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Thursday, October 31, 2013

Otmar Issing: EU will only live up to expectations when tendency toward centralisation and bureaucratisation resisted

This post is part of a series of interviews carried out by our sister organization, Open Europe Berlin. To read the original interview between Otmar Issing, the former Chief Economist of the European Central Bank, and Open Europe Berlin in German click here.

Otmar Issing addresses the audience at the Open Europe Berlin launch, Oct.2012
OEB: What does Europe mean to you?

Issing: Following the terrible wars and dictatorships of the past, for me, Europe means a continent of peace and freedom.  The freedom to travel, and particularly for young people -- to learn, study, and to make friends beyond national borders. The single market, a barrier-free market serving over 500 million people, is the economic dimension, and the prerequisite for prosperity and employment in Europe. 

OEB: What does the European Union mean to you?

Issing: The European Union embodies the institutional structures, which preserve the aforementioned achievements.  The European Union will live up to expectations only when the tendency towards centralisation and bureaucratisation are resisted. 

What does the euro, the shared currency, mean to you?

Issing:The euro represents a promise of a stable currency to the citizens of the euro area.  During the first 14 years of the euro, the central bank fulfilled this promise by way of its obligatory price stability policy.  However, the existing economic policies of many countries continue to be contradictory to [the ECB's] policy, which is absolutely necessary to the guarantee of long-term stability for the euro and the eurozone. 

"If the euro fails, then Europe fails!" To what extent do you agree or disagree with this statement?  

Issing: Europe is far more than the euro. It is more than currency and economy. But a collapse of the euro, which I consider rather unlikely, would indeed cause considerable economic and political turbulence and it would set European integration back. 

'More Europe' in which form of the EU? In which policy areas should the European Union (a) do more; (b) change its practice; or (c) do less? 

Issing: ‘More Europe’ is a mantra, which in my opinion, lacks concrete content and easily leads to the misguided adoption of ever further centralization.  Should the EU wish to realize its aspiration of becoming the leading voice for Europe on the global stage then it must:
  • Create the preconditions for growth and employment;
  • Encourage the individual member states to take responsibility for the implementation of necessary reforms;
  • Accommodate the principle of subsidiarity, rather than continuing to shift competencies to the European level. 

Wednesday, October 30, 2013

Rutte: Don't blame voters for anti-EU sentiments - blame politicians

Dutch PM Mark Rutte is often seen as a key UK ally who is able to maintain warm relations with both the Liberal and Conservative sides of the coalition. In London today to deliver the Isaiah Berlin lecture he talked about the big challenges facing Europe, making the following key points:
  • The EU is greater than the sum of its parts but it is a means to an end - prosperity, security etc - rather than an end in itself.
  • As a liberal, he said that he believes that decisions should be made as close as possible to those whom they affect - and therefore the EU should not be involved in areas that can be better handled at the national level such as the minimum wage, pensions, social security and taxation.
  • However, where the EU could add more value is in expanding the single market, particularly in services (it was Rutte who first made the suggestion that this could take place under enhanced co-operation, an option we explored in our recent report).
  • Commenting on the NSA spying scandal, he said the Dutch government would support the Franco-German initiative to clear up the issue with the Americans to prevent a repeat but added that he opposed any new competences for the EU in this area. He also said that it would be "totally counter-productive" to suspend the US-EU free trade negotiations over this issue, and that he strongly opposed this (Business Secretary Vince Cable who was in the audience appreciated that one).
  • He said that he backed David Cameron's 'business task force' report which aims to cut red tape and promote competitiveness and innovation which Europe needs in order to maintain the high standard of living many of its citizens have become accustomed to, and that he supported efforts to demarcate EU competences from national ones, but that he opposed unilateral opt-outs which could damage the single market.
  • On the political side, he said that there was widespread disillusionment with the European project among much of the public, but that rather than blaming the voters for opting for fringe parties on the left and right, established parties have to shoulder the blame for creating the political space for them to operate in.
  • Finally, he stressed that although he was not opposed to referenda per se, his strong preference would be for any eurozone related changes (banking union, competitiveness contracts) to take place under the existing legal framework as opposed to re-opening the EU treaties which would trigger votes in several countries which would inevitably become in/out votes.
All in all then a mixed bag for David Cameron - strong support for his vision of a leaner, business friendly, trade-orientated and more accountable EU, but scepticism towards opening up the EU Treaties which could offer possibilities for more fundamental changes.

Tuesday, October 29, 2013

National democracy pushing back: European Commission shown its second ever 'yellow card'

The European Commission has just been shown its second ever 'yellow card'. Remember, this is the provision introduced by the Lisbon Treaty, stating that if one third or more national parliaments object to an EU proposal on subsidiarity grounds (within an eight week window), then the Commission has to reconsider the proposal. In theory, the Commission can choose to ignore parliaments (one of our long-standing criticisms of the mechanisms). However, in fairness, the last time the yellow card was issued - in the case of the so-called 'Monti II' Regulation on the right to strike - the Commission did scrap the thing.

National parliaments from eleven EU member states - the UK, Czech Republic, Cyprus, France, Hungary, Ireland, Malta, Netherlands, Sweden, Romania and Slovenia - have now complained that plans for a European Public Prosecutor Office (EPPO) breach the subsidiarity principle.

According to the Lisbon Treaty, the establishment of the EPPO requires unanimity, and the UK would have sought to opt out, but that also means that other EU countries could have pressed ahead with this without Britain.

So the move is still significant for a few reasons:
  • It is another example of how national parliaments are increasingly pushing back against EU centralisation, and how little appetite there is for 'ever closer union' (the Commission's proposal was limited, with the prosecutor only being responsible for investigating fraud involving EU funds).
  • It shows national parliaments can agree. In total, 15 chambers from eleven EU member states objected to the idea. Bear in mind that an objection raised by a chamber from a country whose parliament is unicameral (e.g. Sweden or Cyprus) counts as two votes. Therefore, to some extent, it counters the argument that a new 'red card' system allowing a group of national parliaments to block unwanted EU proposals - which we have supported for a while - would not work because national parliaments would not get their act together. 
The ball is now in the European Commission's court. It will take quite a bit of nerve to ignore 15 more or less democratically elected chambers (*ehum*) in Europe....

What's in a question?

Coming to a polling station near you?
The UK's Electoral Commission, in response to the onward march of James Wharton MP's EU Referendum Bill, has been opining on how to ask the UK population if it wants to remain in the EU. .

James Wharton MP's original:

'Do you think that the United Kingdom should be a member of the European Union?' (Yes/No)

However, Electoral Commission would like to tweak this to:
  1. 'Should the United Kingdom remain a member of the European Union?'
    Or, the one that it seems to favour:
  2. 'Should the United Kingdom remain a member of the European Union or leave the European Union?'
    (‘Remain a member of the European Union’ / ‘Leave the European Union’)
So what is the difference? Well not much but the Electoral Commission feels there is a need to emphasise that the UK already is a member of the EU. Apparently, the EC worries that there are some people in the UK not realising that the country already is a member of the EU - the original question might therefore be interpreted as one about whether the UK should join. Something we doubt, particularly after a long referendum campaign, anyone could remain in the dark on. Still perhaps no harm in following their advice?

