Friday, October 24, 2014

Updated: Commission silent as foundation for increased EU budget contributions remains unclear

Update 24/10/14 17.05:
Outgoing Commission President Jose Manuel Barroso has just given his press conference which frankly did not clear much up. Barroso insisted, as the Dutch position below does, that this payment demand is part of an annual adjustment which is based off of the revised figures for annual GNI (which are produced by national statistics agencies and then verified by eurostat).

Essentially, he is suggesting that the final figures for the UK in 2013 proved to be so far ahead  of expectations that they altered the UK's share of the budget significantly.

This is not a completely implausible scenario but it leaves some glaring gaps. Firstly, its hard to imagine the economy outperformed so much and other EU economies underperfomed so significantly that the UK has to stump up another €2.1bn. Secondly, this doesn't fit with the leaked doc from the FT. As discussed below, the figures clearly seem to relate to a longer term assessment based off the ESA changes to the way GNI is calculated.

All that said, its becoming increasingly clear that the positions of the Commission, UK and others are not quite compatible so something will have to give in a negotiation.


Currently, there is still no clear explanation for where the demand for increased contributions to the EU budget came from or exactly how it was calculated - see our comprehensive analysis here. While the Dutch and the Brits are both concerned about being asked to contribute more, they are actually putting slightly different versions of events forward. These two split the prevailing theories about how this has come about.

The first version of events, pushed by the Dutch, suggests that this is not as surprising has been made out since it is actually down to the regular assessment of the four cycle of VAT receipts and tax returns related to GDP of countries. When asked by Dutch BNR radio ‘Does this revision have anything to do with the new accounting method?’, Dutch Finance Minister Jeroen Dijsselbloem responded,
“No, this seems to come from a [annual] source revision which is something different from the statistical method that is used to calculate [the GDP].” 
The point that surprised the Dutch was that the demand came out at almost double what they had forecast and there is no clear explanation of why this is.

The other version of events ties into the document leaked by the FT. Judging by this document it is hard not to see this cost as a result of a calculation based off the introduction of the new European System of Accounts 2010. The UK is suggesting it was unaware of such a significant overhaul to the EU budget calculations and has not been included in the discussion around the changes. The document clearly looks to alter the budget contributions over the period between the introduction of the previous system of accounts and the end of 2013. The total figures also line up with the reports and are yet to be rejected or even disputed by anyone. The fact the figures are so large also fits more with this version of events than the regular adjustment - in this sense something will have to give (size of demand primarily) for the first version of events to be true.

What do they agree on?
  • There is clear agreement that this has been handled poorly by the Commission, who is still yet to provide any clarity into the debate or explain exactly how much they are asking for and why.
  • Furthermore, the demand for payment immediately also seems to be a miscalculation by the Commission which caught some unawares at least in terms of the size, if not the timing.
While this may seem trivial it is vitally important that the Commission makes clear and gets to the bottom of what is going on here. Ultimately, Cameron’s options will be very different depending on whether the demand is driven by a unique one off event (such as long terms GDP changes) or part of a regular assessment of the EU budget. In any case, whatever the source serious questions need to be asked about how a bill of €2.1bn can materialise with little or no political discussion.

Why is the UK being asked to pay in more to the EU budget and what can it do about it?

There are a number of headlines today around the EU’s request for a further €2.1bn from the UK in terms of its contribution to the EU’s budget.

Below we breakdown exactly how and why this has happened and what options the UK has now.

How has this happened?
  • The European Commission has launched a review of EU budget shares (based of VAT receipts and Gross National Income [GNI]) going back to 1995.
  • This is tied in with the introduction of the new European System of Accounts (ESA) 2010 which came into force in September. This is a new approach to assess the true value of a country’s economy (its GDP) by counting some activities which are often missed. Many of you will have read the countless headlines about how GDP will now try to quantify the value of prostitution and the drug trade. However, the new calculations also give more weight to research & development and other softer types of investment. The Commission has estimated that these adjustments will push most member states GDP up, albeit by varying degrees.
  • Essentially, since 1995 the UK has performed better than expected and better than many of the other EU member states. As such its economy is larger than originally thought. Under the review this means that its share of the EU budget – which is calculated off the back of GDP and population as a share of overall EU GDP and population – has increased.
  • The EU is also in the process of producing an amendment to the annual budget which we discussed here. At some point, very recently, the EU has decided to almost combine the two issues possibly causing a speed up in the payment date for this €2.1bn lump sum.
Why has everyone been caught off guard?
  • While the annual amendments to the budget are expected and usual (though often unnecessary and far too high as we have pointed out numerous times) this adjustment on GDP terms is unprecedented and seems to be largely a one off – as such it has caught most people off guard.
  • It also seems that the release has been kept under wraps for some time. While the amending budget has been known and discussed for some time, with the final details circulated to member states a week ago in preparation for the current EU summit, the details of this were only released to member states a day ago. Essentially it was somewhat sprung on them ahead of the summit.
  • This is exacerbated by the fact that this is clearly an extensive long term process and that the ESA 2010 adjustment has been running for years. To say the release and interaction with member states on this issue has been poorly handled would be a massive understatement.
What are the UK’s options now?
  • First, it’s clear the UK is not alone in its outrage. The Netherlands has been asked to pay in a further €640m, while Italy has been asked for €340m. Dutch Prime Minister Mark Rutte has called this “an unpleasant surprise which raises a lot of questions”, adding, “when I say go to the bottom of this, it means to look at all aspects, including legal ones. It is still too early to run ahead on this.”
  • The first option is to get an agreement to deduct any payments from future budget contributions. This would avoid having to pay in a lump sum now and also mean that it on net the UK does not pay any extra.
  • The second option would be to secure a political or legal agree to ignore these uprated GDP shares and stick with the originals. This should be doable through a vote in the European Council. That said, because some members are getting a rebate – France and Germany in particular – this could prove a very tricky agreement to strike.
  • As Rutte has already pointed out, countries may have legal recourse. Exactly what form this could take is unknown but the retroactive nature of the cost and its lack of discussion and warning could provide some grounds.
  • Lastly, the UK (and the Netherlands) could simply refuse to pay. As large net contributors to the EU budget, there is little that others can do to force them to pay. Obviously the EU could launch its own legal action in terms of infraction proceedings; however, the maximum fine for the UK is around €225m on an annual basis – much less than it is being asked to stump up here. This could also be combined with the point above, with the UK refusing to pay until the legal proceedings have run their course. ***see update below***
Open Europe’s take
While this does not necessarily seem to be a political stitch up from the EU there is no doubt that it is unreasonable and politically irresponsible. Retroactively taxing someone over 20 years is fundamentally unfair. The fact that the UK and Netherlands are being punished for doing better than expected and better than others almost encapsulates everything that is wrong with the EU’s approach – particularly when the Eurozone economy is struggling to find any growth.

