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Monday, November 29, 2010

Prepare for departure

In a comment piece for Die Welt, Jörg Eigendorf has some well chosen words for Chancellor Angela Merkel.

With regards to the “What happens now?” question being thrown around the Euro countries, Eigendorf deems both the idea of an enlarged rescue package and common Euro-bonds as “madness”. He argues that Germany would then be responsible for other European countries in the eyes of the law, “thus undermining both the Maastricht Treaty and the German Federal Constitutional Court”.

Eigendorf notes that possible moves would also “collectivise responsibility for wrongdoings, and probably only postpone the bitter end and worsen the final fiscal fiasco.” He adds that
German politicians must be aware that the solvency of their own state is finite. At the latest, if Spain is rescued, the imbalances in Italy, and probably also France, will be calculated.
These, he argues, are burdens already borne by the German taxpayer, and
the more the federal government gets involved in the collective liability, the larger and more transparent the costs to the general public are. From a political point of view, it won’t be endured for long.
Finally, he comments:
The Merkel government can hope that the current crisis management works, that the markets calm down and countries see reason on fiscal policy. That is possible but it is not probable. Instead, there is the alternative of deeper political union, which doesn't look realistic, or an orderly unwinding of the euro zone to fewer, relatively economically solid countries. Even if a government leader should not speak loudly about it, that is exactly what Chancellor Merkel should now prepare for.
Strong stuff...

European solidarity has a limit, even if your name is Adenauer

Adenauer is a name synonymous with the European project, owing to Konrad Adenauer, the German Chancellor from 1949 to 1963, one of the founding fathers of the European integration.

However, in a sign of the changing attitudes in Germany to the euro in particular, his grandson, Patrick, is sponsoring a lawsuit against the €85bn loan for Ireland agreed yesterday by EU finance ministers. He is one of the 50 supporters of a legal challenge to be submitted this week by Professor Markus Kerber - the renowned academic and constitutional expert who will also be speaking at our event in Brussels on 9 December.

European solidarity clearly has a limit in Germany, even if your name is Adenauer.

Friday, November 26, 2010

Changes

On the popular German TV show with Maybrit Illner on ZDF, Hans-Olaf Henkel, the former head of leading German Industry Federation Bundesverbandes der Deutschen Industrie (BDI) said that although he used to be a fan of the euro, he has now drawn the conclusion that introducing the euro was "a big mistake".

Mr Henkel added that as a solution, the monetary union would need to be split up into a northern bloc and a southern bloc. The northern currency union would then stick to strong budgetary discipline while staying well clear of inflation. The southern part could then improve its competitiveness through currency devaluation.

Interestingly, he suggested that France should be a member of the 'southern euro'.

You can view the episode here (in German), and an interview with Mr. Henkel in English can be found here.

A 'mea culpa' which could serve as an example to follow for politicians around Europe, including certain people in the UK...

Thursday, November 25, 2010

"If Spain falls, the Euro falls"

Things are getting really scary in Euroland.

Fears of contagion are spreading like a rash, replicating the patterns preceding the bail-out of Greece. An article in Der Spiegel has a very useful break-down of the challenges facing the key euro countries feeling the heat at the moment - Greece, Portugal, Ireland, Spain with a place also reserved for Italy.

The article notes that "Spain is 'the litmus test' of Europe":
"Hundreds of thousands of Spaniards lost their houses and 1.2m their jobs [after the housing bubble burst]. Today, bad loans amounting to €180bn burden the institutions, half of which are related to retail banks."
The unemployment rate in Spain is 20%, with youth unemployment being twice as high, at a crazy 40%.

Next year Spain must raise €65bn in order to refinance old debt. Problem is that this could turn out to be hugely expensive. The rates on Spanish ten-year government bonds rose to more than 5% yesterday for the first time since 2002, amid fears on the markets that Spain is only one jitter away from meeting the fate of Ireland. The country's multi-billion euro exposure to bad debt in Portugal isn't helping either.

As Der Spiegel notes:
"There is a lot at stake – for Germany. Firstly, because German banks have lent approximately €134bn to Spanish banks and companies. Secondly, because the European rescue package, equipped with €750bn, was not designed for the bankruptcy of a large country like Spain. In other words: if Spain falls, the Euro falls."
Meanwhile, a piece on Reuters is "Thinking the unthinkable - a euro zone breakup", quoting some people arguing that we'll be fine because it's only "bond spreads" - and the political will is too strong for the euro to sink.

True, the political force behind the euro is powerful, and some politicians will see hell freeze over before giving up on their flagship project.

But seriously, all these people who got the euro wrong in the first place must now begin to realise that political will alone cannot stamp out economic laws and economic reality?

Whose Common good?

I am neither worried about the survival of the euro nor about the survival of the European Union. I am however concerned that in Germany, the federal (government) and local authorities are slowly losing sight of the European common good.
-Eurogroup chairman Jean-Claude Juncker in Germany's Rheinischer Merkur newspaper, adding that he was nonetheless concerned about the future development of the EU.

Our question: whose common good is he talking about?

Wednesday, November 24, 2010

Europe turning against the euro?

Well, we're not quite there yet. But those who still think - and there are some - that reservations about the future of the euro is something which exists primarily amongst the we-told-you-so bunch on the Tory backbenches, should try to pick up a European paper once in a while.

While the tone and focus on the criticism differ - depending on the prevalent attitude to Europe in the respective countries - media across Europe is clearly becoming increasingly disillusioned with the entire euro-project. And it would be strange otherwise.

