Conditionality is king. Failing to impose costs on those responsible for the crisis, particularly the banks, not only sows the seeds for future economic problems but also fuels political divisions. The euro zone can ill-afford more of either.

If there was a eurozone quote of the week award...

...Slovakian MPs would be up to their eyes in them. The Slovakian EFSF vote has provided us with plenty of action over the past few days, with Richard Sulik's SaS party certainly putting the cat amongst the eurozone pigeons.

One of the consistent themes of the SaS' opposition to increasing their country's exposure to the eurozone crisis through extra guarantees to the EFSF is that Slovakia enacted harsh reforms in order to join the EU and the Single Currency, while Greece has been 'rewarded' for its fiscal mismanagement and accounting tricks with external bailouts (although the accompanying austerity won't make it feel that way for ordinary Greeks).

These are serious issues, the political implications of which are impossible to predict right now. But whatever your thoughts on the SaS' decision to oppose the EFSF expansion, you have to admit its MPs have come up with some cracking soundbites. Take Martin Poliacik, a 31-year-old SaS MP, who said he hoped the rejection of the bill would kick start an "immediate" debate about the future of the EU:

"It's like going to a nightclub and the doorman says 'you're not coming in wearing those shoes' or 'without a suit on', and when you eventually get into the club you see that other people are wearing jeans and trainers."

Or Sulik himself:

“I'd rather be a pariah in Brussels than have to feel ashamed before my children, who would be deeper in debt should I back raising the volume of funding in the EFSF bail-out mechanism.”

And responding to one of his pro-EFSF expansion coalition colleagues:

"I will believe in solidarity when you put up your flat as collateral for the EFSF."

With the EFSF set to return to the Slovakian parliament for round 2 this week, expect the list to grow.

I want this much EU integration

In a speech in the European Parliament today, Commission President Jose Manuel Barroso noted that the "Future of single currency depends on closer integration of monetary and economic policy". To illustrate exactly how much more EU integration he wants to see - and to avoid any mis-representation by the EP's interpreters - Barroso appears to have resorted to body language.

Picking up the pieces...

As expected, it now looks as if parties in the Slovakian parliament have come to an agreement over the ratification of the EFSF. The opposition Smer party, which abstained from the original vote in order to force elections seems to have got its wish, with early elections rumoured to take place around 10 March 2012. In exchange they have agreed to support the passage of the expanded EFSF in a vote on Friday. Between the Smer and the SDKU, the Premier's party, the proposal should pass without much (more) drama.

(A proposal on holding early elections will be submitted and, if all goes to plan, voted on by the parliament tomorrow. It needs 90 votes out of 150 to pass and is expected to achieve that threshold).

That clearly paves the way for the eurozone to move forward with its much rumoured 'grand package' for saving the eurozone. But what about domestic Slovakian politics? It seems to have been left in a ruinous state after the EFSF bill exposed huge divisions within the governing coalition.

The current government has fallen and a new interim one will be formed by the President, Ivan Gasparovic (see picture - although we expect he is far from this jolly right now). Discussions will take place between the largest parties over the coming weeks in an attempt to form a new coalition, whether the previous coalition can be salvaged to form a base for a new one remains to be seen. With elections not due until March, some form of government will undoubtedly be needed - not least because we're sure eurozone leaders will come knocking on Slovakia's door before long for approval of another set of 'solutions' to the crisis.

As for Sulik, leader of the SaS and proverbial thorn in the side of eurozone leaders, he along with his ministers have been asked by the Premier to resign, a call which they swiftly rejected. It still seems likely that they will have to leave the government and can be forced out during the President's reshuffling.

Ironically, the Speaker of the Slovakian Parliament, currently Sulik, is meant to announce any early elections, but that seems unlikely given the current circumstances. The job is therefore likely to turn to the deputy speaker.

Heading Towards A Bitter 'Finale'?

We've been here several times before, and we know that big surprises are always around the corner with Italian Prime Minister Silvio Berlusconi. However, this time Il Cavaliere's exhausting political twilight might really come to an end. In fact, Berlusconi is due to deliver a keynote speech in the lower house of the Italian parliament tomorrow morning (it was initially expected for this afternoon), outlining his government's priorities for the following months. The programme will then be put to a vote of confidence on Friday. If Berlusconi fails to secure a majority, he will almost certainly have no choice but to step down.