Once again the EU has failed to learn any lessons from the previous budget negotiations and has helped to feed those who want to leave the EU, possibly ultimately shooting itself in the foot. Still, what's interesting is that in a debate marred by splits, the UK political class is almost entirely united in its outrage against this move. It is ironic that in the week when one poll found British support for EU membership at its highest since 1991, the Commission has managed to unite everyone from Lib Dem MEPs to UKIP in outrage. If Cameron manages to resist the demand somehow, he would be able to score a massive victory.

Update 24/10/14 12:05:
One point to add regarding the refusing to pay option and the potential fines. On top of the potential fine from infraction proceedings mentioned above, the amount of €2.1bn will be charged 2.5% interest per month (standard 2% above the Bank of England base rate currently 0.5%), which increases by 0.25% for every additional month which the outstanding amount is not paid off. Such interest could clearly mount up very quickly and become very expensive. If the UK is eventually forced to accept £2.1bn figure, then it could clearly turn out to be very costly. Ultimately, though, if the UK is prepared to play hard ball, it would lead to a stand-off that will would need to be resolved by a political negotiation. Such disputes rarely reach such escalated levels and resolutions are normally found before costs mount up. 

Thursday, October 23, 2014

Time to reassess the EU’s environment and climate change policies

EU leaders are meeting today in Brussels to discuss the EU’s 2030 energy, environment and climate change framework which will likely involve some new targets for emissions reduction. You can find our full thoughts on the original Commission proposal here – but broadly we think that the more flexible structure is a good approach and that dropping the binding renewables target is the right approach.

To that effect Open Europe today published a new comprehensive analysis of the EU’s 2020 framework. The highlights that some of the key assumptions that drove the policy have proven to be incorrect:
1. A global deal – Without this the net benefits of the EU’s approach fall from over €200bn to between -€11.4bn and -€20.6bn.
2. Emissions targets will lead to lower emissions – while the UK’s domestic carbon emissions have stabilised or even fallen slightly, its overall consumption of carbon has risen (save for a drop during the financial crisis).
3. UK’s targets are achievable – Recent simulations for the European Commission suggest the UK will fall 4% short of its target of 15% of energy from renewable sources by 2020.

4. Technological developments will cut cost of renewables – renewable energy remains, for the large part, reliant on subsidies and unable to compete with fossil fuels on the open market.

5. UK’s energy security will increase – far from increasing, the UK’s energy future looks more uncertain than ever, with talk of blackouts now commonplace in the media. The renewables target is exacerbating the coming energy crunch. Given the intermittent and unpredictable nature of many renewable sources close to 50% of the UK’s generation capacity will need to be from renewables. The only real option is offshore wind. However, given the size of fields needed they will need to continually move into deeper, rougher water. The available data suggest a clear correlation between deeper water and higher costs.

Therefore, while the likely removal of the renewables and other binding targets from 2020 to 2030 is welcome, we believe it will not be sufficient. In particular we highlight that the current policies are having a significant impact on bills. Open Europe estimates that, in 2013, the average household’s dual gas and electricity bill was increased by £59 (5%) due to EU regulations or UK implementation of EU defined targets. By 2020, EU-related regulations or targets will increase annual household bills by £149 (11%).

The impact on medium sized businesses is particularly troubling as shown in the graph below. Open Europe estimates that in 2013 the average medium sized business bill was increased by 9% (£130,000) due to EU regulations or UK implementation of EU defined targets.  By 2020, EU-related regulations or targets will increase medium sized firms’ bills by 23% (£350,000). With these figures there are some caveats: DECC claims that there are sufficient offsetting policies which will reduce these costs, however, it’s not clear why these cannot exit in any case (i.e. why bills could not be even lower on net) and that even if these policies were changed, the costs may not evaporate entirely.

Lastly, in terms of the overall picture these policies have proven to be costly but with limited benefit, while many countries, including the UK, look off track. Therefore, we recommend an urgent reassessment of the current policy along with the 2030 framework. After all, if there is a move away from a binding renewables target after 2020, logically it seems strange for governments and businesses in the UK to make huge investments just to meet the current target which will soon be obsolete.

A crucial part of EU reform will creating more flexible policies which can adjust to changing circumstance, which involve continuous, rigorous economic assessment and where mistakes can be undone. This seems as good a place to start as any.

Michael Wohlgemuth: Why the EU cannot bank on Germany’s economy

Open Europe Berlin Director Michael Wohlgemuth has written an interesting piece for World Review, looking at the current status of the German economy. Here it is:
The German economy is showing clear signs of weakening. GDP declined by 0.2 per cent in the second quarter of 2014 and German business sentiment fell for a fifth straight month in September to its lowest level in 17 months. Manufacturing orders dropped during August to the lowest level since May 2013.

Germany’s problems will remain and get worse.

Much of the resilience of the German economy during the last years can be attributed to harsh labour market and social security reforms. These were introduced by the Social Democrat Chancellor Gerhard Schroder (1998-2005) in 2003 with his ‘Agenda 2010’.

The new centre-right / centre-left coalition led by Chancellor Angela Merkel has rolled back many of these reforms by reintroducing early retirement, granting extra pensions for mothers and installing an unprecedented legal minimum wage - of 8.50 euros per hour - in all sectors and all regions of Germany.

The German government has been forced to admit that the minimum wage will increase labour costs by 10 billion euros. It is still unclear how many jobs will be lost after its introduction in 2015.

The new pension benefits will cost around 200 billion euros until 2030. Early retirement could take up to 250,000 elderly off the job market over the coming years when skilled and experienced labour is becoming increasingly scarce and valuable.

