Open Europe blog

Europe and the City

2012-03-02T19:27:00.004Z

A write up from our event from earlier today is now online, featuring a highly interesting panel of speakers including Jonathan Faull, Director General for Internal Market and Services at the European Commission and Hannes Swoboda MEP, President of the European Socialists in the EP. The panellists were seeking to answer the question what impact the euro crisis will have on the UK financial services industry. Read the summary here.

We'll also upload a recording of the event shortly.

And while we're at it, a reminder of the report that we published in December, Continental Shift: Safeguarding the UK's financial trade in a changing Europe, which can be found here. The report certainly hasn't become any less relevant with the conclusion of today's EU summit...

Despite a mundane EU summit, plenty of challenges remain in Greece

2012-03-02T18:19:00.005Z

Just a quick post on the developments at what must be seen as the most mundane (if not pointless) EU summit on eurozone issues for some time. Reports today suggest that the eurozone will withhold part of the bailout funds for Greece, only paying out the part required to ensure that the voluntary Greek restructuring can go ahead.

This was mostly expected and as we have noted previously, as well as in our report released yesterday, the amount that needs to be paid out is sizeable. The eurozone estimates it at €58.5bn, while we have suggested it could be closer to €86bn.

The main reason for this difference arises from the expected level of recapitalisation for Greek banks. The eurozone returns to previous estimates of around €23bn to aid the banks, despite widespread reports that this could reach €40bn - €50bn as admitted by the leaked EU/IMF/ECB debt sustainability analysis. For our part, we estimate that the bank capital needs could fall between €36bn - €46bn (depending on how they incorporated the write downs onto their balance sheets) to meet the European Banking Authority’s 9% capital requirements.

It is likely that Greek banks will need at least €50bn in the longer term, so it may be that the eurozone is keen to limit the immediate capital pay-out to the minimum necessary to stabilise the banks. This may be prudent on one hand, since it reduces the amount which needs to be raised to push the restructuring through and is less politically divisive. However, running the banks so close to the edge in an economy as uncertain as Greece’s could be asking for trouble.

The final point worth considering on the Greek banks is the issue of collective action clauses (CACs – see here for background). It looks increasingly likely that they will need to be used to get the necessary participation in the Greek restructuring (notice at this point we finally drop the ‘voluntary’ qualifier, as in no way could that still be claimed to be the case). This would leave Greek banks in a tricky situation. Under this scenario the rating agencies would likely leave Greece in a ‘default’ rating longer than expected, meaning that Greek banks will be locked out of borrowing from the ECB for some time (funds which they need to survive). The main way to keep Greek banks alive would be to transfer their funding to the Greek Central Banks Emergency Liquidity Assistance (ELA) as we discussed here.

This is far from ideal, since the ELA is opaque and secretive, but ultimately it may be necessary and unavoidable. Triggering CACs at this stage may be one of the few ways to actually deliver the debt relief which Greece needs. It presents many challenges and unknowns but it still seems better than pursuing a path which seems to be fundamentally flawed.

What will the next Conservative manifesto say on Europe?

2012-03-02T16:00:00.000Z

Over on Conservativehome we have an article highlighting the importance of and looking at potential senarios for the next Conservative election manifesto:

The discussions at the EU summit will inevitably focus on Greece and the eurozone and so mercifully the UK will again largely be a spectator. However, EU leaders are also seeking to further advance the “fiscal compact”, which Cameron refused to sign up to back in December, again highlighting how the end point for the UK is inevitably different to that of the eurozone. It is now settled that the UK will never join the Euro, and neither can it subscribe to further integration - yet the eurozone is speeding towards fiscal union and all EU states bar the UK and Denmark are legally obliged to join. It is therefore clear that, at some point new membership terms will need to be defined, but how? Crucial to this will be what becomes policy in the Conservative Party’s next manifesto.

David Cameron on 4 November 2009

We have a precedent to follow as we have been here before, (in November 2009) - the last time the Conservatives set out detailed proposals on the UK’s relationship with the EU. The Czech President had just bowed to the inevitable and signed the Lisbon Treaty, creating a strategic problem for the party leadership that it could no longer ignore. On the one hand Conservative MPs, (and more importantly candidates) were viscerally hostile to the Treaty, generally believed the EU had gone too far and wanted powers back. On the other the Conservative leadership did not to wish promise anything it knew would be difficult to deliver and (rightly or wrongly) to say anything that could lead to a hostile reaction from Sarkozy and Merkel. What came out of the frantic internal discussions was set out in a speech by David Cameron’s on 4 November 2009.

The speech committed the Conservatives to an attempt to undo some effects of the Lisbon Treaty but not to full scale renegotiation and definitely not a referendum, apart from on future transfers of power to Brussels. But David Cameron also stated “of course we can return to this subject in a manifesto for the parliament after the next one…” and, in the event he failed to achieve his ends:

“we would not rule out a referendum on a wider package of guarantees to protect our democratic decision-making, while remaining, of course, a member of the European Union.”

So it is Conservative policy (Coalition excuses aside) to consider a referendum if it proves impossible to achieve anything this Parliament – which is looking increasingly likely. And the million dollar question: a referendum on what, exactly?

7 manifesto options

Well, here are the options that could go in a manifesto:

In/out, binary referendum: This would commit the Conservatives to a public vote on EU membership, with the options being the status quo versus full withdrawal from the EU.

Pros: It would post a clear, binary question in a referendum and satisfy a fraction of the parliamentary party.

Cons: Both answers would be wrong. A "stay in" would kill off efforts to radically reform the EU (which an overwhelming majority of the British electorate wants), while an "out" vote would trigger more questions than it answers (e.g. alternatives to membership – EEA, Swiss-style bilateral deals, Customs Union, WTO rules). The referendum campaign would also fundamentally split the Conservatives while uniting everyone else (Lib Dems, Labour, Business and Media).

No referendum – a manifesto commitment to renegotiate: A commitment to seek to renegotiate its membership terms and so gain a popular mandate via the general election.

Pros: It gives an incoming government flexibility to negotiate when the time is right.

Cons: It does not answer the desire for a referendum or give an explicit and provide the forceful show of opinion that might be needed to aid negotiations.

A mandating referendum: This seems to be what David Cameron was hinting at in 2009. A referendum would grant the government a mandate to renegotiate the treaties with the other EU states.

Pros: It could give a clear expression of the British people’s desire to repatriate powers.

Cons: It would immediately bog an incoming government down in a referendum campaign many people would not understand. What happens if nothing is achieved in the negotiations? What happens if the referendum fails to attract a good turnout or people vote no? It would be a bit like holding a referendum on who we want to win the Euro 2012.

A confirmatory referendum: An alternative to the above is to promise to renegotiate the UK’s EU membership and put the outcome of the negotiations to a referendum.

Pros: It is clear what the electorate are giving their approval to.

Cons: If nothing much is achieved people in favour of a wider negotiation may not vote, feel let down or potentially vote No. What happens if they vote no?

A mandatory and confirmatory referendum: This option would allow for two referenda - one before renegotiation and one after.

Pros: It is the purest option democratically and it’s clear what the vote would be on.

Cons: It could involve voter fatigue and shares some of the pitfalls of 2 and 3 above.

A reserved referendum: In this case the manifesto would commit the Government to renegotiation, but with the ‘nuclear option’ of a far wider referendum if the negotiations fail to achieve a significant repatriation of power.

Pros: This would give the incoming Government some bargaining power, would show it meant business and give it some flexibility.

Cons: It would be up to the government to decide if its negotiating mandate had been met so potentially avoiding a more in-depth examination of the UK’s membership of the EU.

A multi-stage, multi-option referendum: A final option, which is gaining traction, is to combine some of the above scenarios. This could involve French-style rounds of referenda, i.e. a first round would involve in, out or renegotiate, with a second round involving a vote on the two runner-ups.

Pros: It would fairly capture the options on the table and potentially give a UK government a very strong mandate.

Cons: Again, some of the same problems re-emerge, for example, when will the electorate vote, ahead of the re-negotiation or afterwards? The whole process could also become prohibitively complex.

There’s then the question of what would actually be entailed in a re-negotiation package with respect to what powers a government would actually wish to ask back. Working with an All Party Parliamentary Group on EU reform, Open Europe is currently setting out a number of areas where powers, in various forms, could flow back to the UK, putting its relationship with Europe on a sustainable footing (see here, here, here and here ).

The ground is moving under our feet - the status quo is no longer an option.

Which one will they chose and why?

We still have a long way to go, and more so than in any other area, the Conservatives may be overtaken by events, as it’s still anyone’s guess exactly where the eurozone – and therefore the EU – is heading. But it’s absolutely clear that Conservatives, of all ranks, need to start to seriously think this through. Which way will the Conservative leadership jump?

The second Greek bailout: bad for Greece, bad for eurozone taxpayers

2012-03-01T11:58:00.004Z

Ahead of today’s EU summit, Open Europe has published a new briefing arguing that the second Greek bailout is bad for Greece and bad for eurozone taxpayers. The briefing notes that of the total amount (€282.2bn) that is entailed in the various measures now on the table to save Greece – through the bailouts and the ECB – only €159.5bn, or 57% will actually go to Greece itself. The rest will go to banks and other bondholders. Furthermore, immediately following the restructuring, Greece’s debt to GDP will still be 161%, a reduction of only 2% compared to where it is now. On top of this Greece has to undertake extensive budget cuts amounting to 20% of GDP in total – a level which no other country has even attempted in recent history.

By 2015, once the first and second Greek bailouts have been completed, as much as 85% will be owned by taxpayer-backed institutions (EU/IMF/ECB).This means that in the event of a likely default, a huge chunk of the losses will fall on European taxpayers, potentially leading to significant political fallout in countries such as Finland, the Netherlands and Germany. The briefing concludes that, given the sizeable debt relief needed in Greece, a fuller coercive restructuring would have been a simpler and more effective option from the start and should still be pursued.

To read the full briefing click here.

Hollande takes on London

2012-03-01T11:30:00.000Z

“I am not dangerous” said a grinning Francois Hollande as he arrived in London yesterday.

The Socialist frontrunner to the presidency is on a damage-control trip following a series of statements on markets and wealth creation. The self-described “Mr Normal” has sought to win over the French electorate by presenting himself as the humble antidote to flashy Nicolas Sarkozy.

Trouble is, Sarkozy is playing the same game. Two weeks ago the incumbent President proclaimed himself the “candidate of the people” and vowed to defend French interests against markets by introducing a Financial Transaction Tax.Hollande, perhaps sensing that Sarkozy is treading on his home turf, has upped his rhetoric.

On Monday night, he denounced the “indecent wealth” of French CEOs, and proposed the introduction of an eye-watering 75% tax rate on annual salaries above €1million. The announcement came in the middle of an unrelated debate on unemployment, prompting accusations of improvisation. Sarkozy claimed that the statement smacked of “amateurism”, while Budget Minister Valerie Pecresse denounced Hollande’s “fiscal inflation”, pointing out that “he invents a new tax every week, without proposing any budget savings”. Hollande has a record of market and wealth-bashing. The Correze deputy stated, twice, that he “didn’t like rich people” in 2007, and announced at his official campaign rally two months ago that his “real enemy was finance”.

On Wednesday, he sought to make amends and soothe market and City of London fears. At a meeting with Ed Miliband he pointed out that “the Left was in power for 15 years [under Mitterrand] during which we liberalised the economy and opened markets to finance and privatisation. There is nothing to fear”.

Is that true?

Well, tellingly, Hollande did not meet one City representative during his time in London.

The 75% tax rate is just the latest in a string a proposals designed to hit the richest hardest. Le Monde estimates that under Hollande’s programme, wealthy citizens would pay almost €12bn in tax. Alongside the 75% rate, which will hit between 15,000 and 20,000 households, Hollande calls for a €10,000 limit on tax relief, a hike in inheritance tax, and a 45% tax rate on incomes above €150,000. The 75% rate outstrips current EU tax levels, the highest of which is 56.5% in Sweden. Frightening French CEOs is unlikely to encourage investment, and fuels fears of an exodus of wealthy French nationals. As Nicolas Sarkozy warned this morning on French radio, “the rich will have no reason left to stay”.

Aside from the domestic political considerations, the move also raises serious questions about the viability of tax harmonisation within the eurozone, something the current French and German governments are pushing for in an effort to improve competitiveness through economic policy convergence. Although the initial proposals focus on corporation rather than personal tax, it is difficult to see how such disparate rates of top personal tax rates would not affect countries' competitiveness within the eurozone.

Hollande’s shift to the Left puts him at odds with other European leaders. Cameron and Merkel have snubbed him, while Miliband’s endorsement was lukewarm. Although Hollande stated that “we need Great Britain to take part in Europe and the adventure of construction”, and argued that “European progressives need to secure the success of the next generation”, Miliband stressed that he would not seek to increase tax rates on the highest earners, or introduce a financial transaction tax. Meanwhile, German Social Democrats have distanced themselves from the 75% tax rate. More than 500 UK business leaders called on George Osborne to cut the "damaging" top tax rate today.

European heads of government will hardly be reassured by the Socialist Party’s recent prevarication over the ratification of the EU’s permanent bailout fund, the European Stability Mechanism. The party’s refusal to endorse the fund (20 deputies voted against, many others abstained) is seen in Europe as illustrative of the Socialists’ unpredictable policy-making. Hollande’s oft-repeated pledge to renegotiate the fiscal treaty does not inspire much confidence in Brussels either. As a high-ranking Brussels official told Le Monde two days ago “nobody really knows what Hollande stands for”.

Either way, Hollande's off the cuff announcement marks another twist and turn in what is becoming a fascinating contest with significant repercussions not only for France, but Europe as a whole.

Spain's deficit: "Brussels, We Have A Problem"

2012-03-01T09:00:00.004Z

That was the headline of an editorial in Tuesday's edition of Spanish business daily Cinco Días. The problem - slightly overlooked due to news coming out of Athens, Berlin and Dublin - is that Spain's public deficit at the end of 2011 was 8.51% of GDP. This is 2.5% higher than the target agreed with the European Commission.

In effect, this means that in order to meet the agreed deficit target (4.4% of GDP) by the end of the year, Spain needs to find total savings of €44 billion. The new centre-right government slashed some €15 billion of spending last December, meaning that an additional €29 billion now needs to be found somewhere, through public spending cuts and/or tax hikes. That won't be easy.

As in other parts of Southern Europe, the question is how much austerity the population is willing to take. With austerity measures starting to bite, widespread protests are continuing across Spain in the wake of last year's indignados movement. Thousands of students have been taking to the streets in all the main Spanish cities over recent weeks to protest against education cuts, with the demonstrations sometimes turning violent. Civil servants in the debt-laden Castilla-La Mancha region yesterday went on strike over the local government's plans to cut salaries by 3% and extend the working week by two-and-a-half hours.

In a sign of how much power unelected officials now have in the eurozone, the Spanish government is hostage to decisions made by the European Commission on whether to soften Spain's targets, and give the country a bit of breathing space. Economic and Monetary Affairs Commissioner Olli Rehn and his Spanish colleague Joaquín Almunia, in charge of competition, have said that a decision on whether to revise the targets can't be taken until Spain submits its draft budget and fiscal consolidation plans for 2012, which is unlikely to happen before the Andalucía and Asturias regional elections on March 25.

The Commission has two options. It can play hardball and tell the Spanish government that deficit reduction targets are not negotiable, risking more rage from the masses. Or it can loosen the targets, risking requests from other eurozone countries for the same treatment and hostile market reactions.

For the moment, Rajoy insists that "we will lower the deficit as much as we can." However, Spanish government sources quoted by El País have suggested that the budgetary plans to be submitted to the Commission are already based on a deficit for 2012 higher than the previously agreed 4.4% of GDP. If you ask us, there's no way that Spain can reach the original target.

As the Spaniards say: un hecho cumplido.

What is cheap ECB liquidity actually solving?

2012-02-29T17:00:00.002Z

The ECB held its second three year long term refinancing operation (LTRO) this morning. Overall 800 banks requested €529bn in funding. The market and wider reaction has been mixed – the amount was well within expectations although the number of banks was much higher (up from 523 last time). The larger number of banks is widely being seen as positive since it suggest smaller banks took part this time - and they are more likely to lend directly to businesses - while on average banks asked for less liquidity.

The more important figure though, is how much of this is new liquidity. Of the previous €489bn LTRO only around €200bn was new lending, since banks rolled over their previous loans from shorter ECB lending operations. In this instance (since many loans have been rolled over) the new injection of liquidity is likely to be much higher. We expect that the new liquidity totalled between €300bn and €400bn.

Short term loans issued by the ECB earlier this week totalled €134bn, while €150bn of short/medium term lending is also due to expire this week - both can be seen to give an indication of the amount of lending which will be rolled over. Much of the new lending will have come from the loosened collateral requirements (€200bn or so) as well as the decreased ‘stigma’ associated with banks which borrow from the LTRO.

We’re yet to see a full list of who borrowed what (and probably won’t for some time) but there are some details (we’ll update as more come through):

Intesa Sanpaolo (IT) - €24bn
Lloyds (UK) - €11.4bn
Allied Irish (IR) - Unknown
Banco Popolare (ES) - €3.5bn
KBC (BE) - €5bn
Unicredit (IT) - <€12.5bn (not that this helps pin down the figure much)
BBVA - Similar to first LTRO (around €11bn)

Italian banks are reported to have tapped the LTRO for around €100bn in total, while banks such as ING (NL) and ABN Amro (NL) have stated that they did not tap the operation at all. Clearly 'stigma' is not an issue in Italy but alive and well in the Netherlands, presenting an interesting microcosm of the problems facing these countries.

One point we’d note is that the first LTRO was not tapped heavily by banks from the bailed out countries. There is no evidence that banks from Portugal or Greece took any ‘new’ lending from the first LTRO while Irish banks only took an additional €5bn (% of their current borrowing from the ECB and Irish central bank). This could be for one of two reasons: the banks are more or less blocked from taking on massive amounts of extra liquidity since they should be leveraging and meeting stringent capital requirements under the bailout programmes. Or, the banks in these countries had run short of collateral to post with the ECB in exchange for loans. It will be interesting to see if this problem held true in the second LTRO, given the loosened collateral requirements – early indications with the Portuguese borrowing costs jumping suggest it will.

This shows how the LTRO will not solve any of the eurozone problems. In fact it may not even help sentiment or lending in the worst hit countries. The Italian and Spanish banks look likely to increase their purchases of their domestic government debt, further intertwining eurozone states with their banking sectors. The question now is, how many more LTROs will there be?

Given the lack of a credible solution to the problems in Greece and Portugal we fear more may be on the horizon.

Ps. For you German speakers, it's well worth reading this piece from Die Welt's Holger Zschäpitz on why the LTRO is turning the ECB into a lender of first instance rather than one of last resort

UK banks and the ECB – part 2

2012-02-29T12:03:00.028Z

We'll get back with a take on today's €529 bn of loans by the ECB to 800 banks, via the so-called LTRO, soon.

But first, something different. Remember, we've long been critical of the ECB's backhanded QE, which has created a range of zombie banks in weaker euro economies (reliant on ECB funding to survive). See here, here, here, here, here and countless other examples of when we're looked at this issue. So it's odd that we're now literally taking the 'oh it's not so bad' view in a discussion about whether the ECB is 'bailing out' banks. Well, at least UK banks.

This after the Left Foot Forward blog claimed, and then re-stated, that "the EU" is bailing out UK banks, after Loyd's (now confirmed) and possibly RBS (unconfirmed) accessed funding from the LTRO 2 (see here for background on this issue). We still do not see how this constitutes a 'bailout'. Again, these UK banks are merely saving cash through avoiding an extra exchange rate charge and borrowing at cheaper rates, rather than relying on more expensive (but still available) sources of funding. While the money will only be used to fund their European operations. This just isn't a 'bailout' in any sense of the word.

The Left Foot Forward provides a politically interesting interpretation, but, we believe, also misunderstands some crucial points:

- If it amounts to a bailout, it's a contender for the smallest one in history. €15bn (if that's the final amount) is equivalent to a tiny amount of the UK's banking sector, the assets of which amount to numerous times the size of UK GDP (around £1.5 trn). €15bn is hardly the difference between life or death for UK banks and surely not enough to signal the need for a complete change in approach.

- Lower collateral requirements are not directly tied in with the LTRO, as the Left Foot Forward blog suggests. It's a separate policy (just announced at the same time), but was not in place for the first LTRO, so to claim this is the whole motivation for the LTRO is a misnomer. It may allow UK banks to use assets which may not be accepted elsewhere, but is that enough for it to be considered a bailout? The only instance where this association would work is if UK banks had already used all other collateral worthy assets to gain liquidity - this simply is not the case. In fact the main choice for UK banks is whether the reduced cost is enough to offset the negative 'stigma' of using the LTRO.

On the wider point about QE style interventions, the blog is also confused. Does it want a UK LTRO or lower collateral requirements or both and would this be instead of QE or on top of it?

- Here we would say that the BoE already did its (more direct) version of the LTRO with the Special Liquidity Scheme and its ‘Quantitative Easing’ (QE) programme. It's still overshooting its inflation target by some way, throwing more liquidity into the system seems impractical and risky.

- Furthermore, money in the system has increased steadily in both Europe and the UK but lending has not, which is a problem. But increasing liquidity will not solve this. As results from January show, lending in the eurozone still fell despite the December LTRO. It fell by less than the previous month but still not a resounding victory for the theory that the LTRO is a clear cure to all the lending problems in the wider economy.

We could go round and round discussing the intricacies of the problems facing banks in Europe but ultimately there are endemic structural problems which cannot be solved by simply throwing more liquidity at the problem - in either the UK or the Eurozone.

Markets vs. Democracy - Round 278

2012-02-28T15:37:00.017Z

The Irish government has just announced that it will hold a referendum on the euro fiscal compact. The Irish Taoiseach Enda Kenny said he had taken advice from the country’s Attorney General, and made the decision to call a public vote. He also said he would sign the fiscal compact treaty at the meeting of EU leaders on Friday, and the details and arrangements for the referendum will be sorted and announced in the coming weeks, with a vote to be held before the summer.

The Irish government had previously said that the chances (or risks if you ask the markets and EU elite) of a referendum were always 50-50, so this was far from a foregone conclusion. And, as Zerohedge put it, markets have reacted badly to the news of democracy, with the euro weakening significantly. But what is the precise significance of this announcement?