The decision to require a confidence vote is clearly not a bolt out of the blue. Yesterday was a bad day for Berlusconi and his government, which was dealt at least three hard blows. First off, the lower house of the Italian parliament failed to approve the first article of the 2010 budget review - a bureaucratic document whose adoption is usually a mere formality.

Details of the outcome of the vote are key. The government needed a majority of 291, but stopped at 290 votes. Quite significantly, both Italian Economy Minister Giulio Tremonti and the leader of junior coalition partner Lega Nord Umberto Bossi were in the parliament building, but did not take part in the voting, with Tremonti (provocatively?) entering the room a few moments after the verdict. Following the vote, prominent members of Berlusconi's party - including Defence Minister Ignazio La Russa - urged the Prime Minister to verify whether the government is still supported by a majority in parliament.

In the second place, the Italian Court of Auditors slammed the Italian government's draft reform of the tax system, due to uncertainties over its financial coverage. The proposed reform is a centrepiece of the set of austerity measures aimed at achieving a balanced budget by 2013, as it is expected to recover around €20 billion over the next three years (mainly through the abolition of hundreds of tax breaks currently into force).

Finally, the European Commission criticised the Italian government's plans for a tax amnesty, warning that the resort to “non-permanent measures such as a tax amnesty in order to achieve a balanced budget by 2013 harms the credibility of Italy’s deficit and debt reduction strategy.”

In other words, the Italian government is under fire on all fronts. Indeed, Berlusconi was in a similar situation last December, but he managed to win the confidence vote thanks to a bunch of opposition MPs - later remunerated with a few government assignments - defecting to his ruling coalition. However, the situation now looks quite different. Over the past few weeks, Lega Nord leader Umberto Bossi has repeatedly hinted to the possibility of early elections, saying that he thought it "objectively complicated" for the ruling coalition to remain in office until 2013, when the next general elections are scheduled. Therefore, Lega Nord MPs' favourable vote is not a done deal, at least for the moment.

But the worst news for Berlusconi may come from inside his own party, as a group of 'rebel' MPs and Senators led by former ministers Giuseppe Pisanu and Claudio Scajola has been calling for the formation of a "transitional government", possibly open to centre parties. The votes of this group of MPs could be decisive.

The situation looks extremely fluid at the moment, with some media reports suggesting that, due to growing pressure from Lega Nord, Berlusconi might call early elections next year even if he wins Friday's vote. This is not necessarily bad news, despite Italy's precarious economic situation. What Italy badly needs now is a stable and credible government to implement, among other things, the reforms demanded by the ECB (see here and here). After all, the markets are not hanging Spain out to dry, even after Prime Minister José Luis Rodríguez Zapatero announced early elections...

Poles at the Polls: The big change is no change

Following Sunday’s parliamentary elections in Poland, the governing centre-right coalition composed of Donald Tusk’s Civic Platform (PO) and the Peasants’ Party (PSL) has effectively been re-elected, with PO winning 39.2% of the vote and PSL 8.4%. While this might not come as a surprise given the government has been largely scandal free and has presided over the most healthy economic growth in the EU during the ongoing crisis, it is nonetheless noteworthy that Tusk will become the first Polish Prime Minister to win a consecutive term since the fall of Communism in 1989. As the Guardian noted:

In the first 18 years after communism, Poland had 13 different governments, a new one every 17 months on average. Now it seems that Tusk could govern for eight years in a row.

The results suggest that Poland's notoriously volatile and unpredictable politics might be entering a phase of consolidation, although it must be said pre-election polls were far from consistent and set out a variety of possible scenarios. It appears that Jaroslaw Kaczynski’s Law & Justice (PiS), despite winning a healthy 29.9% of the vote, might have plateaued, and will struggle to expand into fresh political territory. Political commentators last night couldn’t decide whether Kaczynski’s attack on Angela Merkel and Germany’s “new imperial ambitions” helped or hindered his party’s cause, but they agreed that it was unlikely to have had a deciding effect either way.

