Tuesday, April 15, 2014

The Farage allowances episode is primarily a sign of a fundamentally broken allowances system

The Times today uses the news that Nigel Farage is to be investigated by the EU’s anti-fraud office OLAF, following a complaint from an ex-Ukip official that £60,000 of EU allowances paid into his personal bank account have gone “missing”, to attack the “fraudulent prospectus” that he is “the politician who is not a politician”.

The chief allegation is that:
"The Ukip leader has received £15,500 a year from the EU since at least 2009 to pay for the upkeep of his constituency office, a small converted grain store near Bognor Regis, according to transparency reports filed on the party’s website.  
However, the grain store was given rent-free to Mr Farage by Ukip supporters 15 years ago. Utilities and other non-rental costs amount to no more than £3,000 a year, according to the former office manager, leaving about £12,000 a year unexplained."
The paper also notes that Mr Farage “also revealed that he used a proportion of his [General Expenditure Allowance] to pay more than £1,000 a month towards a controversial second EU pension scheme of which he was a member between 1999 and 2009.”

We looked at this additional pension scheme back in 2009, when it closed to new members, and it was controversial for two reasons. Firstly, it was two-thirds funded by taxpayers and, second, the system relied on MEPs being honest enough to fund the shortfall in their allowances out of their own salary. Credit to Farage for leaving the scheme - but being part of it in the first place doesn't reflect well on him (though he's one of many, many MEPs from all parties who were or still are).

Whatever the rights or wrongs of Farage's actions, this illustrates that the EP's allowances and expenses system is still miles away from what taxpayers should accept. The General Expenditure Allowance is notoriously vulnerable to abuse because it is generous, has a wide list of potential uses and does not require MEPs to produce receipts. The Times' leader itself admits that "It is probable, even if these allegations prove to be true, that Mr Farage has done nothing illegal".

Predictably Farage's response casts him as the victim of a "politically motivated attack from what is the establishment newspaper." The general expenditure allowance, he said, "is given to every MEP and we can spend it how we want to," adding:
"We have used the money to promote the cause of Britain leaving the European Union and we have done that unashamedly"
It is right that Nigel Farage is subject to proper scrutiny and that investigations are carried out if he has a case to answer. And whether singling out Farage will actually help or hurt his cause remains to be seen. However, what's clear is that the EP's allowance system must urgently be reformed.

This is something that we'll most definitely return to.

Can the real Super Mario please stand up?

Former Italian Prime Minister Mario Monti may be out of Italian politics, but it's fair to say he still likes to talk - especially when travelling abroad.

In an interview with Belgian daily De Morgen and Dutch daily De Volkskrant, Monti seems to hint at what many Bundesbank-fearing Germans already suspected: that the ECB's pledge to do "whatever it takes" (i.e. the OMT, the new bond-buying scheme) was de facto grounded in a political decision - contrary to what the ECB's mandate dictates.

Here is what Monti said in the interview:
[At the June 2012 European Council], I have used my full negotiating position in order to get a line approved that looks boring at first glance. At 4 am, the signatures of all leaders had been provided, including the ones of [German Chancellor Angela] Merkel, of my good friend the Dutch Prime Minister Mark Rutte, and of Finnish Prime Minister Jyrki Katainen, you can say the monetary firepower from the North [...] The line established, in short, that eurozone countries who did their homework, like Italy, were guaranteed ECB support. That statement – at the highest political level – didn’t impress the markets, because the leaders did have the authority, but no money. One month later, ECB President Mario Draghi came out with his famous statement: the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. That did calm the markets, because Draghi did have the money. 
Monti is clearly trying to claim some credit - and the headline of the interview in De Volkskrant is actually "Mario Monti: the man who saved Europe". However, if Monti is right, it clearly means that the ECB's political independence was seriously compromised, since, strictly speaking, there should be no link whatsoever between a political agreement and ECB action..

Draghi's statement is one of the main reasons behind the fall in borrowing costs for countries in the eurozone periphery - some of which have yet to deliver on real economic reform. Monti may have given Draghi some of the credit - but he has also given fuel to those Germans who fear the ECB's independence is a thing of the past.

Monday, April 14, 2014

The EU stands united in the face of Russia - or does it?

So, about Ukraine...
Arriving in Luxembourg this morning to discuss events in Ukraine with his European counterparts, British Foreign Secretary William Hague called for a "clear and united" EU response to Russia's 'escalation' of the crisis.

Hague added:
There is very little doubt -- there can't really be any real doubt -- that this [the unrest in Eastern Ukraine] is something that has been planned and brought about by Russia. The forces involved are well armed; well trained; well equipped; well coordinated and behaving in exactly the same way as what turned out to be Rusian forces behaved in Crimea, before the full Russian military takeover of Crimea.
He added:
I don't think denials of Russian involvement have a shred of credibility.
Meanwhile, Jean Asselborn, the Foreign Minister of Luxembourg, arriving at the same meeting did not seem to get the memo. He said the following:

I cannot actually imagine -- just how the EU could not identify with the men dressed in black in the Maidan -- I cannot imagine that the Russian side identifies with the men in black, with guns and weapons, that are occupying administrative buildings and government buildings in Eastern Ukraine.
He added:
I am still convinced after I heard President Putin, and the Russian Foreign Minister, that the Russians do not want to destabilise East Ukraine and do not want to occupy Eastern Ukraine.
Meanwhile Frans Timmermans, the Dutch Foreign Minister, opted for a more cryptic message, mixing his ducks with horses. Asked if he thought forces in Eastern Ukraine were acting under Russian directions, he replied:
If it looks like a horse, and it acts like a horse, then it is probably a horse -- not a zebra.
As clear as mud.

Why is the UK so bad at counting people who come and go?

The ONS has now admitted that its figures for net migration into the UK were underestimated for the best part of a decade. For the period 2001-2012 it has said that 346,000 more people came to the UK than under its previous count. That the migration figures are liable to revision should be no surprise as the underlying original data - the International Passenger Survey (IPS) - is (as the name suggests) only a survey. The UK Government doesn't properly count who comes and leaves. However, the underestimation is still startling. 

Of the newly found 346,000 (the green line charted below) it is assumed that most of it can be accounted for by EU migration.


Source ONS

As we can see from the purple line net EU migration picked up after 2003 peaking in 2007 at over 100,000 per year. This coincides with the period of the majority of the ONS under-counting. The ONS believes its under-counting was due to a failure to recognise the large numbers of EU migrants coming through regional airports. Under the original IPS figures for the 1996-2011 period, a net figure of 3.9 million came into the UK of which 800,000 were from the EU. So who are the newly discovered 346,000 and how many EU migrants did actually come to the UK?