Incidentally, the question is for next years' Scottish referendum  which the Electoral Commission seems to be happy with, reads:

"Should Scotland be an independent country?" (Yes/NO)

We doubt there are any Scots not aware that Scotland is a member of the UK, but for consistency, perhaps the EC could have recommended the following:
  • 'Should Scotland remain a member of the United Kingdom (and EU) or leave the United Kingdom (and EU)?'
    (‘Remain a member of the UK and EU’ / ‘Leave the UK and EU’)
There are many ways to ask for the exit...

Czech elections: The people have spoken but who will interpret what they said?

Will the Czech sausage machine
 be able to create a government?
As the old adage goes - to retain respect for sausages and governments you should not watch them being formed. To stretch the analogy, Prague remains a giant and possibly broken sausage machine trying to fuse together some unlikely ingredients into a government. Added to this the man in control of the machine, President Zeman, is by no means an impartial observer.

So will the Czech machine manage to form a new government supported by 100+ deputies in the 200 strong parliament? There are a number of possibilities, mostly centred on the Social Democrats (ČSSD) and maverick millionaire Andrej Babiš' new ANO party, but if you do the maths it is just conceivable that ANO could form a centrist/centre-right government excluding the Social Democrats - if all the other small centre-right parties can agree and a Presidential veto is avoided.

Here is the election result translated into seats in the new Parliament:

ODS, the centre-right party which led the last coalition government is still in parliament but is now a shadow of its former self (although polls suggested it could do even worse). Added to the fragmentation of the centre-right another problem is the surprising weakness of the ČSSD Party. This weakness is compounded by President Zeman - whose own SPOZ party failed to make it into parliament - been accused of orchestrating calls for ČSSD leader Bohuslav Sabotka to resign, calls which he has so far resisted. It has been suggested that Zeman's plan could be to replace Sabotka in order to make way for the appointment of his ČSSD ally Michal Hasek as PM.

As with most continental elections, there will be no mad rush to fix a coalition. Agreement between the ČSSD and ANO will not be easy, and there is no longer an obvious ČSSD candidate for PM who would gain the approval of the President. A continuation of the caretaker regime might suit the President and constitutionally there is little to stop him, although this is likely to be viewed with concern in Brussels.

Another possibility is that the President may again try to appoint an ally of his as PM who in turn fails to win a confidence vote - a repeat of what happened over the summer and which leading to the early elections. This could then lead to a centre-right coalition or another early election. But fresh elections seem unlikely to be able to produce any clearer result so a strange flavoured sausage is perhaps on the menu.

Is this a surprise? The fragmentation of the political spectrum (and the centre-right in particular) is the result of widespread disillusionment with the political class. What will this mean for the Czech Republic's policy towards the EU? Under the ODS the Czech Republic was, as we point out here, in David Cameron's pro-reform camp, but the ČSSD is unlikely to follow that route while the ANO is still an open book.

Monday, October 28, 2013

'Handygate': The number of EU countries involved growing by the minute

Well, this one snowballed quickly. The number of countries either implicated - or feeling the need to comment on - "Handygate" (as the Germans call it) is growing by the minute. Here's a round-up.

Germany: The fallout over allegations that the NSA hacked Angela Merkel's phone continues. According to Bild am Sonntag, US President Barack Obama was personally briefed about the eavesdropping by NSA Director, Keith Alexander, as far back as 2010. Several papers claim that the American embassy in Berlin was used as a hub for the alleged bugging.

However, according to US officials quoted by the WSJ and FAZ, Obama was unaware of the whole affair. The reason? The NSA has so many tapping operations going on that it wouldn't have been practical to brief the President about all of them. The article suggests the White House did scrap some monitoring programmes upon learning about them, including the one tracking Angela Merkel.

Spain: Spanish daily El Mundo dropped a bit of a bomb today, claiming that the NSA bugged over 60 million phone calls in Spain in just one month - between 10 December 2012 and 8 January 2013. The report, also based on former NSA agent Edward Snowden's secret documents, suggested the eavesdropping didn't involve the actual content of the phone calls - just their duration and where they were being made from. But still.

The Spanish Foreign Ministry summoned the US Ambassador in Madrid, James Costos - who later stressed in a statement that the wire-tapping activities have played "a fundamental role" in protecting both US  interests and those of its allies.

Italy: Italian magazine L'Espresso alleged last week that not only the US, but also the UK had been spying on Rome. The latest is that, according to the Cryptome website, the NSA allegedly bugged some 46 million phone calls in Italy between December 2012 and January 2013. But the Italian intelligence service has urged caution, saying there's "no evidence" supporting the claims.

France: Though the French press has been relatively quiet about the episode today, the country has already summoned the ambassador with the accompanied public outrage from politicians. It seems to be dying down a bit in France, though.

Poland: Notoriously Atlanticist, Warsaw has also been forced to go public, with Polish Foreign Minister Radoslaw Sikorski saying over the weekend that the alleged hacking was a "scandal which undermines trust" and that he would be inquiring with Washington whether Poland was also affected by NSA surveillance. However, asked in the interview whether Poland was under surveillance, he apparently answered with a smile: "We also use surveillance".

Sweden: Foreign Minister Carl Bildt has been taking a chilled approach, insisting that he knows "what kind of world we live in" and that "I never say things over the phone that could hurt Sweden if it ended up with a foreign power."

Netherlands: Prime Minister Mark Rutte has said that "I will support [Merkel] completely in her complaint and say that this is not acceptable. I think we need all the facts on the table first."

Belgium:  Belgian Prime Minister Elio Di Rupo commented, "The idea is to have a working method [at the EU level] by the end of the year, which should avoid that friends spy on each other." However, asked on whether the EU should suspend free trade talks with the US, Di Rupo said, "We want to avoid blackmail."

UK: Finally, though the worst fears over suspension of the EU-US trade deal so far have not materialised (although it's still balanced on a knife's edge), David Cameron remains stuck between a rock (the US) and a hard place (Germany). In the Commons today, Cameron talked up the need for a robust intelligence service, saying it has "also allowed us to warn our EU allies about terrorist plots aimed at their people."

We can't 'complete' the EU single market in services but we can do a lot better

The APPG on European Reform, to which Open Europe acts as the secretariat, has published a new report, following the Group's inquiry into the EU's single market in services. The APPG held evidence sessions with a wide range of business groups from the City, retail and small business sector to the creative services sector.

The inquiry concluded that there is no ‘single market in services’ in any meaningful sense of the term. This is due in part to the sheer diversity of service sectors in the EU, and because these sectors are regulated by a complex mix of national and EU regulation.

The diversity of services markets in the EU means that the single market in services cannot be ‘completed’ - a term of often used but little understood - by one harmonised set of rules. However, much more can be done to reduce barriers to trade in services across Europe.

The challenges are different depending on the sector. In financial services, the EU's passporting rules have provided firms with benefits to trade across borders - the primary concern is how new EU regulation could curb these benefits and how eurozone crisis response could spill over to the wider single market.