Demographic decline will be Germany’s greatest challenge in the long run: coming decades could see Germany’s workforce shrink by about 200,000 every year. The old age dependency ratio - between those older than 65 and those of working age - could increase from 31 per cent in 2013 to 57 per cent in 2045.

Immigration to boost the workforce would be essential. Experts calculate that net-migration of around 400,000 people a year - preferably young and educated - would be needed to avoid demographic decline.

So where should Germany’s future economic growth, desperately needed to pay for pensions and somehow to rescue the eurozone, come from?

The answer is from productivity and innovation, in short: smart investment. Labour participation rates, labour productivity and entrepreneurial ingenuity would have to increase dramatically.

However, Germany’s productivity growth is lagging behind almost all other economies in the world.

The established German Mittelstand - its economic backbone of small and medium-sized enterprises - and some big exporting firms, are still good at innovation. However, Germany holds a dismal 111th place in the World Bank’s ranking for ‘ease of starting a business’ and its service sector is under-developed and over-regulated, while Germany’s education system fails to produce enough matching skills.

Germany’s capital stock is depreciating faster than new investments are replacing it. A declining capital stock combined with a declining workforce, leaves no hope for a growing economy.

That does not mean Germany’s government must add more public debt to the mix.

Many observers are demanding that the government abandons its ‘austerity obsession’ and take advantage of the historically low interest rates for more debt-financed ‘stimulus’.

But the Merkel government is still in the position to do the right thing and increase investment without abandoning the new constitutional balanced budget rule. German politics should also provide better regulatory and tax environments for private domestic investment and lower barriers to entry for its service sector.

Domestic industrial investment is also increasingly discouraged by the ‘lonely revolution’ to wean Germany off both fossil and nuclear energy.

This policy may cost consumers, taxpayers and business up to one trillion euros over the next two decades, according to Peter Altmaier, the former minister for the environment, who is now chief of the Chancellery and minister for special affairs.

German energy costs are now more than double those in the US, while Germany’s greenhouse emissions have increased.

German entrepreneurs and foreign investors have always had these negative factors on their radar.

Germany’s problem is not austerity, but demography and complacency. The message is you cannot bank on Germany.

Wednesday, October 22, 2014

The Farage Paradox part II: Support for EU membership at highest level since 1991

Back in May, we pointed out the so-called 'Farage Paradox' - even as the party came first in the European elections in the UK and Farage himself was widely seen as having bested Nick Clegg in their TV debates, support for leaving the EU had fallen to its lowest level for a long time according to Ipsos-MORI with 37% in favour of Brexit and 54% in support of staying in.

A few months later and UKIP is still riding high in the polls with a victory in the Clacton by-election under its belt and with the Tories on the run in Rochester and Strood - amid all kinds of noise around EU migration. However, on the wider EU question, support for membership has climbed even higher - today's Ipsos-MORI poll has support for membership at 56% - its highest since 1991!! - with support for leaving on 36%.

It's not entirely easy to nail down the drivers behind the trend - even the UK's public defeat over the appointment of Jean-Claude Juncker as European Commission President hasn't reversed it but one possibility could be that as the prospect of exit becomes more real, especially in the wake of the Scottish referendum, people are more likely to go with the 'better the devil you know' option. Another explanation is that Farage is good at stirring up support in concentrated parts of the country, but his divisive rhetoric turns others off. A feel-good factor over the economy (through as we've argued before, this can cut both ways) combined with increased uncertainty around the world - making the status quo look safer and club membership more attractive - could be other reasons.

Either way, it shows that even as UKIP find a way of tapping into disenchantment with the EU and mainstream UK politics, they are failing to convince  people that they have the right remedies and this risks derailing the broader 'out campaign, as the pro-Bexit Tory MP Michael Fabricant has warned:
"The out team will be very different, with no leader who commands popular support. Before you can even make the case for Britain becoming a mid-Atlantic economic hub, freed from the shackles of Brussels diktats, the Eurosceptics will be all over the place. No clear leader, and angry looking grey men who have been arguing the toss on Europe for years, will fail to impress. Yes, Nigel Farage is clearly the most charismatic Eurosceptic in years, but does anyone really imagine Farage being the Alex Salmond of the out campaign? Would he be persuasive enough to seduce a nation?"
However, it is worth bearing in mind that other polls have slightly different outcomes. Today's YouGov poll for the Times' red box showed lower levels of support for EU membership - support for membership is roughly the same under their 'major changes' scenario as under Ipsos-Mori's status quo scenario (YouGov's status quo option assumes renegotiation was attempted but failed to secure even modest changes, so can't be directly compared with the Ipsos-MORI one).

This shows that even if some polls suggest a majority of Brits would vote to stay in no matter what, EU reform and renegotiation remains by far the best option for any UK government. 

As has been noted before, that's why some Better Off Outers are now starting to fear that long sought after In/Out referendum - in itself an ironic development. 

Monday, October 20, 2014

Irony alert as Poles ride to UKIP's rescue in a classic Brussels stitch-up

We reported only a few days ago that UKIP's EFDD group in the European Parliament collapsed after a Latvian MEP resigned, meaning the group no longer met the criteria of having MEPs from at least seven different EU member states. The news drew a lot of media attention (not to mention schadenfreude) mainly due to the financial implications for UKIP - which, according to our estimates, stood to lose nearly €2 million a year in EU funding.

Today, it was announced that Robert Iwaszkiewicz, an MEP with Janusz Korwin-Mikke's KNP (pictured) has joined the group. Korwin-Mikke himself was deemed too toxic to join the UKIP group after the European elections given his controversial views on rape (women always "pretend to resist") and the Holocaust (no evidence Hitler knew about it), and that was before he provoked a full-blown race row. Iwaszkiewicz himself is hardly baggage free; during an interview about with Gazeta Wrocławska a couple of months ago, when asked about domestic violence, he said that:
"I'm convinced that many a wife would benefit from such a response in order to re-connect with reality."
When asked about his Korwin-Mikke's views as described above, he said that "these are taken out of context... when considered broadly, they make sense". In any event, this does not appear to be a principled defection - but rather a classic Brussels-style dirty deal. Polish daily Rzeczpospolita reports that Korwin-Mikke and Farage struck an agreement which would see Iwaszkiewicz's transfer mirrored by an MEP from the EFDD move to the 'far-right' bloc led by France's Marine Le Pen, which also includes Geert Wilders's PVV, the Austrian Freedom Party and Lega Nord, and fell one nationality short of forming an official group during the summer. The paper describes this a "binding transaction" and quotes Iwaszkiewicz as saying that:
"Negotiations are on-going. It was necessary to save them and I had to join urgently".
It remains unclear therefore whether an MEP from the EFDD will definitely join the Le Pen group - but that seems to be the implication. Because of the way the nationalities are represented over the two groups, it would either have to be one of UKIP's 24 MEPs or one of the two Sweden Democrats.