Meanwhile, the other big news was the poor result of the well established post-Communist Democratic Left Alliance (8.3%) and the strong showing by new Ruch Palikota (10%), a socially liberal populist movement established by ex-PO troublemaker Janusz Palikot, renowned for unconventional press conferences, which aims to take on the influence of the Catholic Church in Poland. EurActiv described the result 'good news' for the EU Presidency because Tusk is a “pragmatic liberal conservative” opposed to what he sees as “a new wave of euroscepticism" within the EU.

So looking at the bigger picture, what does this mean for EU politics? It is has been said that if you get three Poles in a room you end up with four different political opinions. We'll not speculate as to whether this is true, but what is true is that there is a significant degree of commonality in Poland when it comes to EU issues. With the exception of PiS, all the main parties are broadly in favour of the current EU arrangement. However, Poland remains a value-conservative nation - a disposition which clashes with the often humanitarian (some would say post-modern) under-current in EU law.

As a socially conservative party, PiS voters in particular tend to be be more assertive when it comes to EU law, and this is why the previous president Lech Kaczynski decided to opt Poland out from the Lisbon Treaty’s Charter of Fundamental Rights of the European Union, which clarified (in theory at least) that it did not extend the rights of the European courts to overturn domestic law.

While the coalition with PSL has in effect given PO free reign in many policy areas, the condition has been to put off reforming Poland's outdated and deeply flawed agricultural insurance system, which is very generous for farmers and sacrosanct for PSL. Poland is likely to remain staunch defenders of generous EU farm subsidies, and will oppose any serious attempts at radically reform the CAP (which we have argued in favour of many times). Poland will instead lobby for a more even distribution of benefits from North-West Europe to Central and Eastern Europe. Likewise, in the context of current wrangling over the EU budget, as a net recipient of EU funds, Poland is unlikely to want to see a reduction or freeze in the budget, as again, we have argued for. Meanwhile, in opposition, PiS is likely to keep an eye out for any value driven EU legislations, especially in the social sphere, which it can use to attack the government for not defending Polish interests. Given the ECJ's renowned judicial activism, it is possible such a tussle is only over the horizon.

But PO is also insinctively economic liberals in many areas, and will hopefully be a voice of reason in opposing top-heavy or disproportional regulations coming out of Brussels. And, with the right diplomacy, there should ample scope for the UK and other pro-growth member states to co-operate on trade liberalisation and expanding the single market.

The Real Face(s) Of Greece'sTax Evasion

A story bordering on the surreal from Greek newspaper Ta Nea yesterday. Apparently, the Greek financial police (SDOE) are investigating 77 cases of 'parsimonious' Greeks who have managed to set aside bank deposits worth a mind-boggling total of €1.9 billion, despite their individual income tax-returns not always mirroring a situation of well-being. The list includes 36 doctors and three former hospital directors.

Here are some examples - they do really speak for themselves:

• A farmer who between 2001 and 2010 declared an annual income ranging between €1,608 and €6,774 (except for 2006 and 2007, when he submitted an income higher than €74,000) made deposits amounting to €10.6 million over the same period;

• A hair-dresser only submitted a tax-return for 2009, declaring an income of €35,435, while having deposited €423,531 between 2007 and 2010;

• An astrologist did not submit any tax-returns in 2007-2009, yet made deposits worth €2.19 million over the same period;

• A doctor only submitted tax-returns in 2005 and 2006, with a total declared income for both years of €172,014, but made bank deposits amounting to €5.7 million between 2005 and 2010.
  
  

This is seriously crazy stuff, which throws up a whole range of questions. For example, what's up with Greece and hairdressers? And how much of the €10.6 million pocketed by the super-wealthy farmer actually came from EU farm subsidies?

The Central European Tea Party

Yesterday's Handelsblatt featured a story on how an "Eastern European Tea Party" is brewing, as Slovakia's Freedom and Solidarity (SaS) party is sticking to its guns and continues to oppose the expansion of the EFSF, the eurozone's temporary bailout fund (we would hasten to add that Slovaks would probably feel more comfortable with being described as 'Central Europeans').