The answer is that we do not know. The 2011 census, which is a more accurate dataset, suggested that there were 2.7 million EU migrants in the UK of which 1.1 million had come from the 'new' post 2004 accession states. But this may itself be an underestimate and will include a large number of longer term migrants. It is likely that the ONS is right to suspect that their figures for EU migrants were underestimated but unless the UK starts counting people in and out we will never accurately know.

This is one of the biggest problems with the EU migration debate: the absence of reliable data and information erodes public trust in free movement. Yes, EU membership involves some loss of control over the border. But the UK is still out of the Schengen 'passport free' zone and other countries - via more effective identification (a complicated discussion in itself), taxation and border systems - are far better than the UK at counting.

Friday, April 11, 2014

What’s wrong with Finland? Part 2

Since our last post on this issue things seem to have only got worse for Finland.

The European Commission’s latest economic forecast (see table below, click to enlarge) made pretty dire reading with Finland expected to be one of the worst performers in terms of economic growth over the next two years.


Furthermore, it seems that the credit rating agency S&P has finally caught up with our analysis of Finland, putting its AAA rating on negative outlook, suggesting that it may lose it in the next couple of years. Similar to our concerns about the rebalancing of the Finnish economy, the demographic problems and a stubborn lack of competitiveness, S&P noted:
“Finland’s persistent subpar growth rate reflects deep structural demographic and economic imbalances that hamper the government’s efforts to achieve fiscal consolidation. We consider that there are downside risks to growth and policy implementation.”

“We believe that the economy remains vulnerable to any slowdown of economic activity in the euro area or among other major trading partners, such as Russia.”
As the second part of the quote suggests, the situation in Ukraine and the potential sanctions on Russia are also likely to worsen the outlook for Finland.


The graphs above (data from Bank of Finland) highlight that Russia accounts for a decent chunk of Finnish trade and given the dwindling sources of growth any hit to this could certainly hamper the rebalancing of the economy and the reform/recovery process.

Furthermore, as we have flagged up before, Finland is one of the many countries heavily reliant on Russia for gas and energy more generally. With Putin’s threat to cut off gas to Ukraine the situation has potentially escalated another step, at least in economic terms, Finland is one (of the many countries, including Russia) which is on the front line.

Once again, all this is not to say that Finland is an economic basket case, far from it, but that even the healthy economies in Europe are undergoing some serious overhauls and reforms, further complicating the crisis response and, now, dealing with issues such as the Ukraine-Russia crisis.

Thursday, April 10, 2014

Greece exits the wilderness and returns to the markets

It has been labelled by some as the “amazing comeback”. Greece has this morning sold €3 billion of five-year bonds at an interest rate of 4.95% - and the demand exceeded €20 billion.

To be fair, the turnaround in investor sentiment with regards to Greek debt is pretty astonishing and the demand for the first Greek bond issue has outstripped even the most optimistic forecasts. As the newswires pointed out this morning, it increased quite significantly overnight:

But this outcome has left a few people scratching their heads and wondering what this means for Greece and the eurozone – both of which continue to struggle when judged on a broader set of data indicators. Below, we try to address some of these questions in a reader-friendly Q&A.

Why has demand been so strong?

There are a couple of reasons for this, and they have little to do with Greece.
  • The bond auction remains small, and the yield fairly decent relative to other peripheral economies and 'junk' or high yield bonds of similar length. And there will always be investors looking for a better return. After all, even in the immediate aftermath of the Greek debt restructuring there were plenty of investors willing to take a punt on the newly formed bonds in the secondary market – and many of them ended up with good returns.
  • This links to a broader problem in Europe, and even in developed economies – the shortage of safe assets and the lack of yield. Given the rock-bottom interest rates and dwindling inflation, the level of return available on many financial instruments is not what it used to be, and investors are keen to find new avenues to boost their gains.
But isn’t there a huge amount of risk involved?

Actually, given the structure of the deal and the environment involved, maybe not as much as one would expect (click on the graph to enlarge).

  • Firstly, the bonds will be issued under English law. This will stop them being restructured in a similar fashion to the previous Greek bonds, meaning that the investors have significantly stronger legal protection.
  • Secondly, the maturity of the debt is quite short, especially relative to the very long term (20+ years) maturity on the loans from the eurozone. This ensures that payment of these bonds falls well before Greece needs to start paying off its official loans – as the graph above highlights.
  • Thirdly, the ECB’s promise to purchase government bonds if the crisis escalates again still stands. Furthermore, this has been combined with greater support from the eurozone for Greece and a new aversion to write downs of sovereign debt. 
  • All of this means the likelihood of losses on Greek private sector debt has been significantly reduced. It has not been eliminated, but if any write-down were to be forthcoming it would most likely be losses on official sector loans, not least because they now make up 66% of Greek debt.
This has almost come out of nowhere in the past week or two: why such a rush?
  • The first, obvious reason is Greece’s need for further funding. The issue of a funding gap this year and over the coming years (estimated to be around €20bn up to 2016) has been well covered. This bond issue, combined with some new fiscal measures and probably the leftover capital in the Greek bank bailout fund, will help fill most of that fiscal gap over the next couple of years. It also potentially paves the way for further debt issues.
  • However, there are deeper political reasons. As shown by yesterday’s anti-austerity strikes, this morning's bombing outside the Bank of Greece and the dwindling majority of the government in parliament (which now stands at only two seats), there still is a significant amount of political uncertainty around. The government seems to harbour hopes that this return to the markets will galvanise its support, and act as a symbol of the turnaround it has helped to create.
  • Furthermore, with the European elections around the corner and the opposition SYRIZA party looking set to do well, the government seems to believe that this issue could somewhat also boost their support at the polls.
But how much of a turnaround does this really signify for Greece?

While it’s certainly a positive, the macro level data for Greece remains worrying. As the charts below show (courtesy of Natixis), unemployment remains very high. In particular, youth and long-term unemployment are both stubbornly high, and threaten to become a drag on the economy in the longer term. While business activity has stopped its decline, the hope of a swift recovery is yet to be based on clear evidence. There is a long way to go in the structural reform programme, as highlighted by the 329 reforms recommended by the OECD.


More broadly, Greece’s long term strategy for competing and growing in the eurozone remains unclear, and it has zero room to absorb further economic shocks. Citi - forever bearish on Greece - took it upon themselves to be the buzzkill amongst all this optimisim with the chart below (via FT Alphaville). Ultimately, it remains a small symbolic step, especially given the size of the bond issue.

 Will Greece get to spend this money as it wishes?

That seems hopeful at best. While Greece may have a little more flexibility compared to when the funding comes from official loans, of which almost every penny is clearly assigned, there will be little wiggle room. As even those countries outside bailout programmes have found, the oversight at the eurozone level is now quite significant. Greece’s budget still has to be agreed in tandem with the EU/IMF/ECB Troika, and little flexibility is likely to be allowed, especially since there is already an outstanding funding gap which needs to be filled.