If the former, UKIP and Nigel Farage will face some uncomfortable questions given the extent to which they have tried to distance themselves from the Front National. Regardless, this incident just underscores the absurdity of these taxpayer subsides for European Parliament groups.

Barroso lets his hair down - and British media loves it

Would the UK have zero influence outside the EU? 
Outgoing European Commission President José Manuel Barroso is in London, and he has made a few interesting remarks about the Tories, Brexit, EU free movement and Grant Shapps. Wading into the most intense debate on EU migration in the UK since 1066, he has really hit the headlines. 

However, Barroso no longer has any real say over decisions in the EU - it's Juncker's show now, and he has made addressing the UK's concerns a key priority, although it remains very much an open game. Also, remember, the bulk of Cameron's renegotiation won't be with the Commission - it'll primarily be with member states (though having the Commission on-side will certainly help). 

In any case, Barroso told the BBC's Andrew Marr Show yesterday:
"So far the British government has not presented a proposal, a concrete proposal [on reform of EU free movement rules]. There are ideas floating, there are rumours. I cannot comment on specific suggestions that have not yet been presented. What I can tell you is that any kind of arbitrary cap seems to me to be not in conformity with the European rules."
Barroso is of course right - restricting the number of EU workers coming to the UK, via quotas, would be illegal under EU rules - as we argued in our recent flash analysis and most people agree on. The question is whether changes to these rules are possible - this is a big discussion which we've looked at here. However, Barroso also tried to strike a more conciliatory tone when he stressed that there are "widespread concerns in the UK and elsewhere about abuse of free movement rights" and further changes could be made to address them, although "changes to [EU migrants' access to benefits] need all countries to agree."

Barroso had some less well-targetted comments, claiming for example, that the UK would be "irrelevant" and "have zero influence" outside the EU, while also appearing to link EU membership to Cameron's ability to fight the Ebola virus.

At an event this morning, Barroso was also asked about remarks made by Conservative Party Chairman Grant Shapps, who was sent out yesterday to dismiss Barroso's comments, calling the outgoing European Commission President “an unelected bureaucrat”. Barroso - now clearly free to let his hair down - went all in:
“Since I was 29 years old, I was elected in my country…I don’t know who this gentleman is, but certainly he has not more democratic legitimacy than I have.” 
Which begs the question, if Barroso doesn't know who Shapps is, how can he comment on the man's electoral record? Anyway, it allowed the Tories to play the 'we stand up to Brussels card'.

Legal challenges could pose new problems for EU sanctions on Russia

Arkady Rotenberg and Rosneft CEO Igor Sechin
We’ve discussed the economic and political challenges which the sanctions on Russia have caused for the EU. So far the economic pain has been managed (though Germany has been hit quite hard), despite outbursts from a few countries. The long standing political differences over how to deal with Russia have also been exposed.

However, now a new front has opened – a legal one. Both Rosneft and billionaire Arkady Rotenberg have launched legal challenges against the EU sanctions on Russia at the European Court of Justice (ECJ).

While the details of the challenges have not yet been revealed in full (the cases can be found here, here and here), Rosneft will be challenging the grounds for banning them and others from capital markets access, while Rotenberg will be questioning the decision to freeze his assets in Europe and impose a travel ban.

So, why exactly might this be a problem?

Well, the EU does not actually have a great track record of being able to legally enforce its sanctions despite the assumption that the ECJ would always back the EU. There are numerous recent examples:
  • In September this year the EU General Court (a step below the full ECJ) ruled that the EU’s sanctions which froze Iran’s Central Bank assets were unlawful since the evidence behind them was so “vague and lacking in detail”.
  • Similarly towards the end of 2013 there were a series of cases which saw the sanctions against numerous Iranian banks and companies overturned due to lack of sufficient evidence.
  • In fact, there have been countless examples of this over the past few years since the ruling in the Kadi case, which essentially established the ability for sanctions to be challenged and precedent for them to be overturned on insufficient evidence.
The thrust is that the ECJ and EU system for legally enforcing sanctions is actually quite inadequate for a number of reasons:
  • The decision to impose sanctions is essentially a political one. This means the evidence or research which goes into deciding who is sanctioned can often be limited. This makes justifying the sanctions in legal terms quite difficult.
  • Where there is evidence it can often be confidential and provided by national government sources. However, there is no system for sharing, submitting or even holding confidential information at the ECJ. All evidence submitted to the court must be shared with the other side and is often made public. This makes many governments and intelligent services very uncomfortable. This combined with the point above means that in some cases the court is forced to overturn sanctions simply because it has not been given enough evidence to make a proper judgement.
  • Those being sanctioned are often not the real target. The Russian sanctions are a prime example of this – individuals and firms around the Russian government have been hit to try and inflict pain and force a change of approach by the government. But this means that to legally defend the sanctions the link between the two must be conclusively proven and they must be shown to be involved in the activity which resulted in the sanctions.
(For a more detailed discussion we recommend reading this evidence submitted to the House of Lords on the isse).

It has taken a while for this to filter through. The main reason is that the original sanctions, which were focused on those involved in destabilising Eastern Ukraine and Crimea were easier to defend and legally prove. However, as sanctions have broadened and the objective has become causing general economic pain, the legal base has also become more stretched. Clearly, Rosneft and Rotenberg feel they are now at a point of vulnerability.

It’s hard to fully assess at this point in time just what chances they have of succeeding. The hope might be that the cases will draw attention and encourage those EU countries which do not fully support sanctions to apply more political pressure for an easing of the controls. Just today we have seen Hungary speaking out against them.