An opinion piece in Expansión - Spain's main financial daily - argued:
"The next foreseeable step is that the other peripheral European countries, whose welfare is in question, will question the legitimacy of a supranational body which holds very little democratic counterweight to impose blood and tears."
An opinion piece from Spanish daily La Razón's Brussels correspondent, Jorge Valero, titled "the sweet decadence of Europe", argued:
"The slow exit from the recession, in comparison to the US and emerging economies, has revealed the shadows, imbalances and contradictions of the jewel in the crown of the European utopia: the euro."
Moving to France, a comment piece in Le Figaro noted:
"The Greek domino fell during last spring. The Irish domino has been wobbling over the last days. The Spanish domino will follow suit, along with the Portuguese domino. This is all very sad for those experts who conceived the eurozone and put it into practice - by pursuing an often absurd monetary policy which led to the 'genocide' of our industry."
In Germany, the front page of yesterday's Handelsblatt carried the headline: "The next Ireland is called Portugal", while an article in the paper noted that the current crisis has "once again revealed the two-tier society of the eurozone." An article in FAZ warned against the EU's "bizarre bailout logic" that because Ireland has been granted a bailout, then "there is no need to worry about Portugal and Spain."

In today's Handelsblatt, a comment piece argues:
"whether we can save the euro, is questionable. It is however sure that we become gravediggers when we push countries in crisis into a straightjacket".
As we note in a previous post, in yesterday's Die Welt, Dorothea Siems expressed some strong views:
"The euro-adventure stands the risk of meeting a terrible end. Germany must make clear where the borders of what it can bear lay. This is because the euro isn't a goal in itself. The EU is a lot more than just Euroland. Not because of national power play, but because of a sense for reality. The future of the EU should not be made dependent on the euro, simply for the reason of not wanting to harm European unity in the long-term."
Further north, an analysis piece in Swedish daily Svenska Dagbladet noted that:
"it took six months for the markets to figure out that the miracle cure against the debt disease which the EU-doctors prescribed this Spring consisted of worthless soda water."
An opinion piece in the Hungarian paper Magyar Nemzet by columnist Anna Szabo argues:
“The eurozone, which most East-Central European states wanted to join, is now marching towards uncertainty […] Until now the requirements for the introduction of the euro could be sidestepped without punishment and now [all eurozone countries] are facing the consequences.”
Meanwhile, Hungarian news magazine HVG reports that the Hungarian Prime Minister Viktor Orban has said that Hungary “is glad that it is not in the eurozone.”

Tuesday, November 23, 2010

Clueless politicians

We were reminded of this spectacularly inaccurate assessment the other day (from our "How the EU-elite got it wrong on the euro" briefing):
"The euro has been a rock of stability, as illustrated by the contrasting fortunes of Iceland and Ireland. Joining the single currency would be a major step [for the UK]".
- Former MEP Richard Corbett, back in 2009.

Having lost his seat in last year's European elections, Corbett is now working as an adviser to EU President Herman Van Rompuy (hopefully staying well clear of anything to do with monetary policy).

More quotes from clueless politicans to follow...

Will German democracy kill the euro?

Commenting on the Irish bailout, Die Welt editor Dorothea Siems makes some very important points.

She argues:

The euro adventure stands the risk of meeting a terrible end. Germany must make clear where the borders of what it can bear lay. This is because the euro isn't a goal in itself. The EU is a lot more than just Euroland. Not because of national power play, but because of a sense for reality. The future of the EU should not be made dependent of the euro, simply for the reason of not wanting to harm European unity in the long-term.
She goes on to argue that a break-up of the eurozone "is possible".
Anyone who thinks that is nonsense should consider that EU's aid plan forces the Greeks to making savings [to its public finances] worth 15 percent. Such an austerity plan has never taken place in peacetime. Ireland's situation is hardly better.
An online opinion poll in the paper shows that 89 percent of readers want to a return to the D-Mark. Obviously to be taken with a pinch of salt but still an indication of something.

German democracy is more vibrant than what many people think - and selling bail-outs to the German electorates is hard work, to put it mildly, as Angela Merkel knows too well.

On Sunday 10 May 2010, her CDU party dropped by more than 10 points in regional elections in Germany's most populated state, North Rhine-Westphalia, following the announcement of a 110 billion euro bailout program for Greece. She could thank her lucky stars (and some political shrewdness) that the follow-up 500 billion euro aid package to support the euro didn't come a couple of days earlier (it was agreed on the evening of the elections).

Meanwhile, Handelsblatt today reports that various top German economists from most of the important German economic institutes have warned against making the Eurozone aid package permanent, saying it would lock in a permanent debt union, burdening German taxpayers which in turn would endanger the legitimacy of monetary union in Germany.

Therefore, as we've argued for some time, it could be Germany that calls time on an enlarged euro.

This line is today picked by Gideon Rachman in an article with the headline "Germany could come to kill the euro". He argues:
Countries such as Greece and Portugal might be a lot more competitive if they could devalue their currencies. But quitting the euro might feel like a national humiliation for members of the southern periphery. There is also no mechanism for quitting the euro in an orderly fashion. Any obvious preparations to do so might trigger a bank run. So if the euro is to break up, the country that sues for divorce is likely to be a strong economy – with Germany as the likeliest litigant.

The Germans would not take this step quickly or lightly. A commitment to European integration has been a leitmotif of German foreign policy for half a century.

But if the Germans became convinced that their eurozone partners were simply impossible to deal with – and that therefore the whole single currency experiment could not work – they might decide to quit. There are two ways I could imagine this happening.