Wednesday, April 09, 2014

Anglo-German partnership on EU reform could prove crucial at the negotiating table

Die Welt's Economic Editor Tobias Kaiser has an opinion piece in today's paper entitled entitled “Stay with us, Brits”, in which he argues that:
“Berlin needs London as a partner in the fight for fiscal reason [in the EU].” 
Kaiser highlights that:
“Berlin and London have to put their ideas of Europe against the French coined version of European etatism... The openness of the European economy has to be guaranteed and the protectionist regulations and national rules – which still prevent the development of a genuinely free exchange of goods, people, and ideas within Europe – have to be dismantled.”
This is an argument we have been making for a while. In 2012, following the election of Francois Hollande as French President, Open Europe Director Mats Persson argued that:
"Hollande simply rubs the Germans up the wrong way. His spending rhetoric is an outright challenge to German Chancellor Angela Merkel’s vision of a euro firmly grounded in Prussian budget discipline."
"Therefore, though it won’t be easy, the scope for a new bargain between London and Berlin – based on Britain needing new terms of EU engagement if it is to remain inside, and Germany needing the UK’s quiet support for a more economically sustainable euro – is possibly greater than ever."
While Hollande's push against austerity has waned, the process of Anglo-German cooperation has gained pace - exemplified by the recent joint op-ed in the FT where George Osborne and Wolfgang Schäuble agreed on the need for safeguards for the single market in the face of tighter political and economic integration in the eurozone.

Kaiser's call for greater economic openness within the EU also echoes the argument in favour of greater services liberalisation by Die Zeit's London correspondent John F. Jungclausen, who cited Open Europe's report which found that removing barriers to cross-border services trade could alone produce a permanent increase to EU-wide GDP of up to 2.3% or €294bn.

It's good to see the process beginning to bear fruit and gain wider traction in the German media, particularly on the specific areas where reform is necessary. As we pointed out ahead of Chancellor Merkel's recent visit to the UK, there is scope for a wide ranging 'Anglo-German bargain' in areas such as EU migrants' access to benefits, greater powers for national parliaments, and the devolution of some EU back to the national or local level. According to a recent Open Europe/YouGov poll, an EU reform agenda built on these pillars would enjoy significant public support in both countries.

With all this in mind, now would seem the perfect time for the UK government to begin road-testing specific reforms in Germany and other countries. 

Tuesday, April 08, 2014

ECJ sets important legal precedent by striking down Data Retention Directive

The European Court of Justice (ECJ) has this morning struck down the EU's Data Retention Directive by declaring it "invalid". The ECJ had been asked by the Irish High Court and the Austrian Constitutional Court to rule on whether the Directive complied with the EU's Charter of Fundamental Rights.

In one sentence, the Data Retention Directive requests telecommunication services providers and operators to store certain categories of information (date and length of phone calls, senders and recipients of e-mails, etc.), but not the content of conversations, for a minimum of six months to a maximum of two years. It was introduced in 2006 to help national authorities fight serious crime and terrorism.

Interestingly, the UK has 'gold-plated' the Directive by fixing the data retention period to twelve months. But other EU member states were less zealous. Last year, Sweden was issued with a €3 million fine from the ECJ itself for failing to transpose the Directive into national law in time. Germany has been taken to court by the European Commission for the same reason. 

According to today's ECJ ruling,
By requiring the retention of those data and by allowing the competent national authorities to access those data, the Directive interferes in a particularly serious manner with the fundamental rights to respect for private life and to the protection of personal data.
The statement goes on:
The retention of data required by the directive is not such as to adversely affect the essence of the fundamental rights to respect for private life and to the protection of personal data [...] However, the Court is of the opinion that, by adopting the Data Retention Directive, the EU legislature has exceeded the limits imposed by compliance with the principle of proportionality. 
One of the reasons cited by the ECJ is:
The Directive covers, in a generalised manner, all individuals, all means of electronic communication and all traffic data without any differentiation, limitation or exception being made in the light of the objective of fighting against serious crime.
Therefore, the real problem for the ECJ seems to be the violation of the proportionality principle. Or, put differently: the rationale behind the Directive is correct, but its scope is disproportionate. Now, we would argue, this is a problem affecting many other pieces of EU legislation (think, for instance, EU employment and health and safety rules) - which is what could make today's ruling an important precedent.

Hungarian Commissioner says anti-immigration sentiment in Europe is a "non-issue" - days after a neo-fascist party gets 21% of the vote in Hungary

A bigger threat to the EU
than the UK's 'right to reside test'?
The Barroso Commission's term is rapidly coming to an end and Viviane Reding and Laszlo Andor are neck and neck in a pulsating contest for who will claim the wooden spoon - the award for worst Commissioner. Reding held the lead for a long time but Andor may have just caught up after his comments about immigration at an event yesterday on engaging the youth in EU politics.

According to EurActiv, when asked by an audience member about the rise of anti-immigration in EU member states, specifically towards Bulgarian and Romanian nationals, Andor replied that this was a “non-issue” raised mainly in the UK and Denmark, who were not founding members of the EU. He went on to say that:
“Discussions there are really annoying because they are discussing on non-issues like benefits tourism which is largely a myth.
Leaving aside the extent of so-called benefits tourism - which we can debate - is a Commissioner from Hungary really saying that anti-immigration sentiment isn't a problem? A bit rich given that an outright fascist party - Jobbik - won almost 21% of the vote in last weekend's Hungarian parliamentary elections, a higher vote share for a similar party than in other EU country, and an increase from around 16% in 2010. Remember, this is a party that even Marine Le Pen from Front National has refused to cooperate with as she considers them to be too nasty.

There are plenty of unpleasant parties around Europe but aside from Greece's Golden Dawn, Jobbik really are in a league of their own. Despite running a more restrained and professional campaign, the party is at its core fundamentally anti-Semitic and anti-Roma, espousing a Hungarian nationalism that sees the inter-war dictatorship under Miklós Horthy when the country was aligned with Hitler and Mussolini as a source of pride. The party also has strong links with fascist paramilitary groups that have been involved with violent street clashes with Roma.

In 2012, the party's deputy parliamentary leader Márton Gyöngyösi infamously argued that
“I think now is the time to assess…how many people of Jewish origin there are here, and especially in the Hungarian parliament and the Hungarian government, who represent a certain national security risk for Hungary.”
The party's 2010 election manifesto meanwhile claimed that:
"The coexistence and cohesion of Magyar and Gypsy is one of the severest problems facing Hungarian society... a segment of the Gypsy community strive for neither integration, nor employment, nor education; and wish only that society maintain them through the unconditional provision of state benefits... certain specific criminological phenomena are predominantly and overwhelmingly associated with this minority, and that as a result such phenomena require the application of fitting and appropriate remedies."
Given their general outlook we imagine Jobbik wouldn't be too keen on large scale EU migrations into Hungary (other than of ethnic Hungarians from bordering countries which they have actively called for).