Even if Rosneft and Rotenberg were to win, history has shown that this is no guarantee of the sanctions being removed permanently. Previously, the sanctions have simply been reworded and instituted under a different legal base. Sure they can be challenged again but it is a very lengthy legal process. Alternatively, better evidence has been collected in due course and a more solid base for the sanctions provided. Of course, the EU would retain the right to appeal against any judgement.

With that in mind we wouldn’t expect any results for 12 – 18 months and in the meantime the sanctions will stay fully in place. In that sense, given the economic and political fallout from the sanctions so far not to mention the increasingly desperate economic crisis in Ukraine, many will hope the situation has reached some resolution before these cases ever have a chance to be resolved.

Friday, October 17, 2014

The EU Referendum Bill passes another hurdle - but time is running out

EU Referendum Bill rises again
The Conservative party's attempt to force an EU Referendum in 2017 onto the statute book is back in the guise of Bob Neill's Private Member's Bill (remember James Wharton's bill was killed of by the Lords back in January). Once again, the bill has passed at second reading stage in the House of Commons (283 MPs voted in favour and none were brave enough to vote against).

So what are its prospects for success this time around?

The Bill will now go to Committee stage where the best strategy for those who wish to scupper it (without been seen to be overtly doing so) will be to amend the bill in order to prevent it from being 'parliament acted' - something which will happen automatically if the Bill is rejected outright or is still stuck in the Lords by the time parliament is dissolved for the general election. Since the unsuccessful Bill has to be exactly the same on both occasions, if Labour and Lib Dem MPs manage to - for example - extend the franchise to 16 and 17 year olds as happened in the Scottish referendum, the Parliament Act could not be used. The exact make-up of the committee (will any pro-referendum Labour MPs be included?) could prove crucial.

Another problem is that unlike James Wharton - who topped the Private Members' Bill ballot last time around - Bob Neill only came third, so his Bill is behind the two other PMBs in the parliamentary pecking order. Both are relatively contentious themselves - one seeks to fundamentally reform the so-called 'bedroom tax' and the other aims to enshrine the government's to spend 0.7% of GDP in foreign aid - so the more time they spend in Committee stage, the longer it will take for Neill's Bill to progress to that stage.

If however it does navigate its way through the Commons unamended, then it will be for the next UK Government to either hold the referendum as instructed, ignore the law or seek to reverse the legislation. Either way, it will have served its primary purpose - convincing a sceptical electorate that the Conservatives are serious about a referendum.

UK takes another blow over bankers' bonus cap

EBA HQ in London
The European Banking Authority (EBA) on Wednesday released the results of its investigation into whether banks across Europe have been using ‘allowances’ to skirt the EU’s bankers’ bonus cap. This is obviously a hugely contentious issue in the UK and the fact that UK banks have been taking this approach has been well publicised and oft criticised by EU politicians. But it’s interesting to note that the EBA found 39 banks across six EU states had been using such allowances, so clearly it is an issue which extends beyond the UK’s big banks.

Nevertheless, the opinion does not bode well for the UK with the EBA concluding:
“The EBA found that in most cases institutions had topped up the fixed remuneration of their staff and had introduced discretionary ‘role based' allowances which have an impact on the limit of the ratio between variable and fixed remuneration required by the EU Capital Requirements Directive (CRD IV).”

“The report showed that most of the allowances, which were the subject of the EBA investigation, did not fulfil the conditions for being classified as fixed remuneration, namely with respect to their discretionary nature, which allows institutions to adjust or withdraw them unilaterally, without any justification.”
The report is much as expected, with the EBA making the case that the allowances are not permanent pay for a number of reasons: they are revocable with little notice, specific to the staff member not the role, often have forfeit clauses therefore not permanent and are often linked to proxies for the firms performance (such as the economic environment).

The last point in particular clearly chimes with concerns from banks that they will have less control over their costs at times of economic hardship. This is exacerbated by the point (number 37 in the report) below which is frankly just a bit strange:
"Some role-based allowances might only have been introduced to comply with the bonus cap introduced by the CRD IV while retaining some cost flexibility. Cost flexibility is of importance where the performance of the institution or a business unit is no longer considered adequate."
Surely, cost flexibility is always relevant for a business, particularly one in a very competitive environment, and not just when it is failing? We’re not quite sure what the EBA is getting at there.

What happens now?
  • The opinion isn’t binding, although the EBA has said it expects national regulators to make sure that all banks are in compliance by the end of the year, however, it has no legal way to enforce this (yet).
  • The EBA is currently reviewing its guidelines on the issue and will hold a public consultation before the end of the year with the new official rules being published in the first half of 2015 (at this point they will be legally binding).
  • In particular, if banks want to continue using allowances they will have to be “predetermined, transparent to staff and permanent”.
  • Ultimately, this throws a bit more uncertainty in the mix with banks uncertain over exactly how and when to adjust their allowances.
What does this mean for the UK?
  • Clearly, this is a bit of a blow for the UK. That said, the issue has already to an extent moved out of the EBA’s hands. The UK is challenging the original proposal at the European Court of Justice. Even if this proposal fails it could challenge the updated guidelines/rules which are used to implement the cap. Banks themselves could of course choose to launch legal challenges although this looks unlikely at this stage.
  • Banks will ultimately find a way to pay their staff the market rate. This will likely end up being in the form of higher base salaries, something which will make banks less flexible and push up their average costs. This could potentially harm competitiveness and possibly force banks to pass on such costs to consumers.
  • The biggest concern is a broader one of precedent and where laws are really made. The bonus cap was a specific law tagged onto a much larger piece of legislation to which it is largely unrelated. This significantly aided its passage through and watered down scrutiny. Then given the technical nature of the rules a lot of the holes were filled in by the Commission and the EBA in setting the exact parameters for implementation – providing a lot of power to the two institutions. The temptation to take such an approach with complex financial regulation is obvious and circumvents the little accountability and control which member states have.
This debate surely has some way to run yet but this looks to be one battle which so far the UK is losing.

Thursday, October 16, 2014

What are David Cameron's options on EU immigration?

Following reports that David Cameron is considering a new announcement on how he would renegotiate EU free movement, potentially considering an "emergency brake", we have set out in a short briefing what his potential options are.