The first is a successive wave of financial crises across the eurozone, affecting larger countries, which gradually sap German taxpayer confidence that the 'loans' that the EU is extending to its weaker members will ever be repaid. The second is if, as seems quite likely, the treaty changes that the German government is demanding to satisfy its courts fail to be ratified by some of the other 26 EU members. At that point, the Germans might throw up their hands and say, in effect, 'Well, we tried our best, but the other Europeans won’t do what is necessary to save themselves.' Germany might then feel released from its historic obligation to 'build Europe'."
All very interesting. In our most recent briefing we explain why we think that a split-up of the euro into two separate currency blocks looks increasingly likely.

Monday, November 22, 2010

Will an Irish bailout actually solve anything?

Open Europe has today published a briefing asking the simple question: will an Irish bail-out actually solve anything?

A healthy Irish economy is quite clearly in the UK's interest, and to extend loans to a struggling neighbour (to use Osborne's rhetoric) is in itself nothing controversial. Sweden offered cash to Iceland after that country hit the rocks following a banking meltdown (not unlike that of Ireland) for example.

And Ireland is clearly in better shape than Greece, Portugal and Spain, and a rescue package could, at best, buy Ireland some time to get their house in order - courtesy of its open economy.

However, it's also true that euro membership alters the logic - and potential effectiveness - of a bailout. As we argue in the briefing, there are five reasons why a one-off bailout for Ireland will not solve the eurozone's problems:

1. Temporary loans or greater budget discipline across the eurozone will do very little to help countries such as Greece, Ireland or Portugal regain competitiveness, the main problem these countries face.

2. In essence, what was asked of Greece, and soon Ireland, is two-thirds of a traditional IMF package - cuts in expenditure and increased taxes. However, the third, vital ingredient - currency depreciation - isn't permitted within a single currency. Instead, currency devaluation has to be replaced by so-called "internal depreciation", meaning even more squeezes to jobs and wages which aren't politically or socially affordable.

3. The ECB is likely to continue to pursue a German-style monetary policy, leading to an undervalued currency for Germany (fuelling German export-led growth) but an equally overvalued currency for the weaker economies such as Portugal and Spain (although Ireland itself could be helped by a weaker euro). This, in turn, locks in a multi-speed eurozone, with the same type of tensions we've seen over the last year coming to the fore again in future.

4. The politics of a loan bailout and stronger supranational budget rules are unsustainable. The lending countries, most importantly Germany, can only sell a de facto debt union to their electorates if it comes with strict rules and terms. But such terms imposed from the outside seriously undermine the ability of the borrowing countries to democratically govern themselves.

5. The role currently being played by the ECB is untenable, both for political and economic reasons:
  • Politically, the ECB's decision back in May to start buying 'junk' government bonds from the secondary market has compromised its independence - which the Germans were promised would never happen. A bailout using loan guarantees from other EU states may allow the ECB to withdraw its emergency funding for now, but without a long-term solution the ECB is likely to be called on again to prop up ailing states.
  • Economically, the situation is unsustainable as well. The Eurosystem of eurozone central banks that underpins the ECB is leveraged 24 times, while the average hedge fund is only leveraged 3 to 4 times. A fall in assets of only a few percent would wipe out the ECB's reserves, which could lead to the ECB itself being in need of a "bail-out".
As we conclude,
There are no obvious long-term solutions that do not come with huge political and economic costs. The dilemma facing the eurozone remains whether it is to become a fully fledged United States-style fiscal and therefore political union with huge continuous transfers from the German-led bloc to those on the periphery - which would inflict serious damage on the German economy; or prepare for a messy divorce possibly in the form of a two-tier euro and even some countries exiting altogether.

Giving people the wrong ideas?

Presenters on Hungarian radio station NeoFM's daily morning show, "Bumerang", have joined the long line of people trying to make sense of the bizarre projects that have received EU funding. Listeners have been asked to choose their favourites amongst our list of examples of EU waste and send in any of their own.

Polling highest is the example of €500,000 given to two Swedish fishermen to scrap their fishing vessels, only to find them later applying for further EU subsidies to buy new, smaller boats, which were subject to a different set of EU rules. Other contenders included Hungary's very own €411,000 dog "rehabilitation centre", which never materialised and the €16,000 given to Tyrolean farmers to boost their emotional connection with the landscape.

But the exercise may have produced an unintended side effect. This is what the presenters had to sat at the end of the show, "We are so stupid! Why aren't we also applying for EU funding to raise the popularity of European Radio. We'd only need €100,000."

Friday, November 19, 2010

"Europe is more than a nine year old currency"

Yesterday saw some interesting reactions from the German papers, in response to the increasingly likely Irish bail-out.

A leader in Die Zeit dismisses Herman Van Rompuy's “exaggerations” and “apocalyptic” comments (“if the Euro doesn’t survive, then the EU won’t survive”, he said earlier in the week), and so those of Chancellor Merkel who made a similarly dramatic statement only a few days ago. The leader asserts that “the European idea is more than an almost nine-year-old monetary community", arguing that the EU could function perfectly well without a single currency (hear, hear!).

It argues,
...you can thank the common market that anyone can, Europe-wide, sell their goods and services and be treated as if they were local there. And all of that would be the same without the Euro. A permanent change to a different currency would only make life a little bit more strenuous for your average citizen.
Dirk Heilmann in Handelsblatt captures many of the issues on the table in his piece’s titled: “Yet again we are saving Europe’s banks.” As the powerhouse of the euro zone, the Germans are expected to be picking up a reported third of the rescue package (!).
Now, with the rescue of Ireland, it has been clear from the beginning that it is essentially a bailout…The banking problems are so large that they overwhelm the land. So, again, we rescue banks: the Irish, their foreign creditors and the owners of Irish government bonds.
Yet Heilmann is sympathetic to the Irish plight:
The taxpayers should help Ireland’s credit institutions and their creditors, because Europe's banks are still ailing. Their compulsory rehabilitation is urgently needed.
He's also quick to dismiss Greek comparisons,
We are not talking about a country that has squandered these advantages like the Greeks and frittered away the Euro dividend...we are talking about a country, that, like Iceland, let its financial sector grow unattended for a long time, until the monster turned around and ate its master.