It is frankly ludicrous for Andor to single out the UK and other member states struggling to address the political and economic ramifications of unanticipated large scale immigration for criticism when a full blown fascist revival appears to be underway in his own backyard.

Has the ECB actually moved closer to QE?

There has been a cacophony of comments from ECB members and ECB watchers over the past few days. However, the overriding view since ECB President Mario Draghi’s press conference last week is that the ECB has now moved a step closer to unconventional action such as Quantitative Easing (QE).

This is mostly down to two factors. First the following statement from Draghi’s presser:
“The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation…this statement says that all instruments that fall within the mandate, including QE [Quantitative Easing], are intended to be part of this statement. During the discussion we had today, there was indeed a discussion of QE. It was not neglected in the course of what was actually a very rich and ample discussion.”
Second, the FAZ report over the weekend that the ECB has been modelling the impact of a €1 trillion per year (€80bn per month) QE programme. While it suggested that such a programme would only raise inflation by between 0.2% and 0.8% (not a significant amount given the cost), the simple fact it is being modelled has been enough to give markets hope.

We believe QE or similar measures have become a bit more likely, but mostly because the market now seems to expect action and if the ECB is to maintain its credibility it will need to do more than simply talk.

That said, while there may be ‘unanimous commitment’ to using such measures when needed, it’s still not clear what the criteria are for such action and it is even less clear that all members of the GC agree on when such action would be needed. Draghi was pushed on this on the first question during the Q&A session, however, he never provided a direct answer.

Furthermore, much of the coverage has suggested that QE is in fact closer because the ideological opposition to such a measure at the Governing Council (GC) level has crumbled - although we're not sure that such a clear unified opposition ever really existed.

With this in mind then, it’s worth once again pushing the point that, in fact many of the issues with further easing are practical, political and/or legal rather than ideological at the ECB. We have previously analysed each measure in detail, below is a summary and links to all those posts:
Quantitative Easing (purchasing government debt)
We have detailed the issues extensively here (but also here and here). Draghi has hinted of these practical issues before, highlighting that they need time to design the programme and gather more information. Beyond political opposition in Germany and the legal limits to ECB financing governments, there is a clear problem in that the purchases would need to split according to the ECB capital key, meaning little would flow to the periphery where the deflationary forces are strongest. Add onto this the fact that QE in other countries has not been proven to boost the real economy or even bank lending as well as that it may exacerbate the squeeze on safe assets and it becomes clear that practically and technically this would be a very difficult step for the ECB to take and is not well suited to tackling the problem of low inflation.

Quantitative Easing (purchasing private assets)
See our detailed analysis here. The thrust would be to target purchases of assets which would help promote bank lending – the main one discussed is Asset Backed Securities (ABS), particularly ones made up of loans to the real economy. However, these markets in Europe are small and underdeveloped meaning the level of assets available and suitable for purchase would be minimal. The ECB has suggested it wants this market to grow but it’s tough to force such a move, especially in the short term.

Negative deposit rate
We analysed this option here. Since then the ECB seems to have made progress on the technical implementation of such a move. That said, the impact remains very uncertain. It could further reduce excess liquidity, force money market funds to shutter and force banks to pass costs onto consumers. On the plus side it could help weaken the euro.

A targeted LTRO (similar the Bank of England’s Funding for Lending Scheme)
Discussed, with other measures, here. A fairly simply option to take, however, given that there is already full allotment (unlimited liquidity at low rates) and banks have already repaid a lot of the previous LTROs there is no guarantee there would be any significant take up or that it would filter through to the full economy.

Ending sterilisation of the Securities Markets Programme (SMP)

A smaller measure, discussed in this post. While it would stop liquidity being drawn out of the system on a weekly basis, it’s not clear that this liquidity would flow to the real economy.

Further standard measures such as rate cuts and changing collateral rules
We rounded up such options a while ago here. Given that rates are already so low and that the transmission mechanism remains broken, the impact of such moves is likely to be limited to signalling intent rather than hoping for any significant return.
Overall, nearly all of these measures face quite serious practical, technical and/or legal obstacles.

Furthermore, it is unlikely that there is any consensus at the ECB GC level of when each measure is needed or what the triggers for such action are. The obstacles are also probably viewed to be different sizes by each national central bank. All that is to say, while it may have moved slightly closer, don't yet count on QE being much more than a last resort.

Monday, April 07, 2014

Hört auf die Briten (und Open Europe)!

One of the constant frustrations at Open Europe is that the EU debate  is too often artificially framed between two camps: "in at any cost" and "out at any price."

That media likes a good shouting match is nothing new, but the biggest victim from framing the debate in such a way is substance. UK media and politics are inherently adversarial, following the logic of two politicians debating over the despatch box. It has its charm and benefits, but when translated to European politics it doesn't quite work, primarily because there are many positions on Europe, with the majority position still being staying in a heavily reformed Europe.

As we noted before, for their part, European media are often far too keen to simply copy the artificial two-camp narrative, leading to a conversation of the deaf.

This may now be changing slowly.  Earlier this year, Open Europe and the Fresh Start group of MPs brought together 400 of Europe's leading reformers at our EU Reform Conference to discuss the next steps. After all, saying reform is necessary without the policy to back it up is all talk and no trousers.

Which is why it's encouraging to see John F. Jungclaussen, the London correspondent for German weekly, Die Zeit, noting that:
There are not only shrill tones in the cacophony of the British Europe debate. In the lower frequencies, there are contributions which Europe should urgently listen to. They come from a group of parliamentarians from both Houses [of Parliament] and different parties that joined efforts because they want to engage constructively. Together with the think tank Open Europe, they develop concrete reform proposals which are just as pragmatic as they are meaningful.
Jungclaussen cites Open Europe’s report showing that further liberalising the EU’s services markets would produce a permanent increase to EU-wide GDP of up to 2.3% or €294bn, as a "particularly good example" of one such proposal.

Jungclaussen's piece shows that this more nuanced understanding of the debate carries traction, not only in the UK, but across Europe.

MEPs miss an opportunity to do their job

Last week, the European Parliament had the opportunity of doing what most other elected bodies in the free world consider a core task: making sure taxpayers' money is spent in a transparent, accountable and regular way.

MEPs were asked to provide discharge to the 2012 EU budget, in which according to the European Court of Auditors, the rate of error rate had increased to 4.8% compared with 3.9% in 2011 and affected every area of EU spending. The COA's own benchmark for acceptable levels of error is 2%. Of the total €138.6bn spent by the EU in 2012, €6.7bn was affected by errors.