Other sectors, such as retail, are covered by the EU's so-called Services Directive (which regulates sectors that account for around 45% of EU GDP). But a mixture of poor implementation of the ban on some trade protectionism, such as economic needs tests, and the Directive's legal ambiguity mean a large number of barriers remain in place, with firms having to comply with home and host country regulation in order trade across borders, which adds cost and complexity.

The APPG proposes a package of changes and at the top of the list is adopting the ‘country of origin’ principle to enable service providers to trade across EU borders under their home country regulation – if necessary, through enhanced cooperation among a group of like-minded EU member states. This is an idea we've been keen on for a while and set out in detail in a report earlier this year.

Others proposals include:
  • reducing the number of regulated professions;
  • installing a liberalising EU Commissioner;
  • developing the potential of e-commerce;
  • applying “Better Regulation” principles; 
  • and establishing new mechanisms to block unnecessary or discriminatory regulation and rules that hamper trade with non-EU countries.
The EU has held out for far too long on realising the potential of Europe's services sector. But with the German elections behind us and everyone in Europe talking about competitiveness, there’s now a huge window of opportunity to make this happen.

Friday, October 25, 2013

Czech election day: Which political party will prove the least unpopular?

Someone is unhappy with the way things are going
Czech artist David Cerny is best known for his satire of EU nations that caused both outrage and amusement across the EU. Today his target is closer to home - the Czech political class and in particular Czech President Zeman, erecting a giant sculpture on the river Vltava that needs little explanation. Cerny's feelings are widely shared and point to a general disillusionment with the political class ahead of elections on today and tommorow.

The elections themselves have been brought forward by seven months following the collapse of the centre-right ODS led coalition following a combination of bizarre corruption allegations involving former PM Necas' mistress, now ex-wife and state intelligence services (part of a wider deterioration in democratic standards across Central and Eastern Europe). President Zeman then appointed Jiri Rusnok (who served as Finance Minster when Zeman was the PM between 2001-02) to lead a caretaker government which fell after it failed to win parliamentary support. In other words, a right old mess.

Here is the latest poll compared to the 2010 results:

The big factor here is the fragmentation of the established mainstream centre-right ODS party. Taking up the slack are a kaleidoscope of small untested centre-right and independent parties centred on colourful individuals, including Úsvit founded by a Japanese/Czech businessman, ANO founded by a Czech billionaire and TOP09 led by former foreign Minister Karel Schwarzenberg. President Zeman's own hopes of a breakthrough for his SPOZ party have been hampered by revulsion at his own politicking. One of these parties is likely to be the junior partner for the social democrats (CCSD) who are clearly in the lead and who have said they would prefer not governing with the unreformed Communists (KSCM) who command 18% of the vote and resurrect bad memories for some (although this is also a possibility).

It was once thought that the Czech Republic had escaped the chaotic politics of the region by settling down into a two party system, the Social Democrats and the centre-right ODS. It now appears Czech politics is just as turbulent as many other former communist EU states, where parties have short lives and bad endings.

Moreover, the marginalisation of the ODS will be a setback for David Cameron, as the party is a key ally of the Conservatives in the European Parliament and under Necas, the Czech Republic was the only other country not to sign up the fiscal treaty. It is hard to see a social democrat led government being naturally on board for the kind of pro-competitiveness reforms that Europe so badly needs.

Thursday, October 24, 2013

US-EU free trade deal could be collateral damage of latest NSA allegations

So we wondered what the big story of the European Council would be. Now we have the answer: Merkel’s cell phone. Der Spiegel today alleged that Merkel's phone may have been targeted by US security services. Merkel called President Obama to make clear that she "unequivocally condemns such practices” and was told that the US is not monitoring and will not monitor her communications (which as German media commentators have identified leaves open the possibility that this could have taken place in the past). The US Ambassador in Berlin was also summoned for a dressing down which follows similar action taken in France over allegations the US also spied on French diplomats.

Because this issue has been hyped-up by the media, this has the potential to be more damaging to Anglo-Saxon-Continental relations than arguably any other episode since the Iraq war - and there are lots of things going on here.

Civil liberties vs. security: As ever, this encapsulates the very sensitive trade-off between the obligation of the state to ensure the security of its citizens and the right of the citizens not to have the state arbitrarily snooping in their business. The Germans – given the painful memory of Stasi and Nazi surveillance – are particularly sensitive to this (and that the German Chancellor herself is the alleged victim adds fuel to the fire). Forget everything else on the agenda of the EU summit today, this is what really is creating the headlines in Germany.

Data protection - EU vs national: Some EU leaders and politicians - including Justice Commissioner Vivianne Reding (for whom this issue is like ideological steroids) are keen to use the long planned overhaul of EU data protection rules to enforce greater EU-level safeguards, though the link to the tapping of Merkel's phone isn't entirely clear. France and Poland are reportedly keen on fast-tracking this issue through the EU legislative process while others including the UK and Scandinavian countries countries are less keen. Germany has not committed itself either way (although German Interior Minister Freidrich said the current version would have to be revised).

The UK vs France: However, the same Data Protection Directive that France wants to pass also featured in the recent UK business taskforce report as an example of EU rules which hurt innovation and growth, and argument echoed by Rohan Silva in today’s Times. Medical research charities have also warned that the new rules - specifically a series of amendments tabled by the Green MEP Jan Philip Albrecht - could starve them of the data they need to work on new treatments. So this issue might also indirectly pit the UK versus France.

Germany vs. the Anglo-Saxon world: This is a critical one - any souring of relations between the US and Germany is bad news, and the UK could well be implicated by association (remember Tempora). The thing to watch out for will be the impact on the EU-US free trade deal currently under negotiation (TTIP) as Germany could now well insist on various complicated privacy safeguards and guarantees which Obama will have hard time delivering (not least since getting a deal past Congress perceived as undermining national security could prove very tricky). If TTIP were to fail, it would embolden those claiming that the UK needs to leave the EU to maximise global trading opportunities,

This is also putting Cameron in a very awkward position as he doesn't want to offend either the Germans or the US - but he'll most certainly be pressed on taking a position.

Secondly, the European Parliament – which also needs to approve the final deal – may see an opportunity here to hijack TTIP to exert its own power. The EP has form on privacy and civil liberty issues, as seen by its attempt to take SWIFT hostage. In fact, SWIFT itself could be complicated by the accusations against the US (we’re not saying that the EP doesn't have any valid arguments in this area).

So this is an episode that most certainly will reverberate for quite some time.

Spanish unemployment: A temporary turnaround?

New data on Spanish unemployment are out today. The headline figures look, once again, rather encouraging. The overall unemployment rate has fallen below 26% in the third quarter of the year, and there are 39,500 employed people more than in the previous quarter.

The number of unemployed people has gone down by 72,800 - which is the largest decrease in a third quarter since 2005.