Thursday, November 18, 2010

Britain may not be able to avoid bailing out the Irish

Irish central bank governor, Patrick Honohan, said this morning that he expects Ireland to be given a "very substantal loan" from Europe. There's still much to play for, but an Irish bail-out is looking increasingly likely.

Over on the Spectator coffee house blog, we argue:
In the UK, of course, backbench MPs and others have been quick to condemn any move which would force British taxpayers to cough up cash under the EU’s various bail-out arrangements. Only problem is: the UK may not have a choice. The part of the eurozone bail-out package which Britain could be underwriting to the tune of £6-7 billion - the so-called European Financial Stability Mechanism – is not protected by a UK veto. This means that the mechanism can be triggered by a majority vote amongst EU ministers, and that the UK could be outvoted."
We go on to argue:
But let’s not kid ourselves: the UK is hugely exposed should the Irish economy sink, irrespective of how difficult we all find it to prop up a single currency which we knew all along was heading for trouble.

Leaving aside the need for Ireland to clean up its banking system and the accompanying too-big-to-fail discussion – admittedly two big issues to leave aside – the Treasury is therefore right to look at ways to assist Ireland bilaterally. If anything, bilateral rescue arrangements between similar economies have a far better chance to end happily than messy multilateral bail-outs which come with ideologically fuelled demands (i.e. German or European Commission demands for raising the corporate tax rate which would be economic suicide for Ireland). The joint loan given by the Nordic countries to Iceland when that country hit the wall in 2008 could be one model.

In its own strange way, a UK-Irish deal could also serve to strengthen the UK’s position in Europe. But alas, the terms and conditions for UK taxpayer-backed loans to Ireland no longer rest solely with the British government.
Read the full post here.

Wednesday, November 17, 2010

Finnish reservations

[Financial] aid isn't sufficient if a country's own correcting measures aren't tough enough. That's why Finland wants to introduce guarantees. This would ensure discipline in the borrowing countries. It would also send a strong signal to the citizens that it's not the EU but the country's own measures that are saving them.
Finnish Finance Minister Jyrki Katainen continues to insist that any eurozone loan to Ireland should come with strong guarantees to ensure that the money is paid back. According to Finnish media it's still possible that Finland will oppose loans to Ireland unless such guarantees are attached.

The view from Benelux

Belgian Finance Minister Didier Reynders today said that aid to Ireland is "inevitable", claiming that it's impossible for Ireland to get out of this pickle without some sort of cash injection. He added that for the ECB it would become "difficult" to remain providing liquidity to banks in Ireland and in other countries.

His Dutch counterpart, Jan Kees de Jager, was more cautious and refused to comment on Reynders' assessment, merely saying that "Ireland will ask for help when it's necessary (...) If you're with your back against the wall, you will be forced to ask for help."

Tuesday, November 16, 2010

Barroso's case of the Budget Blues

After a tumultuous five-plus-months of discussions, EU negotiations over the 2011 budget broke down two days ago, leaving an array of despondent MEPs, Commissioners and eurocrats to lament a 'budgetary crisis'.

Commission President Jose Manuel Barroso launched a not so veiled attack on the terribly obstinate member states who tried to install a little 'pseudo-austerity' into the EU budget (real austerity would mean actually cutting expenditure rather than trying to cap the budget rise at 2.9%). Jose said:
I regret that a small number of member states were not prepared to negotiate in a European spirit Those that think they have won a victory over 'Brussels' have shot themselves in the foot. They should know that they have dealt a blow to people all over Europe and in the developing world.
Yes, you read right. Barroso is actually attempting to take the moral high ground here. First of all, if the EU institutions really wanted to help the developing world, why not spend some time taking a long hard look at the existing fat in the EU budget rather than jumping up and down demanding more money.

But, more hypocritical, is the presumption that an increased EU budget is necessarily going to help the developing world. What about the huge amounts spent supporting European farmers at the expense of their competitors in poorer countries and the additional impact this has on increasing food prices?

One can also point to flaws in EU trade agreements that leave poorer countries unable to support domestic producers against floods of cheap, subsidised European imports.

The EU's large aid budget is also less effective at targeting funds at the poorest countries than many of member states' own aid programmes.

All in all, Barrosso's tug at the heart strings looks a lot more like a self-serving attempt to boost the power of the EU institutions rather than a sudden bout of altruism.

Power to the Parliament

Open Europe has just hosted a debate on the Coalition Government's proposed 'referendum lock' with Europe Minister David Lidington. A write-up and recording of the event will be put on our events page shortly. But in the meantime, two thoughts:

A point raised - echoing what was argued in the Economist's Bagehot column last week - is that the referendum lock amounts to an effective "UK Veto Bill" over new EU treaties. This, so the reasoning goes, is de facto locking in a two-speed Europe, with Britain in the 'slow lane', as it would never be able to sign up to new Treaties under the Bill (assuming that any referendum on a new EU Treaty in the UK would result in a No vote).

This logic contains some truth but is also dated. In today's more fluid, interesting but also more perilous, Europe what matters is one thing: the health of your economy.

Europe is already a multi-speed beast, fuelled by the ongoing eurozone crisis. The slow lane is reserved for the countries which don't have enough cash to carry them over until tomorrow - not those which choose to stay out of the European Public Prosecutor (for example). Which lane the UK occupies in the future will depend on its economic fundamentals - not the referendum lock.