However, MEPs voted to approve the discharge report, drafted by German CDU MEP Markus Pieper, with 488 votes in favour, 121 against and 10 abstentions - effectively signing off the budget.

The report admits that: 
"For the 19th time in succession, the Court of Auditors was unable to grant a positive statement of assurance regarding the legality and regularity of the payments underlying the accounts". 
(Yes, we know the Court of Auditors signed off the Commission's own accounts, so no need for any Commission officials reading this to make that well-worn point). The MEPs provided various justifications for nodding through the budget despite the errors, including:
"a distinction must be drawn between errors and fraud, and [the EP] considers that, in the vast majority of cases, errors stem from administrative mistakes, many of which are linked to the complexity of Union and national rules, which can be corrected".
They have a point. Errors and fraud are not the same thing - though the line can be awfully blurred. However, we doubt the average taxpayer would be entirely content with that explanation. The bottom line is that the cash should not have been paid out. As we've argued before, the high level of error is primarily due to the nature of the EU budget itself - it's size, complexity, confused objectives etc - and this will persist until it's fundamentally reformed.

What's interesting about the MEPs' behaviour is that they are a lot less forgiving when it comes to the spending by European Council/Council of Ministers - i.e. the member states.The EP decided to postpone the approval of the Council's accounts "because of its lack of cooperation".

EU Anti-Fraud Commissioner Algirdas Šemeta reacted to the EP's decision by saying that "The EU budget is the one of the most transparent and accounted for public budgets in the world", while arguing that "For the past 5 years, the overall error rate has been consistently below 5%. In other words, over 95% of all EU spending is in line with the rules."

The Netherlands, Sweden and the UK- three of the biggest net contributors to the EU budget collectively responsible for 20% of the funding - take a radically different approach. They again voted against discharge in the Council of Ministers, regretting that
"the overall error rate in recent years has increased to 4.8 %, being significantly above the acceptable threshold of 2 %."
Surprisingly, Labour and Lib Dem MEP, but also Dutch VVD MEP Hans Van Baalen voted against the position taken by their member states in the Council.

Not inspiring confidence.

Friday, April 04, 2014

A new eurozone economic policy "made in France"?

The appointment of Arnaud Montebourg - an outspoken critic of German and EU-mandated austerity and pro-competitivenesses policies - as the new French Economy Minister has not gone down well in Germany.

In a feature piece headlined, "He insults Germany and is promoted", Die Welt claims that "his appointment is controversial – he is known for his failures". The paper goes on to argue:
"He sees himself as the legitimate successor of Jean-Baptiste Colbert, the finance minister of the legendary French Sun King Louis XIV... In his previous post of Minister for Re-industrialisation, he above all others terrified foreign investors with class warfare slogans, and now has acquired even more powers in the government of President Francois Hollande".
The paper also claims that Montebourg secured his new position by threatening Hollande that, unless given the Economic Ministry, he would resign from the government - a move which would have been hugely destabilising given his position as a figurehead on the left of the Socialist Party. The paper has a round-up of some of Montebourg's more memorable quotes:

On globalisation, free trade and protectionism:
“The EU is the only one that does not protect itself against unfair competition. We have become the idiots of the global village...For 30 years, consumers have made the law in Europe and the result has been a disaster. Me, I defend the producers."
On the European Commission's application of competition and state aid laws:
"[These people] exercise law in the manner of the taliban, [they are] fundamentalists who apply the [legislative] texts blindly to the detriment of European interests".
On Angela Merkel and Germany's actions during the eurozone crisis (back when the French Socialist Party was still in opposition):
"The issue of German nationalism is resurfacing through the policy à la Bismarck [of Angela Merkel]."
And:
"Mrs Merkel is killing the euro, and it would be time to show the failure of the German model, rather than singing its praises."
Even allowing for the fact that Montebourg is playing to the gallery a fair bit, and that the new government's economic policy will remain more pragmatic overall, it is clear why his appointment will raise concerns in Berlin and beyond about France's already fragile economic situation. In the meantime, we're looking forward to new additions to his already impressive repertoire of memorable quotes.

Thursday, April 03, 2014

Rutte shows Clegg how its done on EU reform

It's good to hear a Dutch speaking liberal party leader forcefully expressing the case for EU reform. Sadly, as we noted earlier, it certainly wasn't Nick Clegg.  

In fact it was the Dutch Prime Minister Mark Rutte, who once again today reaffirmed his credentials as a key proponent of EU reform with a speech to the FDP in Berlin.

As we have also noted before, the Netherlands (both the country and its government) is becoming a bit of a breeding and testing ground for ideas on EU reform. In his speech Rutte said:
"A lot of people in Europe are angry at the EU. Angry at those who sat at the controls in Brussels during recent years. Our common project of peace becomes, if we don't recognise this on time, a project of discontent."

"We won't restore the future and the belief in a functioning Europe with European elections or with European ‘spitzenkandidaten’. The ball is now in the court of national parliaments. Their legitimacy is greater than that of the European Parliament. So they should deal at an earlier stage and also more intensely with decision making in and from Brussels"

"European where necessary, national where possible. Tasks such as healthcare, education and taxation really are things which are for the Netherlands to decide, I think."

"That's why the European Commission should be given four core tasks: to strengthen the single market, to stimulate international trade, to more strictly apply agreements made and to only regulate in Brussels what really must be dealt with at the European level."

"All too often agreements regarding the budget or the democratic rule of law haven't been respected...Europe is more and more being associated with an anonymous, formal and impersonal layer of government where national sovereignty is being replaced by normative rules ‘from Brussels’".
Lots of overlap (at least in tone) with what Chancellor George Osborne and German Finance Minister Wolfgang Schäuble laid out in the FT last week.

There was however one of Rutte's comments lacked credibility:
"Unemployment is the biggest problem of our time. I see it in my circle of friends.  You probably do too..."
Admittedly we’re not familiar with the Dutch Prime Minister's circle of friends but we find it hard to believe many of them are struggling for work...Nevertheless, Clegg could learn a thing or two.

Second Clegg/Farage debate highlights that the EU status quo is indefensible

The majority of the UK public was not represented at last night's debate
The second EU debate between Nick Clegg and Nigel Farage was an altogether more scrappy and bad-tempered affair with more personal attacks and fewer statbombs being thrown about. 

The polls hand Farage a clear victory - 68%/27% in the Sun/YouGov poll and 69%/31% in the Guardian/ICM poll - a more comprehensive margin than last week.

So clearly a bad evening for Nick Clegg, although the calculations of the Lib Dem strategists seems to be that the combination of the additional exposure and full-throated defence of the EU will allow the party to pick up some extra votes in May's European elections.