• The vote will essentially determine whether Ireland has access to future bailout funds or not. For a country to access the ESM, the eurozone's permanent bailout fund, it must have ratified and fully adhered to the treaty, according to the terms attached to the deal. The Irish government has already given indications that it will tie its approach closely in with the prospect of further bailout funding, with Deputy PM Eamon Gilmore pointing out the link between emergency funds and the fiscal pact approval. These scare tactics are likely to grow throughout the referendum campaign, with the flip-side of rejecting the treaty being seen as tantamount to a vote for eurozone exit. In other words, the Irish will vote with a gun to their head.

• It provides yet another illustration of the clash between different parliamentary/constitutional democracies (in this case the German vs the Irish constitutions) that time and again have served as an ‘obstacle’ to perceived crisis solutions.

• Irrespective of the outcome, the vote will not derail the euro fiscal compact as it only requires 12 member state ratifications before entering into force, though it could well limit the impact of the pact.

• Those that thought that the complicated political situation in Europe could be reduced to a simple 26 vs 1 narrative, following Cameron’s ‘veto’ to an EU27 Treaty back in December, have received another reminder as to why that isn't the case.

In sum, it would have been difficult to avoid this referendum and we're glad the Irish government did not engage in the legal gymnastics that have been going on elsewhere in the eurozone (*cough* Frankfurt). If further fiscal integration is ever going to succeed (leaving aside whether it's desirable), it will have to happen with a clear and strong mandate from the people. This is also a practical point which market players should ponder. Changes built on a clear mandate from the people (particularly when wrapped in pretty heavy austerity) have a far greater chance of standing the test of time.

But the likely approach of tying a Yes vote to access to more bailout funds and greater security and a No vote to a eurozone exit is already worryingly over-simplistic. Finally injecting some democracy into the eurozone crisis should not be watered down by pigeonholing it into tightly defined categories.

That said, as we've noted, the fiscal pact has already been watered down itself and signing up to it would not be the end of the world for Ireland - but only if that's what the people decide after a full discussion of the issue.

A 'selective' Greek default and some emergency liquidity

2012-02-28T12:04:00.011Z

A few interesting developments overnight and this morning in the eurozone. Specifically, S&P’s decision to put Greece into ‘selective default’ and the ECB’s reaction.

‘Selective default’ is essentially a partial default rating (in this case validly applied due to the current restructuring which Greece is undergoing and the fact that some bonds held by the ECB have been exempted). Under the ECB’s rules, when a country (and therefore its debt/bonds) is classified in any form of default its bonds cannot be used as collateral for the ECB’s lending operations. The ECB released a statement confirming as much this morning.

The kicker here is that Greek banks are completely reliant on ECB lending for their liquidity needs – they could not survive without it. Unfortunately, a huge majority of the assets which Greek banks use as collateral with the ECB are tied up with the Greek state (Greek government bonds or bonds backed by a Greek state guarantee). The plan to deal with this issue is for the majority of lending to Greek banks which currently takes place under the ECB to move to the Greek Central Bank’s Emergency Liquidity Assistance (ELA) programme. The ELA has lower collateral requirements and therefore will presumably continue to accept the 'defaulted' Greek bonds as collateral.

This is an unprecedented move and should stop Greek banks collapsing. That said the opacity and secrecy of the ELA means it will be even harder to figure out what is going on within the massive sovereign banking loop in Greece.

As a refresher, we present an article we wrote last September on the ELA for the World Commerce Review. It provides a comprehensive run down of how the ELA works and what implications its use could have for eurozone.

To read the article see here.

Burying parliamentary scrutiny?

2012-02-27T17:09:00.013Z

The picture on the left is not some random shot to illustrate excessive bureaucracy, it's literally the document setting out the details of the second Greek bailout package, which German MPs just voted on.

Not exactly bed time reading.

As expected, the Bundestag voted to approve the package, by 496 votes in favour compared with 90 against and 5 abstentions. We'll provide a breakdown of the votes alongside some further analysis in due course.

While approving the deal, many MPs were unhappy (Die Linke's Kathrin Vogler specifically raised the issue) about having had only a few days to read through, digest and then analyse a document which came to no less than 726 pages, including hugely complicated issues such as explaining different options for bond swaps, how the swap would work and the impact on Greece's debt sustainability (and therefore the risk to German taxpayers).

The agreement was only reached in the early hours of Tuesday morning, and the Bundestag's budgetary committee only looked into the details on Friday, meaning ordinary MPs only got hold of the documentation over the weekend.

This begs the question, how in the world are MPs supposed to fulfil their role scrutinising the decisions reached by governments. The bailout took eight months to organise, now MPs were expected to approve it with a weekend's notice (at least with respect to the details). Given the number of unanswered questions and heroic assumptions on which the agreement shakily rests, this is a pretty scary situation.

In fact, if this is the future of parliamentary/constitutional democracy in the eurozone, you'd forgive national parliaments for believing that is a price not worth paying for keeping the eurozone intact.

The grass is always greener: UK banks, the ECB and the LTRO

2012-02-27T15:01:00.009Z

We'd figured this one would cause confusion once a paper reported on it.

This morning’s FT noted that RBS and Lloyd’s are considering borrowing from the ECB’s long term refinancing operation (LTRO). Remember, the LTRO is the ECB's 'bazooka' response to the eurozone crisis, giving banks across the eurozone access to very cheap long term credit (aimed at avoiding a deep freeze in the banking system, e.g. banks stop lending to each other, which in turn could cause sovereign debt market drying up = Bye Italy).

That banks in Britain - a country that has refused to participate in euro bailouts - now ask for cash from the ECB looks pretty bad on the surface. At least for those not familiar with the ins and outs of central bank financing. And sure enough, the Left Foot Forward blog suggests that the ECB is now “bailing out” UK banks.

Hmmm, not quite.

First, this is actually not new. RBS (€5bn) and possibly HSBC accessed the first LTRO back in December when there was little furore over the process and there has been little fallout since.

But more importantly these banks are providing collateral and borrowing under standard repurchase agreement (repo) terms. Their reason for doing this is not because they cannot borrow this money from the Bank of England or because they could not survive without it - which the Left Foot Forward blog and some others seem to believe - but simply because it is a cheap source of euros. These banks have extensive operations and exposure to the eurozone and therefore it makes practical and economic sense for them to tap the ECB’s lending operations if possible.

All the ECB is doing is taking on the exchange rate risk for these banks (similar to the US dollar swap line – see here for our analysis of this). These banks could obtain this money in pounds and then change it to euros, but then they would have to incur the cost of the transaction and hedge against the risk that the exchange rate could shift significantly over the period of the loan. The UK government or the Bank of England (BoE) could’t really fulfil this role, unless it set up a direct swap line with the ECB (which is redundant since these UK banks can borrow from the ECB directly through their subsidiaries – as they are doing).

In other words, this does not represent any extra risk for the UK or eurozone governments (since collateral is posted) or any failing on the BoE’s part, but simply the subsidiaries of the banks making a practical decision about how to help fund their exposure to the eurozone. Now, there certainly are problems with the LTRO and the risks it poses for Europe's taxpayers in the eurozone long-term. If anything, it would be more concerning if taxpayer-backed banks did not seek to obtain funding at a lower comparative cost and cover their exposure to the eurozone crisis, given that the move is risk-neutral.

We would note the irony in that some in the UK are calling for ECB style unlimited three year lending to banks, while many in the eurozone are calling for UK style ‘Quantitative Easing’ – we guess the central banking grass is always greener…

STOP! Bild pumps up pressure on German MPs ahead of vote on second Greek bailout

2012-02-27T12:47:00.008Z

With the debate ahead of the Bundestag vote on approving the second bailout package for Greece due to get underway in 30 min or so (as ever we will be covering the event live on our twitter page @openeurope), Germany's biggest selling tabloid, Bild Zeitung, has upped the ante calling on MPs to vote against the package.

Under the brilliantly simple headline "STOP" (see picture above), Bild writes:

"Once again, it's payday in the Bundestag. €130 billion are meant to save Greece from ruin. Bild appeals to all MPs, do not proceed with this folly!"

The entire page 2 of the paper then features a range of interviews with economists, such as the German Guru Hans-Werner Sinn, explaining why Greece is a "bottomless pit" and why it "can't stand on its own two feet even with this bailout". The Chief Economist of Deutsche Bank, Thomas Mayer, says that a euro exit should not be "taboo" anymore.

It's pretty strong stuff.

Remember, as we've pointed out before, Bild is a huge paper - by far the best selling paper in Germany (far bigger than the Sun for example) and according to some measures, the paper with the widest circulation outside Japan.

In other words, it has a lot of political clout and serves as an important barometer of public opinion, which you mess with it at your peril. A poll in Bild Am Sonntag also showed that 62% of Germans are against the second Greek bailout (up from 53% in September).

But how many MPs, not including those who were already going to vote against, will be swayed? Given that the opposition SDP and Green party will back the government there is virtually no chance of the bailout being rejected, so the issue is how many coalition MPs will rebel, and whether it will be more than the 15 who voted against the expansion of the EFSF back in September.

If Merkel is unable to rely solely on her MPs to pass through the bailout, it will have serious repercussions for the continued viability of the government...

How to make the EU’s farm policy work for jobs, growth and the environment

2012-02-27T09:40:00.013Z

Open Europe has today published a new report looking at the EU’s farm policy – the Common Agricultural Policy (CAP) – and how it could and should be reformed. As we set out in the report, the UK gets a bad deal from the CAP, contributing £7.1bn more than it gets back over the current EU budget period. At the same time, the subsidies it receives are spent in a way that actively channels resources away from areas and sectors that could generate the most economic or environmental benefits.

Short of entirely liberalising the policy, Open Europe has proposed a radical overhaul, linking subsidies to measurable environmental benefits, while allowing productive farmers to opt in or out of the scheme. At the same time, the overall CAP budget would be rationalised, reducing the UK’s contribution to the EU budget by £7.3bn over seven years.

The full report can be downloaded here, but these are the key points:

- On-going negotiations over the EU’s long-term budget provide an opportunity for the UK to reverse the serious poverty of vision that has characterised British diplomacy and government thinking on CAP reform for decades – but the window for doing so is quickly closing.

- The UK remains a big loser from the CAP. Between 2007 and 2013, the UK will contribute £33.7bn to the CAP and get back £26.6bn; a net contribution of £7.1bn. Per hectare, the UK receives £188, compared to for example France, Germany and the Netherlands which receive £236, £251 and £346 respectively.

- There remains no clear link between the wealth of a country and how much it receives from the CAP. Latvia, for example, gets £115 per hectare from the EU’s Single Payment Scheme – the least out of all member states – despite average farmers’ income being only 35% of the EU average. By contrast, wealthier member states such as Ireland and France continue to do well out of the CAP.

- Despite a series of reforms, the main ‘benefit’ of the CAP is that on the whole, it is less damaging than it used to be. Owing to its arbitrary design and contradictory aims, the CAP fails to meet its own objectives of delivering bio-diversity, boosting farmers’ competitiveness and promoting rural jobs and economic development.

- The share of the CAP spent on explicit environmental aims in the UK is only 13.6%. By failing to differentiate between different types of land, direct CAP subsidies actively channel public resources away from where they could create the biggest environmental gain.

- At the same time, by providing income support irrespective of whether any meaningful economic activity takes place on a farm, direct CAP subsidies often act as an outright disincentive for farmers to modernise, in turn locking in unviable business models and hurting Europe’s competitiveness.

- The cost to consumers and taxpayers across Europe of the EU’s farm subsidies and tariffs now stands at €86.9bn – of this €52.5bn stems from CAP subsidies. If, hypothetically, the CAP and other EU measures to protect farming, such as tariffs, were fully liberalised and the money freed up were re-channelled to more productive areas of the economy, it could be worth a boost in output equivalent to €139bn or 1.1% of EU GDP. Britain would experience a boost in output of €14.2bn or the equivalent of 135,000 full-time and part-time jobs.

- Full liberalisation of the CAP would be economically viable. However, given the widely held belief that that there is still a role for the state to play in delivering objectives such as bio-diversity, land management and R&D, such an option is most likely to gain political support.

- Therefore, we propose a pragmatic mix: a new, radically revamped EU farm policy, allowing for resources to be effectively allocated to both production and environmental benefits while better targeting jobs and growth. This would involve four steps:

1) The current CAP structure would be replaced with a system of agri-environmental allowances. Funding for member states would be allocated according to environmental criteria, such as bio-diversity, but be administered nationally. Payments could then be transferred between farmers depending on where the environmental gain is the greatest.

2) After complying with some minimum environmental standards, farmers would then be free to opt in or out of this scheme, with those farmers wanting to focus exclusively on production being free to do so.

3) EU-level funding for rural economic development should be limited to the poorer member states only, and be migrated over to the EU’s structural funds. Farmers should also be able to qualify for time-limited support from a fund similar to the EU’s Globalisation Adjustment Fund, targeted at making farmers more competitive and able to move into other parts of the economy.

4) A limited pot of money for agriculture related R&D should remain at the EU level.

- By simultaneously streamlining the CAP budget, such a system would reduce the UK’s contribution to the EU budget by £7.3bn over seven years.

The Commission takes transparency too far...

2012-02-24T10:15:00.002Z

In a light-hearted break from the doom and gloom of the eurozone crisis, Italian daily Il Corriere della Sera reports that yesterday EU Economic and Monetary Affairs Commissioner Olli Rehn had to field a couple of particularly tough questions during his regular midday press briefing.

Were they about the future of Greece? Or the lack of growth in the eurozone? No.

Apparently, earlier this week the Finnish Commissioner held a very confidential meeting with six male reporters from several major European dailies...in the European Commission's sauna! Yes, it has a sauna.

The briefing was supposed to remain secret, but it soon became common knowledge in the crowded press room. A German journalist asked Rehn whether he was planning to extend such "confidential briefings" to female reporters at some point. Clearly embarrassed, Rehn managed to put together an answer,

I've regular contacts with journalists, in various contexts, on and off the record. I take note that there's an interest with regard to these meetings.

Ivo Caizzi, Brussels correspondent for Il Corriere della Sera, went one further, enquiring about the dress code for such meetings. Olli Rehn, his head bent, was left speechless, while his Spanish spokesman promptly said that there was no need to provide further details (not that anyone was desperate to know them!) because everyone is aware of "Finnish customs" when it comes to the use of saunas.

Some things are best kept under wraps Olli...

Money vs Democracy: What The European Press Said Of The Second Greek Bailout

2012-02-23T09:30:00.001Z

As the negotiations on the second Greek bailout went on until 3.30am on Tuesday, Europe's papers weren't able to provide a response to the agreement until yesterday. Here's a round-up:

As usual, we would like to start with Germany. The front page of Die Welt ran with an unequivocal headline,

Europe: Welcome to the Transfer Union

In the Frankfurter Allgemeine Zeitung, Economics Editor Holger Steltzner argued,

Prices must fall if Greece wants to compete with its neighbours in agricultural products or tourism. Such an adjustment usually works via the exchange rate with the devaluation of the own currency. But members of the monetary union have relinquished this instrument. In Greece wages and prices would have to fall by half in order to become as successful as Ireland. That is too much – there is a lack of will and force. Therefore, a third credit package is coming – or the farewell to the euro.

While part of the German press was more interested in the economics of the second Greek bailout, others chose to focus on what the second Greek bailout could mean for the future of Greek democracy.

In Die Welt, political commentator Günther Lachmann warned,

Europe is being radically changed. With regulations in a Socialist-style language the EU is trying to govern nation-states...The kind of consequences this has can now be seen in Greece. There, the government is actually thinking of changing the constitution, at the request of the EU, to give absolute priority to debt repayment.

Wolfgang Böhm wrote in Austrian daily Die Presse,

[Greece] is de facto being completely put under custody...This has nothing to do any longer with the normal democratic order of a sovereign state.

To continue with 'Northern' Europe, this is what Carla Joosten wrote in Dutch magazine Elsevier,

The euro has condemned European citizens to deal with each other more than they may really want to. Can Europe go on this way?

A leader in Belgian magazine Knack carried the headline,

Greece must choose between money and democracy.

The article is particularly critical of German Finance Minister Wolfgang Schäuble's idea of postponing the Greek elections, due in April, and questions how it is possible that such proposals,

Are being floated without any serious protest coming from the European Commission, the European Council or even the European Parliament.

Let's move South.

In Italy's main business daily Il Sole 24 Ore, editorialist Carlo Bastasin noted that, with the second Greek bailout,

Europe enters into the heart of the state’s supreme authority, showing that monetary and fiscal policies are now detached from the sphere of the nation’s exclusive prerogatives.

In an op-ed in Spanish business daily Expansión, Spanish Economics Professor Juan Castañeda warned,

This European way out of the crisis in which national institutions democratically elected by citizens are gradually losing the effective ability to rule their countries…to the advantage of European institutions chosen by states will do nothing but distance even more the citizens from the so-called European project.

So what's the alternative? Well, get prepared to read something pretty unusual among Spanish academics,

Greece’s temporary suspension from the euro and the circulation of the new drachma in parallel would allow for the effective devaluation of Greek prices and costs, once and for all and without so much social discontent.

For those who love ancient Greek history, Nick Malkoutzis took inspiration from the 'marathon negotiations', arguing in Greek daily Kathimerini,

Marathon can refer to one of two things: one of the most decisive battles in history, in which the ancient Greeks repelled the threat of the Persians and a disastrous future, or the long-distance race which marks the lung-busting effort of messenger Pheidippides to inform the Athenians of victory over the invading army...Where these two allegories might cross paths in the case of modern Greece in the wake of the Eurogroup’s bailout decision is that the country might escape the clutches of disaster but its people, like the ancient messenger, might collapse from exhaustion.

Not sure we can call the following comment piece a 'reaction' to the second Greek bailout, given that it was written ahead of Monday's Eurogroup meeting. However, French columnist Nicolas Barré made a very good point in French business daily Les Echos,

Two years ago, European leaders concealed the gravity of the situation of the sickest economy of the eurozone, and pretended to believe that, with some tens of billions of aid, [Greece] would be put back on its feet and miraculously regain the markets’ confidence. Not only was this a complete failure, but such a denial of reality also undermined the credibility of the eurozone as a whole and contributed to make the crisis worse. So that nowadays it’s frankly paradoxical that the more cautious, those who warn against the risks, those who don’t rule out a Greek default in the coming months, are relegated with disdain into the ‘anti-European’ camp.

And here's what François Roche has written in La Tribune,

Over the coming years, Greece will be watched over by an impressive number of EU and IMF observers. It must commit, in its constitution, to prioritising the reimbursement of its foreign creditors. Can this stand up to the exasperation of [Greece’s] public opinion and part of the political class? For the first time in the history of the European construction, a member state is deprived of part of its budgetary policy prerogatives.

What about voices from outside the eurozone?

In Swedish daily Dagens Nyheter, columnist Annika Ström Melin argued,

The crisis is not only about the survival of the euro. A rescue package for democracy will be required as well. Even more secret meetings and ingenuous but incomprehensible agreements between the representatives of the political elite are not enough to save the European project.

In Polish daily Rzeczpospolita, Andrzej Talaga wrote,

Trading sovereignty in exchange for financial assistance could be acceptable if it were a temporary measure, until Athens is ready to stand on its own feet again. However, this is not going to happen – the agreement reached in Brussels contains…utopian macroeconomic assumptions regarding Greece’s debt, deficit and growth prospects which could only be achieved if Greece were to completely overturn its economic, administrative and political system and replaced its pathology with a healthy state and economy…Let it be a warning to others.

We are sure that, after this 'marathon' of comments, you are still curious to know what we said in reaction to the second Greek bailout. We published a comprehensive response on our blog, which you can read here. In addition, over on the Telegraph's blog, we argued,

New debt issued by the Greek government in 2014/2015 will essentially be junior to existing debt. This raises the question why private creditors would want to purchase Greek debt at all in three years' time, given that they would be first in line for any losses if Greece’s economy goes down the tubes. Taken together with the tough austerity targets which could choke of any chance of recovery, as the [debt sustainability analysis] admitted, this may force Greece to seek another €50bn bailout after 2014 [as investors will have little incentive to hold Greek bonds].

This is enough reaction for one day, but if you want to stay on top of the latest developments in the eurozone crisis, follow us on Twitter @OpenEurope.

Decoding the significance of Germany's 'Presidential Poker'

2012-02-22T09:00:00.001Z

Following the resignation of Germany's President Christian Wulff last week after a long drawn out affair involving an undeclared loan from a businessman (not the most salacious scandal ever), Protestant pastor and DDR human rights activist Joachim Gauck has been nominated as his replacement by the governing CDU/CSU and FDP coalition, with support from the opposition SDP and Green parties. This means he is virtually guaranteed to secure the position after a parliamentary vote (German Presidents are not directly elected).

However, his nomination was far from a smooth process, with the junior coalition party, the FDP, pulling off an extraordinary coup by instating Gauck ahead of more 'establishment' candidates preferred by Merkel. The FDP has had a tough time of late; derided for its lack of effectiveness and credibility (its promised tax cuts not deliverable in the current climate), riven by internal infighting (not least over the eurozone bailouts) while opinion polls consistently put them under the 5% required to win Bundestag seats. The party therefore saw the 'Presidential poker' - as the German media dubbed the nomination process - as an opportunity to hit back and outmaneuver Merkel by working with opposition parties to install Gauck - the people's choice - as opposed to another of her political allies, like Wulff had been.

Although it remains primarily an issue of internal German politics, the wrangling over Gauck's nomination could also have a significant impact on wider eurozone politics. Firstly, there is the internal fallout within the coalition, with CDU/CSU politicians furious at what they see as the liberals' "betrayal". Der Spiegel notes that the atmosphere in the coalition has been "poisoned" with FDP leader and vice-Chancellor Philipp Rösler and Merkel reportedly having a furious exchange before the latter agreed to concede on the issue. Somewhat mischievously, the Greens' co-chairman Cem Özdemir commented that:

“In the darkest days of the cold war, trust between the Soviet Union and the USA was better than trust [between the parties] in this coalition.”

While a break-up of the coalition and early elections look very unlikely, not least because of the FDP's dire polling figures, there has been much speculation that the party's actions during the 'President poker' should be interpreted as positioning for a potential future 'traffic lights' coalition (SDP + FDP + Greens). Following last weekend's success, it could well be the case that the FDP will adopt further attempts at 'differentiation', putting a strain on the unity of the coalition. This could have potentially serious consequences given that the eurozone crisis could well take another turn for the worse, for example if Portugal is found to require further assistance, or if the agreement on Greece's restructuring and 2nd bailout started to unravel.