Secondly, some commentators really should read the actual Bill before ranting. Philip Stephens, who every week recycles columns in the FT, for instance. Today he argues,
It is likewise curious that a Tory party so wedded to parliamentary sovereignty should be so keen to subordinate its authority to a plebiscite. Margaret Thatcher got it right when she criticised the last popular vote on Europe in 1975. The referendum, the then Tory leader observed, sacrificed parliamentary sovereignty to political expediency.
This is wide of the mark. In fact, the biggest winner from this Bill is not the British people - a referendum is unlikely to be called for a long-time (which Stephens also acknowledges) - but the UK Parliament. Every decision outlined in the referendum lock will ultimately rest with Parliament, including whether a power shift is significant enough to warrant a referendum under the so-called significance criteria in the Bill.

In this sense, the proposal is actually more of a Parliamentary lock, than a referendum lock. What the Bill will do is restore some control to Parliament - which has been handed over to the government (and then onto MEPs, EU judges and eurocrats) through various EU treaties.

Now it's up to Parliament to decide what to do with these powers.

Ps. Stephens also argues that the EU Bill is "a piece of legislation so dense and unintelligible that it makes the Maastricht treaty seem like an easy read." He clearly has limited experience with EU treaties and texts. In fact, the EU Bill is a Stieg Larsson novel compared to much coming out of Brussels, such as the unconsolidated version of the Lisbon Treaty for example (which we were the first to decodify).

Meanwhile in Austria

“It is now becoming clear, that the Greeks cannot sufficiently keep to their plans for revenue, i.e. what comes in from taxes. Therefore, I speak very critically with regards to granting the next instalment in December...From the Austrian point of view, there is no reason to release the contribution in December with the [Greek] numbers as they are at present.”

- Josef Proell, Austria’s Finance Minister, says his country could choose to withhold its contribution to Greece, worth around €190m in December.

Monday, November 15, 2010

"Everything is at stake"

Chancellor Angela Merkel has been speaking at her party's congress and, given the events in Ireland, the euro was a key theme of her speech.

It's fairly stirring stuff:

"Everything is at stake -- if the euro fails, then Europe will fail. The idea of European values and unity will have failed, an idea that gave our continent strength and prosperity after the last century with its wars and destruction. It's up to us. It's our task to create a new anchor for a culture of stability in Europe."

She went on to criticise the decision to admit Greece into the euro:

"In 2000 Schroeder and Eichel couldn't let Greece join the euro fast enough and they ignored all the warnings. It was a political decision...political decisions are important but those which ignore the facts are irresponsible."

Merkel also made a point of defending Germany's export-led model, which many say has contributed to the euro's problems, adding:

"We will not allow ourselves to be punished for something that we do well. We'll not allow ourselves to be whipped because we export good products, made in Germany, all around the world."


Should the UK contribute to an Irish bailout?

The increasingly likely prospect of an Irish bailout is looming and that is also likely to have an impact on the UK.

While the UK was not involved in the Greek bailout, British taxpayers are liable for one of the two bailout funds agreed in its aftermath: the €60bn European Financial Stabilisation Mechanism (EFSM), founded on a very dubious reading of the EU treaties, is a lending facility guaranteed by all EU member states, including the UK, using the EU budget as collateral. The other bailout fund, the €440bn European Financial Stability Facility (EFSF), was agreed outside the EU treaties, and can also issue loans guaranteed by eurozone governments.

According to Downing Street officials, the UK's share of the €60bn fund is 12%, so British taxpayers are potentially liable for between £6bn and £7bn at current exchange rates.

If Ireland asks for help it is up to the European Commission to propose the use of the EFSM with EU finance ministers making the final decision. However, the vote is taken by qualified majority, meaning that the UK has no veto and effectively no choice in whether to contribute to a bailout using the €60bn fund.

A UK Treasury official has already been quoted in the Times saying that the UK will its play its part to help Ireland. “This is not like Greece — they are close trading partners,” the official said. The Mail also quotes an official saying, "There are several ways it can be done, but it looks like EFSM will be used - that's the one we participate in".

It seems likely that the EFSF would be used as well, with additional funding coming from the IMF, to which the UK also contributes.

David Cameron has said today that stability in the Irish economy is "very much in Britain's interests". Shares in RBS reportedly fell 5% this morning over investors' fears of the banks' exposure in the country and Bank of International Settlements' estimates from June highlighted that the UK's exposure to Ireland was greater than Germany's.

But while it's in the UK's interest to see Ireland through, a bailout must come at a price. The eurozone's one-size-fits-all exchange rates contributed significantly to Ireland's fate, with a huge property bubble fuelled by low interest rates. This private debt problem is now becoming a public debt problem as the government struggles to cope with the ailing banking sector.

The question is what will change in the future to ensure that this doesn't happen again? Serious questions need to be asked about whether Ireland's membership of the eurozone is really sustainable.

The unholy alliance of politicians and banks believed the fairytale that Ireland could simply hand sovereignty over monetary policy to the ECB in exchange for growth and German-style stability. It was their poor decisions which also contributed to the economy overheating and a bailout should not be allowed to paper over their role in the crisis.

As Cameron said today,

"I don't want to make life difficult for the Irish at a time when they are trying to take difficult decisions about their own economy but they did have a consumer boom, property boom, badly-regulated banks...

"They added to that the issue of euro membership - I always think the great lesson from the Exchange Rate Mechanism is that the Euro is the Exchange Rate Mechanism without an exit, and that is the problem."