Here are the key points:

The debate about internal EU migration has two dimensions. Though inter-linked they should be treated separately. “Fairness” – who can access what benefits and when; and “volume” – how many migrants come to the UK every year. David Cameron is reportedly considering moving from addressing fairness to making a demand to curb the numbers of EU migrants to the UK.

There is substantial support at the EU level to give national governments greater control over access to their welfare systems and doing so would not require treaty changes but a qualified majority vote among governments and the agreement of the European Parliament.

Any move to limit the numbers of EU migrants coming to the UK would most likely require treaty change (with the possible exception of an ‘emergency brake’) and therefore the unanimous agreement of other EU governments. It is currently unclear what exactly – if anything – Cameron might ask for on volume, but he may have three broad options, which in order of increasing difficulty to secure EU agreement are:

  1. An ‘emergency brake’ triggering temporary controls on EU migration if the flow is considered ‘destabilising’, too large and/or concentrated;
  2. Permanent quotas on EU migrants;
  3. A points-based system, similar to that which exists for migrants from outside the EU, differentiating between “skilled” and “low-skilled” migrants.

There are a number of questions around how an ‘emergency brake’ could be organised practically, but if this is David Cameron’s top EU negotiating priority he may just achieve it, given that there are precedents for brakes in other areas in the EU treaties and there is increasing awareness across the Continent that public concern about free movement is contributing to the EU’s unpopularity.

Whatever the merits of the proposal, as a domestic political strategy, it is unclear whether an ‘emergency brake’ would be enough to see off UKIP – as Cameron could still be accused of failing to secure full control over Britain’s borders and migration policy – although it may reassure 'swing voters'. Therefore, Cameron risks spending a lot of political capital abroad for limited political return at home.

Securing either option 2 or 3 would be an extremely difficult task as it would involve fundamentally rewriting the EU treaties and unpicking one of the founding principles of EU membership. There is likely to be little or no political appetite for such a move among other EU countries. The Swiss experience shows that, even outside the EU, measures to limit EU migration could result in threats from Brussels of reduced trade access to EU markets.

This is not to say that EU rules on free movement can ever be changed, but rather that this is one area where Number 10 will find it hard to get away with creating the headline first, and the content later. Given the domestic sensitivity of the issue and how deeply it strikes at the heart of existing terms of EU membership, successfully negotiating change requires a well thought out plan that has domestic and European level buy-in.

See you in Court: Should there be a referendum before the UK opts into the European Arrest Warrant?

Could another Rees-Mogg Judicial Review lead to a referendum?

Update 17:00:
The Spectator Coffee House blog is reporting the Conservative Chief Whip may be preparing MPs for a decision to stay out of the EAW. However the line from Number 10  is that they are still "in principle seeking to opt back in."
Before 1 December, MPs will vote on whether to accept the Coalition's decision to opt back in to around 35 EU Crime and Policing laws and, for the first time, accept the jurisdiction of the European Court of Justice - or stay out completely. As we have written before, the choice is a straight one between "more or less EU control over UK crime and policing."

But this flagship Coalition EU policy may fly in the face of another - the European Union (Referendum) Act 2011 - which was supposed to give the British people the final say on the transfer of powers to the EU. So why are we not going to see a referendum? Well as this decision was already in the pipeline, it was excluded when the Government drafted its legislation. However, other areas such as participation in the European Public Prosecutor would definitely require a referendum.

This division will now be tested in the Courts courtesy of a judicial review by Jacob Rees-Mogg MP and UKIP treasurer Stuart Wheeler who believe that not only does the decision to opt-in to the European Arrest Warrant require a referendum, but the EAW also contravenes Magna Carta and Habeas Corpus. [It is worth remembering that Rees-Mogg's father and Stuart Wheeler have both previously brought legal actions against ceding of power to the EU]. As a legal opinion, commissioned by the Freedom Association, points out there are a number of serious problems including:
“With regard to the question of whether the UK’s opt-out from the jurisdiction of the European Public Prosecutor’s Office (EPPO) will be rendered ineffective owing to the ability of the EPPO to initiate the issue of an EAW and secure its execution in the UK, it is quite clear that it would."
It's unlikely that the Courts will side with the appeal, but in any case, it'll be interesting to follow what it has to say about it.

'Grillage People' no more: European Parliament group of Farage and Grillo collapses

Nigel Farage and Beppe Grillo (the 'Grillage People', as @Berlaymonster brilliantly renamed the duo) have just lost their group in the European Parliament.

The Europe of Freedom and Direct Democracy (EFDD) group has collapsed following the departure of Latvian MEP Iveta Grigule, of the Latvian Farmers' Union. We don't know yet what pushed Grigule to leave. Sources from the EFDD group are already circulating their version of what happened:

However, what we know is that Grigule's decision means UKIP, the Five-Star Movement and the other parties that had joined the group will lose a few millions of EU funding. According to our estimates, the EFDD group could have claimed around €3.8 million a year (see here for more details).

As we noted in our previous blog posts, it was not obvious that Farage's group would see through the whole five-year term in the European Parliament - not least because of the differences between UKIP and the Five-Star Movement, the two biggest factions in the group. Still, today's announcement has come a bit out of the blue.

In any case, given UKIP's growing momentum in domestic politics (victorious in the Clacton by-election and riding high in the latest opinion polls), we doubt Farage will be crying into his pint over losing his group in the European Parliament.

It's hard to predict what will happen next. For the moment, MEPs from the dissolved EFDD group will sit as non-attached members - the same status as Marine Le Pen's Front National, Lega Nord and Geert Wilders's Freedom Party, who failed to form their own group during the summer.

Will they all start discussing a possible cooperation? Will any of the (former) EFDD parties look to join forces with Le Pen, allowing her to form a new group? Or will Farage manage to quickly find a substitute for Grigule and re-establish the EFDD group? Time will tell.

Wednesday, October 15, 2014

Seven reasons we love Slovenia's new Commissioner nominee Violeta Bulc

The first (and only) causality of the European Parliament hearings for Jean-Claude Juncker's new Commission so far, is Slovenia's Alenka Bratusek, who withdrew her candidacy for the post of Vice-President for Energy Union after a being effectively vetoed by MEPs.