The second way in which Gauck's nomination could be significant is the potential for him to challenge Merkel's handling of the crisis, if he feels that too many constitutional rules and democratic principles are being circumvented. While the position is largely ceremonial, it does also carry some political clout, with the public looking to the President for leadership beyond the realm of party politics, particularly in such a time of crisis. As a leader in yesterday's Welt argued:

"[Gauck] will be a strong president. His word will carry weight next to that of Angela Merkel. It may well be that Merkel is not really comfortable with that prospect."

Another comment piece in the same paper added that:

“Gauck is a real trumpeter for civil society... praising the ordinary, everyday variant of democracy, including its slow pace and its unsightly political machinery... he will always have something to say.”

Given the ongoing debate in Germany about constitutionality, democracy and transparency in the context of the crisis, it will be interesting to observe how Gauck, a committed pro-democracy activist who is certainly not afraid to speak his mind, will respond if the demands of crisis management continue to put these under pressure. As an independent figure, Guack will be free to act in a way that Wulff, who owed his position to Merkel, was not. This is certainly an area worth keeping an eye on, not least on March 18th, when the new President heads on a state visit to Greece...

Many questions around the second Greek bailout remain unanswered

2012-02-21T12:18:00.016Z

We finally have an agreement on the second Greek bailout…in principle. It only took eight months. If you’re of the belief that a disorderly Greek default would have triggered Armageddon, the deal that was agreed (as ever ‘agreed’ is used loosely) by Euro finance ministers in the early hours of this morning is broadly good news.

Unfortunately, it is once again hopelessly optimistic and contains numerous gaps and unanswered questions which could still bring down the whole deal. This is nowhere outlined better than the damning leaked debt sustainability analysis (see here for full doc).

Below we outline a few key issues (not exhaustive by any means, there are many more) and give our take on how they could play out.

Greater losses for private sector bondholders: Reports suggest the Greek government was sent back to the negotiating table with bondholders at least four times during last night’s meeting. Nominal write downs for bond holders now top 53.5% (or around 74% net present value). The leaked Greek debt sustainability analysis (DSA) assumes a participation rate of 95%.

Open Europe take: 95%, really? We weren’t convinced the previous threshold of 90% with a lower write down would be reached and that was while potential ECB participation was still on the table. Although this target may have been agreed with the lead negotiators for the private sector, it is far from a cohesive group, diminishing the value of the agreement. It will be interesting to see how bondholders respond to the plan but we think that hold outs could well be more than 5%.

Greek ‘prior actions’: The deal includes a list of requirements which Greece must meet in the next week to get final approval for the bailout. These include: passing a supplementary budget with €3.3bn in cuts this year, cuts to minimum wage, increase labour market flexibility and reforms opening up numerous professions to greater competition.

Open Europe take: The now infamous €325m in cuts still needs to be specified. The huge adjustments to labour markets and protected professions mark a cultural shift in Greece – pushing these through will not be painless and could result in further riots.

Fundamental tensions in objectives of the programme: The DSA notes that the prospect achieving a return to competitiveness while also reducing debt is very small – the massive austerity could induce a further recession.

Open Europe take: As we have noted all along the assumption that Greece can impose massive levels of austerity and then return to growth in the next two years is a big leap and almost inherently contradictory. We’d also note that the cuts in expenditure in Greece are larger than have been attempted anywhere in recent memory (successful or failed). Likely to be substantial slippages in the austerity programme while the growth programme remains almost non-existent, essentially closing the book on Greek debt sustainability.

Further favourable treatment for the ECB: ECB and national central banks avoid taking losses on their holdings of Greek bonds but promise to redistribute ‘profits’ from these holdings so that they can be used in Greece.

Open Europe take: See our previous post for a full discussion of this issue. Markets still don’t seem too worried by suddenly being subordinated by central banks in Europe – they should be. This raises questions of the basic premise that all bonds are treated the same, based on who issued them not who holds them. As we’ve noted before, the whole concept of ‘profits’ is misleading, while any distribution would happen anyway – this is not a commitment from central banks but a further fiscal commitment by the eurozone (should really be included in total bailout funding).

Greece may not be able to return to the market even after three years: The DSA points out that any new debt issue will essentially be junior to existing debt, hampering the chances of Greece issuing new debt in 2014/2015.

Open Europe take: This point isn’t too clear but given that the eurozone, IMF and ECB will own such a larger percentage of Greek debt in 2014 any new private sector debt will be massively subordinated and at risk of taking losses if anything goes wrong with the Greek programme. Additionally after the restructuring the remaining private sector debt will be governed under English law and will have the EFSF sweetener – further subordinating any new debt issued to the market. Why would anyone want to purchase Greek debt in this situation (especially given the other concerns above)?

EFSF funding requirements: The EFSF will have to raise €70.5bn ahead of the bond swap – €30bn in sweeteners for the private sector, €5.5bn to pay off interest and €35bn to provide Greek banks with assets to use to gain liquidity from the ECB.

Open Europe take: We’ve already questioned whether raising these funds so quickly can be done and whether the approval from national parliaments will be forthcoming. Even if it is the €35bn is said to fall outside of the €130bn meaning it is expected to be returned swiftly – given the uncertainty over how long banks will need these assets (as long as Greece as declared as in selective default by the rating agencies) this may be a generous assumption.

There is also no talk of the money to recapitalise banks. This is a risky strategy given that Greek banks’ main source of capital (government bonds) will have just been wiped out significantly. The needs were previously specified at €23bn, although reports now suggest they could top €50bn. It’s not clear where this money will come from or when it will be raised. The bond restructuring will be like dancing through a minefield for Greek banks.

We’re still trawling through the responses, analysis and documents to come out of the meeting – meaning there are likely to be plenty more questions and uncertainties to come.

The one thing that is clear is that even if this bailout is ‘successful’, it will set Greece up for a decade of painful austerity and low growth leading to social unrest, while the eurozone will have to provide on-going transfers to help it keep its head above water.

Sorry to be killjoys but as Dutch Finance Minister Jan Kees de Jager put it, the deal isn’t “something to cheer about”.

Germany says goodbye to Greece...?

2012-02-20T17:53:00.007Z

A potentially telling picture from inside today's meeting of finance ministers...?

Unlikely, but still an unfortunate snapshot. In other shocking news, reports suggest that the meeting is moving along slowly with little progress on issues such as getting the Greek debt to 120% of GDP in 2020, the escrow account or how big a presence the EU/IMF/ECB troika should have on the ground in Greece.

It's going to be a long night...

Other captions welcome in the comments (h/t FT live blog)

Another uncertain meeting...

2012-02-20T11:31:00.011Z

Ahead of another meeting of eurozone finance ministers there are still plenty of issues which need to be resolved if Greece is to get underway with its second bailout plan. The key issues are:

- There remains at least a €6bn gap in the Greek funding plan and Germany, the Netherlands and Finland have set a ceiling of €130bn on the size of the second Greek bailout. The meeting must find a way to fill this gap – reports suggest it will be done through a combination of a write down on the Greek debt held by national central banks and a reduction in the interest rates charged on the initial Greek bailout, while discussions are on-going over the redistribution of profits from the ECB’s holdings of Greek debt (which as we point out here is nearly impossible).
- Currently the debt sustainability analysis shows Greek debt at 129% of GDP in 2020, above the target of 120%. This may be in addition to the funding gap mentioned above (although this isn’t clear).
- Will the eurozone accept and approve the lower IMF contribution? Reported to be only 10% this time around, compared to 30% in previous bailouts (also raises questions over the IMF’s support for the programme more generally).
- Following the Greek restructuring, Greece will be declared as in ‘selective default’ by the rating agencies. Any Greek bonds will not be eligible as collateral to gain loans at the ECB. This essentially means Greek banks will be stripped of assets which they use to gain the ECB funding upon which they are completely reliant. The plan suggests providing them with €35bn in assets, although outside of the bailout funding. Where will this money come from? Likely to take the form of EFSF bonds, although the creation of these bonds will still need to be approved by the eurozone in the same manner as if it were lending cash directly.

As we outlined in a recent briefing, eurozone leaders will struggle to find an agreement on these issues (along with many others).

We’ll update this blog with any big news throughout the day.

Decoding the ECB bond swap

2012-02-17T17:49:00.012Z

As Die Welt reported yesterday, it now looks as if the ECB will swap it’s circa €55bn (nominal) holdings of Greek debt into newly issued Greek bonds provided by the Greek state. Below we attempt to summarise what this actually means. It’s a bit techie – so bear with us.

There are basically three options for Greece: a debt write-down that creditors agree to voluntarily, coercive restructuring (where Athens uses contract-based provisions to not pay back its creditors) or disorderly default (all hell breaks loose). Today’s deal has reduced the risk of the latter while increasing the chance/risk of the first two. However, it still hasn’t answered the question whether the ECB will actually itself take losses – or participate in some form – in a Greek restructuring.

Why is the ECB swapping its current holdings of Greek bonds for new ones?

Under this arrangement, the new bonds will be distinguished from the old ones in some way (possibly through different serial numbers) allowing Greece to pass legislation which retroactively imposes collective action clauses (CACs) on the rest of Greek debt held outside of the ECB. (This is sort of like the government hiking the tax rate today and then trying to claim 10 years of back tax at this higher rate). While a number of bondholders could agree to take write downs voluntarily, the remaining ones could be forced to do under these CACs. But the ECB is now safe. This matters tremendously since, if Greece went for a coercive restructuring without any special protection for the ECB, the institution could be faced with major losses and huge dents to its credibility – since it continually denied that it was taking too much risk since it saw a Greek default as impossible. The Eurozone and Germany in particular is keen to avoid this (see here for a whole range of political reasons why).

Open Europe take: While we have sympathy with the ECB for trying to avoid losses, this is a rather strange move (and a result of their flawed policy approach we might add). The preferential treatment it now has on Greek debt, suggests that the ECB’s wider holdings of eurozone debt from its bond purchase programme (around €220bn) are senior to eurozone debt held elsewhere. This could create uncertainty in the bond markets of the southern eurozone states, as bonds held by private creditors are much more likely to be next in line for a write down. More importantly, it also opens the ECB up to legal challenges, since some bond contracts will have clauses protecting them against subordination (negative pledge clauses). Importantly this worrying precedence is reported to be the reason why Bundesbank President Jens Weidmann objected to the move, further highlighting the fundamental disagreements within the ECB itself.

Doesn’t this increase the prospect of a voluntary restructuring?

The swap seems to have gone down well with markets. The perception is that private creditors – those that still hold out – will be much more likely to now accept voluntary losses, which – finally – can bring a conclusion to what has seemed like endless talks between creditors and the Greek government.

Open Europe take: The risk of a disorderly default on the 20 March has radically decreased, which must be considered a good thing. The Greek threat of forcing a coercive default using CACs is now much more credible (it can be done with fewer legal complications) which should force private sector bondholders to pull their finger out since they could face far greater losses under a coercive restructuring. At the same time, Greece now actually has the tools to push through a coercive restructuring (via the CACs) and a larger write-down, meaning that this option is still very much a possibility. So perhaps the markets are getting ahead of themselves.

Does this provide any additional debt relief for Greece?

No. There has been some confusion over this point. Currently the swap is 1:1 meaning the ECB will not take any losses or provide any monetary benefit to Greece. The ECB does seem to have agreed to distribute its ‘profits’ (revenues from the interest payments) on the new holdings so that they can be used to aid Greece.

Open Europe take: As we have noted before, the official sector will take losses in Greece, now or in the future (better now). The ECB should not take direct losses but forgoing the difference between the purchase and nominal price of its holdings of Greek debt would be beneficial. On a side note this episode highlights the lack of transparency surrounding the ECB's actions in the eurozone crisis. Despite purchasing the bonds at a discount the ECB holds the bonds at nominal value on its balance sheet, therefore selling them at purchase price means the ECB would still book a loss on paper. This is not an argument against the ECB providing some debt relief to Greece in of itself (by selling the bonds at purchase price), but more that the ECB does not correctly display risk on its balance sheet and did not create enough safeguards against such an event when it first decided to purchase eurozone government debt.

Furthermore, the concept of redistributing ECB ‘profits’ is flawed. The ECB already pays out any profits it makes to eurozone member states. It is then up to them to use the money how they see fit – it is a political decision, meaning the ECB’s comments about profits being used to aid Greece in this sense are more or less irrelevant.

Is this the end of the discussion with the ECB and Greece then?

Not quite. Once the switch to the new bonds has occurred there could still be scope for the ECB to offload them and sacrifice the difference between the purchase price and nominal value of their Greek holdings. The voluntary restructuring will move ahead and if it does not provide enough debt relief the pressure on the ECB to provide some additional relief will increase again.

Open Europe take: As we note above, Greece will probably need help from the ECB at some point. The Greek negotiating position is now significantly weakened since the ECB has greater protection. The ball is firmly in the ECB’s court – not exactly desirable given the opacity and stubbornness which it has presented so far in the eurozone crisis.

Seven reasons for optimism?

2012-02-17T15:19:00.004Z

Swedish Finance Minister Anders Borg – top of the pile in Europe according to the FT – today gave the EU committee of the Swedish Riksdag the lowdown ahead of Monday’s meeting of EU finance ministers (in some countries, lo and behold, ministers are actually accountable to their parliaments for what they say and do at EU summits). Amid all the gloom and doom, Borg outlined seven reasons to now be more optimistic about the state of the European economy:

1. The risk posed by Greece to European banks has been substantially reduced

2. The ECB has taken strong actions

3. The talks with private creditors over a Greek debt write-down are about to be concluded

4. The Italian government is pushing ahead with reforms

5. The Spanish government is pushing ahead with reforms

6. A solid recovery in the US

7. The Chinese government believes that its growth will remain relatively strong in 2012

Enough to believe that the worst is behind us? You decide.

Ps. For some Friday 'entertainment', you may wish to check this out - a rather odd sample of Swedish humour....

Bild sets it sights on another scalp

2012-02-17T10:04:00.008Z

Bild's reporting of the eurozone crisis has hardly been subtle, but following the increasingly hostile attitude towards Germany by the Greek public and politicians, this morning it has openly called for Greece to "finally be be thrown out of the euro!", adding that the only things the country is able to export are “scorn, abuse and insulting rants”.

As Welt journalist Florian Eder pointed out on twitter, with German President Christian Wulff's resignation this morning over the long-standing property scandal, Bild has claimed a significant victory (the paper played a key role in uncovering the scandal and called on Wulff to step down).

Will it also get its way on Greece?

The Greek Crisis: Five Key Developments

2012-02-17T10:00:00.000Z

The decision on the second Greek bailout has been put on ice until (at least) next Monday, but things are moving fast in and around Greece these days - so here are yesterday's five key developments in the Greek crisis:

A new poll published by Greek magazine Epikaira confirmed that the Greek electorate is moving towards the extremes of the political spectrum. New Democracy - the centre-right party led by Antonis Samaras - is credited with 27.5% of votes, while former Greek Prime Minister George Papandreou's PASOK lags well behind with 11%. In total, the two 'mainstream' parties would therefore get 38.5% of votes. The Greek Communist Party, Democratic Left and the Radical Left Coalition (SYRIZA) are credited with a combined 43.5% of votes, but the first has ruled out entering a coalition with the other two hard-left parties. These results are clearly very significant, not least because they will give Germany, Finland and the Netherlands fresh impetus to argue that Greece's smaller parties should also provide written commitments to austerity. Unfortunately, as we point out in our latest briefing, at the moment it's quite hard to see any of these parties agreeing to such a request;

PASOK's Michalis Chrysochoidis, Greek Minister for growth and competitiveness (definitely an unenviable post), told reporters in Frankfurt that his party is "in favour of an extension of the life of [Greek Prime Minister Lucas] Papademos’s government...Elections should take place by the end of the constitutional term in 2013." Incidentally, Germany, Finland and the Netherlands reportedly brought up the possibility of postponing the Greek elections during Wednesday's conference call of eurozone finance ministers;

Greek President Carolos Papoulias' anti-Schäuble invective didn't go unnoticed in Germany. CDU MP Christian von Stetten yesterday said that, without the German Finance Minister, Greece would already have been bankrupt a long time ago. The Greek President's intervention, he went on, was "unthinkable" and "absurd". Most significantly, Mr von Stetten said that Papoulias' words would "certainly impact" on the Bundestag vote on whether to approve the second Greek bailout, due on 27 February;

According to Die Welt, the ECB has started the announced swap of its €50 billion Greek government bond holdings for new Greek bonds. The ECB is swapping the bonds at their nominal value, meaning that it is making profits out of them. These profits will then be distributed via national central banks to eurozone governments, which will have to decide whether they want to return the money to Greece as part of the second Greek bailout. The swap will be reportedly completed by 20 February. We will expand on this specific point later;

Separately, Schäuble is also said to have rejected the idea of providing Greece with a bridge loan to avoid the country defaulting on 20 March - when Greece needs to redeem €14.5 billion worth of its debt - and uphold the rest of the second Greek bailout until after the elections as a means to maintain pressure on Athens.

Lots of stuff going on, and not all is necessarily good news. As usual, if you want to stay on top of the eurozone crisis, we recommend that you check out the €uro-Zone section of our new website and keep following us on Twitter @OpenEurope.

The second Greek bailout: Ten unanswered questions

2012-02-16T12:31:00.005Z

We put out a briefing note today outlining the ten questions and issues that still need to be resolved in the coming weeks in order for Greece to avoid a full and disorderly default on March 20.

The briefing argues that, realistically, only a few of these issues are likely to be fully resolved before the deadline meaning that Greece’s future in the euro will come down to one question: whether Germany and other Triple A countries will deem this to be enough political cover to approve the second Greek bailout package.

In particular, the briefing argues that recent analyses of Greece’s woes have underplayed the importance of the problems posed by the large amount of funding which needs to be released to ensure the voluntary Greek restructuring can work – almost €94bn – as well as the massive time constraints presented by issues such as getting parliamentary approval for the bailout deal in Germany and Finland. While the eurozone also continues to ignore or side-line questions over the whether a 120% debt-to-GDP ratio in 2020 would be sustainable and if, given the recent riots, Greece has come close to the social and political level of austerity which it can credibly enforce.

The briefing concludes that, ultimately, there’s no way Greece can actually ever fully meet the conditions laid down by the EU and IMF – particularly if they keep piling on new demands. The scale of the cuts goes far beyond any fiscal consolidation – successful or failed – that any country has gone through in living memory. The question is instead one of how long the eurozone’s charade of unrealistic conditions in return for more bailout cash can continue. Specifically, will Germany and other Triple-A countries accept half-baked solutions to the big unanswered questions that still haunt the efforts to save Greece?

To read the full briefing click here.

The End of the Road?

2012-02-16T12:01:00.002Z

Nicolas Sarkozy officially announced his candidacy for re-election during a televised appearance broadcast on TF1 last night. The decision hardly came as a surprise. UMP officials had kept tight-lipped about the President’s schedule, but his recent foray into Twitter and lengthy interview in Le Figaro on Sunday fuelled well-founded speculation in Paris. Sarkozy had hoped to delay the announcement until March, but it is believed that party officials’ exasperation and his unpopularity in the polls forced his hand. As Francois Hollande, election frontrunner and Socialist candidate slyly commented on Tuesday morning, “it seems [that the announcement] comes earlier than expected, don’t you think? Perhaps he believed it was a matter of urgency”.

What are his chances?

According to the latest polls by IFOP-Paris Match published just before the interview last night, Francois Hollande leads with 30%, followed by Sarkozy with 25.5%. Marine Le Pen, far-right candidate for the Front National ranks third place with 17.5% of voting intentions.

Historically, French presidents up for re-election rarely experience a boost in the opinion polls following the announcement of their candidacy. Valery Giscard d’Estaing, Francois Mitterrand and Jacques Chirac each experienced slight increases in opinion polls, which were short-lived and generally failed to change the course of the election. Polling experts believe that Sarkozy would be lucky to experience a boost, since his announcement had been widely expected. As Jean-Marc Lech of polling institute Ipsos remarks “for the announcement to create an effect, it ought to surprise the electorate. But nothing [last night] was surprising, other than the exact date and the location of Sarkozy’s interview”.

Rivals for the Elysee dismissed the event. Le Pen called it a “non-event…of no political importance” and centrist candidate Francois Bayrou slammed Sarkozy’s time in office “his record speaks so much louder that anything he can say”, mocking the incumbent’s analogy of a captain refusing to abandon his ship, “when a captain has steered his ship onto rocks, it’s time for change”.

But historical precedents need not necessarily apply. In 2007 Sarkozy proved himself to be an expert campaigner, able to inject dynamism into the Elysee race, and capable of appealing to wide sections of the electorate. Recent positive figures on French growth (0.2% in the last quarter of 2011, compared to recession in the rest of the eurozone) could bolster the incumbent’s argument that he has the experience to lead an embattled France through the economic crisis.

On the whole though, this looks unlikely. Sarkozy has led an erratic unofficial campaign since January. The proposal to introduce reforms to the sclerotic French labour market last month was widely perceived as an electoral mistake. It is unpopular with the French, and is ill-timed, if necessary. Angela Merkel’s endorsement of his re-election was awkward, as it came weeks ahead of Sarkozy’s official announcement, and jars with his recent decision to appeal to Le Pen’s anti-euro, anti-German supporters. In addition, his pledge last night to “put work at the heart of everything” was too similar to his undelivered 2007 campaign promises.

It's argued that Sarkozy's real chance in re-election lies with Le Pen. If the FN candidate fails to secure the 500 mayoral nominations needed to present herself at the ballot, Sarkozy will benefit from a boost in support. Despite his pro-Euoprean stance, it is likely that far-right supporters will be wooed by promises of referendums on the rights of immigrants and the unemployed. This is something Sarkozy is aware of: tellingly, he refused to back Bayrou’s plea for a reform of the nomination system. A poll published earlier this month found that Sarkozy and Hollande would equalise in the first round if Le Pen did not run in the election. However, although this would provide Sarkozy with a boost in the first round, it wouldn't make a difference to his second round chances, where he continues to trail behind Hollande with 43% compared to the Socialist candidate's 57%. In all likelihood, Le Pen will not make it to the second round, so her inability to run on the ballot won't change Sarkozy's chances. Looks like Nicolas needs to try harder to win over the electorate.

Liaising With The Right People?

2012-02-15T16:00:00.000Z

Antonis Samaras (see picture), the leader of Greece's centre-right New Democracy party, has made people in Athens, Brussels and elsewhere sweat quite a bit with his aversion to giving a written commitment to the latest austerity package.