Over recent days, eurozone leaders have grown increasingly nervous as they brace themselves for the vote in the Slovak Parliament on the expansion of the fund (expected later today, unless something changes). That Slovakia's PM yesterday threatened to quit over the issue hasn't exactly lowered the stakes either.

The SaS party has 21 out of 150 MPs and its leader, Richard Sulik (see picture) is the Speaker of the Slovak Parliament, and with the help of the opposition, the party could block the approval of the boosted EFSF. In return for approving the changes to the EFSF, the party has demanded that Slovakia doesn't contribute to the the European Stability Mechanism (ESM), the eurozone's permanent bailout scheme, set to supercede the EFSF in 2013. The article notes that Sulik's MPs are united in their opposition to the EFSF, in contrast to German FDP, for example, which remains split on the issue (incidentally, leading German euro rebel, FDP MP Frank Schaeffler, and Sulik made common cause last week).

Sulik is quoted in the article saying:

"for me the most important thing is to protect Slovak taxpayers'
money. Relative to our economic strenght, we contribute the largest share
towards the bailout scheme. That's not acceptable."

The newspaper compares the Slovak anti-bailout movement to the Tea Party activists in the U.S. We'll see if SaS gives in later today, but one thing is for sure: as the eurozone crisis unfold, this is unlikely to be the last time we witness parliamentary opposition to ongoing bailouts.

***Update 10.00am: SME Online reports that the vote in the Slovak Parliament could be postponed, given that the EU summit to be held this month has been delayed, and is now scheduled for 23rd October (a Sunday incidentally).

***Update 11.00am: Sulik has said that SaS will abstain, while the opposition continues to insist that it will not vote for the EFSF changes unless there's early elections. So the choice for Slovakian PM Iveta Radičová basically comes down to passing the EFSF or saving her coalition government. If the government falls, there will be a majority in Parliament for the EFSF, as the opposition will most likely support the changes to the fund following the dissolution of the government, and will pass it with the help of KU (Radicova's party) - though the date or mechanics of such a vote remain unclear.

Keeping the ECB independent is key to the euro’s survival

Over on the FT A-list, we've got a response to a piece by Jim O'Neill, who argues in favour of a Greek restructuring and bank recapitalisation (as we have many times before). On many points we agree with O'Neill but we do differ on the role of the ECB in solving this crisis.

We argue:

Jim O’Neill sets out some important and necessary steps for how to solve the eurozone crisis – including a restructuring of Greece’s debt, recapitalising Europe’s banks and greater leadership from the European Union leaders. However, the problem in the eurozone crisis was never primarily one of not knowing what to do, but how to get there within the constraints of a supranational currency, pegged to national democracies and fiscal policies. What’s clear, however, is that spraying more liquidity at the eurozone crisis is in itself not a magic panacea – and could even make the single currency less sustainable in the long term.

The notion that the European Central Bank should offer an “unlimited” backstop for eurozone nation states, as Mr O’Neill mentions, is a case in point. Clearly, the loser from the “muddling through” approach employed by EU leaders over the past year has been the ECB. It has seen its credibility drained and its independence compromised (for example through its U-turns on accepting junk bonds as collateral). In fact, an important component of finding a long-lasting solution to this crisis is that any financial backstop for the eurozone is established at the intergovernmental level, not through the ECB.

There are a number of reasons for this, many of which stem from the central bank’s experiences during this crisis. First, the cheap and plentiful liquidity that the ECB has provided to European banks created perverse incentives and moral hazard, possibly leading banks to chase profits through higher yields on peripheral sovereign debt, thereby increasing exposure to the crisis. In addition, this unlimited credit created a set of so-called ‘zombie banks’ reliant on ECB liquidity to survive, but without any conditionality to reform the bad practices and mismanagement that got them into this situation in the first place. The lack of an exit strategy from these policies shows why transferring this model to the sovereign debt markets would be dangerous and undesirable.