However, a few points are worth making:
  • The rise in the number of employed people is due to an increase in self-employed and temporary workers. The number of employees on permanent contracts has actually fallen by 146,300. One can see the glass half-full or half-empty here. This finding can mean that the Spanish labour market is becoming more flexible, or just that the increase in the number of employed people is driven by seasonal workers - especially in the tourism sector.
  • Employment is growing in the services sector, but is decreasing in agriculture, industry and construction. Another sign that the improvement in Q3 figures could be tourism-driven. This is not, in itself, a bad thing - given tourism is definitely one of Spain's key resources and it is obvious that the Spanish economy needs to rebalance (away from construction). But it can't quite be seen as a permanent source of growth, since the flow of tourists is per definition dependent on which season of the year you're in.
  • As we noted on this blog when the figures for Q2 came out, the number of active Spaniards (those working or actively searching for work) continues to go down - marking a further 33,300 decrease.
  • Seasonally adjusted data show that the unemployment rate has actually increased by 0.21% from the previous quarter, and that the level of employment has not stopped going down since Q2 2008. 

The EU might have something to say about Cameron's plan to roll back green policies

Former windmill on David Cameron's former home
publicising a former policy?
David Cameron once said his Coalition would be the "greenest ever", he once even installed a windmill on his own house in the hope of publicising his green credentials. No more it might seem. Yesterday he told the House of Commons:

"We need to roll back some of the green regulations and charges that are putting up bills."

The heat in the cost of living debate is only set to rise, but do not hold out any great hope of a dramatic reduction in energy bills. For the most part they flow from legally enforceable EU laws that the UK signed up to. Something we warned against here and looked at again here.

This begs the question, which ones can the UK scrap on its own and will it seek to renegotiate the others?
  • EU Renewables Directive - imposes a legally binding target of 15% of all energy by renewables by 2020, which translates into producing 30% of UK electricity by costly renewables. This is the driving force behind subsidies and support for renewables. 
  • The UK does have more control over its new Carbon Price Floor policy (which sets a minimum carbon price) and some of its strict energy efficiency policies. But even these fall under the overall banner of the EU defined emission's reduction targets which the EU will have to work very hard to hit.
So will the UK seek to renegotiate these headline targets to allow for cheaper forms of CO2 reductions? Lets see, but if not then all talk of reducing electricity bills are for the most part hot air.

UPDATE: Reuters reports on UK Government papers arguing that EU needs to cut greenhouse gas emissions by 50 percent from 1990 levels by 2030 to avoid the worst effects of climate change. The "roll back" is going well then!

Wednesday, October 23, 2013

Good Europeans, bad Europeans: Time to revisit a couple of labels?

It's that time of year when the European Commission either assigns gold stars to or puts black marks against member states based on how they implement EU rules. The Commission notes that the number of infringement procedures opened against EU member states is consistently decreasing - from 2,900 at the end of 2009 to 1,343 at the end of 2012. So the kids are behaving better overall.

At the end of 2012, the UK had 61 pending infringement procedures - meaning that the European Commission believes the UK is breaching EU law in 61 cases. That seems quite a lot, but, in fact, the UK is facing less infringement procedures than half of the EU's founding members: Italy (undisputed leader for the ninth consecutive year, 99 pending cases), Belgium (92) and France (63). And it's even with another founding member, Germany. Not bad, for a country usually seen as the 'troublemaker' of the bloc.

Out of curiosity, we took one step further - and looked at the ECJ's latest annual report of activities. There, we found the number of "judgments concerning the failure of a member state to fulfill its obligations" - that is, how many times EU judges have actually ruled that a country either broke or refused to implement EU rules.

Look at this graph (click to enlarge):

Between 2008 and 2012, the UK has been found guilty of breaching EU law in 14 cases, of which two times last year. A Mediterranean trio of Italy, Spain and Greece (46 infringements declared), France (33) and Germany (19) all figure ahead of the UK. Interestingly, the graph also shows that the EU's newest member states have been better at implementing EU rules than the bloc's founding members.

We may be repeating ourselves a bit, but this serves as another reminder that those countries often labelled as 'good Europeans' don't always have the best record of playing by the EU's rules.

Tuesday, October 22, 2013

Another manufactured row over the EU budget?

On the 30th of June 2011, the Commission unveiled its blueprint for the EU's long term-budget (MFF) between 2020-2014. Since then, we've witnessed a rather drawn out and undignified scrap as member states, the Commission, MEPs and a whole assortment of lobbyists and vested interests have fought tooth and nail to ensure their own priorities secure as much funding as possible.

In the past, we compared this process to an ill-mannered round of bartering at a provincial flea market, but in retrospect this may have been an overly generous depiction. The depressing result is a budget that pointlessly recycles far too much cash around wealthier member states while not allocating enough to areas such as R&D which could enable the EU to take advantage of growth opportunities in innovate areas of the global economy.

To recap: this February, following an earlier aborted attempt, EU leaders finally struck a deal on the overall spending levels, agreeing on a historic cut in EU spending. MEPs were unhappy and demanded a whole host of concessions in exchange for their consent to the package, one of which was an additional €11.2bn to top up this year's annual budget. In May, member states approved a first trance of €7.3bn (despite the UK's objections), and two weeks ago provisionally approved the release of the remaining €3.9bn.

The problem was that MEPs demanded that the €3.9bn be officially signed off before they approved the MFF, and therefore postponed the vote until next month. However, this has prompted EU Commission President Barroso to warn that the EU could become "insolvent" by the middle of next month. This issue has become further complicated because the member states have apparently demanded that €400m in appropriations from the European Solidarity Fund - intended to compensate Germany, Austria, the Czech Republic for floods and drought over the Summer - be included in the €3.9bn while MEPs want the money to come from fresh national contributions.

This new argument seems particularly pointless as it affects 0.28% of EU spending this year and 0.04% of the budget for 2014-2020. It is inconceivable that the Commission could not make up this sum from existing allocations. Also, the European Solidarity Fund is primarily a symbolic instrument, especially when it comes to wealthier member states (€360m of the €400m has been allocated to Germany). Instead, this latest institutional argy-bargy has served as just another opportunity for MEPs to try to show off their importance. MEPs are also likely to publicly pick a fight over some of the cuts made by member states to next year's annual budget as a cover to secure some minor concessions.

Surely the EU can do better than this.

Monday, October 21, 2013

European Council draft conclusions: have Merkel's 'reform contracts' made a comeback?

As we noted in our previous blog post - and as we predicted in our briefing trailing the German elections - Angela Merkel could now well be pushing for so-called 'reform contracts' or 'competitiveness pacts' (which is what they're called in the CDU/CSU manifesto). The idea involves trading exceptionally strong reform commitments in the eurozone periphery in return for German cash.

We've managed to get our hands on an updated version of the draft European Council conclusions (which is doing the rounds in Brussels) ahead of the meeting of EU leaders later this week.

And what do you know, the following paragraphs have made it in (our emphasis):
"The Commission will provide a first overview of the implementation of country-specific recommendations that will be a basis for the monitoring of their implementation. This will also assess growth and jobs enhancing policies and measures, including the performance of labour and product markets, the efficiency of public service, as well as education and innovation in the Euro area.