She's been replaced by Violeta Bulc, Slovenia's Development Minister, who will face the music next Monday, when MEPs grill her on her suitability for the Transport portfolio (the Energy Union job will go to Slovakia's Maros Sefcovic).

But who is Violeta Bulc? Quite a colourful personality, if the internet is anything to go by. Europe is so often accused of being run by boring bureaucrats, even being accused of being as charismatic as "damp rags." Bulc is anything but. So we've picked out Bulc's best bits, mostly from her CV online for you to savour below.

1. Interesting ideas about energy generation:  "Natural environmental heat can transformed directly into electrical energy," says Bulc. A shame that she most likely won't have the Energy Union brief really as it could have made for an interesting discussion during her EP hearing.

2. She believes in 'Syntrophy' - which is apparently something to do with 'the creative power of nature.' And here's what she had to say about discovering it. (Note the CAPS.)
At various levels and in various dimensions, and every once in a while, something triggers excitement in each and every one of our cells. Love. Surprise. Achievement of a goal. A realisation along the way. A thought. Hope. Birth.

I felt this type of excitement when I was introduced to SYNTROPY. I can hardly express emotions that were flooding me while I was traveling through complex formulas that were mostly incomprehensible to me, yet so familiar that I felt as if they were a part of my life all along.
3.  Positive values: Her business, Vibacom, is run on the values of "the power of positive energy and pure thoughts." This "creates the conditions for prosperity and thrivability." Well, the EU could definitely do with an injection of positive energy...

4. Serious sporting prowess: Not only does she have a black belt in Tae Kwan Do, but she was also a professional basketball player in Yugoslavia, and won athletic championships in javelin. Eat your heart out Vladimir Putin.

5. She blogs: Violeta's blog is well worth a peruse. Here's a post from last month called, "The vibrations of the White Lions in the new Era."

6. She is a qualified Shaman and firewalker: She has a certificate from the Shamanic Academy in Scotland. No explanation offered - and is one needed? She has also received a certificate for "firewalk" and "breathwork" instructor at the recognised school of transpersonal education, Sundoor. Should come in handy during her grilling by MEPs...

7. She's got charisma: In 2010, she won the "Sunny Personality of the Year" prize. We're sure that a sunny disposition will help Bulc in Brussels which is hardly regarded as being among the most uplifting cities in Europe.

While we concede she may be a little out there, she certainly has the potential to shake up the dreary and self-regarding Brussels bubble.

Tuesday, October 14, 2014

The Stoiber report: a milestone in the fight against EU red tape?

Edmund Stoiber presents his report
Today saw the publication of the final report of the "High Level Group on Administrative Burdens", i.e. an EU taskforce charged with cutting red tape and easing its impact on businesses. The group - chaired by former CSU leader and state Premier of Bavaria, Edmund Stoiber, was put together back in 2007, so its final report has been a long time coming.

As we have been going on about the costs of EU regulation long before it became fashionable - compiling the first ever overall cost figure for EU regulation based on UK government impact assessments in 2009 - this has been a report we have been eagerly anticipating.

The report contains a number of recommendations, some at the EU level and some at the national level. The key EU level recommendations include:
  • Adopting a new EU Action programme and strengthening existing EU programmes for reducing overall regulatory costs such as REFIT, as well as setting a net target for reducing regulatory costs and publishing annual statements of the total net cost or benefit of new legislative proposals,
  • Setting a net target for reducing EU regulatory costs,
  • Introducing a system of offsetting new burdens on businesses stemming from EU legislation by removing existing burdens from elsewhere in the acquis,
  • Rigorously applying the “Think Small First” principle and competitiveness test to all proposals, with SMEs and micro-businesses be exempted from EU obligations as far as possible,
  • Developing a common EU methodology to measure regulatory costs and benefits and making the evaluation of all EU legislation compulsory on the basis of this in order to measure actual outcomes against original objectives before any proposals for revision or new legislation are made,
  • Declaring a political commitment to focus only on those interventions which are indispensable at the EU level and which add the greatest value compared with national or regional action,
  • Empowering an independent body to scrutinise the Commission´s impact assessments before the legislative proposal is adopted by the Commission and to assess the evidence base and costs and benefits supporting legislative amendments by the European Parliament and Council before the legislation is adopted.
The report estimates that were all these to be adopted, businesses in the EU could save up to €41bn per year on top of proposals already adopted by the Commission and European Parliament with an "annual reduction potential" of €33.4bn.

Overall, the recommendations are very welcome and reflect many of the proposals that we have been championing for some time - for example, we first proposed an independent impact assessment board with "real teeth" back in 2009. The report also overlaps with David Cameron's business taskforce report published last year, albeit the Stoiber report does not explicitly call for the adoption of a 'one in, one out' principle when it comes to new regulation. Also, the report does not address big questions like the extent to which the EU should be involved in social and employment policy and the impact of the European Court of Justice in increasing the costs of EU regulation via the back-door as has happened most notably in the case of the Working Time Directive (which the report does not mention). 

Nonetheless the report - together with the nomination of Frans Timmermans as Commissioner for better regulation in a generally reform-orientated Commission - is indicative of a cultural shift within the Commission away from regulation as a process in of itself towards securing concrete outcomes and addressing business concerns. It is certainly, among other things, a nod to concerns raised around the EU and the UK in particular about the EU's tendency to over-regulate and impose excessive costs on businesses and consumers. 

In fact yesterday's Guardian reported that Stoiber explicitly referenced the need to keep the UK on board, and in presenting the report he argued - as passionately as it is possible to when discussing EU regulation - in favour of an EU that is less obtrusive, heavy-handed and opaque. He also admitted that in the past, many politicians and EU officials had seen any EU-level regulation - regardless of its desirability or suitability - as a means to advance the 'EU cause', but that such thinking was now history (although we would say it hasn't completely gone away).  

Overall, it is clear there is a real opportunity to create a more enterprise and business-friendly single market. However, as ever with EU reform the challenge for the new Commission and for national governments will be to translate the rhetoric into concrete action. The fact that the Commission President Barroso has seemingly rejected one of the proposals already - for an independent impact assessment board is concerning.