We go on:

Furthermore, let us not forget that, unlike the Federal Reserve and other central banks, the ECB does not have a dual mandate – its primary aim is that of price stability. If markets do not believe it can achieve this, and if the line between politics and monetary policy become increasingly blurred, then market instability and fluctuations may become the norm for the eurozone. That the eurozone lacks a lender of last resort, is a structural flaw in its fabric which has been sorely exposed by the current crisis.However, papering over it with unlimited liquidity in the near term will not solve the problem. And perhaps most importantly, forcing the ECB into the role of lender of last resort could seriously jeopardise German support for the entire euro project, with the ultimate outcome equally unpredictable to that of the current market turmoil. The Germans still take ECB independence seriously, as witnessed by the dramatic resignation of Jürgen Stark over the ECB’s bond-buying programme. As attractive as it may sound at first glance, we should be wary of the temptation of sacrificing the ECB’s credibility at the altar of a short-term fix.

Finally, let’s not forget that, even following a solution to this crisis, a vast array of countries will be left with mismatched interest rates, an overvalued currency and a convoluted decision making process. The problems in the eurozone run much deeper than additional liquidity can solve. Yes, Greece needs to restructure, banks need to be recapitalised and if an inter-governmental, democratic way can be found to top up the European financial stability facility, with more focus on banks, this should also be explored. Alas, this may not be enough to save the euro.

The ECB has been heavily involved in this crisis and it may have to continue its current role, but it's important it goes no further. The credibility and independence of the ECB is vital if the euro is ever to work in the medium to long term. Besides, having to sacrifice the principles of the institution which underpins the whole monetary union in order to ensure its short term survival surely says enough in itself about the underlying conflicts within the fabric of the eurozone.

What about the democratic deficit, Mr Cameron?

In an interview with today's FT, David Cameron calls on eurozone leaders to take a "big bazooka" approach to the euro crisis, arguing that "You either make the eurozone work properly or you confront its failures" and "if you're in the euro you have accepted some common responsibilities".

Echoing Chancellor George Osborne's remarks at last week's Tory conference, Cameron seems to be implicitly calling for the EFSF, the eurozone's bailout fund, to be topped up to around €2tr - widely considered to be the amount needed to backstop Spain and Italy.

Yes, from a purely economic and financial point of view, Cameron's remarks make sense, as do his calls for banks (French in particular) to be strengthened. However, there are two problems with Cameron's comments. First, democracy. Secondly, financial contribution.

In the interview Cameron says that

"In a time of crisis you have to do the right thing in order to deliver what I think - German politicians and Germany really wants, which is a working eurozone."

Hmmm, isn't this precisely the type of rhetoric that was employed by EU leaders during the debates on the Lisbon Treaty, which Cameron and the rest of the Tory Party consistently criticised for failing to tune in to voters. We're thinking of the two referenda on the Lisbon Treaty in Ireland for example - the common theme being, 'voters don't actually really understand what they want or have voted for so let's have them vote again.'

So, if you follow Cameron's remarks to their logical extension, although virtually all the polls show that German, Dutch and Finnish voters are dead against a top up of the EFSF, what these countries really want is a working eurozone, so such poll results should basically be ignored. Irrespective of the economic merits of his arguments, it's hard to see how the UK government could credibly lecture others on the EU's 'democratic deficit' ever again.

A similar line was touted by an FT leader today, which similarly argued for the EFSF to be boosted but added more or less as an afterthought that:

"Above all, leaders must create the political conditions for good policy. Monetary union can only survive if each of its members wants it to: without voter support Europe will fail."

What exactly does this mean? The article seems to imply that the EFSF needs to be topped up to a couple of trillion, but that, at the same time, without the support of citizens "Europe will fail".

We're having problems squaring that circle.

And if Cameron really thinks that a boosted EFSF would solve the eurozone crisis, with a corresponding positive impact on the UK economy (it may or may not, but that's besides the point for this particular discussion), why should Britain not contribute. It may be their currency, but it's Cameron's banks and recovery, so why not cough up, say, through a financial transaction tax?

The point here isn't that it's wrong to argue in favour of these measures. But we need to be completely honest about the basic tension at the heart of the eurozone crisis: giving markets what they want, invariably means running over voters.

EU leaders may get away with that at the polling booths. But then again, they may not.