On this basis, work will be carried forward to strengthen economic policy coordination, including on the main features of contractual arrangements and of associated solidarity mechanisms."
It's a vague formulation - and hard to know exactly what it means - but we think it's at least fair to assume that the idea is back on the agenda (our view is it never quite went away). As we've argued repeatedly, the kind of beefed-up supervision and enforcement that the Germans have in mind would most likely require EU treaty change. The nature, scope and timing of such a Treaty change is anyone's guess at the moment, however.

Is Merkel gearing up for a scrap over EU Treaty change?

The big EU related story of the day (our bumper report on EU regulations notwithstanding) is Der Spiegel's splash that German Chancellor Angela Merkel set out her proposals for giving the EU greater powers over eurozone members’ national budgets to EU Council President Herman Van Rompuy last week, a move which would require EU Treaty change. Merkel will reportedly insist on legally enforceable contracts between the Commission and individual member states, setting out their obligations for maintaining budgetary discipline and improved competitiveness. In return, Germany could agree to a eurozone budget which would amount to tens of billions. Finally, the President of the Eurogroup would become a “Euro Finance Minister” of sorts.

In one form or another, these ideas have been around for a while but many politicians and commentators asserted that the German government had no interest in opening up the EU treaties. However, as we noted in our pre-election briefing:
"German politicians and the general public are both keen on stronger central eurozone control over taxation and spending as a prerequisite for any further financial aid... Such beefed-up supervision and enforcement could well require EU treaty change in some form. A Merkel-led government may well push for a formalised 'competitiveness pact' after the elections."
This is only one Spiegel report, but it could well be that Merkel is looking to make a concerted push after all. She will have significant opposition to overcome in the form of the SPD, who will almost certainly be her coalition partners by December. The party remains opposed to any treaty change that could trigger referenda in individual member states (although the debt-redemption fund proposed by the German Council of Economic Experts, a policy broadly backed by the SPD, could have the same effect). Likewise other member states (chiefly France) and the EU institutions are far from keen on Treaty change. However, if Merkel has set her sights on something, we would not bet against her, not least because this move would be very popular back home.

This could be the opening that David Cameron has been looking for to force through EU reforms but at the very least will present another stage for a clearer definition on the separation between eurozone and non-euro countries and the necessary safeguards. That said, he too will have to contend with the SPD who have made it clear today that they oppose the return of powers to member states, as party of a new treaty deal specifically designed to fix the Eurozone.

Should MPs seek to engage with the EU institutions directly?

Who should represent the UK in the EU, MPs or the Government?
The Hansard Society's recent collection of essays included many good proposals on how to improve Westminster's scrutiny of EU business. We have already commented on who did not have anything to say on improving it  - here are some of the ideas of those who did:

Firstly, Gisela Stuart MP made a fundamental observation as to what scrutiny should seek to achieve. "If it’s about shaping decisions, then Parliament enters the stage far too late to make a difference" but "it’s not the role of national parliaments to second-guess their governments at EU level. I’d argue that Parliament’s role is to scrutinise its own government’s actions at EU level." In essence - who scrutinises the scrutinisers. While acknowledging that the UK Parliament can not change measures already agreed at an EU level she went on to suggest some innovations including a Europe Minister in the Cabinet, with his/her own question time to improve political accountability.

By contrast the Europe Minister David Lidington MP, although probably not opposed to being in the Cabinet, sees the role of MPs differently believing in "upstreaming the process, so that Parliament can influence Brussels at the very beginning of the decision-making process." This view of Parliament as an 'influencer' was shared by the chair of the EU Committee in the House of Lords Lord Boswell who explained that his "committee engages actively with bodies including the Commission, the European Parliament, national parliaments of other EU member states and the devolved assemblies of the United Kingdom" without addressing the concerns raised by Stuart.

This all raises interesting questions, picked up on by Open Europe's Christopher Howarth who argued "in cases where say a Lords’ committee gives its opinion to the Commission it is unclear whose opinion is being voiced – it is not Parliament’s as a whole, just a sub-section of parliamentary opinion". In essence if MPs seek to influence the EU directly, on whose behalf do they speak? How do they decide what to influence and to whom should they be accountable? Should the unelected Lords Committee be seeking to influence the EU perhaps to do things the UK Government does not approve of?

In other submissions, Chris Heaton-Harris MP and Robert Broadhurst's looked at the proposal for an EU red card to give national parliaments a veto over EU measures concluding that in practice it "would still leave Parliament unable to control the flow of EU legislation". Instead they proposed a new Act of Parliament that would require Ministers to receive a mandate before negotiating in the EU, giving Parliament the final say and a new UK EU relationship. They added a thoughtful look at how the current scrutiny committee mechanisms could be sharpened up.

Bill Cash MP, the Chair of the European Scrutiny Committee explained how Parliament's scrutiny process grew up and  "commented on ideas for incremental reform" while believing that "it is important to consider more radical options".

Dr Ariella Huff and Dr Julie Smith looked at other systems around Europe including the Dutch Parliament's devolved scrutiny system and the Danish mandating system before suggesting that Ministers attend the UK's scrutiny committee before and after Council meetings.

Lastly Open Europe's Christopher Howarth suggested a number of other innovations including giving MPs the power to summon MEPs to Westminster and conduct confirmation hearings of the UK's EU officials before concluding “Scrutiny without power is not scrutiny, it is ritual... The only real solution is to return powers to Westminster”.

Friday, October 18, 2013

Dutch contortions on budget highlight potential limits of eurozone rules

Jeroen Dijsselbloem (L) and Olli Rehn (R)
The Netherlands, Germany's most prominent triple A ally, has been through a bout of political upheaval in recent weeks, which could have brought down the government. The troubled coalition of the centre-right VVD and centre-left PvdA was struggling to find a majority in the Dutch Senate for its 2014 budget, which aims to comply with the EU's deficit rules.

After several months of discussions with opposition parties the government narrowly managed to convince three opposition parties last Friday to support measures for the 2014 budget: the left-liberal D66 and two small Christian parties: the Christian Union and the SGP.

European Commissioner Olli Rehn's conflicting statements on the issue illustrate how the Commission now must attempt to cajole the member states into line. He suggested in June that the Netherlands should ideally aim for a 2.8% deficit, with Finance Minister (and Eurogroup Chairman) Jeroen Dijsselbloem responding that the 3% EU deficit target was already difficult enough. This week Rehn praised the Netherlands for reaching a deal on a 3.3% deficit in 2014, even saying that the US should follow the example and "go Dutch". By the way, the government's own economic advisory agency, the CPB, thinks the real deficit will be 3.5%.

Martin Visser, the finance editor of the Netherlands' most-read daily De Telegraaf commented that:
"Even before all the calculations are made, Rehn provides a political judgment instead of a purely economic one."
When push comes to shove, the European Commission is always liable to grant a bit more wiggle room to national governments - illustrating the difficult in enforcing the EU's souped-up budget rules. This week German Finance Minister Wolfgang Schäuble criticised Rehn’s decision to exempt large scale public investments from calculations of member states’ structural deficits, describing it as a “re-interpretation of criteria”. What constitutes a 'structural deficit' is, of course, always open to debate and therefore finessing.