However, he has finally bowed to pressure. Here is a link to the letter Samaras sent to the European Commission, the ECB and the IMF to reassure them that he will stick to the latest round of austerity measures adopted by the Greek parliament on Sunday if he wins the next general elections in April.

Predictably, media reports are focusing on the following part of the letter,

If New Democracy wins the next election in Greece, we will remain committed to the [Greek Stabilisation] Programme’s objectives, targets and key policies.

Given that former Greek Prime Minister George Papandreou has already sent over to Brussels a similar commitment on behalf of his Socialist PASOK party, on the surface Greece seems to have made another crucial step towards its second bailout.

However, doubts remain over the strength and the actual relevance of the commitment sought by Greece's public lenders. Firstly, as Samaras specifies in his letter,

Prioritising recovery along with the other objectives, will only make the [Greek Stabilisation] Programme more effective and the adjustment effort more successful. Therefore...policy modifications might be required to guarantee the Programme’s full implementation. And, once again, we intend to bring these issues to discussion along with viable policy alternatives.

Indeed, this is supposed to happen "strictly within the framework outlined by the Program, so that the achievement of its objectives will not be put at risk." Still, this reads like a clear hint that, at some point, Samaras may want to give a boost to Greece's public spending in the name of economic recovery.

Secondly, and most importantly, are the Commission, ECB and others really liaising with the right people in Greece? In other words, is a written commitment from only PASOK and New Democracy enough to ensure that Greece will keep doing its homework regardless of who wins the next elections? According to the latest opinion polls, the answer seems to be a 'no'.

In fact, Samaras' party is currently polling at 31% - definitely not enough to secure an absolute majority in the Greek parliament. The problem is that New Democracy's 'natural' ally in a hypothetical coalition, the far-right LAOS party, recently withdrew its support for Lucas Papademos' technocratic government precisely because it didn't want to back the latest round of austerity imposed on Greece.

Crucially, the polls show that not even a German-style (unlikely) Große Koalition between New Democracy and Papandreou's PASOK would be enough. With PASOK credited with only 8% of votes, the two parties would put together less than 40% of votes - still not an absolute majority.

In other words, Athens' public creditors seem to have lost touch with the political reality in Greece. And the reality is that, as the two 'mainstream' parties are increasingly seen as mere executors of the requests coming from the EU, Germany, France and others, the Greek electorate is moving towards the extremes of the political spectrum. As the FT's Gideon Rachman points out, three far-left parties account for 42.5% of the votes - so potentially more than New Democracy and PASOK together.

Perhaps the European Commission should try and pick up its interlocutors a bit better. Or, perhaps, people in Brussels think that Greek voters will feel 'encouraged' to vote for either New Democracy or PASOK as they are the only two parties which can make sure that Greece gets its second bailout...

Poles go cold on the euro

2012-02-15T15:15:00.000Z

In our daily press summary this morning we covered an interesting Polish CBOS opinion poll which found that support for eurozone membership had fallen to an all time low: only 32% of respondents declared themselves in favour, compared with 60% against. Over the past decade therefore support for joining the euro has halved; an all time high of 64% was recorded in July 2002. Given that the stated goal of the Polish government is to join in the euro in the next few years – indeed it is bound by the EU Treaties to join at some point in the future – the rising public opposition is significant.

However the poll also had a number of other interesting findings which are worth highlighting:

42% support Poland’s accession to the intergovernmental ‘fiscal treaty’ vs. 35% against
57% are opposed to Poland lending an additional €6.3bn to the IMF to possibly support vulnerable eurozone members vs. 32% in favour
62% believe that further European integration would be beneficial for Poland vs. 26% who believe otherwise
81% believe EU membership is beneficial for Poland vs. 12% who believe otherwise

Clearly a bit of a mixed bag with the strong opposition to contributing to the IMF for the purposes of bolstering the eurozone showing the limits of the ‘European Solidarity’ that Polish politicians often espouse.

The poll result could serve as another reminder to those who argue that the euro is an integral and necessary component of the EU and further integration, and that rejecting the euro would signal the death knell for the European project as a whole. Ultimately this poll and other like it are good news for supporters of a more flexible EU arrangement, where countries can integrate more closely together if they wish, but can also remain outside of some common structures – such as the single currency.

More delays in Greece may not be an option...

2012-02-15T13:29:00.014Z

Following another postponed meeting of eurozone finance ministers, there have been reports that the eurozone could try to delay the second Greek bailout package (possibly until after the elections in April) or just pushed ahead with part of it (the voluntary restructuring of Greek debt).

As reported by the FT and the WSJ in the past day or two, a draft of the latest bailout agreement has been circulating, however we believe that some of the issues which the drafts raises have been underplayed - particularly those that impact the chance of delaying or breaking up the bailout.

The draft lays out how some of the bailout funds will be used:

Bond sweeteners - €30bn
Funds to buy back bonds from the Eurosystem - €35bn
Funds to pay off interest - €5.7bn
Bank recapitalisation - €23bn
Total - €93.7bn (out of the €130bn bailout)

This is money needed to make the PSI successful and allow the voluntary restructuring to be completed. Firstly, this highlights that the claims by the eurozone that they could simply push ahead with the PSI without fully approving the second bailout seem to be incredibly misleading. Without this money in place there would be a huge amount of uncertainty on the part of bondholders, particularly Greek banks who would need new capital injections to survive. However, to disperse this substantial amount of money would need full approval from the eurozone and some national parliaments. Given that it is widely accepted that the PSI needs to be put into motion this week if Greece is to avoid a disorderly default on 20 March getting this money released could be a huge stumbling block.

Secondly, where would this money come from? The draft stipulates that the EFSF will issue debt to raise these funds (since it currently only has guarantees), however, it is has not pre-funded any of these commitments and suddenly flooding a subdued market with over €90bn in (possibly non-triple-A) EFSF bonds is not an effective funding strategy. There is no telling how the market will react or at what cost the EFSF will be able to borrow. The urgency of the situation feeds the uncertainty here and could be catastrophic for Greece.

Lastly, with new provisions such as €35bn for bond buy backs, will €130bn be enough to fund Greece for three years? We questioned whether this was even enough originally, now it seems even more unlikely.

The chance of getting approval for and raising this amount of funds in the time necessary (a week or two max) seems unrealistic. But it is also unlikely that eurozone finance ministers will delay the PSI further, simply because they cannot afford to. The eurozone has once again backed itself into a corner and things are likely to get worse before they get better.

Is Spain Going Greek On Statistics?

2012-02-15T09:00:00.006Z

Spain seems to be doing its best to steal a couple of headlines from Greece. Why? Well, according to sources quoted by Reuters, the European Commission suspects that the newly elected centre-right government led by Mariano Rajoy (pictured) might have inflated Spain's deficit figures for 2011 - potentially a pretty harmless exercise, given that the new cabinet only took office before last Christmas, meaning most of the blame for failing to meet the deficit reduction targets will fall on its predecessor anyway.

The alleged move was aimed at making figures for the current year look better by making last year's look worse. It's no secret that Rajoy and his ministers are longing for the Commission (and Germany) to agree to revise Spain's deficit reduction targets. Spain is expected to bring its deficit down from 6% to 4.4% of GDP by the end of this year. The problem is that, as Rajoy's government claimed, Spain's deficit at the end of 2011 was around 8% of GDP - i.e. around 2% above the target. Add that Spain's growth forecasts have further deteriorated over the past few months, and it becomes clear that there's virtually no chance of the 4.4% target being met.

The likely motivation for such a move would be the hope that having a higher starting point for this year's deficit could improve the case for softening Spain's deficit targets, while also allowing the government to look good when they make substantial progress in closing the gap. After all, the Commission would know that an extra 1% of deficit-to-GDP to be cut means an extra €10 billion that needs to be found by the end of the year.

However, despite the Commission trying to play down rumours as usual, Spain now risks being fined if the suspicions are confirmed.

A country manipulating its statistics would by no means by news for the euro crisis - Greece could actually give its partners one or two tips on how to make figures 'fit for purpose'. This is all quite speculative still, but if confirmed, these reports could seriously damage the reputation of the centre-right Spanish government, at home and abroad.

Democracy and transparency remain the biggest victims of the euro crisis

2012-02-13T18:03:00.003Z

Over on the Telegraph blog, we argue:

The 80,000 Greeks that came out in Athens yesterday to protest the latest round of bailout austerity imposed by EU-ECB-IMF troika can shout all they want. They can even express their disgust at the polling booths in the country’s general elections, scheduled for April. It won’t make much difference. To get its second bailout, the leaders of Greece’s main political parties are required to submit a written commitment to fully implement the package regardless of who wins the elections in April.

Everyone recognises that Greece needs fundamental reform – the country has for too long epitomised reckless economic behaviour. But as Andreas Vosskuhle, the heavyweight President of the German Constitutional Court, said in a recent speech: “It would be tragic and fatal if we were to lose democracy on the road to saving the euro.” Beyond everything else, this is the central dilemma the eurozone faces: necessary economic reforms are constantly pitted against basic democratic principles.

The demand for a written assurance to stick to the austerity plan in Greece is only one in a series of direct assaults on democracy, accountability and transparency that have followed in the wake of the eurozone crisis, including:

The technocratic regimes in Italy and Greece: Berlusconi was hopeless and Mario Monti has given Italy a boost, but the replacement of elected governments in Greece and Italy – under heavy pressure from eurozone leaders – with unelected technocratic regimes, has left a very bad taste. This was unintentionally summed up by the President of the European Council, Herman Van Rompuy, when he remarked in a recent speech that “Italy needs reforms, not elections".

This a practical issue too: reforms decided by technocrats without a proper popular mandate are less likely to be implemented and to stand the test of time.

An EU ‘budget-veto’ commissioner: A leaked German/Dutch plan would see the creation of a Commissioner, with the power to veto the budgets of poorer eurozone states – the proposal instantly drew a barrage of criticism and looks to be a step too far a the moment.

Central banks dictating economic policy: In August last year, the ECB sent an absolutely extraordinary letter to Berlusconi’s government, setting out a range of prescriptive reforms, including changes to the Italian Constitution, that Rome needed to enact in return for the ECB agreeing to buy Italian government bonds. These demands, which were only revealed months afterwards through leaks, appeared to have become government policy.

“Dark, secret rooms”: Symptomatic of the crisis, Eurogroup Chairman Jean-Claude Juncker suggested last year that eurozone meetings should take place in “dark, secret rooms” to avoid market speculation, admitting that he often “had to lie” during his career. In creditor and debtor countries alike, elected MPs are becoming increasingly frustrated at playing second fiddle.

Reduced insight for citizens: Citizens are left in the dark too. The opaqueness has even spread to traditional pro-transparency, non-euro countries such as Denmark. Since the eurozone crisis erupted, the website of the Danish parliament no longer publishes draft minutes of upcoming European Council summits – a great service which used to grant citizens insight. No explanation is given except for bilaget er fortroligt (the document is confidential).

The secrecy of the fiscal compact: negotiations on the much-hyped euro fiscal compact have equally been shrouded in great secrecy and the legality of key aspects of the document remains dubious.

The ECB’s mysterious balance-sheet: Apart from complaints in Germany that it’s engaging in illegal state financing (against promises made to German citizens), the ECB doesn’t publish any break-down of their bond purchases (not even with a time lag), nor any information about where the bonds they hold lay on the balance sheet. As the bond-buying amounts to a hidden, and growing, cost of the crisis to eurozone taxpayers, this begs the question: who, exactly, is accountable for these decisions?

And the list can be made much, much longer. As some are keen to point out, as all of this is happening under the auspices of (mostly) elected governments, it’s perfectly consistent with democracy. But even if that is true, the eurozone elite continues to test the limits of democracy at its own peril. If policies remain the same irrespective of who’s in power, sooner or later, voters will look to other, and far more unpleasant, alternatives.

Has Schäuble given up on Greece?

2012-02-13T09:29:00.016Z

It is estimated that 80,000 took to the streets of Athens yesterday to vent their anger at the latest round of bailout austerity. Another 20,000 reportedly protested in Thessaloniki.

After days of talks, Greek MPs finally approved the latest round of measures required by the EC-ECB-IMF troika. The vote was carried by 199 in favour to 74 against. But the Coalition parties expelled 43 deputies for failing to back the bill.

Police said 150 shops were looted in the capital and 48 buildings set ablaze. Some 100 people - including 68 police - were wounded and 130 detained, a police official said this morning.

While condemning the violence, Prime Minister Lucas Papademos conceded yesterday that, "The full, timely and effective implementation of the program won't be easy. We are fully aware that the economic program means short-term sacrifices for the Greek people."

The problem is that "short-term sacrifices" is rather optimistic. Everyone recognises that Greece needs to reform, and no one could fail to be shocked by yesterday's scenes, but the Greek people also need to be offered some hope of a brighter future. Given that the plan for Greece is for it, in 2020, to be in more or less in the shape that Italy is in now - and many would suggest Italy's situation is unsustainable in the long-term without its own dose of reforms - the structural change required in Greece looks to be well beyond what the country can take.

At the weekend, German Finance Minister Wolfgang Schäuble seemed to be reaching a similar conclusion. He said in an interview published in the Welt am Sonntag newspaper that, "The promises from Greece aren't enough for us any more. Greece needs to do its own homework to become competitive, whether that happens in conjunction with a new rescue programme or by another route that we actually don't want to take."

When asked if that other route meant Greece quitting the eurozone, Schäuble said: "That is all in the hands of the Greeks themselves. But even in the event [Greece leaves the eurozone], which almost no one assumes will happen, they will still remain part of Europe."

Today, FT Deutschland quotes sources involved in the bailout negotiations suggesting that Germany's position on Greece is hardening to such an extent that it would actually now rather see Greece default. "Germany confused everyone else" in the negotiations, complained one. The paper also suggests that observers in the CDU are noticing a rift between Schäuble and his Chancellor. "Schäuble supports the bankruptcy of Greece, Merkel wants to strictly avoid it," said a leading member.

However, it seems that some in the German government may finally be beginning to realise that they are flogging a dead horse.

You're On Candid Camera, Herr Schäuble

2012-02-10T11:07:00.013Z

At yesterday's meeting of eurozone finance ministers, Portuguese TV channel TVI24 caught an exchange between a seemingly unaware German Finance Minister Wolfgang Schäuble and his equally unaware Portuguese counterpart Vítor Gaspar. Schäuble said,

"If in the end we need to make an adjustment to the [Portuguese bailout] programme, having taken large decisions about Greece...This is key. But then, if necessary, an adjustment of the Portuguese programme, we will be prepared."

Clearly code for extra bailout cash for Portugal. "That's much appreciated" replied a thankful Gaspar, prompting Schäuble to flag up an important caveat,

"Members of the German parliament and public opinion in Germany do not believe that our decisions are serious, because they don’t believe in our decisions on Greece.

Speaking after the meeting, Gaspar tried to play down speculation that Portugal will need a second bailout, and told reporters,

"When [Schäuble] mentioned the possibility to make Portugal’s [bailout] programme more flexible, he meant nothing more than what was repeated several times by eurozone heads of state and government: countries under a [bailout] programme, which are complying with their programmes, but due to reasons beyond their control may face difficulties in returning to the markets, can count on the willingness of their European partners to extend financial assistance if necessary under those conditions."

Not that convincing. If anything, Gaspar seemed to confirm what Goldman Sachs and BBVA have recently predicted: Portugal may not be able to return to the markets in 2013, and will therefore need an additional cash injection (€30-50 billion to cover its financing needs until 2015, according to Goldman Sachs).

And Schäuble wasn't the only one caught on camera yesterday. Expansión reports that Spanish Economy Minister Luis De Guindos was yesterday caught telling EU Economic and Monetary Affairs Commissioner, Olli Rehn, that Spain's planned labour market reforms will be “extremely aggressive, with great flexibility in collective negotiation and reduced compensation for dismissal.” Spanish unions aren't overwhelmed with joy today.

Looking at it from the bright side, there's now at least some transparency in the eurozone crisis...

Light at the end of the tunnel? Not yet...

2012-02-09T15:11:00.010Z

Update 10 February, 9:45 am

Greece's letter of intent (29 pages including the annexes) with all the envisaged austerity measures is available here

After countless missed deadlines, numerous strikes and some very exasperated European officials it seems there is an agreement in Greece. Finally.

Despite the failure to achieve one overnight, an agreement had been coming given that only one point of disagreement remained – on pension reform. The Greek political parties refused to cut primary or supplementary pensions further, leaving a €300m gap in the Greek budget – pretty small given the huge sums at play in the Greek deal.

The statement just released by the Greek PM is minimalist to say the least - only two sentences. It confirms that a deal has been reached and suggests the total bailout size will be €130bn.

So what does this deal mean?

Well, it is positive in that it moves the whole Greek discussed forward one large step, but it isn’t the end of it – not by a long way. Essentially, the Greek unity government has now agreed and committed to a new programme of austerity, just one part of the wider Greek package and in itself not necessarily productive. As we have flagged up elsewhere austerity alone cannot and will not solve the Greek problem and could be on the verge of becoming counterproductive given the economic (low growth) and political (civil unrest) implications.

It also allows a deal to be presented at this afternoon’s meeting of eurozone finance ministers, allowing progress on some of the other remaining questions, which include:

- What structure will the bailout take (in terms of allocation of funds and distribution of payments)?
- What will the total level of debt reduction from the restructuring be?
- When will the restructuring begin and will it be in time to pay off the €14.4bn in debt maturing on 20 March?
- Will the European and Greek parliaments approve all aspects of the deal?
- What role is the ECB playing? Will it submit its holdings of Greek debt for restructuring?

This afternoon’s press conference with ECB President Mario Draghi was fairly cryptic on this last point, with Draghi trying to dodge questions about the ECB and Greece for the most part – although he did drop a couple of hints.

Our take is that the ECB may, very reluctantly, take some part in the Greek restructuring. It will not take any losses and is hesitant to transfer its bonds to the EFSF, the eurozone bailout fund, even at cost price. One possible outcome could be that the ECB will distribute the potential €15bn in profits from its holdings of Greek debt to the eurozone countries (since they are the ECB’s backers and already share in its profits) to be put to use in funding Greece. How this can be done upfront, especially without using the EFSF, remains to be seen.

Additionally, the fact that the Greek PM’s statement specified the bailout amount as €130bn suggests that there will still be a budget gap in Greece which needs to be filled, even with the agreement on the additional austerity. An ECB contribution seems to be the only remaining viable way to close this gap then.

So, we are eventually one step closer to another bailout of Greece. The end to the uncertainty is positive, but in the long term it seems to be just another step along the wrong path.

Holding The Fiscal Treaty Hostage

2012-02-09T09:30:00.002Z

Socialist candidate François Hollande (see picture) has begun to flesh out what his pledge to renegotiate the new European fiscal treaty on budgetary discipline would involve, if he wins the upcoming French presidential elections.

First, (and predictably, given that it is by far the most controversial point of the fiscal treaty, as we argued here and here), the leader of the French Socialists will seek to "clarify" the role of the European Court of Justice. In an interview in yesterday's Le Monde, Hollande said:

"In what framework would [the ECJ] intervene to verify the respect of budgetary discipline? What is the nature of the sanctions imposed on countries which don't respect [budgetary discipline]? These are all points that will have to be clarified."

Secondly, Hollande pledged to make the fiscal treaty less focused on austerity by introducing specific provisions aimed at boosting growth and employment in the EU. In particular, he mentioned,

"The possibility for the European Investment Bank to increase its lending capacity."

and,

"The possibility, within the framework of the EU budget, to use part of the structural funds to subsidise investment projects in weak growth countries."

Perhaps most interestingly, when reminded that twelve ratifications are needed in order for the fiscal treaty to enter into force, meaning that the agreement could potentially go ahead without France, he noted,

This treaty will be signed on 1 March, but I'm not sure that, in May [the second round of the French presidential election is scheduled for 6 May], more than one or two countries will have ratified it. Therefore, we will be able to renegotiate this treaty, signed but not yet ratified.

Hollande also said that he expected to get support from "countries such as Denmark or Italy, which are also seeking clarifications or additions [to the fiscal treaty]." However, he has no intention of putting the fiscal treaty to a referendum (bad memories from the French referendum on the EU Constitution perhaps?), because,

We won't hold a referendum on a treaty which doesn't mark a real rupture, unlike the Maastricht Treaty.

So, we might be looking at a pretty big showdown between Hollande and Angela Merkel. The German Chancellor isn't exactly helping either - saying that she is not planning to meet the French Socialist leader in the short term because "heads of state have more important things to sort out." Therefore, if Hollande - who according to opinion polls is heading for a victory - sticks to his electoral pledges once in power, France could effectively turn from a major supporter into a major obstacle for the new fiscal treaty.

As ever, the 26-versus-1 narrative is looking quite fluid...

Up in the air: Can the EU’s tax on airline emissions ever work in its current form?

2012-02-08T12:41:00.000Z

You can’t say Brussels wasn’t warned. After protests and criticism from various non-member states and international organisations, the European Union’s decision to impose a carbon tax on flights in and out of the EU has fallen flat, as China announced it would ignore it and the US Congress prepares to ramp up action against it. It seems quite a feat, even for the EU, to get China and the US on the same side of a trade dispute.

The new legislation, which came into effect this year, forces all airlines flying in or out of Europe to buy carbon permits (from the EU’s Emission’s Trading Scheme) to cover their emissions. This is intended to help Brussels meet its 2020 commitment to reduce greenhouse gas emissions by 20% from 1990 levels. Until now, the aviation industry’s environmental impact had not been regulated – and in that sense the EU’s proposal may be positive as a first salvo. The move has been welcomed by environmentalists, who point out that airlines’ share of world emissions (currently 3%) is set to soar in the coming years.

Interestingly enough, governments are far more vocal about the drawbacks of the trading scheme than its impact on the airlines specifically. This is because airlines could actually stand to gain under the new scheme, according to a report in The Economist. Under the plan airlines will only be charged for 15% of the carbon that they emit – or possibly less if their government has an offsetting scheme. The scheme will give airlines a valid excuse to raise prices to compensate for the higher operating costs – although the chances of them using the opportunity to squeeze out more profits cannot be ruled out. By increasing ticket prices by just 25 eurocents, Ryanair stands to gain more than €10 million from the new scheme. The lax carbon quota also means that the scheme is unlikely to achieve its environmental aims, although this is true of much of the EU ETS. In sum, there is a good chance that consumer behaviour won’t be affected by the small price rise, and that airlines will increase the number of flights as their profits rise. This would further undermine the weak environmental credentials of the policy.