The eurozone's monetary policy was and is going to be unsuitable for Ireland for the foreseeable future and the fate of many Irish citizens' economic futures now lies largely in the hands of others. Maybe it's time to consider the exit?

Friday, November 12, 2010

It's not going away

Rumours that Ireland will soon be forced to seek a cash injection from the eurozone rescue package of no less than €80 billion have been denied by both a Commission spokesperson and Irish Taoiseach Brian Cowen.

Pressure on Irish bond spreads seems to have eased following a statement by France, Germany, Italy, Spain and the U.K., with the purpose of assuring investors that they wouldn't be forced to chip in to future eurozone bailouts (with regards to existing outstanding debts).

The statement says:
any potential private-sector involvement (...) does not apply to any outstanding debt and any program under current instruments.
The current jitters in the markets seem - at least in part - to have been triggered by German calls for a permanent euro crisis mechanism, which would force bondholders to shoulder part of the burden should a eurozone country go bust. Irish PM Brian Cowen commented that "It hasn't been helpful".

A mechanism for an orderly default procedure is a sensible idea, but it cannot be used as an excuse for avoiding tough decisions, such as cleaning up the banking sector, coping with the government bonds bubble, or most importantly, solving the inherent problems in the current eurozone structure.

What's clear is that this issue won't go away - there are many strong forces at work, creating the same toxic political-economic-monetary mix which preceded the Greek bail-out.

In an interesting post on his WSJ blog, Alen Mattich looks at the EU's €440 billion EFSF vehicle (one of the bail-out mechanisms agreed in May), arguing:
"Would such guarantees do the trick?

Insofar as it’s just a confidence game, yes. But there’s a real risk we are once again facing a solvency crisis. If Ireland, Greece and Portugal cannot make good on their existing debt, they will have to be bailed out or be made to default. All the evidence is that the Irish, Greek and Portuguese populations cannot support the debt they already have. For instance, at current yields, Greece would have to fork out something around 10% of its GDP to foreign creditors just to meet interest payments.

Since default would mean an instant crumbling of the euro zone, bailout is the only answer.

Germany, with help from the Dutch and maybe even the French, might be able to cover Irish, Greek and Portuguese debts, at least to the point where the local populations could reasonably be expected to service the remainder.

But could these countries resolve the problems with their structural deficits? Would their voters be happy to be, once again, poor within the euro zone when they’d gotten used to feeling rich? And would the Spanish and Italians be happy to sit by while others are being helped–never mind contributing to the bailout? What are the chances they too wouldn’t demand assistance?

It’s a game the Germans won’t play for ever. Or even for long.
All this links with the most fundamental problem of them all - the huge differences in competitiveness between the different economies in the eurozone, locking in the current tensions.

Incidentally, Ireland seems to be showing signs of engaging in a more fundamental debate about its monetary arrangements and the implications of EMU membership

The finance spokesman of Fine Gael, Ireland's largest opposition party, yesterday said:
Once the instrument of devaluation was taken from us, which we resorted to on a number of occasions in the 80s and 90s to restore competitiveness, a new regime had to be put in place and that was not put in place
Talk of devaluation, an indispensible ingredient in any IMF cure for bankrupt countries, is likely to catch on.

Thursday, November 11, 2010

Government's referendum lock tabled

The Government has today tabled its "European Union Bill", containing the so-called 'referendum lock' and 'sovereignty clause', which the Tories have said will prevent the transfer of powers from Westminster to Brussels without the consent of the electorate and strengthen the power of Parliament.

The Bill is a welcome 'democratic break' on any major future treaties, for example, but it's going to take some thorough analysis before anyone can really say how it will stand up to all the potential permutations that EU politics is likely to throw up in future. Day-to-day transfers of power to Brussels can also be highly significant - and there's a bit too much ministerial discretion in the bill for comfort, i.e. on what constitutes a 'significant' transfer of powers.

As we have argued before, the current also Bill misses the opportunity to incorporate decisions on whether to opt in to new EU justice and home affairs laws. The Government should be required to seek the prior approval from Parliament before it can opt in to a JHA measure, such as the controversial European Investigation Order. An amendment to this should be added to the bill.

If this is included, and some of the other loopholes in the bill are closed, this would actually represent a very big step forward for democratic control over EU decision-making. MPs therefore have work to do.

Watch this space for more...

Wednesday, November 10, 2010

What do a dog fitness centre, a €5.25m fleet of limousines, a cartoon horse and 'virtual language swimming' have in common?

Yep, you've guessed it, it's that time of year again. Today we've published yet another list of wasteful EU projects, the third such list in as many years (you can find the previous ones here and here).

One of our favourites is "Eurogaloppo" the cartoon horse which was dreamt up in order to teach German schoolchildren about the EU. A booklet was published chronicling Eurogaloppo's journey to Brussels on which he met several high-profile EU leaders, including Chancellor Angela Merkel and former European Parliament President Hans-Gert Pöttering.

The cartoon horse also bumped into Commission President Jose Manuel Barroso, seemingly unable to contain his excitement:

Eurogaloppo: “I have so been looking forward to finally meeting a commissioner!”

Barroso: “Do you mean a commissioner like in a crime programme?”

Eurogaloppo
: (sheepish silence)

Barroso
: (grins) “Actually, you are not far wrong. The EU Commission and the crime commissioners of the police have something in common: they are both authorities.”

The top of the list is however reserved for the aforementioned "dog fitness centre", designed to “improve dogs’ wellbeing”. Perhaps the biggest crime of all, or maybe not, is that the dog rehab centre is yet to be built, despite receiving €411,000 of EU funds.