Let them eat tanks

This isn't going to boost European taxpayers' support for the Greek bailouts...

Dutch media reports that though Greece struggles with a debt of some €350bn and is on track to miss the EU/IMF deficit targets by a couple of billion euros, the country has apparently bought 400 M1A1 Abrams tanks from the US, with upgrades, costing the (European) taxpayer $4.3 million each, in addition to 20 AAV7A1 vehicles, on average costing €1.6 million each. The article notes that another order could soon follow.

If this is accurate (and we've only seen newspapers reports so far), the total bill for this order comes in it €1.3bn - an amount which would take Greece a lot closer to reaching its deficit target this year (currently, it looks set to miss the deficit target for this year by €2.4bn).

Elsevier notes that, in contrast, the Netherlands, whose parliament yesterday approved the second Greek bailout, is currently planning to sell military equipment in a bid to cut spending.

Update 1.30pm: following a tip on twitter that the story was not quite as sensational as was being reported by some media outlets, it turns out that the tanks are probably a "concession" from the US to Greece, so there won't be a "bill" per se for the tanks. However, taxpayers might not be let off the hook. The deal also includes options between simple refurbishment of the tanks - costing Greece tens of millions of dollars - and upgrading them to a higher level of operational capacity, which would involve an even higher corresponding cost, according to Svenska Dagbladet. Furthermore, Greece has also inquired as to the 'price and availability' of 20 AAV7AI Amphibious vehicles, which cost an average of €1.3 million, which could potentially make up the first batch of a total order of 75-100 vehicles.

Even if the total cost of the deal is a lot lower than originally reported because Greece is not buying the tanks outright, as taxpayers around Europe are being asked to provide loan guarantees to cover the potential costs of a Greek default, this type of spending priorities will raise a few eyebrows (and yes, we do understand the geo-politics of that region).

One month to save the euro?

Though the markets did rebound today, off the back of yesterday's announcement from the ECB that it will extend its unlimited liquidity provision for banks until at least July 2012 (Bank of England's QE 2 announcement also helped). But amid a series of downgrades, the eurozone crisis continues to throw up more questions than answers.

So what's next? Well, this is a useful eurozone crisis 'roadmap, outlining key events over the next 4-5 weeks, courtesy of Dow Jones:

--Sunday, Oct. 9: French President Nicolas Sarkozy meets German Chancellor Angela Merkel in Berlin

--Monday, Oct. 10: Malta parliament votes on EFSF changes (delayed from Oct. 6)

--Tuesday, Oct. 11: Greek and Italian T-bill auctions.

--Slovakia parliament votes on EFSF changes.

--Thursday, Oct. 13: Italian bond auction.

--Friday, Oct. 14-Saturday, Oct. 15: G-20 finance ministers meeting.

--EUR2 billion of Greek T-bills mature

--Monday, Oct. 17-Tuesday, Oct. 18: EU Council meeting

--Tuesday, Oct. 18: Spanish and Greek T-bill auctions.

--Thursday, Oct. 20: Spanish and French bond auctions.

--Friday, Oct. 21: EUR1.625 billion of Greek T-bills mature

--Saturday, Oct. 22: EUR1.059 billion of Greek bond interest payments due

--Tuesday, Oct. 25: Spanish T-bill auction.

--Friday, Oct. 28: Italian bond auction.

--Monday, Oct. 31: Belgian bond auction.

--Tuesday, Nov. 1: Mario Draghi replaces Jean-Claude Trichet as president of the ECB

--Thursday, Nov. 3: ECB policy meeting

--Thursday, Nov. 3-Friday, Nov. 4: Meeting of G20 leaders in Cannes

--Monday, Nov. 7: Meeting of Eurogroup finance ministers

To cite that old Queen song: "Are you ready, Are you ready for this. Are you hanging on the edge of your seat"

What’s A Few Hundred Billion Between Friends…? Part II

In our post last week, we set out the current state of play regarding the ratification of the expansion of the EFSF by the 17 eurozone’s members’ parliaments.

Since then, the Austrian and Estonian parliaments have ratified the EFSF expansion as expected. The Netherlands has followed suit this evening, with 96 MPs voting in favour and 44 against.