It’s likely that non-EU member states are kicking up a fuss because the new scheme implies a loss of sovereignty. China’s foreign Ministry accused the EU of applying “unilateral” measures to the global airline industry. Under the new scheme, airlines (all of which are state-owned in mainland China) pay for 15% of the carbon burnt across entire trips, rather than just that used flying over Europe. Airlines would therefore essentially be taxed outside of the EU’s jurisdiction. In addition, there is less scope for non-EU governments to impose their own tax to off-set carbon emissions – a big issue given the questionable format of the EU tax.

Beijing and Washington are also wary of Brussels’ wider meddling in global environmental standards. The EU’s mooted Fuel Quality Directive is set to impose regulation which would reduce the lifecycle intensity of greenhouse gasses emitted by the transport industry. Such a move would jeopardise US and Chinese interests in high carbon fuel, which has a ruthlessly efficient lobby industry. It’s likely that China and the US are partly arguing against the current measures, as they hope to thwart further EU plans and avoid setting a precedence of adhering to EU environmental standards.

Regulating the airline industry has valid environmental aims but in this case the EU’s proposal looks to not only fall short of these goals but also of foreign policy and consumer protection consideration. This comes as no surprise given the EU’s track record on the environment, as Open Europe has shown. It’s a reasonable opening gambit, but the EU should now focus on negotiating with China and the US to find a global consensus on how best to approach the issue.

Not Sure They Really Deserve It...

2012-02-08T09:00:00.005Z

On his Coulisses de Bruxelles blog yesterday, French journalist Jean Quatremer offered an interesting insight into what Greek MPs earn. In light of Greece's current economic situation, the figures reported by Libération's Brussels correspondent are somewhat disturbing.

Apparently, the net monthly salary of a Greek MP can reach up to €8,500 (yup, you read that right). On top of this, the lucky members of the Greek Vouli are also entitled to:

An expenses allowance of €4,900;
An allowance of €1,200 for participation in parliamentary committees (but surely, sitting in committees is part of an MP's job?);
An accommodation allowance of €1,000 (for MPs travelling from outside Athens);
An office allowance of €1,800;
Free transport.

To put these figures into context, according to EU Economic and Monetary Affairs Commissioner Olli Rehn's spokesman, the average minimum wage in Greece is €871 a month (still surprisingly higher than Spain, €748, and Portugal, €566, but that's another issue).

But salaries and allowances are not the only things likely to anger Greek citizens. Since last year, Quatremer notes, the annual income and properties of Greek MPs must be published on the Greek parliament's website.

For the record, here are some interesting details on the annual earnings of the two top Greek politicians (figures are from 2009 and are also mentioned by Greek newspaper Kathimerini, see here).

George Papandreou (former Prime Minister, leader of socialist PASOK party):

An annual gross salary of €122,114
Other "miscellaneous revenues" worth €6,926
Savings worth €61,379
A house in Athens
A stock portfolio of €228,000 owned by his wife

Antonis Samaras (leader of centre-right New Democracy party):

An annual gross salary of €107,150
Other "miscellaneous revenues" worth €110,695
Five plots of land and a flat (whose value is not specified)
Savings worth €285,467 deposited in a Belgian bank, plus a further €8,952 deposited in a Greek bank
3,500 shares in a ferry company

If we were Greek voters we wouldn't take much confidence in the fact that leading politicians felt the need to deposit the majority of their savings outside the country.

There is clearly something wrong in a place where 'normal' citizens have either been lost their jobs or faced a series of pay cuts over the last two years, while the political class - which certainly bear a good deal of responsibility for the conditions Greece finds itself in - continues to ignore the option of substantially reducing their own salaries. It wouldn't do a whole lot to solve Greece's debt problems, but it would still surely be the right thing to do.

Shooting yourself in the foot

2012-02-07T17:44:00.014Z

At risk of sleep walking into a proposal for an EU financial transaction tax, the UK Treasury is now receiving some well-needed, and wholly unintentional, diplomatic help from Algirdas Šemeta, the European Commissioner for Taxation.

Mr. Šemeta took to the European comment pages over the weekend, trying to convince those countries that remain opposed to the FTT to come to their senses – literally. Calling for a debate based on “common sense and facts”, he claimed that the evidence in the Commission’s own impact assessment had been mis-used by those who oppose an FTT. A spokesperson for Mr. Šemeta said they now intend to “fine-tune the economic analysis”, presumably to put an end to the outrageous practice of using the Commission’s own economic evidence as evidence when considering the desirability of a proposal.

In any case, amongst other countries, Mr. Šemeta seems to have targeted Sweden – a country which actually had a go at implementing a financial transaction tax in the late eighties (with pretty disastrous consequences). In an article in yesterday’s Svenska Dagbladet, he argued, “The Commission understands the Swedish hesitation, given the experiences the Swedes have had with an FTT. But we want to ensure that the Swedish experiences have been taken into account when we formulated the proposal.”

This didn't quite have the desired effect.

A leader in today's Swedish daily Sydsvenska Dagbladet – hardly a eurosceptic publication – carried the headline ”The Commission is too cocky”. Here goes:

"Šemeta starts by requesting a debate based on ‘common sense and fact’. Then he discards those who have questioned the proposed transaction tax, saying that ‘they either haven’t read the Commission’s proposal or haven’t understood it'. The Swedish National Debt Office, which in its opinion for the [Swedish] Finance Department labelled the proposal 'exceptionally poorly thought through'?…Finance Minister Anders Borg has read but not understood – or perhaps not even read? [He doesn’t] get the facts? Or lacks common sense?”

It goes on,

“One rationale [behind the tax] which the Commission has referred to, is that there are currently around ten countries that have some sort of tax on financial transactions. This is not good, thinks the Commission, as it distorts the competition on the internal market. But why wouldn’t the tax proposed by the Commission have similar distorting effects, albeit on a different level? There is high probability that businesses will move to different countries.”

The paper then gives it both barrels,

"Šemetas intervention shows that the EU-commission has a serious communications problem which seems to stem from an even more serious attitude problem. A slightly more humble approach wouldn’t hurt from an institution that lacks a popular mandate. In particular considering the tricky situation that the EU is currently in, or rather, has put itself in.”

Similarly, Karl Sigfrid, Swedish MP for the governing party Moderaterna, takes Šemetas to task in a reply in Svenska Dagbladet,

"Šemeta wants to kill off three alleged myths, the first being that a financial transaction tax would give us fewer jobs and lower growth. The interesting thing about this myth is that it’s from the EU Commission’s own analysis, which says that the reduced productivity resulting from the EU-tax is just as large as the income generated from the tax, and probably even greater.”

Sigfrid concludes,

“The article by the Tax Commissioner hints that if we only get an EU tax, indebted countries will not need to consolidate their budgets to any greater extent. Instead of trying to sell us miracle cures, it would be better if the Commission emphasised the importance of work and responsibility.”

Note to George Osborne: put Šemeta on your Christmas card list.

Cash-for-dubbing?

2012-02-07T15:00:00.002Z

Does the name Ernst Strasser (see picture) ring a bell? If not, let us refresh your memory. Ernst Strasser, from Austria, was one of the MEPs involved in the cash-for-amendments scandal unveiled by the Sunday Times last year. More precisely, he was the one who had been secretly filmed by undercover journalists boasting, "Of course I'm a lobbyist, yes."

Well, in a recent interview with Austrian TV, Strasser has sparked surprise (and some laughter, we're pretty sure) when he claimed that the video evidence being used to 'frame' him had been "deliberately tampered with by Murdoch's people", as the mouth movements do not exactly match up with the text in the film.

Right...

Greek end-game: Day 2 (or rather 700)

2012-02-07T10:54:00.006Z

The end-game in Greece continues to rumble on into another day of negotiations. On the rhetoric front, matters have heated up as well. Neelie Kroes, the Dutch EU commissioner told De Volkskrant, "It's always said, if you let one nation go, or ask one to leave, the entire structure will collapse. But that is just not true."

Talks between the leaders of the Greek political parties will continue at 2pm GMT today, after Greek Prime Minister Lucas Papademos held talks with the EU/IMF/ECB troika late into the night yesterday. Unfortunately, it doesn’t seem as if much was achieved. We expect that the issue of this new debt repayment account for eurozone bailout funds was broached and developed with the (likely reluctant) Greek authorities. Essentially, this funnels more funds into paying off Greek debt rather than using it to boost competitiveness or improve governance in anyway.

Following the talks Greek Finance Minister Evanagelos Venizelos was surprisingly blunt, saying, "Unfortunately the negotiations are so tough that as soon as one chapter closes, another opens."

As we noted yesterday, some progress was made towards deal between the Greek political parties, as they agreed in principle to 15,000 additional public sector job cuts, a reduction in the minimum wage and supplementary pensions. However, these cuts still do not meet the demands made by the troika, while the details of how they will be implemented are still to be ironed out.

We will continue to update this blog with developments in Greece throughout the day.

Can the UK cherry pick EU crime and policing laws post-2014?

2012-02-07T09:05:00.004Z

Yesterday 102 Conservative MPs wrote to the Telegraph backing our latest report on EU crime and policing, which argues that the UK should take advantage of a one-off opportunity in 2014 to opt out of around 130 laws covering this area.

Under a transitional arrangement, the UK has a unique opportunity to opt out of these laws, which include the European Arrest Warrant and DNA data sharing, but, if they are kept, this body of law will fall under the full jurisdiction of the European Court of Justice for the first time.

The MPs wrote,

We need practical co-operation to fight terrorism, drugs, human trafficking and other cross border crimes – not harmonisation of national criminal laws...We want the UK Supreme Court to have the last word on UK crime and policing, not the European Court of Justice.

...The recent study by Open Europe offers a pragmatic alternative. Britain should exercise its 'opt out' from 130 measures under the EU's crime and policing plan by 2014. The UK would retain the right to opt back in to any specific policies deemed vital on a case-by-case basis...

You can read a summary of the report here, but its the last point the MPs raise in their letter that we'd like to elaborate on here: the UK's ability to 'opt back in' to individual laws it has opted out of using the block opt-out.

Fast forward to 2014 and after a UK opt-out. These 130 EU laws would no longer apply in Britain (if the UK opts out in 2014 it must opt out of all 130 laws covered by this arrangement) but the UK might wish to rejoin one or two of these laws because they are deemed vital to the UK's interests. Today in the FT for example, senior police offers have warned against losing the European Arrest Warrant.

Should the UK wish to 'opt back in' to an individual law, perhaps a reformed European Arrest Warrant, this would require the approval of the EU institutions. In her recent letter to the European Scrutiny Committee Home Secretary Theresa May noted that,

In respect of measures forming part of the Schengen acquis, this would be governed by the Schengen Protocol. The UK would need to make an application under Article 4 of that Protocol and the Council would decide on the request "with the unanimity of its members" and the representative of the UK. For non‐Schengen measures, Article 4 of the Title V Protocol would apply, which is the process for opting in to a measure post adoption and allows for conditions to be set by the Commission.

Now, you can see why this might present a potential problem with the approach of opting out and selectively opting back in. The UK could, in theory, be refused ‘re‐entry’ once it has opted out en bloc or individual opt-ins could become entangled in negotiations over other, unrelated areas of policy and get caught up in EU horse trading.

For example, James Brokenshire, Minister for Crime and Security, has stated, “We believe that the Commission would attach conditions, for instance they might only allow us to join groups of related measures, some of which we might like and others we might not.”

However, there are several reasons to believe that the Minister's concern is exaggerated:

First, the EU Treaty protocol that governs the block opt-out is quite clear that:

...the Union institutions and the United Kingdom shall seek to re-establish the widest possible measure of participation of the United Kingdom in the acquis of the Union in the area of freedom, security and justice without seriously affecting the practical operability of the various parts thereof, while respecting their coherence.

It is very difficult to see how opting back into laws would adversely affect "practical operability". As Professor Steve Peers, a leading expert on the legal aspects of the opt-out, notes:

While the UK would need the formal approval of the Commission or, in a few cases, the Council to opt back in to the prior measures, in practice this will not likely be a problem. The UK and Ireland have in practice opted in to a number of Justice and Home Affairs measures without any difficulty obtaining approval from the Commission. For its part, the Council has been reluctant to approve UK participation in Schengen measures relating to border controls, unless the UK takes part in Schengen fully, but it has approved the UK’s participation in the criminal law and policing aspects of Schengen.

So, legally and practically, there seems to be little reason to believe the UK would be prevented from opting back in. What about the politics?

As Professor Peers notes, for the vast majority of the laws in the list (the 106 non-Schengen measures) the Commission's approval is needed - here at least political horse trading should not be a factor. If it is, there are likely to be far bigger problems to worry about.

For the rest (the 24 Schengen measures), unanimity of the Council of Ministers is required and political factors could come into play but, again, the UK would be able to point to the Treaty protocol and take the legal high ground. It would also be rather strange to see the UK prevented from taking part in further EU integration - after all opting back in would involve accepting the full powers of the ECJ. This was the concern that gave rise to the opt-out in the first place.

However, given that EU negotiations are very much about the art of horse-trading, it could well be that the bloc opt-out gets lumped together with a whole range of other issues. Given the turmoil in which the EU, and the eurozone in particular, finds itself at the moment, come 2014, who knows what new challenges the UK-EU relationship could face. It's conceivable therefore that other member states could use the opt-out to get some concessions from the UK, but that's very speculative. And in any case, that's a strong argument for exercising the opt-out and beginning the process now, in order to avoid unpredictable horse-trading down the line.

Making a decision sooner rather than later would provide a chance to thoroughly evaluate which laws the UK might truly want to keep. Using the opt-out could also provide the UK with an opportunity to push for reform of laws such as the European Arrest Warrant before deciding to opt back in to them.

So, while there is a very small chance that UK applications to opt back in to individual laws might become a hostage to politics, the UK would have a very strong legal argument in its favour. In the end, if the other member states don't want the UK to participate, then that probably signals that this has turned into something rather bigger than simply the level of EU police cooperation.

The Greek end-game?

2012-02-06T09:07:00.013Z

Greece is on a "knife edge". That was how Greek Finance Minister Evangelos Venizelos put it on Saturday ahead of emergency talks between Greek political parties and the EU/IMF/ECB troika (with eurozone countries and private sector bondholders thrown in there somewhere as well).

We're sure you're thinking - surely, we've heard this all before? That may be the case, but unfortunately this time may be different. For once, Greece has a hard and fast deadline to meet to avoid a disorderly default.

But lets back up a second, whats the current disagreement between the Greek government and its creditors all about? Well, despite seemingly getting talks with the private sector bondholders pretty much finalised, new gaps between the Commission/ECB/IMF troika and Greece have opened up over the second bailout (as we predicted in our previous posts). The main areas of contention (as expected) seem to be the desire for eurozone countries to see greater wage and spending cuts. However, the three party coalition which underpins the 'technocratic' government of Lucas Papademos is refusing to back greater austerity - they simply believe their parties and the public won't support it. They may well be right but they may also have one eye on upcoming elections (as has been suggested). All of this puts the eurozone at yet another impasse. There is no way eurozone states will agree to disburse another €130bn - €145bn without a greater commitment to austerity in both the Greek public and private sectors. But without support from all three parties any commitment would be an empty one.

Usually, this would spell another round of talks, negotiations and some form of muddling through. However, this time they have essentially set a deadline of the start of this week to finalise the entire Greek package. The reason for this is the €14.4bn in Greek debt which needs to be paid off on 20 March. For the next bailout to be released, the 'voluntary' restructuring needs to have taken place and the new austerity measures need to be making their way through parliament. Without the money from the second bailout Greece will not be able to pay off this maturing debt. Most experts and those involved expect that six weeks is the minimum amount of time it will take to put the restructuring in place - meaning that it needs to get underway this week, hence the deadline.

There is also the 'side' issue of how much money will actually be paid out in the second bailout and whether the official sector (eurozone loans/ECB) will take losses in the restructuring. These are in themselves massive issues which will affect the future of the eurozone - particularly the role of the ECB (as we have previously discussed here). But in the eyes of the eurozone these discussions cannot even take place until there is a consensus from the Greek political elite to commit to greater austerity. Unfortunately, then, there are still some very big issues to be ironed out, even after the current disagreement is settled.

The term "knife edge" does seem fitting here...

Updates 06/02/2012: We will continue to update this blog with developments from Greece throughout the day.

09.30am - Reports this morning suggest Greece has been set a deadline of noon to find an agreement amongst the political parties in favour of the necessary austerity. However, this has been denied by Greek officials, who suggest the deadline is simply for an agreement to be struck ahead of the next eurogroup meeting (which was due to take place this afternoon but has now been moved to an undefined date).

12.20pm - RANsquawk is reporting that the Greek political parties have reached an agreement on a 20% wage cut and a reduction in supplementary pension, pushing them closer to a deal with the troika. No formal announcement yet but one is expected later today. Meanwhile, Merkel and Sarkozy have been holding a joint press conference in which (other than praising each other) they continued to reiterate their firm stance on Greece, although also stating that they expect an agreement very soon. If there is a consensus found in Greece today we can expect an emergency Euro-group meeting tomorrow or Wednesday.

2.00pm - Despite rumours of an agreement being reached, it looks as if the negotiations are far from over. Greek Prime Minister Lucas Papademos is set to hold talks with the troika later this evening to update them on his progress. Papademos will then hold another meeting with Greek political leaders tomorrow, presumably to communicate any messages which the troika wish to send. We assume the message will be for greater austerity. So don't expect a Euro-group meeting until at least Wednesday.

2.20pm - France and Germany earlier requested that Greece create a special account targeted at financing Greek debt, although specifically paying off interest rather than the total amount for now. The plan remains unclear and undeveloped but seems very similar to the recent German demands that Greek bailout funds go towards paying off debt first and foremost. Could the issue of an EU budget commissioner be revived during these negotiations then? Unlikely, but still risky ground for the French and Germans to tread given the heightened tensions since that leaked document.

5.20pm - After a slightly quieter afternoon than anticipated, AP has announced that there is a consensus between the Greek parties to accept the demand to cut 15,000 public sector jobs. A deal looks to be edging closer but is far from sealed yet. There is also set to be a general strike for the whole day tomorrow, meaning there is a good chance of massive protests and possibly even large riots in Athens.

6.15pm - Things have picked up again in the last hour, particularly with Greek PM Lucas Papademos reportedly asking the Greek Finance Ministry to do a thorough assessment of what a Greek exit from the eurozone would mean. Papademos is currently in a meeting with the troika (which began at 6pm), during which we're sure these reports will be broached, mostly likely with some disdain on the part of the troika. In the meantime, Merkel and Van Rompuy have been reiterating their positions by continuing to insist that the situation is not as bad as it seems and that Greece can avoid a default.

Another exposure which could sink Greek banks?

2012-02-02T12:53:00.010Z

An interesting but niche issue has come to our attention recently in relation to the on-going troubles in Greece. The 'Baltic Dry Index' (a measure of global shipping demand/prices) has fallen for a month straight to record lows. When this index falls it suggests that there is trouble in the shipping industry, raising questions over the stability of shipping firms. As it turns out many of these firms have secured their financing from Greek and other European banks – meaning if they start defaulting on their loans these banks could take losses. This raise further questions over the bank recapitalisation plans and whether such contingencies have been thought of in the second Greek bailout (which sets aside €20bn for Greek banks).

As a recent NYT article noted:

“Basil Karatzas, the chief executive of Karatzas Marine Advisors, a ship brokerage and finance advisory firm in Manhattan, estimated that European banks hold about $500 billion in shipping loans on their books and face nearly $100 billion in losses to restructure them.”

Furthermore, not only does global demand seem to be faltering (although the index may not be the best judge of this), there is also a massive over supply of ships – due to orders put in during the boom period in 2008 which are only just being completed now (the equivalent of 22.7% of the cargo shipping fleet is due be produced this year alone). This suggest a combination of supply and demand issues which means this could become a lasting problem and will not just be tackled with a boost in growth in Asia.

Data on exposure to shipping loans is scarce, but in 2010 Greek banks had a portfolio of $16bn just on Greek owned shipping. Other European banks had about a $50bn exposure. Of this the 4 largest UK banks had $16bn and 10 German banks had $18bn.

The volatility of the index should be kept in mind but it’s an interesting fresh angle on the problems in Europe. If things keep going badly in the shipping sector, which it seems almost certain they will, some banks could face an increase in the level of non-performing loans on their books. Given that capital buffers already seem to be spread pretty thin this could cause problems. Of course this could take time to have an impact, if it does at all, but worth keeping an eye on.

Sarkozy: a Tobin Tax is an "absurdity"

2012-02-01T12:57:00.006Z

In a debate with Francois Hollande and François Bayrou, a youthful Nicolas Sarkozy calls the Tobin Tax an “absurdity”. You heard that right. Sarkozy - who recently announced his plan to introduce a Financial Transaction Tax(FTT) by the 1st of August “with or without the others” - warns in a 1999 TV debate of the dangers of excessive financial regulation.

In particular, he argues:

“If we tax, none of the other countries will do so,” adding that “penalising wealth creation in our country will only serve to benefit wealth creation elsewhere, unemployment for us and jobs for the others”.

He’s clearly changed his mind.

Calm down dear: Cameron's EU veto isn't dead yet

2012-02-01T10:53:00.002Z

Over on the Telegraph blog, we argue:

MPs and MEPs – from different parties and for different reasons – have lined up over recent days to explain how David Cameron lost the plot over his EU veto, as it has become clear that the EU institutions are now involved, albeit on the margins, of the fiscal treaty that 25 out of 27 EU countries signed up to earlier in the week.

As we've noted before, the veto that Cameron pulled at the December EU summit was never the best of the possible outcomes. However, the veto hasn't left Cameron empty-handed. In fact, contrary to popular belief, if played cleverly, the veto could remain a source of UK leverage in Europe for years to come. Here’s why.

In the treaty that was signed off, the role of the Commission and the ECJ is very limited. All the ECJ can do is impose a hypothetical fine on countries that fail to transpose spending caps into national law – but not prosecute states that break these spending limits. This makes virtually no practical difference to the UK.

However, as we have pointed out before, it still sets a worrying precedent, which the UK needs to be all over like a cheap suit. But the most effective way to disarm this potential threat is not to seek to blow up the dam by launching an all-in legal challenge.

Instead, Cameron should keep his cards close to his chest. The threat of legal action is Cameron's greatest asset at the moment. Any legal challenge would be a messy, lengthy affair, involving a lot of uncertainty. The Germans in particular – ever conscious of their Constitutional Court – know that the current arrangement involving an ad hoc euro treaty is legally dubious. As long as the Germans feel uncomfortable, Cameron maintains his leverage.