Hungarian media have noted that apart from new office buildings that remain derelict (click here for photographic evidence), the centre remains a distant dream for the local dog population. For now dogs in the area will have to put up with the kind of equipment pictured, which we can all agree doesn't compare to the "hydrotherapy" promised by the new centre.

All joking aside, the list is well worth reading ahead of tomorrow's likely agreement on an increase to the 2011 EU budget as a reminder of the kind of waste inherent in the EU's outdated and overly-complex budget.

Of course not all EU spending is bad, and we pick out a few good examples at the end of our list. But until the EU budget is reformed around more rational priorities (rather than used to subsidise farmers and redistribute large amounts of money among the EU's richest countries) and had the fat trimmed from it, we make no apologies for pointing out its flaws and mismanagement.

Monday, November 08, 2010

The right priorities

This one is from back in August but still:

Apparently, Peterborough City Council has lost out on £1,325 from the EU, meant to go towards a YMCA initiative aimed at encouraging young people to volunteer in local communities, known as the Red Triangle project.

The reason? The Council failed to display the EU logo on the few hundred business cards that were printed as part of the project.

As Jonathan Martin, chief executive of Peterborough and Cambridgeshire YMCA, put it:

It’s a shame that no song and dance has been made about what a success the project was. It seems all the noise is about a lack of logos on some cards.
The craziest part here is not the amount lost but that someone, somewhere along the long, complex chain of EU funding actually could be bothered to spend time and taxpayers' resources to work out that the failure to display the EU logo on a few hundred business cards should cost Peterborough City Council exactly £1,325...


Friday, November 05, 2010

A step backwards? Hardly

In an interview with the FT, Nick Clegg today declared that the Coalition Government would not use the negotiations over a new EU treaty to repatriate powers from Brussels to London. "We are not going to reopen this issue of the repatriation of powers. We are not proposing to go backwards", he said.

Well, we kind of suspected that was the Government's position already, but "not going backwards"?! That's an utterly silly comment - it belongs to a time when the EU debate was divided between arch-eurosceptics harking back to the British Empire and European federalists equating more EU integration with "progress".

Europe and UK politics have both changed however (clue: the coalition itself). Clegg's assertion is a bit like saying that the Coalition's drive for more localism - which the Lib Dems champion - is somehow a reactionary move. Bringing back powers from Brussels to the UK means bringing decisions closer to people. That, Nick, is not a step backwards by your own definition - on the contrary.

The interview wasn't all nonsense though. Clegg did suggest that the UK's willingness to passively wave through an EU Treaty change, must be matched by reforms to the budget and changes to some of the EU's more counterproductive habits.

He said,
There is no interest for the EU in getting entirely on the wrong side of public opinion on this budget issue...They have got to get real. You can’t make these budget decisions in a political vacuum.

He also lashed out at the EU's “summit inflation” which left EU policymakers “chasing their tails”.

That's sensible stuff. But the question now is: having given away its veto over Treaty change, how does the Coalition plan to deliver in the post-2013 EU budget negotiations?

Talking about EU reform as a "step back" is probably not the smartest way of doing things. Not least since many member states would make the same argument about any change to the EU budget.

Thursday, November 04, 2010

Cap and trade - not the only way to skin the cat

Following his defeat in the mid-term elections, US President Barack Obama has now announced that he will drop his plans for a cap and trade system to reduce CO2 emissions. The idea behind cap and trade is to put a limit on greenhouse gases and then allow companies to buy and sell pollution permits under that ceiling.

President Obama said:
Cap-and-trade was just one way of skinning the cat; it was not the only way...I'm going to be looking for other means to address this problem.
As we've argued many times before, the cost of the EU's Emissions Trading Scheme (EU ETS) is massive and it's far from clear that a cap and trade system is the best way to achieve global emission cuts, while also encouraging investment in alternative energy. Obama's decision is sensible. But it clearly has implications for Europe, not least since the EU might now be put at more of a competitive disadvantage in the absence of a cap and trade system in the US.

Interestingly, former deputy prime minister John Prescott - who was a key UK negotiator at the Kyoto global warming conference in 1997 - today argued that in light of Obama's decision world leaders should ditch their hopes for achieving enforceable targets for emissions reductions. Instead, he said, they should push for a voluntary agreement at the upcoming Cancun summit:
Let's have a voluntary agreement. Let's stop the clock. Instead of Kyoto having to be done by 2012, stop it for about five years, put in a voluntary agreement and a verification system.
For his part, German Economy Minister Rainer Brüderle warned yesterday against imposing more environmental rules on German industry, arguing that global competition doesn't allow for a go-it-alone approach. He has a point.

The better way forward for the EU would be to set overall targets but then allow individual member states to reach them in whichever way they deemed to be the most cost-effective.

There is more than one way to skin the cat - also in the EU.

Wednesday, November 03, 2010

Talk about micro-managing...

First the EU sets renewable energy targets that force member states to build thousands of wind turbines, then the Commission tells them how not to build them...

According to Euractiv:
The European Commission has issued guidelines on how to design wind farms so that they do not disturb birds and bats living in the EU's 'Natura 2000' network of protected sites.

Tuesday, November 02, 2010

When the driving force of policy is not to cause a fuss

Over on his blog, the WSJ's Iain Martin is today making clear what he thinks of Cameron's performance at the EU summit last week, and the Coalition's Europe policy more widely:
Cameron’s priority on Europe has been, as it has been throughout his leadership, that it shouldn’t flare up and cause him a problem. In coalition with the Lib-Dems, he now has even more reason to avoid the issue. Around him are former Euroskeptics, such as William Hague, who are prepared to go along with the European project (as currently constituted) in return for a quiet life and the perks of office.