However, an interesting (and unforeseen) development has occurred in Malta, where it was announced that the vote would be delayed after new legal questions were raised by a former prime minister. The debate is set to resume on Monday, with a vote expected the same day.

Meanwhile in Slovakia, which at one point looked like it might scupper the whole deal, it appears a consensus is now at hand. The Freedom and Solidarity party, which had been the source of discontent within the country’s governing coalition, has put forward a proposal to establish a parliamentary committee with the power to veto individual loans made under the EFSF, which looks likely to be accepted by the other parties.

Although the final approvals of the EFSF upgrade by member states' legislatures appear to be inevitable, as we've argued in our previous post, this will only mark the end of a particular chapter in the ongoing crisis, the Endgame is not even in sight yet...

Europe at the Tory conference: much ado about nothing

The blog has been a bit quiet for a few days because the Open Europe team have been busy in Manchester at the Tory party conference. However, normal service will now resume.

In the days leading up to the conference, "Europe" was predicted to be one of the major issues on the agenda, which it was. Preceding and during the conference, Cameron and Hague both publicly supported a renegotiation of powers from Brussels but stressed this was something that was either "for the longer term" or "many years" away. Both rejected calls for an EU referendum - something which Boris Johnson said was "not a bad idea". But this is the closest that the papers got to a 'Tory split over Europe' story.

To be honest, the entire conference was a bit flat, and for all the talk about Europe leading up to it, and the whole host of fringe meetings on the topic, nothing particularly new or exciting was actually said.

Over on ConHome, Bruce Anderson argues that, "The heat has gone out of the Europe debate. Everyone knows that the EU is in retreat; no-one is afraid of a renewed federalist onslaught." This is partly true, but it's equally true that many Conservatives probably find it difficult to grasp where, exactly, Europe is at - which isn't surprising, given that Europe (if that ever was a coherent political entity) itself has no idea where it is at, or is heading.

In addition, despite what some have argued, there's a growing realisation that the eurozone crisis is seriously scary, and at worst, threatens to send the UK economy straight back to recession. Conservative MPs and activists realise (though not without exception) that there's a difference between the immediate economic crisis - which is about contingency planning, buffering up banks and preparing the economy for potential sovereign defaults - and the long-grinding political and constitutional settlement that will follow the crisis (should it ever end).

The usual calls for an in/out referendum aside, Europe therefore never really kicked off as an issue at the conference. But nonetheless, for the Conservative party leadership, now is the time to be thinking strategically for the future, as important tactical battles most certainly remain on the horizon.

Speaking at one of our fringe events, Dr Kay Swinburne MEP warned of the climate of “hostility” towards the UK in Brussels, arguing that the Government should focus its efforts on increasing the number of British civil servants in the Commission. She also suggested that the Government should have “killed off” plans for an EU-wide financial transactions tax earlier, noting that EU Tax Commissioner Algirdas Semeta had “already started work” on presenting the FTT as a valued added tax (VAT) – which could be imposed without a unanimous vote and therefore strip Britain of its right to veto.

The party leadership's hopes that any major decision on Europe can be delayed depends on events in the eurozone, which continues to edge closer to a tipping point (though eurozone leaders seem to have made a common sense move, by focussing on the recapitalisation of banks). While Tories made EU small talk in Manchester, France and Belgium were forced to bail out another bank in the shape of Dexia (due to fears over its exposure to Greece) and Italy was downgraded.

Last night, only hours after Hague said to the BBC, "Don't run away with expectations that there is about to be some major treaty change, these things take years to negotiate and then to ratify in other countries," President Jose Manuel Barroso was telling gathered reporters that, "We may need treaty change for more integration if current (financial) mechanisms are proved not to be enough." Alongside him, Chancellor Merkel added, "we shouldn't rule out the possibility of treaty change."

Yes, EU treaty changes are slow-moving things, but if they are to have any chance of setting at least parts of the agenda, Messrs Cameron, Osborne and Hague may have a lot less time than they hope.

Some Friday afternoon polls...

Over at Open Europe, we admit to be poring over EU-related polls from the German-speaking world, like a German Commission offical over the Greek accounts.So here's some polling for a Friday afternoon.