Given that the role of the ECJ is so limited, by holding the option of a legal challenge in reserve, Cameron can tackle the use of the EU institutions head on if it ever genuinely threatened the UK's interests: ie if the ECJ or the Commission started to dabble in single market issues under the auspices of a euro treaty.

In other words, Cameron can credibly tell Merkel: we want you to get on with the business of saving the euro (whether the current policies will actually work is a different matter), but stick to the rules, or it's game over. Just as Merkel is seeking this treaty to assuage domestic political opinion, Cameron can point to his MPs. They will not allow him to stand by should he fail to launch a fully fledged legal challenge if the circumstances require it.

In contrast, playing all his cards now would be far riskier. Since the role of the ECJ is minimal, it’s not certain that a legal challenge would be successful at the moment (see here for our thoughts on this). If he lost a court case over an issue of little practical importance to the UK, he would lose his leverage and set an even more worrying precedent.

And remember, it's still the explicit aim of the fiscal pact members to incorporate the treaty into EU law within five years – over which the UK retains its veto. This sets the UK up for another round of negotiations where it will be free to make demands of its own.

At the end of the day, there’s no escaping that Britain, and most other euro outs, need a different set of arrangements under EU law than euro members – on an increasing number of issues. If the EU, for all practical circumstances, becomes equivalent to the eurozone, then the UK is out, and life won't be easy for the Swedes of the world either. For all the posturing, all EU countries will want to avoid this.

In any case, the fiscal pact is big on talk but small on action – non-euro members are invited to one eurozone summit a year if the fiscal pact is being discussed at that summit. In itself the fiscal pact won’t change the world. Sorry everyone – there’s not that much to see here.

Better then for Cameron to save his ammunition – there are many, many EU negotiations to come.

Merkel takes the fight directly to Hollande

2012-01-31T11:45:00.002Z

The politics of the eurozone crisis took several new twists and turns over the weekend, including the news that Angela Merkel intends to step in and “actively” support Nicolas Sarkozy’s Presidential re-election campaign (although he is yet to formally announce his candidature) against the Socialist candidate Francois Hollande. It is understood this involvement could take the form of joint campaign appearances.

Moreover, Hermann Gröhe, a senior member of Merkel’s CDU party did not mince his words when he commented on the election, claiming that:

“[Sarkozy] is the right man in the Elysée now and in the future…We need a strong France with a strong president in charge…The Socialists are stuck in their dreams of the past. All they are doing is bringing out dusty concepts and wealth distribution fantasies from their moth-ridden policy cupboard.”

In recent months, Hollande’s candidacy has become the focal point of opposition to Merkel’s crisis management strategy and the ethos that underpins it - symbolised by the treaty on closer fiscal integration and discipline. Hollande has promised to focus less on austerity and more on promoting jobs and growth, both in France and the eurozone; he has pledged, if elected, to re-negotiate the treaty so that it focuses less on 'stability' and more on 'solidarity'. Although Sarkozy signed up to the treaty at yesterday's summit, the French parliament will not have an opportunity to ratify it before the presidential elections.

The stakes are therefore high for Merkel who has a lot political capital – both domestically and internationally - riding on the successful transposition of the treaty into domestic law throughout the eurozone (even if it is debatable as to whether it will address the root causes of the crisis). Given that polls consistently give Hollande a clear lead, Merkel has decided that in order to protect the treaty in its current state, she will have to intervene. While it may be unpopular with her own MPs who consider it to have been watered down too much, she knows this is nothing compared to how it would be affected by a likely Hollande victory.

The big question is whether Merkel's endorsement will be to Sarkozy's benefit or detriment; it certainly jars with his recent media strategy of playing the humble do-gooder trying to make the best out of a bad situation. It is likewise no secret that due to Merkel's (perceived) lack of willingness to compromise on issues such as eurobonds or the ECB, both she and Germany as a whole have become the pantomime villains of the crisis. There is also potentially the risk of a backlash against Sarkozy if the French public feels that Merkel has crossed the line and is actively trying to meddle in their domestic political arrangements.

Ultimately however, both Merkel and Sarkozy will hope that as suggested in the FT’s editorial this weekend, the French public will vote with their hearts in the first round, and with their heads in the second. While they cannot win in the popularity stakes, they will count on the fact that the public will at least recognise that they have taken tough but necessary action to tackle the eurozone crisis, and that for all his rhetoric, Hollande lacks a credible plan for making the French economy competitive. There are some grounds for optimism - a poll earlier this month found that 82% of respondents had a positive view of Germany, in particular regarding its leadership and work ethic. Finally, it is worth remembering Merkel is not renowned as an astute political operator for nothing; evidently she has decided Sarkozy's re-election is not a lost cause.

Merkel's intervention should add further spice to what is shaping up to be a fascinating election campaign - as ever we will keep you updated on the ins and outs...

Germany still doesn’t understand Greece

2012-01-30T16:57:00.006Z

Despite being locked together in economic turmoil for almost two years, the reports which emerged over this weekend further suggest that Germany still does not understand the depth of some of the problems facing Greece (and that they cannot be tackled by a one dimensional policy).

We are of course referring to the leaked German proposal calling for Greece to cede budget sovereignty to the EU. Naturally, this is an impossible claim and was roundly rejected by Greece and the Commission, while German officials have spent the weekend trying to douse the flames behind the scenes.

It is not clear whether or not this was ever a serious proposal on the part of the German government, although stern talk from the German Finance Minister Wolfgang Schaeuble and the Economy Minister Philipp Roesler suggested that the sentiment behind the proposal was real enough. We will not dwell on the obvious and well documented political and democratic questions which this raises – it is clearly a step too far which could and would not ever be accepted by the EU in the current framework. There has been talk of a Eurozone finance ministry at some point in the future, but this stands apart from asking a single country to undemocratically cede control of taxation and spending to the EU- meaning the proposal was destined to sink as soon as it hit the water.

This substantial issue aside, the sentiment behind the proposal reveals a continuing misunderstanding of the Greek problem from the German government. Despite all the talk of “growth and jobs” in recent days, it is clear the emphasis is on austerity above all else. It also raises serious questions about Germany’s belief that Greek debt could ever be sustainable under Greek control – which should be a concern for German citizens since they are about to finance the largest share of another €130bn bailout.

Fundamentally though, as a recent OECD report noted, the problems within Greece run a lot deeper than just the ability to agree on the ‘right’ policies. For all its shortcomings, the Greece has instituted a multitude of deficit and debt reduction plans over the past year. However, the real issue comes with the implementation of these reforms, as the OECD comments:

“Ministries take decisions but these are often not reflected in concrete results. A succession of reforms launched in recent years (including reforms of the administration) did not bring the expected results, due to poor implementation.”

So, the problems do not necessarily lie with the politicians or the top level civil servants (or at least they do not stop there) meaning that shifting top level control to the EU would make very little practical difference.

These problems cannot be tackled overnight or by simply imposing more austerity. Germany has continually refused or failed to understand the nature of the problems facing Greece despite much of the public posturing. With the outcome of the Greek restructuring negotiations still far from clear, a change in tact is needed - although it could well already be too late.

Fifth time lucky?

2012-01-30T12:15:00.003Z

Thanks to La Stampa Brussels correspondent Marco Zatterin's blog, we've just got hold of the fifth (maybe last) draft of the new 'fiscal treaty' on budgetary discipline, due to be discussed at today's meeting of EU leaders in Brussels.

As we are at the 'finishing touches' stage, changes from the previous version are getting more subtle and harder to spot. However, there are still a few interesting changes, including:

In Article 3(1b), the so-called 'balanced budget rule' seems to have been further watered down. The wording "with the annual structural deficit not exceeding 0.5% of the GDP at market prices" has been replaced by "with a lower limit of a structural deficit of 0.5% of the GDP at market prices." We wonder how the markets will react: There's quite a substantial difference between imposing a maximum cap and a blander lower limit. We interpret this as meaning that the lowest the limit will be set for any country will be 0.5% (where as previously it could have been even stricter). Since the article still refers the the Stability and Growth pact we can infer that the new balanced budget targets will probably fall somewhere between 0.5% of GDP and 3% GDP (the deficit limit in the treaties);

Non-euro countries will no longer need to implement at least part of the budgetary rules set out for eurozone countries in order to qualify for a place by the table at future summits of eurozone leaders. However, invites will still be allowed only for meetings which specifically focus on the implementation of the 'fiscal treaty'. In light of the recent agreement with the opposition Social Democrats, this is probably enough to have the Swedish government sign up. Poland's stance remains more uncertain, as the Polish government is clearly seeking greater participation;

In a bid to win Denmark's support, the latest draft stipulates that fines imposed by the ECJ will be paid into the eurozone's permanent bailout fund, the ESM, only if they are imposed on eurozone countries. Otherwise, the money will be channeled into the EU's general budget;

Regarding the fines, there's an aspect of the 'fiscal treaty' that is worth flagging up. Under the agreement, the ECJ will impose fines of 0.1% of GDP on countries that failed to comply with its previous ruling (on whether the countries have correctly incorporated the balanced budget rules into their national laws). This is a power that the ECJ seems to have under Article 260 of the Lisbon Treaty. The power to impose fines in such circumstances is therefore not a new power (and the ECJ still does not have the power to punish countries for missing their deficit targets). However, questions still remain over the eligibility of the ECJ to rule on whether the balanced budget rules have been correctly incorporated in the first place;

Countries who want to join the agreement at a later stage will not have to wait for other Contracting Parties to "approve the application by common agreement." Under the latest draft, accession will become effective as soon as a country deposits the necessary instruments of accession - i.e. when it decides to ratify the 'fiscal treaty'.

Most changes aimed at convincing the remaining holdouts to sign up while keeping the tone of the treaty the same, but the 'lower limit' change does suggest a further watering down of the rules.

Update, 30/01/12, 1pm

Over on the Telegraph's live blog, it has been noted that this version of the pact does allow for some of the fines to go into the EU budget (as we also note above). The Telegraph suggests that this could benefit the UK, since budget surpluses are distributed to all member states. In theory this is true, but the fines which are paid into the EU budget will be those levied on non-eurozone countries. However, as we point out above, non-eurozone countries no longer need to incorporate any of the rules in order to be invited to attend future eurozone summits. In other words, non-euro countries would have no incentive to accept the rules set out in the 'fiscal treaty' before joining the single currency. What would they be fined for then? It seems very unlikely that non-eurozone countries would ever be fined and therefore that it could ever benefit the UK.

Senior Labour MPs back devolving structural funds back to the UK

2012-01-30T09:12:00.004Z

This is an interesting development. Amid everything else that's happening on the Europe-front, a bunch of Labour MPs today come out in force, backing the idea of devolving EU structural funds back to the UK. In a letter to the Guardian, 17 Labour MPs, including former Cabinet Ministers Bob Ainsworth and Jack Straw, urge the Coalition to adopt the policy first floated by Gordon Brown, to focus the structural funds exclusively on the poorer member states.

The letter reads:

In the context of the growing euro crisis, it is interesting to note that Gordon Brown – while he was chancellor of the exchequer – argued strongly for the repatriation of EU structural funds. Writing in the Times in 2003, he said: "When the economic and social, as well as the democratic, arguments on structural funds now and for the future so clearly favour subsidiarity in action, there is no better place to start than by bringing regional policy back to Britain."
The article was written in support of a Treasury document called A Modern Regional Policy for the United Kingdom, published in March of that year. The paper argued that there was much time and money being wasted in processing contributions from countries such as Britain, only to send the contributions back in the form of structural funding.
Much easier and simpler, the then chancellor seemed to be saying, to let Britain keep the cash and get on with the job of using our own structural funds. The pressure group Open Europe has calculated that Britain would have been better off by something like £4.2bn if Brown's system had been adopted. What is more, some of the most deprived UK regions are currently short-changed by the structural funds, because EU allocations are based on inflexible, one-size-fits all criteria. For instance, the West Midlands has the lowest disposable income per capita in the UK, yet pays the EU £3.55 for every £1 it receives back in structural funding, according to Open Europe estimates. In contrast, if Labour's policy had been pursued, each region would have experienced a rise in the amount of subsidies they receive by around 45% compared with now. For example, Cornwall would have received an additional £207m over seven years.
Alan Johnson, also argued in 2003, that regional policy ought to be "resourced domestically in richer member states, like the UK, with the institutions and the financial strength to do it. This would end the unnecessary and inefficient recycling of funds between richer member states, like the UK, via Brussels ..."The Cameron government seems to have abandoned any attempt to change EU structural funding to concentrate on trying to freeze the EU budget – a strategy which has already failed. Perhaps this government could take a look at what was being argued for a few years ago – it could benefit us all.

John Cryer MP, Jack Straw MP, Katy Clark MP, Thomas Docherty MP, Dennis Skinner MP, Gisela Stuart MP, Andrew Smith MP, Mike Wood MP Robert Ainsworth MP, John McDonnell MP, Kelvin Hopkins MP, Jeremy Corbyn MP, Grahame Morris MP, Ian Lavery MP, Ian Davidson MP, Frank Field MP, Graham Stringer MP

One for the Coalition to ponder...

How much change is there down the back of the structural funds sofa and what can it be used for?

2012-01-30T08:45:00.001Z

A recent Franco-German paper (leaked to EurActiv and others) outlined a set of proposals on how to achieve a better balance between austerity and pro-growth measures in tackling the eurozone crisis. One suggestion was:

“the establishment of a fund for growth and competitiveness in programme countries and other countries facing serious structural challenges should be considered. At this stage, this fund should pool a certain amount [25%] of the 2011 automatic decommitments of these Member States from the Structural and Cohesion Funds”

Decommitments refers to money that has been allocated to a member state from the structural and cohesion funds (SCF) and not spent two years after the year in which it was allocated.

Unsurprisingly many EU politicians were very excited about a potential fresh pot of money to pump into lagging economies, with Merkel stressing there was “a lot of money” in the structural funds, while Spain’s Europe Minister, Íñigo Méndez de Vigo, speculated the amount could be up to €100bn (although it is not clear if he was referring just to the SCF or other EU funds as well – the EU has a lot of different, overlapping funding instruments). Rumour has it this idea will be further discussed at today's EU leaders’ summit.

However, EU Commissioner for Regional policy, Johannes Hahn, popped up on Friday with an interview in Süddeutsche to puncture this particular balloon, describing the plan as “unrealistic”, and claiming that the total value of funds unused in 2010 and 2011 only amounted to €30m.

Hahn said that about three-quarters of the total €350bn value of the SCF over the current 2007-13 budgetary framework had been allocated to projects, meaning:
"This leaves 25%, and there is always the misconception that the money was not used. But it is used. It is budgeted, which means that it has been assigned to individual countries, but not yet mapped to specific projects."
There is a huge difference between €30m and €100bn – so clearly there is a lot of ambiguity as to what portion of the funds is theoretically still available. Quite possibly the Frano-German paper treated funds allocated to countries but not projects as ‘unused’ – something Hahn clearly disputes.

However, irrespective of how much extra funding could be found from this source, as shown in our recent report on EU regional policy (which we hope Mr. Hahn will find the time to read), and as we have argued previously, the nature of the funds means that they are simply wholly unequipped to serve as a backstop in a debt and solvency crisis.

We argued that countries such as Greece, Spain and Italy (all with a national income over 90% of the EU average) should no longer be eligible for SCF, as their record in these countries was at best inconclusive, while their pro-cyclical nature may even have exacerbated the credit bubble. Our report argued that a new fund could, in theory, avoid the many faults built into the structural funds (see section 2 of the report for a detailed cost/benefit analysis) and prove to be a huge benefit to countries such as Greece, Spain and Italy in bouncing back from the eurozone crisis; for instance by better targeting labour market mobility and re-skilling significant sections of the labour force.

However, this would have instead of, and not an aside to, the existing SCF framework. This could feasibly only be achieved in the next long term budget, as allocations for every country up until 2013 have already been agreed. As Hahn pointed out in the interview, channelling money from the SCF to a new purpose-built fund will require the agreement of member states (and the European Parliament). Given how territorial member states are over payments from the EU budget, it is far from certain they would agree to something which would fundamentally alter the balance of their payments and receipts.

Either way, given the fundamental structural failings in the eurozone, this looks like yet another classic example of eurozone leaders tinkering around the edges of the problem…

A new year, the same old problems...

2012-01-27T15:08:00.016Z

Ahead of the first (full) EU summit of the new year, we've put together our thoughts on what progress to expect.

As per usual there are lots of topics to be discussed but we don’t expect too many concrete decisions. We’d expect a final draft of the euro fiscal pact to be completed, some progress on ESM - the eurozone's permanent bailout fund - and a commitment to "growth and jobs" (as opposed to recession and unemployment..?). Huge questions over Greece and size of bailout funds will probably remain. Below we outline the key issues to watch out for (take 2):

Fiscal pact: This should be last round of discussions on the new European treaty. The aim has always been to have the final draft completed by end of January. However, there are still a few issues which need to be resolved.

The key interaction is between how the rules will apply to those non-eurozone which sign the pact and how much influence they will have (i.e. how many meetings they get to attend and what decisions they will have an impact on). Sweden, Poland, Denmark and the Czech Republic will make their decision on whether to sign based on how this plays out. The final agreement won’t be finalised as the Czechs and Irish will still have to decide whether to hold a referendum on the treaty. Expect it all to be tied up at the March summit.

Our bet is on the Poles, Danes and Swedes signing up if they're guaranteed some sort of place at the table and if the rules of pact actually don't apply to them - creating a rather bizarre situation.

The UK and the use of EU institutions: We suspect that Cameron will reluctantly accept the formulation in the fourth draft of the fiscal compact which gives the ECJ the right to slap fines on member states for not implementing the pact's spending ceilings. Technically, this marks an overlap between the fiscal compact and the EU treaties - something which Cameron has argued against in the past.

ESM treaty: Behind the scenes negotiations have been on-going, so the draft should be fairly far along. The biggest sticking point was the use of Qualified Majority Voting (QMV) to make decisions within the ESM, which Finland objected to. There now looks to be a compromise. The Finnish Constitutional Committee announced today that it approves of the new wording in the ESM treaty, whereby QMV is used to disburse loans but for any change in the size of the ESM a unanimous decision is needed. The Grand Committee (representing the Finnish Parliament) will rule on Monday and is expected to support this position. This is pretty big.

Additionally, there should also be a discussion on the size of the ESM and whether the ESM and EFSF can run in parallel. It's hard to read Germany on this issue. There have been indications that Germany may be willing to let ESM and EFSF run together, but it would want the fiscal pact and Greece sorted before it is considered. It's likely the topic will be broached but final decision will be delayed until March.

Greek restructuring: EU leaders are unlikely to have a deal ready to present at the meeting so it may be more of a general discussion. Even if a deal is achieved, which reconciles the differences between Greece and its bondholders over the level of interest paid on the new bonds, there is still the huge question of holdouts and ECB. Expect these issues to be covered along with talk of increasing the size of the second Greek bailout and losses for public sector - but don't expect any big movements (at least not publicly).

Growth and jobs agenda: EU leaders have been pushing this 'new' agenda recently. After coming in for massive criticism for their undying commitment to austerity, they are keen to focus on boosting competitiveness, promoting growth, creating jobs and the like. Despite that, as of yet a coherent policy agenda to achieve this has not been formulated - most of the time there is just a broad commitment to ‘structural reforms’.

We expect much of the same from this meeting - leaders (David Cameron in particular) will play up the renewed focus on growth rather than just austerity but it remains unclear how much difference the EU can make on this front. Ultimately, national governments need to push ahead with long term changes to the structure of their economies (labour market reforms, increased education and training, investment in R&D, increased competition etc.) This will take time, money and political will, all of which the eurozone is short of at the moment.

What keeps central bankers in Frankfurt awake at night – and why should Britain care?

2012-01-27T11:18:00.002Z

In a blog post for the Telegraph, we argue,

In his speech in Davos yesterday, David Cameron outlined some very sensible proposals for how to deal with Europe's economic crisis. But, almost in passing, he also called for a eurozone “central bank that can comprehensively stand behind the currency and financial system”, implicitly suggesting that the ECB must be ready to provide more cash to struggling banks and governments around Europe. Unfortunately this statement completely misses the intricacies which the ECB and the eurozone face in the coming months.

The ECB’s balance sheet now stands at a pretty scary €2.7 trillion, higher than that of the money-printing Federal Reserve in the US. By buying government bonds and providing cheap cash to banks around the eurozone, the ECB is now leveraged 33 times – up from 24 times only last summer. This means that for every €1 the ECB holds in reserves and cash, it has €33 swirling around somewhere in the eurosystem.

But it isn’t the size of its balance sheet that keeps ECB officials awake at night – all central banks are leveraged – as much as the circa €60bn of (nominal) Greek bonds festering on its books. This (relatively) tiny item has become political dynamite, as Greece is set to default on its debt in March, either through a voluntary agreement with its creditors or by simply running out of money. As creditors and the Greek government are locked in to talks over which one it’ll be, big question is: will the ECB be forced to take a hit?

The question is crucial as the ECB has said in the past that it will not take losses on its eurozone exposure – ever. For the Germans, losses for the ECB would mark a huge betrayal of the Bundesbank-model, in which a central bank is trusted and prudent, and doesn't take on excessive risks – and therefore has the credibility to control inflation. Many German commentators have spent the past year grumbling about the ECB’s back-handed Quantitative Easing and illegal financing of state deficits. The ECB has got around this by purchasing the bonds on the secondary market, but if it took losses on Greek debt, this argument falls.

But at the same time, if “public” bodies, including the ECB, holding Greek debt don’t accept losses in a Greek default, the write-down may not be large enough to give the country even a hypothetical chance of bouncing back, meaning the EU/IMF cannot give it more loans. For the ECB, this amounts to a pretty awful catch-22: accept losses and see your credibility and rationale undermined or reject losses and at worst prompt a disorderly Greek default or possibly just massive distortions in eurozone bond markets.

So what’s the best solution? We’ve long argued for a full restructuring of Greece’s debt (now 60-70%) and reassessment of Greece’s position in the euro. But that looks unlikely right now. Instead, the ECB could be offered an escape route. It purchased its bonds at around a 30% discount. It could accept a 30% write down without taking any losses and would give Greece some additional debt relief. Another option would be for ECB-held bonds to be bought by the euro bailout fund, the EFSF (at cost price), and then submitted by the EFSF to the voluntary restructuring. The EFSF could absorb the losses, though it too may have to deal with some very uncomfortable questions from taxpayers who will have lost money. But arguably it’s better than sacrificing the credibility of the ECB.