But it’s been obvious for a while that the tectonic plates are shifting in the EU. The sovereign-debt crisis was only dealt with because Germany agreed to underwrite the temporary arrangements put in place to allow for a bailout. Angela Merkel was always going to come back and demand that permanent arrangements be put in place, and that other members of the single currency start to play by German rules...

...Last week Cameron indicated that Merkel could get the changes she wanted to Lisbon, etc., in return for… er, nothing. This is what happens when the driving force of a policy is the desire to not cause a fuss.

Monday, November 01, 2010

Two vetoes for the price of one

In Parliament this afternoon, David Cameron gave his statement on last week's EU summit, followed by questions from MPs. The debate was a bit all over the place if we're to be perfectly honest, with the 2.9% increase to the EU's 2011 budget dominating.

The most talked about intervention came from Ed Miliband who said in response to Cameron's alleged cave-in on the EU budget freeze for 2011: “He wished he could come back and say No, No No, but in his case it's a bit more like No, Maybe, Oh go on then.” (apparently a phrase Miliband didn't quite come up with himself).

On actual substance, Chris Heaton-Harris made the most astute observation. He noted that the PM now has two separate vetoes at his disposal: one over Treaty change and one over the EU budget post-2013. Heaton-Harris asked whether Cameron would use the two vetoes independently to achieve EU reform. As we’ve argued before, a twin-track approach to EU negotiations is by far the smartest way to achieve reform in Europe and the restoration of some democratic control over key EU powers.

If the two vetoes are used in parallel but for seperate issues - one for repatriation of powers and the other for concessions on the CAP for instance - we bet anyone (eurosceptics and federalists alike) that the Coalition government will get at least one game-changing concession in return.

The Coalition could even get other member states along for the ride if it's confident and strategic enough. After all, Merkel has given us a great example for how to do it.

Unfortunately, in response to Heaton-Harris and also earlier in the debate, Cameron hinted he would pass up his veto over the treaty change, effectively giving EU partners a two-vetoes-for-the-price-of-one deal.

Hopefully this isn't the end of the story though, as there's still much to play for before Treaty changes are agreed. But MPs need to get their line of argument in order or the Coalition might well go for the do-nothing option.

For Cameron to use the twin-vetoes separately but in parallel, is surely what backbenchers in favour of EU refom should be pushing for?

The euro cannot live by budget discipline alone

An interesting new paper by German think tank Centrum für Europäische Politik has listed "Five hard rules for a hard Euro". It sums up some of the ideas on how to save the euro, currently floating around Germany.

Here they are:
  1. More automatic sanctions for countries with excessive deficits.

  2. A new sanctions regime for budget deficits should be introduced, but the paper argues that the 60% debt to GDP ratio target is arbitrary if it doesn't include how much new debt is being added every year. Interestingly, the CEP argues that the current Commission proposals necessitates Treaty change (not only Merkel's proposal for a eurozone crisis mechanism).

  3. A 1% budget deficit should be restored as a medium-term goal, by establishing stronger preventive sanctions. This should include imposing non-interest bearing deposits on countries as a sanction, instead of interest-bearing deposits.

  4. An insolvency procedure for member states along the lines of what Merkel has pushed for. However, the CEP argues that this only will be effective if the concept that banks are "too big to fail" is also tackled. We look forward to seeing the CEP elaborating on this point, as it's absolutely vital.

  5. Macro-economic supervision by the European Commission would improve the functioning of the Stability Pact. However, there shouldn't be sanctions for persistent economic imbalances. Hardly surprising, the think-tank argues that EU recommendations to reduce imbalances shouldn't focus on strong export countries, as this would be to the disadvantage of Germany.
Whether all these proposals will fly is doubtful. But the paper is important, because although Merkel has won praise for getting treaty change agreed to in principle - and although we tend to favour a crisis mechanism which transfers risks away from taxpayers - some key questions remain.

Frankfurter Allgemeine Zeitung
this weekend complained that Merkel has in effect already conceeded to putting in place a permanent eurozone rescue mechanism before
it is made clear how owners of state bonds would have to take a haircut in case of a rescheduling of sovereign debt.
The Telegraph's Ambrose Evans-Pritchard notes that ECB President Jean-Claude Trichet warned EU leaders on Thursday night that they didn't understand what they were unleashing. He writes that "Eurozone sovereign states must issue €915bn in new bonds next year", which might get more complicated
as investors have just been told in blunt terms to charge a hefty risk premium on any peripheral debt that expires after 2013, with great confusion over what happens even before that date.
And then there's democracy. Granting unelected bureaucracies such as the European Commission unprecedented powers over budgetary and economic policy will unavoidably weaken the powers of national Parliaments.

Ultimately, however, the proposed solutions don't tackle the core problem, which is the loss of competitiveness among eurozone countries on the periphery. (See point 5 above for the predominant German attitude to being told that this is partly Germany's fault.)

Spain and Ireland more or less respected the stability pact, but they're still in a mess - a mess in no small part caused by unsuitable interest rates in the boom-years, which were really designed to serve Germany. The only solution to these problems is a break-up of the eurozone or perpetual fiscal transfers (highlighted by so many people, including FT editor Lionel Barber a couple of days ago).

As Barber concluded, the medium term solution will be to "muddle through" but at some point the eurozone, and Germany in particular, will have to adress the eurozone's fundamental problems.

Indeed, the euro cannot live by budget discipline alone.

Is the ECB trustworthy?

...according to an increasing number of citizens, the answer to that quesiton is "no". Handelsblatt today notes that trust in the European Central Bank is at its lowest level among citizens in the EU since the introduction of the euro.