A survey for Focus published today shows that 50% of Germans would be willing to exchange the euro and get the D-Mark back, while 48% preferred holding on to the euro. A year ago, 50% wanted to keep the euro, while 47% wanted a return to the D-mark.

Interestingly, 40% of the respondents stated that they were “sceptical” about Germany's EU membership - which seems like a surprisingly large share. 46% stated to have "personally" benefited from Germany’s EU membership, but, mirroring the "sceptic" share, a full 40% said that they had not personally benefited from Germany's membership.

Meanwhile, according to a survey conducted by the Austrian Gesellschaft für Europapolitik, only 37% of the Austrian people think Austria has benefited from the Single Currency, whereas 48% believe it hasn't been beneficial. While, in answer to the question: should the EU have a direct influence on national budgetary policy? 58% voted no, compared to 33% yes.

Additionally, 30% referred to a ‘United States of Europe’ as a ‘fitting model’ for the EU, while 50% disagreed.

A bit of a mixed bag then, but some clear signs of growing fears over the state of the eurozone in these core european electorates. Now the key question is, if and when this feeling will feed through to election results, we for one are waiting with bated breath.

How to lose support for EU free movement and alienate people

The European Commission just made it a lot more difficult to defend free movement in Europe. Free movement and open borders (two separate but related EU issues) are very difficult things to sell to the public, witness the Bombardier row (which had complicated causes, but partly flowed from competition rules designed to uphold free movement/the EU single market), the Danish restrictions on the Schengen agreement or the Lincolnshire strikes back in 2009.

In public opinion, free movement is usually bundled together with other complex issues such as immigration, the 'British jobs for British workers' debate, welfare and potential wage dumping. Economically, we would argue that free movement is on the whole beneficial, but politically, due to its society-changing potential, it's potentially explosive.

Therefore, free movement has to be treated with silk-gloves, with constant attention paid to national sensitivities. If Europe wants to keep it, national governments simply need to be given some discretion, within reason.

Clearly, this isn't something that the Commission understands. This week, the Commission threatened to take legal action against the UK's "right to reside" test on EU nationals, arguing that it violates EU law. Under UK rules, British citizens automatically qualify for benefits such as child benefit, child tax credit, state pension credit, jobseekers' allowance and unemployment support. But nationals from other countries have to pass a right to reside test before they can qualify for such benefits. The Commission argues that this practice indirectly discriminates against nationals of another member state, in turn breaching EU rules on social security co-ordination. The Commission insists that existing EU rules on who qualifies as a resident of a different member state are already strict enough to make sure that "only those persons who have actually moved their centre of interest to a member state (other than their own) are considered habitually resident there".

The Commission's statement was met with a barrage of criticism in the UK.

Employment Minister Chris Grayling said, "This is a very unwelcome development...I’m really surprised the European Commission has chosen to go into battle on this very sensitive issue, when there are clearly far more pressing problems to solve in Europe."

Work and Pensions Secretary Iain Duncan Smith wrote in the Telegraph:

"These new proposals pose a fundamental challenge to the UK's social contract. They could mean the British taxpayer paying out over £2 billion extra a year in benefits to people who have no connection to our country and who have never paid in a penny in tax. This threatens to break the vital link which should exist between taxpayers and their own Government."

"France, Germany and Denmark have all spoken out against the commission's insistence on issuing this week's provocative decision on benefit payments. This decision confirms the worry that the EU is pulling more areas of national competence into its fold. Yet these are decisions taken outside of national democratic processes by unelected and unaccountable institutions."

Given the recent statements from various prominent Labour party figures, apologising for "getting it wrong" on EU immigration, the Commission is likely to face more or less united UK opposition.

Even supporters of free movement will find it hard to see how the UK's "right to reside" tests are unreasonable. The Commission is now picking a fight with several EU countries, on the hugely sensitive issue of "welfare tourism" at a time when populist parties are on the rise across Europe.

Either the Commission backs down, or it risks facing a massive backlash.

As we've mentioned before, if the Commission wants to squash all public support for the EU, it's doing a pretty good job.