However, it remains to be seen what the longer term repercussions of the debates will be. It was striking that, over the course of two hours, Clegg had virtually nothing to say about the EU's flaws and failings and what reforms he'd like to see. Indeed, in response to a question from the audience about how the EU would look in 10 years' time, he said that it would look "quite similar to what it is now". Given what is happening in the eurozone, which will indirectly also affect the UK's position in the EU (something Clegg has himself mentioned on previous occasions), this is simply not credible. It also completely dismisses the public appetite for EU reform.

What is interesting is that, despite Farage's overwhelming victory in the debate, the Sun/YouGov before/after poll showed that public opinion on the In/Out question remained pretty finely balanced. Before the debate there was a small majority in favour of staying in the EU - 48% compared with 42% in favour of leaving - after the debate this was reversed slightly with 45% in favour of staying in and 48% in favour of leaving.

Polling has consistently shown that when the public are offered options that go beyond the binary in/out question, the majority of the public fall between the Clegg and Farage positions, with a far larger constituency in favour of staying in a reformed/slimmed down EU.

People hold different views about how they would like to see the European Union develop. Which of these statements comes closest to your view? (click to enlarge)


Source: YouGov poll for Open Europe, February 2014

Clegg's decision to talk only to the limited number of 'in no matter what' voters might be a clever Lib Dem 'core vote' strategy but it will turn off many swing voters in any future In campaign. All the more reason for politicians to represent the view held by the majority of voters and to test the limits of EU reform before forcing them to choose between In or Out.

Wednesday, April 02, 2014

Meet the new French cabinet

The new French cabinet has just been unveiled (the picture comes from Le Figaro's website). A few ministers have been re-shuffled around, but actually there are only two new entries compared to the previous team: Ségolène Royal as Environment and Energy Minister, and François Rebsamen as Employment Minister.

The most interesting change took place in the Economy and Finance Ministry. Pierre Moscovici has not held onto this post (which means we may see him in Brussels soon as France's next European Commissioner), and his portfolio has been split into two: Michel Sapin is the new Finance and Public Accounts Minister, while Arnaud Montebourg is the new Economy and Industry Minister.

From the names of the two ministries, we assume Sapin will be the one leading in negotiations over deficit targets with the European Commission in future. Similar to his predecessor Moscovici, Monsieur Sapin seems to think France needs to take the medicine and continue with deficit reduction. He said in a radio interview last year,
There's a state, but it's totally bankrupt. This is the reason why we had to put in place deficit reduction programmes, and no siren must divert us from this objective.
It will be interesting to see how he will interact with Arnaud Montebourg, who recently described the people in charge of competition and state aid policy at the European Commission as "talibans of the law" and "fundamentalists who apply the [legislative] texts blindly to the detriment of European interests." Montebourg is also one of the most vocal supporters of a devaluation of the euro to help French exports.

We don't know the rationale behind the decision to split the Economy and Finance Minister yet. One idea could be achieving some sort of good cop (Sapin) / bad cop (Montebourg) dynamic when negotiating with Brussels. That said, after adding the views of the new Prime Minister Manuel Valls and President François Hollande into the mix, it could become tricky to figure out who is in control and which direction the French government actually wants to head on economic policy.

With regards to other ministers, Laurent Fabius, Jean-Yves Le Drian and Christiane Taubira have all kept their jobs as Foreign, Defence and Justice Ministers respectively. Budget Minister Bernard Cazeneuve is the new Interior Minister. The budget portfolio has been moved to the Public Accounts part of Sapin's post.

The next step for Manuel Valls and his cabinet is a vote of confidence in the lower house of the French Parliament, the National Assembly, which should take place on Tuesday.

Follow us on Twitter @OpenEurope for more updates.

Tuesday, April 01, 2014

Article 50: a trump card or joker?

We have today published the full report assessing the implications of our EU ‘wargame’ which simulated the negotiating dynamic under two scenarios: first, a UK-EU renegotiation from within and, second, under ‘Brexit’. As we’ve stressed before, the fact is that unless the UK wants to simply fall back on WTO trading rules and unilateral free trade, renegotiation and withdrawal will both require a negotiation with other EU states and the EU institutions.

The only formal way to the leave the EU is via the so-called “Article 50” exit clause of the EU Treaties, which stipulates a two-year timeframe within which to potentially conclude a continuity deal. In our simulation, after their initial hostility, all other member states recognised the need to strike a new trade deal with the UK with economic incentives trumping political rhetoric. Britain is unlikely to face the ‘worst case scenario’ of having to fall back on World Trade Organisation rules.

However, as our simulation showed, the initial new deal would likely fail to replicate the full access to the EU single market currently offered by full membership:
  • A Norway-style deal – effectively single market membership but with no formal political influence – is likely to be rejected by EU partners and is in any case a bad deal for the UK as it amounts to “regulation without representation”.
  • While a reciprocal trade agreement for goods, where the UK has a sizeable trade deficit of £56.2 billion (2012) with the EU, would be relatively easy to strike, access to the EU’s services market – where the UK has a trade surplus of £11.8 billion (2012) – will be far more difficult.
  • Access for UK financial services would be a particular concern since a third of the UK’s trade surplus in financial and insurance services in 2012 came from trade with other EU member states – of the total £46.3 billion UK financial and insurance services trade surplus, £15.2 billion was with the EU and £14.5 billion with the US. Perhaps over time, further bilateral deals on market access could rectify this but the political resistance from France and some others could be high.
While Article 50 of the EU treaties has the benefit of definitely triggering negotiations – which isn’t guaranteed under Cameron’s renegotiation plan – it comes with several drawbacks:
  • Article 50 is a one way street – once it is triggered, and even if the deal available at the end of the process proves unsatisfactory to the UK, there is no way back into the EU except with the unanimous consent of all other member states.
  • It is likely to put the UK on the back foot in any negotiation. The remaining EU member states would be in charge of the timetable and the European Parliament would have a veto over any new agreement. Therefore, while having to fall back on WTO rules entirely is unlikely, it would remain a possibility.
  • As the UK will not take part in the final qualified majority vote on whether to accept the new deal, protectionist-minded member states could have greater influence on the degree of market access the UK could secure post-exit – particularly on services (see graph below).
Compared to renegotiation from within, Article 50 therefore cedes more control than what is often thought.

Ultimately, though, while a high transaction cost is undeniable, the big question is if there is a point – and if so when – at which the high one-off cost of Brexit would be outweighed by the long-term benefits of more economic and political independence over areas such as financial regulation, agricultural policy or criminal justice, particularly if the eurozone comes to dominate the wider EU and the necessary reform proves unattainable.