On a side note, Dijsselbloem's role as Eurogruop chair is undoubtedly getting tougher. Telling other eurozone member states to get their house in order when your own country has been in the EU's "excessive deficit procedure" since 2009 must be increasingly difficult.

So, after a whole range of eurozone reforms (think Fiscal Pact, six-pack, two-pack etc) the lesson seems to be that legal rules just won't trump politics.

Plus ça change...

UK-German push for EU reform gathers pace as German SMEs call for return of powers from Brussels

Today's FAZ reports on a letter to German MPs from the German Association of Family Businesses (Die Familienunternehmer) which calls for “a fundamental re-calibration of the EU Treaties”. Crucially, this would entail a correction of the distribution of competencies, which in plain English (and German) would mean the possibility of some powers flowing back to member states from Brussels. The letter argues:
“A key element for the sustainable improvement of the situation [in the EU] is the principle of liability. The future of Europe cannot be jeopardised through the progressive pooling of debts with foreseeable cuts to the German budget or the disempowerment of national parliaments in favour of centralisation in Brussels.”
Given the economic and cultural importance of family run businesses/SMEs - the organisation's website notes that there are 180,000 such businesses in Germany employing around 8 million people - this is an important development and the first time a German business group has made such a demand. While it is important not to get carried away - some of the Association's previous calls, such as pushing for MPs to vote down the ESM, fell on deaf ears - it comes at a time when the concept of adjusting the balance of powers between the EU and member states is slowly gaining traction in Germany. Not that long ago the mere suggestion would have been shot down instantly, now even Chancellor Merkel has hinted that it could be a possibility.

As our recent joint opinion poll with Open Europe Berlin demonstrated, there is substantial support among the German public for the return of certain powers.

Source: YouGov Deutschland for Open Europe and Open Europe Berlin

Of course for Germany to support such transfers they must apply to the EU as a whole, which is why British proposals to give national parliaments a greater role in the EU policy-making process could gain support in Berlin, as could proposals to streamline EU legislation. The Sunday Telegraph recently reported that the UK’s CBI is working closely with its German counterpart, the BDI, in order to push through business friendly reforms in the EU which could include the repeal of some EU social and employment laws as well further liberalisation in areas including telecommunications and services.

The momentum for EU reform is definitely growing, and in an encouraging sign of UK-German co-operation (which we advocated before it became fashionable), Conservative MP Alok Sharma and German CDU MP Ralph Brinkhaus argue in a joint piece on the Spectator’s Coffee House blog that “There’s a historic opportunity for Britain and Germany to lead the work of improving the structures of the European Union, together with other like-minded countries. There are areas of common ground for discussion on budget discipline, free trade and efficiency in the public sector to name but a few."

We couldn't agree more.

Like its election, Germany's coalition talks will be dominated by domestic issues

Coalition, coalition, coalition – this is all par for the course in German politics. It’s been almost a month since the BTW13, and the new government has yet to be formed. This is no cause for alarm, of course, Germans like their coalitions, and they understand that they take time to form.

With the Greens now out of talks, Angela Merkel’s CDU/CSU has to try and form a Grand Coalition with the SPD (the most popular choice for government among the public.) The parties  held third-round talks in Berlin yesterday, finally agreeing to enter formal Grand Coalition negotiations. Talks will start next week, subject to approval by an SPD party convention on Sunday.

Merkel's priorities are clear. On Wednesday she laid out her agenda for government as she starts her third-term as Chancellor. They are: ending the eurozone crisis; cutting the costs of Germany’s energiewende (or its move from nuclear to renewable power); dealing with the problem of its ageing population and federal reform of the states.

Although the eurozone crisis is Merkel’s top priority, as we have been arguing for quite some time now, regardless of coalition outcome, the German approach to the eurozone will not change significantly: expect more of the same. The SPD influence may cause some change in style, but not substance. It is unlikely that eurozone policy will feature as the key headline during coalition negotiations.

From a domestic perspective, the focus on demographic challenges is interesting. As we have noted, this is a huge deal for Germany, with its population set to shrink significantly over the coming decades and the pension burden set to jump accordingly. How this is dealt with will play a role in determining for how long Germany retains its current status as the powerhouse of Europe. This is a question that will worry SPD and CDU alike.

Equally important, will be the cost of  Germany's energiewende. A recent report by the FT estimates that that German consumers will have spent over €100bn on subsiding green energy by 2014. The pressure to reform Germany's renewable energy law to lower costs will run across party lines.

Given this, the domestic issues that are bound to dominate coalition talks will be the question of introducing a minimum wage, taxation and spending. Here, the SPD will fight hard for a 'victory'. The party knows that it lost a lot of support the last time it entered into a Grand Coalition with a significantly more powerful CDU/CSU in 2005. And this time around, Merkel’s party is even stronger (it is just a few seats shy of an absolute majority in the Bundestag). Not surprising, that reports emerging from Germany say that the SPD is fighting hard to win the Finance and Labour Ministries over the less-influential Foreign Ministry, (although, this was denied by SPD general secretary Andrea Nahles this morning.)

Although it is unlikely that the CDU/CSU will hand over the Finance Ministry, it will be willing to compromise elsewhere, giving the SPD the 'prize' it is looking for. This could be a compromise on mimumum wage. But it is important to distinguish here (and this is a detail that has not been grasped by some English reports on this issue), that BOTH the CDU/CSU and the SPD are in favour of a minimum wage.The question, then, is what the rate and scope of the wage should be. The SPD favour a statutory (national) minimum wage of €8.50/hr, while the CDU/CSU wants to allow trade unions and employers to negotiate the level individually in each German Bundesland, or state.

As already indicated by CDU-leader Horst Seehofer, he would be inclined to accept the SPD's €8.50 demand under ‘certain conditions’. The caveat being that the SPD demand is OK if it doesn’t cost jobs - given that Germany is already facing some labour shortages this is plausible. Presumably, however, this means that the SPD will have make concessions on other domestic fronts – such as agreeing not to raise taxes further (one of the SPD’s key campaigning platforms) and no further creation of debt. (Like the CDU/CSU, the SPD believes in cleaning-up budgets, but it favours a less-strict austerity schedule.)

So, while the SPD is likely to win the domestic victory it is looking for – it  will not be a huge blow to Merkel’s CDU/CSU, which will be sure to win concessions elsewhere.Compromise in coalition are all part of the course in German politics.

From a wider European angle, however, the coalition talks will be broadly reminiscent of the campaign: domestic issues will supersede.

Thursday, October 17, 2013

Eurozone inflation hits its lowest levels for three years

Eurostat yesterday released its latest inflation statistics and the data for the eurozone provides some food for thought.

Inflation reached its lowest levels (1.1% on an annual basis) since February 2010. This might seem surprising on the surface given all the talk of a eurozone recovery and a turn around. Why hasn’t inflation followed? Well, generally inflation is a lagging indicator and therefore any recovery will take some time to feed through to prices and wages. However, as the graph below suggests, there is more at work here.