This suggests the Commission is nervous about independent scrutiny of its cost estimates for new EU regulation. An independent IA board would be better at catching out harmful proposals - such as the infamous olive oil jug ban - and delivering more measured verdicts on politically contentious issies such as the proposed FTT, where major problems with the Commission’s proposal emerged after it had been tabled and undergone an internal impact assessment. The Commission's resistance suggests that despite much progress, there is still some way to go.

Catalan government calls off independence referendum, but it's not the end of the story

UPDATE (10:55am): 

Catalan President Artur Mas has just been speaking to the press. His remarks were broadly in line with the blog analysis we published earlier (see below).

Two key points from the presser:
  • The planned independence referendum will not take place on 9 November. However, somewhat confusingly, Mas said "there will be polling stations and ballot papers" available to hold a "preliminary" vote on the same day. In other words, a purely symbolic, informal referendum (as opposed to the formal, non-binding one previously planned). It remains to be seen how this offer will go down with Catalan voters.
  • As we expected, the Catalan leader said he is "at the disposal of the other [Catalan] parties" to call early regional elections. However, he suggested that these elections could only be credible as a proxy for a "definitive" referendum if all the pro-independence parties were to run "as a joint list and on a single programme". Therefore, Mas is clearly using the prospect of early elections to put pressure on the Spanish government, while at the same time trying to hedge his CiU party against the risk of being outflanked by the strongly pro-independence ERC (as we explained below) and taking a beating. 
Meanwhile, Spanish Prime Minister Mariano Rajoy has hailed the cancellation of the Catalan referendum as "excellent news" and reiterated that he's open to dialogue with the Catalan government.

ORIGINAL POST (9:15am):  

The Catalan government has called off the non-binding independence referendum planned for 9 November. It was really just a matter of time. Catalan President Artur Mas had repeatedly stressed that he wanted the consulta to be legal, so that the outcome of the independence vote could be recognised as valid in Spain and beyond. However, the Catalan law used by Mas to call the independence referendum has been temporarily suspended by the Spanish Constitutional Court after the Spanish government lodged a legal challenge against it. Hence, going ahead with the referendum would have meant breaching the law - something the Catalan leader wants to avoid.

Clearly, though, this is not the end of the story. Mas will reportedly set out an alternative 'participative process' (proceso participativo) in a press conference this morning - but his new proposal is unlikely to be welcomed by the other pro-independence parties.

As we noted in previous blog posts, the 'Catalan question' seems to have got to a point where the option of going back to business as usual is not on the table anymore. The decision to call off the 9 November referendum may have opened a window of opportunity for the Spanish and the Catalan governments to engage in real talks.

Spanish Prime Minister Mariano Rajoy may be tempted to shut the door and just ignore Catalan demands, especially after Mas has backed down. However, the Catalan leader still has an ace up his sleeve: he can put further pressure on Madrid by threatening to step down and call early regional elections. A snap vote in Catalonia would very likely see a victory for the hardcore pro-independence Catalan Republican Left (ERC).

The party leader, Oriol Junqueras, said of the decision to cancel the independence referendum yesterday:
"We will have to build up a parliamentary majority to issue a declaration of independence and begin the constituent process of the Catalan Republic".
With a Spanish general election due in November 2015, Rajoy would probably want to avoid having to deal with an ERC-led Catalan government and would therefore be more willing to listen. On the other hand, Mas would be taking a huge gamble himself by threatening to call early elections. The Catalan leader fought the 2012 electoral campaign on the pledge of an independence referendum that he has failed to deliver. Hence, his moderate nationalist Convergence and Union (CiU) party would face the risk of harsh punishment by disappointed pro-independence voters.

One thing is certain: the time of political posturing on either side is coming to an end. The sooner the Spanish and the Catalan government agree to sit at the negotiating table, the better.

Monday, October 13, 2014

Meet the new Belgian Finance Minister, an ally on EU reform

Good news for EU reform keeps coming from Belgium. After the publication of the new coalition agreement, which we've analysed here, it has today been announced that Johan Van Overtveldt will be the country's new Finance Minister. A former editor-in-chief of Belgian business magazine Trends, he was elected to the European Parliament in May with the New Flemish Alliance (N-VA) - Belgium's biggest political party and a member of the UK Conservatives' ECR group.

Van Overtveldt's pro-EU reform credentials are beyond doubt.

Last month, he said in an interview that he wanted "no political union" (see the headline in the picture), and added:
"We need a more social Europe, but first the monetary union should be anchored on a healthy basis. When national economies perform better economically, countries will start taking initiatives which go in a social direction anyway...A uniform European minimum wage, for example, is complete non-sense. It would at least need to differ for each country. A minimum wage is a sovereign competence of member states."
Furthermore, the new Belgian Finance Minister is a strong supporter of a 'capital markets union' - a key item on the agenda of the new EU Financial Services Commissioner, the UK's Lord Hill.

An expert in monetary economics (and a personal acquaintance of the late Nobel Prize winning economist Milton Friedman), Van Overtveldt also has an interesting take on the future of the Eurozone. In 2011, for instance, Open Europe hosted the launch of his book, 'The end of the Euro'. On that occasion, Van Overtveldt said he had "always been a doubter" of the sustainability of the single currency, and added:  
"The only solution for Greece is to leave the order to save itself and its democracy."
That said, Van Overtveldt has made clear that, despite his scepticism on whether the single currency may ultimately survive, he supports the efforts to keep the eurozone together. The new Belgian Finance Minister is in favour of "more economic powers for Europe", but opposes Eurobonds or fiscal transfers. This sounds very close to Germany's stance.

On banking union, Van Overtveldt wrote in April:
"The single resolution mechanism is too complex and takes too much time in order to be able to take action...The banking union as currently conceived leads to banks in weaker countries to do as much as they can to borrow from banks in stronger countries...Moral hazard is more than ever haunting the eurozone, like the Loch Ness monster."
Importantly, Van Overtveldt has also warned against a “big leap” towards fiscal union in the Eurozone, saying it would effectively create "two European Unions" - and, according to him, effectively lead to the end of the EU. Hence, we can expect the new Belgian Finance Minister to pay good attention to the concerns of the UK and other non-Eurozone countries when it comes to safeguarding the integrity of the single market.