Le (premier) flic, c'est chic: Hollande picks Manuel Valls as new Prime Minister

As expected, François Hollande yesterday named Interior Minister Manuel Valls, France's 'top cop' (premier flic, hence the title of this blog), as new Prime Minister. The composition of the new cabinet is expected to be announced tomorrow.

For the moment, we know that the two ministers from the Green Party, Cécile Duflot and Pascal Canfin, are not interested in taking part in the new government. They explained in a communiqué that "the ideas supported by the new Prime Minister [Valls] for several years...do not constitute an appropriate response to the problems of the French". We also know that Finance Minister Pierre Moscovici is not in Athens for today's Eurogroup meeting - probably a sign that he is not going to be confirmed either.

It is fair to describe Manuel Valls as an 'atypical' French Socialist - and not just because of his firmness in dealing with certain crime and migration-related issues. The Barcelona-born new Prime Minister has upset quite a few fellow party members in the past. For example, Valls has come out in favour of scrapping France's 35-hour working week and raising retirement age to 65. 

He voted 'No' in an internal Socialist Party referendum on the European Constitution in December 2004 - but then aligned himself with the rest of the party and campaigned for a 'Yes' vote. He even suggested that the name 'Socialist Party' was "dated" and had to be changed. Perhaps not surprisingly, Valls only won 5.6% of votes when Socialist Party members picked their Presidential candidate in October 2011.

In other words, the choice of Manuel Valls as new Prime Minister could be seen as a sign of Hollande's renewed willingness to go ahead with at least some of the supply-side reforms recommended by the European Commission to put the French economy back on track. However, the road ahead for the new French cabinet looks far from easy, for at least two reasons:
  • The reaction of the aile gauche (left wing) of the Socialist Party to the appointment of Manuel Valls has been cautious, to say the least. Rebellions in parliament on future economic reforms cannot be ruled out.
  • The Socialist Party's majority in the Assemblée Nationale (the lower house of the French parliament) has been shrinking following a number of by-elections, and will be down to only one seat - 290 of a total 577 - once outgoing minister Cécile Duflot of the Green Party claims her seat back. This risks making it more complicated for the new government to pass meaningful economic reforms - although Valls could try and muster case-by-case alliances with some of the smaller centrist parties.   
The first test for Valls and his cabinet will be to push through the so-called 'responsibility pact' - a plan to cut taxes on businesses in return for more hiring announced by Hollande in his New Year's address, and the details of which are due to be unveiled later this month.

We will be monitoring the situation in France closely. For now, one last interesting fact for football geeks (of which there are a few in the Open Europe office): Catalan composer Manuel Valls i Gorina, a cousin of the new French Prime Minister's father, is the author of the official anthem of FC Barcelona. And no, this is not an April's Fool day hoax.

Monday, March 31, 2014

Expectations and pressure mount for ECB action

This could easily be a standard monthly headline. As before the past four or five ECB meetings, the questions of deflation and further easing are once again weighing on the ECB Governing Council and the markets.

Over the past month the market has come full circle from essentially ruling out any further ECB action to almost expecting some purchases of assets (both accompanied by the respective strengthening and then weakening of the euro exchange rate).

This was topped off today with the latest inflation data which showed that inflation in the eurozone has dropped to its lowest level for five years (annual rate of 0.5%).



A couple of points to note on this data:
  • While energy prices are still the largest driver of the contraction, unlike some previous months, core inflation (without energy, food prices or tobacco) has also fallen. This may encourage the view that the decreases are not simply due to short term shifts in commodity prices.
  • That said, the core inflation rates remain above where they were in November 2013 when the ECB previously cut rates.
  • Other national inflation data has been quite weak – Spain moved into outright deflation in March, while German inflation was running at only 1%.
  • As Gavyn Davies noted on twitter, the 0.5% rate falls outside of the ECB’s March projections for inflation this year and up to 2016. This raises questions about whether the inflation rate is still on the upward path forecast. Combine this will the volatility and tendency to strengthen of the euro and the ECB’s projections do not seem to be holding up too well.
The other aspect adding weight to expectations has been dovish comments by ECB members, notably by Bundesbank President Jens Weidmann. Many believe this has “opened the door” to significant action by the ECB. Open Europe’s Raoul Ruparel addressed this issue on his Forbes blog on Friday arguing:
“The real issue from a German perspective is not necessarily that the door was ever firmly closed (or open) but that we remain someway from the QE door and to get there would require carefully negotiating some politically and legally explosive obstacles.”
He concludes:
“In the end, I think we find ourselves in a fairly similar position to last month (albeit having gone through a cycle of over scepticism and now over optimism) – further action remains possible but not yet highly likely.”
This meeting will be another one to watch but so far the ECB seems strongly wedded to its new communication and forward guidance policy, which it believes can allow greater control over rates markets, it is not yet clear whether it is willing to abandon this approach or push it over the barrier into full on policy action.

Hollande expected to announce cabinet reshuffle after local election 'punishment'

If you want to get a sense of how badly the latest French local elections went for President François Hollande, have a look at today's front page of left-leaning French daily Libération:

The headline means 'The punishment', and it summarises the outcome of the local vote pretty well. According to data from the French Interior Ministry, the centre-right (that is, the opposition UMP and its allies) gained 139 towns with more than 10,000 inhabitants compared to the 2008 local elections. The centre-left (Hollande's Socialist Party and its allies) lost 160. The fact that the Socialist Party managed to retain Paris - where Anne Hidalgo was elected as the city's first female mayor - cannot compensate for what was an unequivocal defeat nationwide.

Marine Le Pen's anti-EU Front National took control of eleven towns - in addition to Hénin-Beaumont, where the party won an outright victory in the first round. Though not impressive in absolute terms (see this blog post from last week for some more background information), the score is nonetheless politically significant. It shows how French voters increasingly see Front National not just as a mere 'protest party', but as a credible alternative for power - albeit so far only at the local level and in a very limited number of towns.

Meanwhile, the immediate consequence of yesterday's local election fiasco is that Hollande is expected to announce a cabinet reshuffle any moment. The French President has just come out of a two-hour meeting with Prime Minister Jean-Marc Ayrault, whose departure looks very likely, judging by the headlines in the French press over the past few days.

Interior Minister Manuel Valls, who enjoys a pretty high approval rating compared to his fellow cabinet members (in part thanks to his tough stance on certain crime and migration issues), is broadly seen as the favourite to replace Ayrault as Prime Minister. Laurent Fabius, currently serving as Foreign Minister, is another name being mentioned by the French media. 

However, in light of the latest macroeconomic indicators, the impression remains that moving a few ministers around will not be enough to restore the French government's credibility vis-à-vis the electorate - unless the policies also change and France makes some real progress in pushing ahead with the reforms needed to restore its competitiveness within the eurozone.