There has been significant disinflation (falling inflation but not negative inflation, which is deflation) in the eurozone and more importantly in the PIIGS. For all the talk of internal devaluation in the eurozone it has taken some time to feed through to the Consumer Price Index (CPI). Due to factors such as indirect tax increases and sticky prices and wages, it has taken some time for the impact to be fully felt – now that this is beginning to happen it is unlikely to stop immediately and could carry on for some time.

The data also shows that because of the effect described above, inflation in the PIIGS is diverging from the rest of the eurozone somewhat and particularly from the stronger countries in the north.

What does this mean for the ECB?

The FT has a couple of pieces today discussing this, calling on the ECB to do more to tackle the disinflation in the eurozone. While inflation is clearly well below the ECB’s target, the current nature of the inflation does present some issues for ECB policy.
  • Firstly, there is the standard one size fits all conundrum – as inflation plummets in the PIIGS it remains stable in the north and threatens to increase as these countries post higher levels of growth. Adjusting the policies to suit these countries more could prompt unwanted outcomes in the stronger countries. Politically, it’s also worth remembers just how wary Germans are of inflation, as we highlighted recently. Finding the correct line between these two camps is incredibly tricky for the ECB.
  • Secondly, while the struggling eurozone countries could use a boost in demand, the ECB may struggle to find the necessary targeted approach to do this. One measure which has been widely mooted is another long term refinancing operation (LTRO) to help boost liquidity in the market. However, as the graph above shows, there was no boost in inflation from the previous rounds, despite it totalling around €1 trillion. This is largely because the money did not filter through to the real economy and therefore did not impact consumer price inflation. Although things are improving there is still plenty of fragmentation in the market and loans to the real economy continue to fall in the PIIGS.
  • This point also applies more generally in our view in terms of the tools at the ECB’s disposal. As we discussed at length here, although the ECB can do much to stop the break-up of the euro, it has fewer tools to help promote economic growth in the current circumstances, particularly in specific economies.
  • In our view disinflation is not such a risk for many of these countries, in fact many need to see reductions in prices and wages to help boost their competitiveness, although it does of course have knock on impacts for their already flagging GDP growth. That said, deflation is a bigger risk because these countries have such large debt to GDP levels, which would only be exacerbated by deflation – although for countries such as Greece the need for further debt relief is already very apparent so the marginal impact of deflation is smaller.
All in all then, low inflation in the eurozone seems here to stay for some time due to the periphery pulling the average down, even if a fuller recovery eventually materialises. This will create some new issues for the ECB to deal with, however, given the divergence between countries it may well struggle to find the tools to have a big impact on this.

Not what London or Madrid want to hear

According to the Scotsman, Professor Dr Roland Vaubel, who is an adviser to Germany’s economics ministry, has written the following for the journal Economic Affairs:
The opinion of the European Union institutions that Catalonia and Scotland, after seceding, would have to reapply for EU membership has no basis in the European treaties.
Nor does the UN Charter envisage dispositions with regard to secession.
The treaties are also consistent with automatic succession of both the seceding state and the rump state.
 We don't have to point out that this isn't the view in London or Madrid.

Wednesday, October 16, 2013

'Budget Deadline Day' in Europe

As you may have noticed, yesterday saw numerous governments across Europe unveiling their latest budgets for the coming year. Rather than just being a coincidence, this is down to the fact that yesterday was the deadline for eurozone governments to submit their budget plans to the European Commission – 'Budget Deadline Day', if you will.

As part of the ‘Six-pack’ set of rules, eurozone governments must have their budgets endorsed by the Commission, although the ability to actually force changes to the budget plans is limited for those countries which are not missing their targets already (except for significant peer pressure).

As with football’s transfer deadline day, there were some frantic negotiations, albeit without the minute to minute media coverage. Below, we take a look at the budgets of the Italian, Irish and Portuguese governments.

Italy yesterday unveiled its new ‘Stability Law’ – the budget guidelines for 2014-16. There’s some encouraging stuff in there, notably a package of tax cuts for businesses and workers worth €10.6bn over three years (of which €2.5bn to be cut in 2014). Nothing massive, but it's a start. The money to cover for these cuts is due to come from a number of public spending cuts. However, the draft budget will now have to be adopted by the Italian parliament, and some of the measures may change.

Prime Minister Enrico Letta has confirmed Italy aims to bring its deficit down to 2.5% of GDP by the end of next year. That said, the problem for Italy remains its weak growth – which in turn threatens its fiscal targets. Last week, for instance, the Italian government had to adopt a set of urgent measures to find a further €1.6bn and make sure the deficit stays below 3% of GDP this year. Unlike other countries, the budget may hold less importance for Italy’s economic future with the focus now on much needed political reform and improvement in the business environment.

Debate over the Irish budget has been going on for some time, and the government managed to secure a lower level of headline cuts than expected ahead of time - €2.5bn compared to €3.1bn. However, the budget remains controversial with the Irish Independent running the front page headline, "Unkindest cuts", because they fall on pensions, healthcare and unemployment benefits for young people.

For the most part, although this budget was about tinkering around the edges rather than making the huge cuts we have seen before, the government focused on adjusting lesser known taxes to reap numerous small savings. Interestingly, the government also committed to reducing tax evasion and tackling the view of the country as a ‘corporate tax haven’. It will be key to see if this impacts the number of multinationals locating in Ireland and if it has any knock-on impact on economic growth.

Of the three, this is probably the most concerning budget. Following a difficult summer for Portugal, politically at least, the government has once again been forced to find a further €3.2bn in cuts. However, the government has once again taken the same approach by heaping the cuts of public sector workers pay (up to 12% in parts) and on pensions. Action on these areas is needed. However, it has also been repeatedly struck down by the Constitutional Court. This might be setting the scene for another showdown.

This has evoked concerns from within the Commission, and it will be interesting to see whether a full endorsement is forthcoming. Portugal also confirmed it will miss this year’s deficit target and the continuing push to ease next year’s target suggests little confidence that it will meet that one either. The good news is that Portugal’s borrowing costs remain well below their peak, and some market access once it exits its bailout next year seems likely. That said, unless it can get a hold of the public sector reform needed, some additional aid still looks likely.

Overall then, a bit of a mixed bag. Few marquee measures, but some positive moves in terms of focusing cuts on spending rather than tax hikes.

Tuesday, October 15, 2013

Open Europe Berlin: One year on

With the first anniversary of the founding of our sister organisation, Open Europe Berlin, fast approaching, it seems an appropriate time to look back at its achievements over its first year. Following an impressive launch in Berlin featuring a keynote speech by former ECB Chief Economist Ottmar Issing, under the expert guidance of its Director, Professor Dr Michael Wohlgemuth, and Deputy-Director, Nora Hesse, OEB has been making waves on the German EU policy scene and beyond. Its influence is sizeable and growing continuously.

Just last week, leading German daily, Die Welt, described OEB as having a growing influence on the German media, and commended it, in particular, for its success in using social media to contribute cutting-edge research and market-orientated concepts to the debate about the future direction of the EU. The piece notes that OEB research and proposals have "even received responses from the European Commission."  In the past 12 months, OEB has become a fixture in both the German and international press, and for many, OEB became the go-to source for information, analysis and comment in the run-up to the German elections, including internationally broadcast interviews with the BBC and Reuters (see here for a compilation of OE and OEB's best #btw13 hits).