Both options would still be a tacit admission of failure by the ECB, since it always claimed it would hold the government bonds it bought to maturity, but it may have little choice.

All of this should concern the British. Not only because the eurozone crisis is linked to the fate of the UK's economy. But also, as Anglo-Saxon commentators are coming out in droves – alongside the UK government itself – in calling for the ECB to load up on yet more eurozone government debt if need be, it should be a reminder: in the eurozone as in the UK there’s still no such thing as a free lunch.

In the end, someone has to pay – and if you want to keep the Germans fully on board, it best not be the ECB.

A crude agreement

2012-01-25T13:06:00.002Z

On Monday Brussels announced an EU-wide ban on oil contracts between Iran and member states. The hope is that these sanctions will choke the Islamic republic’s finances, and prevent its nuclear programme from progressing further. However, as with countless other EU foreign policy objectives, the goals look to have been undermined by the lack of consensus between EU member states.

Diplomats admitted that negotiating the embargo had been difficult. Quite an understatement given that the enforcement of the embargo has been delayed six months just to ensure that an agreement could be met. The key dispute comes from the fact that Greece, Italy and Spain are far more dependent on Iranian exports than their Northern neighbours. Greece imports up to a third of its oil from the Islamic state, with which it has negotiated a favourable rate. Italy and Spain buy 10% of their oil from Iran.

Forcing these countries to source such a large percentage of their oil from another producer in such a short time frame will undoubtedly put additional costs on their economies (not to mention the potential for higher prices which we discuss below). This seems slightly counterproductive to say the least when they are already struggling to stay afloat in the storm of the eurozone crisis. Not that you can abandon all policy goals on the basis of economics, but it highlights the breadth of impact which the eurozone crisis will continue to have until a lasting solution is found.

That said, fears of an impending energy crisis are alarmist. For one, Saudi Arabia has assured European governments that it will increase its production capacity to replace Iranian imports, which represent a fairly small share of overall EU oil consumption. Gaps in supply can also be met by Libya, which is set to boost exports after a year in remission.

A massive price hike is also unlikely, with refineries taking the hit more than consumers. Providing it does not switch to other Middle Easter suppliers, China will become the biggest consumer of Iranian oil, creating a monopsony through which it can drive down prices. Iran has shown itself willing to sell oil under the market price during previous embargoes. An interesting side effect then is that China could end up benefitting most from this ban by sucking up the excess Iranian supply at low prices. Not the EU’s fault, but it seems to undermine any prospect of the embargo having a huge financial impact on Iran.

Will Europe’s energy future be unaffected then?

Possibly, if two conditions hold:

- First, Iran must not blockade the Strait of Hormuz, through which Europe accesses Saudi oil. This seems unlikely since doing so would likely cause a full scale military conflict as the US has vowed to defend EU cargoes.
- Second, Iran must not throw a spanner in the works by cutting off oil supply immediately (something which Europe could not cope with as the delayed start of the embargo shows).

Will any of this bring Iran ‘back to the table’?

As EU High Representative on Foreign Affairs Catherine Ashton outlined, the aim is to “bring Iran back to the table”. It’s not clear this will be the case - Iran has survived previous embargoes, some of which have even hardened support for the regime. Without China and India joining the embargo (highly unlikely) Iran may not feel much of a squeeze. Even if they did, oil prices would skyrocket creating even more problems for the eurozone.

All in all then, this embargo has been a bit of a mess. Whether or not the aims are valid, it has once again highlighted the disparities in foreign policy goals within the EU, and therefore the limits of a combined foreign policy. It also brings home that, despite its size, the EU’s power is to some extent dwarfed by that of China and the US. Ultimately, their decisions will make or break this embargo, not the EU’s.

Off target: The case for bringing regional policy back home

2012-01-24T16:07:00.007Z

In a weighty new report published today we take a critical look at the EU’s structural funds which are the means through which the EU implements its regional policy. We estimate that over the course of the current 7 year EU budget, the UK will pay in around £30bn to the EU’s so-called structural and cohesion funds, but will get back just under £9bn.

In our press release, we argue that:

“Limiting EU regional spending to poorer countries would be a win-win situation for both Britain and Europe. It would channel more cash to the newest member states and allow the UK to spend exactly the same amount on its regions as it does now, with the option of adding the several billion that it would save from streamlining the structural funds. It would also eliminate a range of additional costs and allow the Government to radically improve the targeting of funds towards poorer areas and to viable projects.”

What exactly is the problem?

The EU aims to reduce regional disparities but under the current system, every region in every member state receives at least some financial support, regardless of how wealthy it is. This means a significant part of the UK’s contribution goes to member states with a comparable level of income. According to our calculations, of the UK’s overall contribution, 70% goes to other member states, 25% is redistributed within the same UK region in which the funds were raised, and only 5% is redistributed between richer and poorer regions within the UK.

This recycling exercise is fundamentally economically irrational, and even the Commission has recognised that it creates “considerable administrative and opportunity costs.”

It also means that most UK regions, even the most disadvantaged, are short-changed because they pay in more than they get out. For example, the West Midlands, which has the lowest disposable income per capita in the UK, pays £3.55 into the structural funds for every £1 it gets back. Other regions that do badly from the current set-up include the North-East, Merseyside, Lincolnshire, Northern Ireland and parts of inner London.

While there is a strong case for having an EU regional policy to assist the poorer member states that have joined the EU since 2004, there is literally no “added European value” – the criteria for justifying EU-level as opposed to national-level decision making – to keeping all member states locked in.

So what can be done?

Our proposal would see the implementation of an eligibility threshold of 90% of EU average income, above which member states would no longer receive any support. This would on one hand enable the remaining funds to be focussed exclusively on the poorer member states, while allowing richer member states to still make significant savings and regaining control over their regional policies and spending. This is broadly in keeping with the position adopted by the previous Labour Government.

What impact would this have?

Such a measure would create a whole range of winners, and a handful of ‘losers’. To illustrate, if this policy had been adopted for this EU budget period (2007-2013):

France would have emerged as the biggest winner from focussing the funds on the poorer states, cutting up to €12.8bn from its net contribution to the EU budget over seven years.
The UK comes second, with a net saving up to €5.1bn (£4.2bn) over seven years.
Importantly, all new Central and Eastern European member states would see a rise in the amount of subsidies they receive (except for Slovenia under one possible scenario), with Poland gaining the most.
Italy, Spain and Greece would all lose out substantially, but they are already set to get a smaller share of EU subsidies as recent enlargements continue to erode their net receipts. More importantly, to cope with the eurozone crisis, these countries need far more responsive and targeted support than is currently being offered by the structural funds.

The way ahead for the Coalition

It appears the Coalition has opted for a ‘safety first’ approach with regards to negotiations over the EU’s next long-term budget (focussing on keeping the overall amount down and protecting the UK rebate). However, pushing for a more ambitious reform along the lines of our proposal would see a significant reduction in the size of the budget and would be better suited to building alliances with like minded member states.

Devolving regional policy from the EU would be a good move for the Coalition if it is to come good on its commitment of ‘rebalancing’ the UK economy away form its reliance on the South-East and financial services, and place to start. The UK could then launch a revamped regional and re-generation policy which would start with the £8.7bn that the UK currently spends via the structural funds, and then re-invests the additional £4.2bn saving from the reform. This would mean virtually all UK regions would experience a rise in the amount of subsidies they receive by around 45%.

In 2003, then Chancellor Gordon Brown argued that:
“the economic and social, as well as democratic, arguments on structural funds now and for the future so clearly favour subsidiarity in action, there is no better place to start than by bringing regional policy back to Britain”
Almost a decade later, this statement still points out the path ahead for the UK.

Harsh

2012-01-24T13:19:00.003Z

Swedish Finance Minister Anders Borg - whose country is currently grappling with whether to sign up to the euro fiscal pact - is not impressed by Greece's implementation of its EU-led austerity programme.

This is what he reportendly told journalists in Brussels this morning:

“There are pretty obvious things that haven’t been achieved on the structural side and in terms of public finances. This is probably one of the worst programmes we’ve ever seen. There has to be a radical improvements in the implementation before there can be a discussion about additional programmes.”

Harsh.

So where does EU money come from?

2012-01-20T09:00:00.001Z

Ahead of our impending paper looking at the effectiveness or otherwise of the EU’s structural funds (watch this space) we came across this timely comment from Hungarian PM Viktor Orban - who has been subject to some (ehum) controversy over recent weeks (he took a roasting in the European Parliament on Wednesday).

During an interview with German tabloid Bild, he was asked that given Hungary’s economic crisis, with the country trying to obtain a “safety net” from the EU and IMF, was it right that Hungarians enjoyed a 16% tax rate on their income while Germans had to contribute up to 47% of theirs - which is sort of a silly question.

When Orban pointed out that Hungary didn't owe Germany any money, the interviewer asked about the €2 billion Hungary receives from the EU’s structural funds every year. Orban’s answer:

“Correct, but this money does not come from German taxpayers, but from the EU. This money is available to us as a member of the EU.”

Hello Mr Orban. Where does "EU money" come from?

Here at Open Europe we argue that less wealthy member states such as Hungary should continue to receive EU structural and cohesion funds (though the funds need serious reform). But the money doesn't come from the EU’s magic plant, but from taxpayers - and around 1/5 of the EU's budget just so happens to be financed by German ones.

Incidentally, in our forthcoming paper, we'll present a solution that will make both Hungary and Germany fare better from the EU budget.

Just to whet your appetite.

The Draft Euro Fiscal Pact - Episode IV

2012-01-19T20:00:00.004Z

We have just got our hands on the fourth draft of the European 'fiscal pact' (this time, the Telegraph's Bruno Waterfield - who is always quick off the blocks - beat us to it), which is being circulated among national delegations tonight. At a first glance, a very limited number of Articles have changed from the previous version - but all the changes look pretty significant:

At the request of Germany, the preamble of the agreement makes now clear that, as of 1 March 2013, struggling eurozone countries will be allowed to apply for a bailout under the eurozone's permanent bailout fund, the ESM, only if they have ratified the 'fiscal pact'. The previous version only required that countries incorporate the balanced budget rule.

The new draft gives the European Commission a greater role, compared with the previous version. In fact,

The Commission will set out "common principles" on the establishment of the national corrective mechanisms which, under the agreement, should be triggered automatically every time governments fail to comply with their deficit targets;

Furthermore, the Commission is now allowed to issue a report on whether governments have correctly transposed the balanced budget rule into national law on its own initiative (under the previous draft, it needed to be "invited" to do so by a member state);

More importantly, if the Commission's report concludes that a country has failed to transpose the balanced budget rule properly, "the matter will be brought to the ECJ by one or more of the Contracting Parties." In other words, a government can only be taken to the ECJ by its peers, at least formally. However, what the Commission says in its report plays a key role in the process.

In regards to the ECJ, its jurisdiction remains limited to Article 3(2), i.e. how national governments implement the balanced budget rule. But some very relevant changes have been made in Article 8, in particular:

If a member state fails to comply with the first ECJ ruling (see above), it can be taken to the ECJ again. If the ECJ confirms that the government concerned has actually ignored its previous ruling, it can now impose a fine (no more than 0.1% of the country's GDP);

Interestingly, under the latest draft, the fines "shall be payable" to the eurozone's permanent rescue fund, the ESM;

In addition, a new paragraph has been added, which makes clear that Article 8 "constitutes a special agreement between the Contracting Parties within the meaning of Article 273 of the Treaty on the Functioning of the European Union".

What does that mean in practice?

This new paragraph really reads like an insurance against any possible objections from the UK regarding the use of the ECJ outside the EU Treaties. For those who, unlike us, do not remember the Lisbon Treaty by heart, this is what Article 273 says,

"The Court of Justice shall have jurisdiction in any dispute between Member States which relates to the subject matter of the Treaties if the dispute is submitted to it under a special agreement between the parties."

Therefore, this small paragraph makes the use of the ECJ (albeit still limited to a legislative rather than enforcement role) 100% legal under the EU Treaties.

One last thing is worth noting. Following suggestions from the Polish government that Poland might decide to stay out of the agreement in the end, unless non-euro countries are allowed to be present at future meetings of euro leaders, the latest draft establishes that:

Non-euro countries that decide to sign up to the agreement must be kept "closely informed of the preparation and outcome" of eurozone summits;

The leaders of non-euro countries must be invited to eurozone summits at least once a year. However, the invites would be restricted to non-euro countries that not only signed and ratified the agreement, but also "declared their intention to be bound by some of its provisions."

Sounds like a tricky trade-off: the Poles are unlikely to take too kindly to having to institute the eurozone fiscal rules before they've joined the euro...

Fresh Trouble for the Fiscal Pact

2012-01-19T17:30:00.001Z

One week after we published the third draft of the new European 'fiscal treaty' setting out tougher deficit and debt rules for eurozone countries, and with a fourth draft imminent, a quick update on where negotiations are at the moment.

The big news today comes from Prague. We reported last week that Czech Deputy Prime Minister Karel Schwarzenberg had threatened to pull his party out of the ruling coalition if the government decided to stay out of the 'fiscal treaty', but Czech President Vaclav Klaus had insisted that he would not sign the agreement "under any circumstances."

Well, the Czech government has now decided to put the issue to a referendum after several rounds of "very bloody negotiations", in the words of Radek John, the leader of Public Affairs - the smallest party of the coalition (pictured). The Czech Republic is not part of the euro, meaning that eurozone countries could still go ahead with the adoption of the fiscal treaty, without having to wait for the outcome of the referendum (non-euro countries can join at a later stage).

However, the announcement is extremely relevant for at least two reasons. First, there's now a concrete possibility of the Czechs staying out of the 'fiscal treaty', which would be the coup de grâce for the 26-versus-1 scenario depicted by a large portion of UK and European media in the wake of Cameron's veto at last month's EU summit (we had a go at showing why these reports were rushed, to say the least, see here and here).

Second, the news of a Czech referendum may trigger public and political pressure for a referendum in Ireland. This would not necessarily destroy the treaty because if a referendum were held on Irish ratification of the treaty, rather than simply the government's agreement to it, the treaty could still enter into force in theory. The last draft required 12 ratifications among euro states to enter into force but, certainly, it would throw a major spanner in the works and thoroughly undermine the credibility of the treaty if Ireland (the recipient of a bailout package) were not fully signed up at an early stage.

But there could be another problem, and a quite surprising one. In fact, it looks like the Polish government is not happy with the latest draft, which (as the previous two) would exclude non-euro countries from attending meetings of eurozone leaders - a strong incentive for many of the non-euro countries to sign the treaty.

And sure enough, the Polish government is now suggesting that it might not join the 'fiscal treaty' unless its request is taken on board - Germany is thought to be rather keen on having the Poles signed up. This is what Polish Prime Minister Donald Tusk told the press yesterday,

"Our efforts aim at a fiscal agreement the shape of which does not make the division of Europe into two clubs - the eurozone and countries outside the club - more lasting than is safe in our opinion."

Meanwhile, a fourth draft of the agreement is being finalised, and should be made available ahead of the next meeting of finance ministers on 23-24 January. The way ahead still looks quite rocky...

More IMF contributions? conditionality is king

2012-01-18T16:05:00.011Z

The rumours were finally confirmed today as the IMF released a statement announcing its plans to increase its funding base by up to $500bn. There’s been a lot of talk in the British media in recent weeks about the potential increased UK contributions to the IMF, and not much of it positive. The coverage has painted any additional UK contributions as tantamount to a eurozone bailout – this is a tempting narrative but ultimately it may be too simplistic. When it comes to the IMF there are a few subtleties which need to be considered, as we outline below.

Firstly, no-one has lost money lending to the IMF…ever. It is always the most senior creditor, meaning it will be the first to be paid back. Therefore the potential risk of this lending is minimal, no matter where it goes. Moreover, as Cameron has pointed out, the contributions do not impact the UK’s debt or deficit, so it is not really a question of giving up other priorities to fund the IMF.

Additionally it seems as if the money will be paid into the IMF general reserve fund and not a specific eurozone fund. It is also likely that other members will contribute, so this moves the point away from being simply about the UK and the eurozone and becomes more about the UK's participation in the global economy. Being a member of the IMF is an important part of the UK’s global role and its foreign policy approach. Unilaterally declining to contribute funds and possibly removing the UK from the IMF would have an impact far beyond the UK’s role in the eurozone crisis.

Furthermore, given the failures of the EU in the eurozone crisis, shifting the balance of power towards the IMF would be no bad thing (in the right circumstances, of course). The IMF has conclusively argued for a large write down of debt in Greece (as we also have) and has the expertise and experience to deal with the challenges of restructuring struggling economies.

That said there are a few conditions which the Government should consider:

- The funds must go into a general fund not a eurozone specific one and must be matched proportionately by all other members of the IMF.
- Larger IMF contributions to the eurozone must be matched by a greater say in the crisis resolution. Generally, it should be made clear by the IMF and its members that the current approach is not working – the focus needs to switch to debt restructuring combined with increased competitiveness and growth.
- The funds must not be seen to impact on Cameron’s decision to veto the recent European treaty. Although IMF funding was mentioned, this is a separate issue since it is coming from a direct IMF request not the EU.

So, it comes down to this: The UK should not hand out further contributions to the IMF without conditions. With these conditions met, the result would not be the same as simply handing more money directly to the eurozone. Alas, in the end, even an extra $500bn at the IMF’s disposal may not make a huge difference the outcome of the crisis.

Which candidate has the most to gain from France's downgrade?

2012-01-18T09:30:00.005Z

The race to the Elysee took another turn on Friday when Standard & Poor’s downgraded French debt. The decision had been widely anticipated by the markets since December, when the ratings agency conducted a review of Eurozone finances. Although all three French parties called for reforms of the ratings agencies – Nicolas Sarkozy’s UMP called for central banks to establish rating criteria, while Socialist candidate Francois Hollande mooted the possibility of a European agency – some candidates reacted better to the downgrade than others.

However, what is the likely effect of the downgrade on the presidential race? A LH2 poll conducted on Friday and Saturday in partnership with Yahoo! and published on Sunday shows that, compared to a month ago, Sarkozy and Hollande saw their ratings slip while the Front National's Marine Le Pen saw her third-place position behind Hollande and Sarkozy boosted. Sarkozy's share of first round voting intentions fell to 23.5% from 26%, Hollande's fell to 30% from 31.5%, while Le Pen gained 3.5% points to 17%.

Le Pen – whom 26% of voters wish to see in the second round according to a separate TNF poll published Friday – used the announcement as an opportunity to justify her policies, which include a return to the franc and protectionist measures such as a 3% import tax to finance her proposed minimum wage and social spending increases. During a jubilant press conference at the weekend, she argued that S&P’s ruling was “validation of the analysis [she] had carried out for the last two years” and that Nicolas Sarkozy’s “boomerang of lies” would soon come flying back to hit him in the face.

Hollande was quick to blame Sarkozy’s economic record. During a conference in French Antilles on Saturday the Socialist candidate remarked that “it’s not France that was downgraded but a certain policy…a certain president”. But his pointedly delayed response to Moody’s decision to maintain its French AAA rating was seized upon by UMP officials as proof that he was rejoicing in France’s downgrade. “Is the Socialist Party more cheered up by bad news for France than good news?” asked the UMP secretary Jean-François Copé.

Hollande also appears aware of the limitations the new downgrade sets for his presidential programme, conceding at the weekend that “not everything will be possible” and his pledge to “re-enchant the French dream” at the beginning of his campaign has itself been downgraded to one of offering “lucid hope”. Hollande has announced that he will propose strong measures to combat France’s ailing economy by the end of the month, a move which commentators have – perhaps rather too quickly - likened to Sarkozy’s 2007 muscular campaign of economic reform.

Sarkozy was the candidate most exposed to the downgrade for obvious reasons. Having brought the question of the country’s debt rating to the forefront of the national consciousness during his campaign to reform pensions (justified on the basis that they would reduce public debt and therefore maintain France’s triple A) he had the most to lose. As he reportedly confided to allies in December, “si la France perd son triple A, je suis mort” (if France loses her triple A rating, I’m dead).

In a conference in Madrid yesterday, Sarkozy downplayed the relevance of the S&P judgment, refusing to answer journalists’ questions because “what happened Friday, is Friday”. Today Prime Minister François Fillon denounced the left’s “small media tsunami which was at times almost as indecent as it was irrelevant”. Sarkozy has instead preferred to focus on employment ahead of the election, organising a ‘social summit’ tomorrow, where he will unveil long-overdue plans to reform France’s labour market, less than one hundred days before the election.

Sarkozy looks like the biggest victim of the downgrade, but Francois Hollande shouldn’t count himself lucky just yet. The Socialist candidate has insisted that he – unlike Sarkozy - never pledged any specific debt rating for France (an admission of pessimism unlikely to win over many additional French voters one would suspect). His pledged reforms to be “tough on the dominance of finance, tough on growth policies, tough on new instruments…tough on tax” don’t appear to have convinced voters either. Le Pen should be able to benefit the most off the back of the downgrade, but her weak performance during a televised interview on Sunday exposed her shoddy grasp of basic macroeconomics (and maths) which has left her poll standing stagnate at 18% today.

In sum, none of the three leading candidates have been able to use the downgrade to their benefit just yet but the race still looks open with only three months before the polls start for real.

Friday the thirteenth in the eurozone…

2012-01-13T22:30:00.002Z

Over on the Telegraph blog, we look at today's euro developments:

It all looked so good in euroland after a market rally and successful Italian and Spanish bond auctions this week. However, on Friday the eurozone crisis again took a turn for the worse. Standard & Poor's – the increasingly unpopular credit rating agency – is set to downgrade France and Austria from their AAA ratings. At the same time talks broke down over what losses banks and other bondholders will be forced to accept when Greece writes down its massive debt, injecting another huge dose of uncertainty into the euro mix.

Euro policy geeks are already engaged in fierce debate about which of these two events constitute the worst news for the eurozone. Let’s have a look:

Downgrades: Friday the thirteenth jinx aside, this downgrade could be spotted a mile away with S&P putting the whole eurozone on negative watch before Christmas. Other eurozone downgrades are also taking place, notably of Italy, but the loss of AAA ratings are undoubtedly the most critical. In addition to the symbolism of having one of the EU’s big three economies downgraded, the eurozone’s €440bn temporary bailout fund (the EFSF) – aimed at backstopping fragile euro states – could be soon to follow. The EFSF needs its current AAA rating to continue to dish out cheap loans to Greece, Portugal and Ireland (and any other country that might need help). But as France is a major contributor to the EFSF, a downgrade for the country could result in a corresponding slash to the rating of the EFSF.