Friday, March 28, 2014

UK and Germany present united front in favour of EU reform



In a major coup for David Cameron, Chancellor George Osborne has penned a joint op-ed in the FT with his German opposite number Wolfgang Schäuble. Both argue for the need for EU reform (including services liberalisation) and for safeguards for non-eurozone states in the face of further eurozone integration - all areas of potential consensus we flagged up in our recent 'Anglo-German bargain' briefing.

On the acceptance of the different needs of non-euro and euro members, and therefore the need for safeguards, they say:
“As the euro area continues to integrate, it is important that countries outside the euro area are not at a systematic disadvantage in the EU. So future EU reform and treaty change must include reform of the governance framework to put euro area integration on a sound legal basis, and guarantee fairness for those EU countries inside the single market but outside the single currency.”
Getting explicit German support for this view and providing a united front on this issue is an important step forward for the UK and for Cameron's EU reform agenda. While Germany has previously hinted at willingness to support the UK on this issue, this is certainly a step up. It also brings Cameron closer to ticking off one of the key targets he recently put forward in what was probably the most important article nobody spotted. Open Europe has long argued that safeguards against further eurozone integration are crucial and that they will play a key role in determining the new set up and balance of the EU.

That being said, the UK government should not be complacent about where it now stands in terms of its reform agenda. While this represents progress, there is some way to go. This provides an important opportunity and a good base for the UK to begin testing specific reform proposals on other EU governments and electorates. After all, while Germany is the largest and possibly the most important partner to get on board, the UK also needs to convince the rest of the EU. While teaming up with Germany should broadly help on this front there is one constraint - not everyone buys into Germany's vision of the new eurozone with significant central oversight and limited share of liabilities. However, as the banking union shows, Germany has so far been adept at influencing the construction of new eurozone structures in its own image.

Possibly a more surprising inclusion is the joint support for services liberalisation, of which they say:
“We must complete the EU’s single market, especially in services, open up to international markets and conclude reforms to the euro area.”
Again, we've been advocating this for some time - we estimate that it could be worth up to €294bn for the EU's economy. Traditionally, Germany has been one of the staunchest obstacles to such service liberalisation, due to its many protected professions. As such gaining its public support is another big coup for Cameron and a positive step for the EU economy.
One final interesting point is noted by the FT:
"Mr Schäuble told Bruges’s College of Europe on Thursday that he wanted negotiations on a revised treaty to start straight after the European Parliament elections in May."
This is equally as important as all of the above for Cameron given that some of the biggest doubts around his push for EU reform and referendum have been on the time-frame of the negotiations. There is clear hope that discussions around treaty changes will begin in earnest after the elections (although in an ideal world they would have been part of an open and transparent debate within the elections). 

Overall the approach isn't perfect - it still speaks of a two-speed Europe, suggesting all member states are heading in the same direction, which is not the case - but it is a big step and an important one for Cameron. It is now vital that he seizes this opportunity to push a wider EU reform agenda.

Thursday, March 27, 2014

Free movement: Germany pushes the limits of EU law [updated]

How much are the new immigrants costing us asks Bild
The German government's preliminary report on EU migration was presented yesterday by Interior Minister Thomas de Maizière and Labour Minister Andrea Nahles, and contains some very interesting measures.

The explosive combination of EU migration and access to benefits has been giving David Cameron a headache for a while now, although as we’ve noted in our press summary and on our blog, similar debates have also been kicking off in Germany, Denmark, the Netherlands and elsewhere. In particular in Germany it has been rumbling for some time, with some mention of it during the election and the new coalition agreement, however this intervention is likely to step up the debate a notch or two.

The proposals actually have quite a lot in common with Cameron's position, although not exactly and each side goes further on certain specific issues. The key question remains though whether they will be judged to be consistent with EU law. This remains unclear and whether or not a challenge from the ECJ is forthcoming will certainly set a precedent in this area. 

Key proposals

Potentially the most important proposal in the draft report is that:
  • Jobless EU migrants seeking work in Germany, who have no means of supporting themselves and have limited job opportunities, should be given a limited window to find a job before being required to leave.
Crucially, the report stresses that this can be achieved within the constraints of existing EU law as this would not apply to those EU jobseekers who have a 'reasonable' chance of being employed, those with sufficient financial means including affording their own health insurance, or even those who have a “mini-job” involving just a few hours of work per week. 

The report recommends that EU migrants who cannot fulfil these requirements would have a grace period before being expelled, and notes that the ECJ deems six months to be appropriate. However, whether such expulsions would work is not clear, since, in theory, EU migrants’ right to free movement would kick in immediately after they left Germany, allowing them to return right away again.

Other proposals in the paper include:
  • Temporary re-entry bans on migrants abusing EU free movement (by forging documents or being in a fake marriage, for example).
  • Linking child benefit payments to tax identification numbers.
  • €200m in financial assistance to help local authorities to deal with migration (€140m would come out of the European Social Fund). 
How does this compare to Cameron's position?

There are some similarities between the German position as set out yesterday and Cameron's position as set out in his FT piece last year, but also some important differences.

On the question of kicking EU migrants out, Berlin is proposing to do so in cases where migrants do not have a job after six months, have no realistic prospects of finding one and are not financially self sufficient, while Cameron wrote that:
“If people are not here to work – if they are begging or sleeping rough – they will be removed. They will then be barred from re-entry for 12 months, unless they can prove they have a proper reason to be here, such as a job.”
This means that Cameron and Merkel have adopted a similar position on removing people who are not working, but London is going further on the specific question of the re-entry ban which would apply to everyone in that position, whereas the German re-entry ban would be limited to more serious cases such as fraud. 

On the question of child benefit, the German and UK positions differ. In the UK, Cameron, Clegg and Miliband all want to be able to stop paying child benefit to parents whose children do not live in the UK. The German position is different – the government currently has no plans to restrict child benefit for children not resident in Germany, the linking of the payments to tax ID numbers is designed to crack down on potential fraud and duplicate payments. 

Next steps

The preliminary report will be finalised by end of June before it enters the legislative process. How will the EU respond? The big question mark is if - despite what the report says - these proposals are compatible with EU law or if either the six-month cut off, or the re-entry ban could face a legal challenge.

Interestingly the report also has a section on “possible further measures on the European level” which notes that:
“Also in other [EU] member states…the issue is debated, in parts very controversially. In this respect the question arises….if and in how far considerations for further steps on the European level or together with European regulations are necessary and reasonable. The Committee will deliver an opinion on this in its final report.”
Meanwhile, there are two separate cases referred from German social courts to the ECJ to watch out for. They deal predominantly with the questions in how far EU jobseekers and EU migrants which are “economically inactive” can be generally excluded from receiving unemployment benefits in Germany. We will closely monitor the developments and keep you updated.