The effect would be higher borrowing costs for the struggling countries that tap the fund, reducing effectiveness of the ESFS as a backstop measure. In addition, an EFSF downgrade will make the fund – and the eurozone – even more reliant on German taxpayers. This would further expose the German economy to potentially bad eurozone debt and, at worst, even threaten the country's own credit rating.

It also raises even more questions about an EU plan, currently being negotiated, to increase the lending capacity of the EFSF through a complicated leveraging and insurance scheme (for details, see here). You simply cannot create money out of nothing – and even more so when one of your key players has just suffered injury.

So expect short term market jitters. But so far, we’re only looking at one credit rating agency, with the other two holding their fire – which is probably why the news coming out of Athens is more significant.

Greece: The negotiations over losses for investors in a voluntary restructuring of Greek debt are starting to look like a bad horror movie. For all the grand talk from EU leaders and officials, bondholders (especially smaller firms such as hedge funds) still have a massive incentive not to participate in the voluntary restructuring – either Greece pays back the money they owe them or there is a default, in which case their insurance on Greek debt (known as credit default swaps) are paid out and they recoup their losses at least.

The crux is that Germany and the IMF in particular have made a write down of Greek debt a precondition for paying out the next trance of bailout money, which Athens needs by March 20 to pay off €14 bn in debt due. If neither Greece, the bondholders nor Germany/IMF blink, we may be looking at a forced Greek restructuring (where Greece legally enforces losses on bondholders) or even a full default and, at worst, a eurozone exit. But there’s still plenty of negotiating time before March.

What’s clear is that both the downgrades and the break-down in the Greek restructuring talks could change the face of the eurozone crisis. Though the downgrades seem more dramatic now, the Greek problem could soon begin to hit home. An enforced write-down or uncontrolled default both essentially amount to the same thing in the eyes of the markets and investors will begin to have doubts about the future of other eurozone countries – if a default can happen in Greece, why not in other insolvent eurozone states?

Tags: bail-out, Credit Default Swaps, credit rating, default, eurozone, France,Germany, greece, Sarkozy, sovereign debt crisis

Wie Kent Olli Rehn?

2012-01-13T11:34:00.011Z

Not everyone in the newly formed (and long awaited) Belgian government seems to be happy with the new supervisory powers the European Commission has gained under the "Six-Pack" on economic governance.

As we reported here, Belgium was forced to withhold €1.3 billion of planned spending in its 2012 budget, after the Commission said that Belgium's estimates of its public deficit (2.8% of GDP at the end of this year) were "too optimistic."

Well, this is what Belgian Enterprise Minister Paul Magnette had to say about that (from today's interview with Flemish Belgian newspaper De Morgen),

"The Commission is today going too far with its measures. Who knows [EU Economic and Monetary Affairs Commissioner] Olli Rehn? Who has ever seen Olli Rehn's face? Who knows where he comes from and what he has done? Nobody. Yet he tells us how we should conduct economic policy. Europe has no democratic legitimacy to do this."

Incidentally, Magnette (see picture) is a fellow party member of Belgian Prime Minister Elio Di Rupo. Unsurprisingly, Di Rupo has promptly distanced himself from this statement. However, an important political message has been sent. Perhaps eurozone countries were not fully aware of the practical effects of the loss of sovereignty they were agreeing to when they rushed towards stricter economic governance - it wouldn't be the first time.

In light of Monsieur Magnette's reaction, we wonder what would happen if similar "recommendations" were made to France and/or Germany. You know things are changing when even Belgian Ministers resort to anti-Commission rhetoric...

What has the ECtHR done for the UK lately?

2012-01-12T16:32:00.002Z

A detailed report, written by veteran Parliamentary legal researcher Robert Broardhurst, and commissioned by a group of backbench Conservative MPs including Chris Heaton-Harris MP and Andrea Leadsom MP, has called for action on the European Court of Human Rights (ECtHR) to reinstate Parliamentary democracy.

This important report argues that we must radically change our relationship with the ECtHR so that it can no longer impose trivial notions of rights on the UK against the will of Parliament.

Among the findings the report discovered that:

Since Britain subscribed to the ECtHR’s jurisdiction in 1966 there have been more than 350 rulings on whether the UK has violated convention rights. The number of judgments made against the UK stands at 271, against only 86 that were successfully defended. This, added to the Human Rights Act's domestic rulings, has led to judgements that fly in the face of public opinion.

Areas looked at where the ECtHR has conflicted with public opinion:

Prisoner voting rights
Prevention of deportations
Extending rights to housing

Broardhurst believes that that the ECtHR's interpretation of human rights in these areas offends the British peoples' common understanding of those rights and that although parts of the Coalition are aware of this problem - the proposed UK Bill of Rights will not offer a full remedy to a growing problem.

Broardhurst's preferred solution offers a more far reaching solution. He argues that to solve the issue once and for all, the democratically accountable UK Parliament should be given the power to overturn ECtHR judgements directed at the UK.

The report suggests that if other signatories to the ECtHR do not agree to this step, the UK may have to withdraw from the Court's jurisdiction. This would also entail withdrawal from the Convention on Human Rights but, as the report notes, the UK could still enshrine the rights of the Convention in national law through a British Bill of Rights. After all, it is the way the rights have been interpreted by judges, rather then the rights themselves, that has been the source of most of the problems.

The UK took the Presidency of the Council of Europe in November 2011 and this will run until May 2012. If reform of the Court is not forthcoming, the number of people willing to consider the option of withdrawal is only likely to increase.

This is of course all complicated by the fact that the EU is set to join the ECtHR in its own right - but that's another story.

Would EU law introduce border controls with Scotland?

2012-01-11T15:21:00.000Z

The last time there was a formal English border with Scotland was under the Romans, although for some parts of the middle ages both England and Scotland may have wished for one. Since then, it's pretty much been come and go as you wish. Well, that may - at least hypothetically - soon change.

This week saw the debate over Scottish independence heating up again, in turn throwing up a number of questions about whether Scotland would have to negotiate new membership terms with the EU, and if so, how this would work. Most discussions have focussed on the euro - which all EU members that don't have an opt-out (which only the UK and Denmark have at the moment) - are required to join.

But there's another interesting twist. You might assume that if Scotland again became independent, the current open border would continue. Well, you could be wrong. This is because while the UK has a specific opt-out from the EU's common travel area (the Schengen agreement) under, the Amsterdam Treaty incorporated the Schengen agreement into EU law (Article 77, previously it was a stand alone agreement), meaning that whoever signs up to the full body of EU law, also signs up to Schengen. In other words, similarly to the euro, Scotland would not automatically have an opt out.

The EU considers that all states should join the borderless EU. This would pose a problem for an independent Scotland as the UK and Ireland have their own Common Travel Area and external borders - to help facilitate travel over the Northern Irish Border. If Scotland was in Schengen, England (and the rump UK and Ireland) would need to apply an external border and passport checks on the new frontier.

That is if Scotland was in the EU at all. The UK's membership does not extend to former members. Scotland would therefore have to negotiate for itself an opt-out from Schengen as a part of its accession process from outside the EU.

In addition to a Schengen opt-put, an independent Scotland would also have to negotiate:

Opt out from the Euro - so it could keep the English (or Scottish?) pound (the SNP says it want this option until the time is right to join the euro).
Possibly its own budget rebate so it is not unfairly penalised
A fair deal on fishing.

Plenty to play for in Europe, in other words, should Scotland wish to go down that path...

The Euro Fiscal Pact: The saga continues, now with better news for Cameron

2012-01-11T09:22:00.000Z

Following last Friday's meeting of negotiators from EU member states (including the UK), a third draft of the new European fiscal pact is now out. As with the version of the draft out last week, Open Europe has got hold of a copy of the revised draft (available here) and, yet again, we're the first in the Anglosphere to publish the draft.

From the UK's point of view, there are some significant changes, at this stage marking a victory for Cameron and Clegg. The controversial reference to the single market in Article 1 is no longer there - the UK has consistently said there should be no overlap between the euro fiscal compact and single market rules - and the role of EU institutions has been narrowed substantially.

From the eurozone's point of view, the draft may actually be worse news than the previous version, as the markets could judge the watering down of the enforcement mechanisms through the EU institutions as a weakness similar to those haunting the original Stability & Growth Pact. Looks as if the Germans have caved in a bit on an extensive role of the ECJ (which the French never were entirely happy about).

After a first glance, the following are the most significant changes from the previous version:

The reference to the single market which reportedly infuriated UK negotiators has gone;

A sentence in Article 2 establishing that "In accordance with the case law of the Court of Justice of the European Union, EU law has precedence over the provisions of this treaty" has also disappeared (this could be both good and bad news for the UK and other non-euro members - we'll return to that);

The expression "structural deficit" has been replaced by "structural balance", but details on what it means in practice are still lacking;

Article 6 on the coordination of debt issuance has been tweaked and now reads, "With a view to better coordinating the planning of their national debt issuance, the Contracting Parties shall report ex-ante on their public debt issuance plans to the European Commission and to the Council";

Under the revised draft, the Commission would not be allowed to submit proposals/recommendations to countries with an excessive public debt (something Italy is particularly concerned about, due to its large debt), but only to those running excessive deficits;

There seems to be a major backtrack on the role of the ECJ, as its jurisdiction is now again restricted to overseeing whether member states properly transpose the balanced budget rule into national legislation;

In addition, the European Commission no longer has the power to take governments to the ECJ. Under the revised draft, the Commission can be "invited" by member states to issue a report on a country which is thought to be in breach of Article 3(2) - the one on the balanced budget rule. If the Commission supports the breach, the concerned government can be taken to the ECJ, but only by another government;

The Economic and Monetary Affairs Commissioner would be excluded from the meetings of eurozone leaders, along with the Chairman of the Eurogroup (but Jean-Claude Juncker should not worry too much about this, given that he will attend as Luxembourg's Prime Minister);

The latest draft includes a specific date for the entry into force of the fiscal pact, 1 January 2013. The number of countries that need to ratify the treaty before it enters into force is now twelve (down from fifteen, which was probably too ambitious, given the problems that could potentially arise in Ireland, Slovakia and Finland);

A brand-new Article 15 has been added, which reads very much as an invitation to the UK and other non-euro members, "This Treaty shall be open to accession by Member States of the European Union other than the Contracting Parties upon application...The Contracting Parties shall approve the application by common agreement";

As regards the transposition of the fiscal pact into the EU Treaties, the wording has been slightly toughened up. The expression "an initiative shall be launched" has been replaced with "the necessary steps shall be taken...with the aim of incorporating the substance of this Treaty into the legal framework of the EU."

We doubt this is the last word though...

Greece-ing the wheels…?

2012-01-10T17:52:00.014Z

It would be a gross understatement to say that negotiations on the Greek voluntary restructuring/write-down/bond swap have been dragging on a bit. The initial idea was first proposed and adopted last July and has been the topic of almost permanent negotiations ever since. Recent reports have suggested that a deal is ‘close’, with Greek officials expecting it to be tied up by the end of the month.

However, given the headlines over the last couple of days, we’re not sure how close ‘close’ really is. We’re referring specifically to all the talk of a retroactive introduction of collective action clauses (CACs).

Excuse the jargon, but this essentially means that the Greek government is considering passing a law which will introduce a clause into outstanding Greek bonds which stipulates that if a certain percentage of the bondholders (usually 75%) agree to a restructuring deal, the remaining holdouts will, by law, also be forced to accept the deal. Seems like a strange move if a deal is just around the corner, doesn’t it?

The aim seems to be that by introducing the CACs the Greek government can ensure a high participation rate in the restructuring, increasing the chances of Greece returning to debt sustainability. This sounds like a reasonable idea on the surface but it raises a huge number of questions given the previous negotiations:

- Invoking CACs would surely constitute a credit event, meaning the restructuring would no longer be ‘voluntary’, leading to the pay-out of credit default swaps. We’ve long been advocates of a forced restructuring in Greece, but this is something which the EU and Greece have been trying to avoid since these negotiations began – it seems a strange turn of events to say the least.

- It has been suggested by some officials that the CACs will be put in place but not invoked, simply used as a negotiating tool or threat. This seems rather long winded (and feeds the idea that a deal is not imminent) but we’re fairly sure announcing it in advance is a poor negotiating tactic, even by EU standards.

However, by our reckoning, the most important issue it raises is over the bonds held by the ECB. As we have noted before, the ECB is now the largest single holder of Greek debt, having purchased a reported €45bn in Greek debt under its Securities Markets Programme (SMP). Up until now the ECB has been able to stay out of the restructuring discussions since they have been conducted on an ad hoc basis (the ECB has continually asserted that it will be holding these bonds to maturity).

Legally, though, the ECB is not a senior creditor and has the same standing as all other bondholders. If the CACs were introduced and invoked they would surely impact the ECB bonds as well. We have previously estimated that such write-downs could cost the ECB €12bn - €18bn, while Barclays recently put the figure as high as €20bn. Not the end of the world for the ECB, but it would be a huge blow to its overall approach to the eurozone crisis (particularly in terms of German support). Furthermore, resisting these losses could be more detrimental to the eurozone since it would essentially mark the ECB as a senior creditor, creating huge distortions in bond markets as investors become wary of the increased prospect of being the first ones to take losses.

So, the discussion surrounding CACs definitely brings a new element to the Greek restructuring issue. It’s very suggestion runs contrary to the claims, which all eurozone leaders have been making, that a deal is close. However, if it is a signal that Greece has realised that a voluntary restructuring may not be workable or be enough to make Greek debt sustainable then it could be a welcome turn of events towards a hard restructuring. As we have argued numerous times before, a Greek default is now unavoidable and will only become more expensive the longer it is put off - i.e. the sooner this is accepted and dealt with the better.

Et tu, technocrat

2012-01-10T15:00:00.003Z

According to the latest news from Italy, it looks like not even the country's technocrats are immune from scandals. Carlo Malinconico (whose surname means 'melancholic' in Italian, see picture), an EU Law Professor serving as Undersecretary to the Presidency in Mario Monti's cabinet, has resigned this morning following allegations that he had his holidays paid for by a dodgy Italian builder.

According to wiretaps analysed by Italian prosecutors, between 2007 and 2008 Malinconico spent a couple of weekends at the five-star luxurious Hotel Il Pellicano in Porto Ercole (part of Italy's glamorous Argentario peninsula in Tuscany) without paying a single cent. The roughly €20,000 bill was, it turned out, footed by Francesco De Vito Piscicelli, an Italian builder who, along with other Italian entrepreneurs, is involved in a scandal over several tenders illegally obtained at the time of the latest G8 summit held in Italy in 2009.

Malinconico decided to resign, but it is still unclear whether a specific investigation will be launched over his relationship with Piscicelli & co. He maintains that, at the time, he wanted to pay the entire bill and that, when he realised that he would not be allowed to do so, he was so annoyed that he immediately cancelled all future reservations at Hotel Il Pellicano. Malinconico also says that he had no clue about who had paid for his holidays and that he is now ready to pay his fair share, if need be (maybe a bit late now).

Given that Monti's technocratic government was put in place precisely to move away from the dysfunctional politics that has haunted Italy over recent years, this episode, reminiscent of the Berlusconi years, is concerning. On the positive side, at least the mis-step is being forcefully dealt with, showing that perhaps lessons are being learnt...

Et tu, technocrat - as the Romans might have put it.

What a ski slope 'in the world's flattest country' says about EU funding

2012-01-10T12:30:00.006Z

Fresh from giving Denmark some credit for prudent use of taxpayers' cash, here's a less flattering story:

Over at Open Europe we have issued periodic briefings on projects of dubious value which have wasted EU funds – in our 2008 report on ‘100 Examples of EU Fraud and Waste’, we picked out the particularly bizarre example of a ski slope constructed on a flat Danish island where snow rarely falls. By Scandinavian standards, the island is renowned for its mild climate, and there are no high hills.

In 2006, the ski slope was given around €100,000, from the European Agricultural Fund which can provide financial support for various activities in rural areas (many have little to do with agriculture, incidentally). Following our list and reports in international media, Agriculture Minister Eva Kjer Hansen, whose ministry handled the grant, said in 2009 the "criteria for getting [EU] subsidies are not rigorous enough" and said that she would "tighten the screw". Then EU Agriculture Commissioner Mariann Fischer-Boel also promised more stringent tests.

Fast forward 2012 and where are we at? Have the EU funds been paid back since they failed to create any new jobs? There has been a radical overhaul of spending criteria? Not quite.

Die Welt last week reported that the organisation "Bornholm's Friends of Skiing" (Bornholm's Skivenner) is to receive a further €33,000 EU grant for the “expansion of the ski lifts”, leading to another round of protests and disbelief.

On average, the ski slope stays open three weeks a year, according to Swedish Television, though last winter - which saw exceptional snow fall - the slope managed to stay open between the end of December and March (hats off). It had a rocky start, however. According to some reports, in its first year of operation, the ski-slope was only open for one and a half days, and nine the year after. During a normal Bornholm winter, snow cannons are of little help, because the snow only remains if the temperature is at minus two degrees on at least two consecutive days.

Hans Jørgen Jensen, the head of "Bornholm's Friends of Skiing", calls the the project a "giant success" (en kæmpe succes), though admitting that "the ski slope isn't a commercial project but I don't have bad conscience. It's about quality of life and is focused on the young."

Now skiing is fun, and it may be that the slope has proven popular with the locals, but few would argue that this constitutes a good use of taxpayers' money. Fundamentally, at the last time of counting, the island registered a GDP per capita of €31,000 - significantly above the EU average of €24,900, posing the question of whether it really needed development geared funding in the first place.

And as German MEP Inge Grässle told Danish daily Politiken:

"it's pointless to give EU money to a ski slope in a place like Bornholm where extraordinary climate conditions are needed in order for the money to generate any type of value. [EU subsidies for downhill skiing] in "one of the world's flattest countries need to come to end."

No kiddin'. So whose responsibility is it for paying out the grant? As is symptomatic of EU-funding, accountability appears to fall into a black hole somewhere between member states and the European Commission.

EU Agriculture and Rural Development Commissioner Dacian Ciolos’s response to the grant is already a classic:

“This is fully in accordance with Article 56 of the Implementing Regulation 1698/2005, which provides support for recreational activities in rural areas…The individual projects are evaluated by the national authorities, because they know the local situation best.”

Ah, it's consistent with Article 56 of the Implementing Regulation 1698/2005. All must be well then. (And they wonder why the citizens find it increasingly difficult to both understand and support the EU).

The current Danish government (which took office last year) blames its predecessors, with Agriculture Minister Carsten Hansen pointing out that it was the previous centre-right government which signed off the grant for the skiing lift. He promises that "The whole administration of the subsidies will be streamlined" (sounds familiar).

Former Agriculture Minister Eva Kjer Hansen who was in charge when the grant was paid out despite pledging to "tighten the screws" is now an MP and member of the Danish Parliament's EU Scrutiny Committee. She defends herself, saying:

"My responsibility was to look at the rules in Denmark [as opposed to EU-level rules?]. And much was done to ensure that the the impact [of the projects] were more concrete and that the more thought-through projects were the ones receiving the money."

She adds,

"It's doubtful whether we get the most out of the subsidies. Therefore we always have this discussion about whether the projects are justified. Or if the money has been handed out merely because there was EU subsidies there which simply had to be used for this or that silly project."

Not exactly a ringing endorsement of the idea of having the EU involved in rural and regional development funding in the first place.

So if I think that taxpayers' cash shouldn't be spent on a 'development' project involving a ski slope on a mostly flat and largely snow-free island with a GDP of 24% above the EU average - who should I talk to?

The draft euro fiscal pact: not great news for the eurozone either...

2012-01-10T09:00:00.000Z

We’ve already reviewed what the latest draft version of the fiscal compact means for the UK (not much good) being the first in the UK to publish the draft of the compact (beating the Telegraph by a hair). But let’s not forget what the treaty is supposed to be about – saving the eurozone. There are still those out there, not least the ECB and the IMF, who believe that this treaty can form an integral part of the solution to the eurozone crisis (along with an increased firewall and structural reforms).

Looking at the latest version of the treaty it seems that not much has changed in the fiscal rules department. As always the 60% debt limit and 3% deficit limit provide the framework, while the 0.5% limit on ‘structural deficit’ is included as with the previous draft. There is no further detail provided on what exactly the ‘structural deficit’ is envisaged to be, although there are some qualifying statements which suggest such stringent rules could be waived in the case of “exceptional economic circumstances”. Still very vague with some key ideas not clearly defined. This doesn’t fill us with confidence. Remember this compact is meant to provide the original stability & growth pact with some teeth, by actually establishing some tools to enforce the fiscal rules.

Article 5 of the new draft suggests that the budgets of countries under excessive deficit procedure will be submitted to the European Commission and Council for “endorsement”. This isn’t much, if at all, different to the new six pack rules, while it again remains unclear what they mean by “endorsement” – will the Commission and/or Council retain a binding vote on national budget plans?

In terms of the overall debt level, the commitment for countries which exceed the 60% debt to GDP ratio to reduce their debt by one twentieth every year remains. However, this still raises lots of questions over implementation. Will this rule apply as soon as the treaty comes into force? Take Italy for example: if it was applied from this year, the government would have to potentially find a €108bn in savings or a 7% of GDP swing in the budget, in order to cut the debt by the required amount. This is more illustrative than anything, but the key point is the tension it represents. Realistically the rules cannot be enforced next year or possibly even the year after, otherwise too many countries would be sanctioned and be forced into ever greater austerity. However, to convince markets, there needs to be a clear plan for implementation and some signs that the immediate problems will be tackled. This latest version of the draft simply does not tackle these issues, nor do any of the wider discussions relating to the fiscal compact.

As we pointed out with our post on the draft’s impact on the UK, there is a widely increased role for the EU institutions. In particular, countries which are seen to have broken the fiscal rules can be taken to the ECJ by other members or the Commission. This gives the proposals significantly more teeth, but given the UK’s position it is far from a foregone conclusion that EU institutions will be able to play this role under the finalised new treaty. It also seems that much of the stuff in the compact can be done within the existing treaties anyway, begging the question why this, new over-lapping deal is necessary in the first place (and yes, we do appreciate German domestic concern).

Until the significant amount of uncertainty is removed from the fiscal compact – in terms of implementation, use of institutions, timeline, severity of sanctions and exceptions it is likely that markets will continue to be underwhelmed by it. Unfortunately, while these short comings persist eurozone leaders continue to meet and talk up their negotiations, which only seems to add to the eventual let-down.