OEB research is already proving to be a leading source of analysis on key European issues including EU regulatory policy; banking union; the EU budget and the EU’s current democratic deficit. Research and media commentary aside, it has also managed to secure interviews with important German figures, including the renowned German economist Hans Werner-Sinn, and Bernd Lucke, leader of the anti-euro Alternative für Deutschland party, whose rapid rise has commanded attention around the world. The OEB blog is also a regular source of interesting information and comment, including guest posts from esteemed figures such as former FDP MP Frank Schäffler, Barenberg Chief Economist Holger Schmieding and Charles B. Blankart, an advisor to German Economy Ministry.

Fundamentally, however, Open Europe Berlin has, and will, continue to play an important role in helping to understand the role of Germany in the future of Europe. And as we have been arguing for quite some time, there is great scope for cooperation between the UK and Germany to agree on strategic and systemic changes to the way the EU operates. How this dynamic plays out, will, no doubt, have an important role in shaping the future of the European Union and both countries' places within it.

UK government's business taskforce launches push to cut EU red tape

Today sees the release of the Business Taskforce report on cutting EU red tape in an effort to boost competitiveness. As our previous work on EU regulation suggests - the Taskforce is picking up on many of our suggestions - this is a push we are very much in favour of, particularly at a time when squeezing out every bit of economic growth possible is vital for economies across the EU.

The report proposes 30 wide ranging reforms to cut EU red tape.We're still working our way through the detailed suggestions but we've included some initial reaction below, which we'll update as we go.
  • The task force backs the full implementation of the EU’s Services Directive. This could deliver up to a €230bn boost to EU GDP, according Open Europe estimates. However, we have suggested the EU should go even further and push for the introduction of the ‘country of origin principle’ which could increase further gains to closer to €300bn (2.3% of EU GDP).
  • Open Europe welcomes the push to exempt small businesses from burdensome legislation, although more needs to be done to address existing issues with social and employment law.
  • In a report from 2011, Open Europe estimated that EU social policy (i.e. EU social and employment legislation and EU health and safety rules) cost the UK economy £8.6 billion a year. The figure is heavily driven by a few very costly EU Directives – most importantly the Working Time Directive and the Temporary Agency Workers Directive. However, some health and safety laws stemming from the EU also represent a net cost to the UK economy. This is the case, for instance, for the Control of Vibration at Work Regulations 2005 and the Control of Noise at Work Regulations 2005.
  • The task force has adopted Open Europe’s recommendation that low-risk firms be exempted from the obligation to regularly update their health and safety risk assessments.
  • Looking for ways to improve EU-wide competitiveness and the European business environment, as the report recommends, rather than looking for specific UK opt-outs is likely to increase the chance of support from like-minded EU countries.
  • Creation of a digital single market could be vital, particularly from the UK perspective with over 70% of UK citizens having bought products or services online but only around 10% having done so across borders.
  • Open Europe recommended adopting a ‘one in, one out’ rule for EU regulation back in 2010 and continues to support such a move as suggested by the task force’s report.
  • On-going assessment of the impact of regulation is vital. For example, the benefits of many regulations are based on assumptions or forecasts and while probable or viable at the time, these do not always come to pass. EU regulations on environment and climate change are a prime example of this. With circumstances shifting it is important that regulation is flexible.
  • The Taskforce also adopts out proposal that Commission proposals which don't come with a robust Impact Assessment, clearly showing the need for and benefit of the law, should be dropped. We agree that more effective use of Impact Assessments is vital and giving the EU’s so-called Impact Assessment Board (IAB) more teeth (which we has long advocated) and the power to ‘red flag’ harmful EU proposals (e.g. the ban on olive oil jugs) would be a positive start. The focus of the IAB must be to ensure high methodological standards so that approval of a regulation depends on its merits, not political motives (for example, major problems with the Commission’s proposal for a financial transaction tax emerged after it had been tabled and undergone a Commission impact assessment).
These ideas deserve the support of like-minded EU member states at a time when policymakers are desperately seeking ways to improve Europe’s growth and competitiveness. It is essential that these good ideas are followed by concrete action to reduce the existing and future burden of EU law on European and British businesses.

Monday, October 14, 2013

EU 'welfare tourism' is not a big problem but that doesn't mean existing safeguards should be removed

The Sunday Telegraph's front page story about a study commissioned by the European Commission into EU migrants and access to welfare has caused a bit of a stir.

As we have pointed out several times before, we support the principle of free movement as it has the potential to boost growth and competitiveness. In addition, the ability for companies based in the UK to easily draw on a wide talent pool is seen by many firms as an advantage of EU membership. However, there is no doubt that EU migration also throws up a huge number of political challenges, such as a substantial loss of national control over who can enter the country, increased competition in low-skilled sectors of the labour market, and increased demand for public services and infrastructure.

Therefore, if public confidence is not to be lost, free movement needs to be managed with extreme care and tempered with other policies including the right of national governments to protect their welfare systems from abuse.

In recent months, the risk of 'welfare tourism' is something that has been highlighted by both national governments and the media, not just in the UK but also recently in Germany, Austria and the Netherlands. Several governments have complained that the rules need to be tightened. EU Commissioner László Andor has responded by accusing the UK of pandering to xenophobia and taking the Government to court over the ‘right to reside test’ it applies to anyone seeking to access benefits. Both sides have been talking past each other, and the result is a focus on 'welfare tourism' that is almost certainly disproportionate to the problem it poses.

The available evidence and academic research overwhelmingly suggests that EU migrants have come to the UK in search of work and not to claim welfare benefits. For example, a 2010 study found that migrants from the new EU member states are “59% less likely than natives to receive state benefits or tax credits and 57% less likely to live in social housing.” The study concluded that in the four fiscal years after 2004, these migrants made a positive contribution to the UK’s public finances. In 2008, the ONS estimated that the employment rate of these migrants was over 80%.

Nevertheless, the report cited by the Sunday Telegraph did have some important findings for the current debate between national governments and the European Commission about EU migrants and access to welfare. Much of the focus has been on the study's finding that over 600,000 “non-active” EU migrants are living in Britain. Now this doesn't actually tell us that much about the impact on welfare. For example, these people could be family members of EU migrants working in the UK, pensioners and so on. The fact the UK Government does not currently keep statistics on those who claim benefits means we do not know exactly who is receiving them or how much this costs.

However, what is relevant in this context is that the report found that the "number of job-seeking EU migrants increased by 73 per cent between 2008 and 2011" and that the number of EU migrants coming to the UK "without a job awaiting them has been increasing".

At the moment, it is unlikely that this is having a major impact on the UK's welfare system, but precisely because the UK applies its 'right to reside' test to those claiming benefits (this is an important safeguard because the UK's universalist welfare system is particularly hard to police). But logic would suggest that weakening these rules would create the wrong incentives by allowing access to benefits such as jobseekers allowance more or less from day one. It would also further undermine UK public confidence in the principle of free movement altogether. However, this is precisely what the European Commission's legal challenge to the UK's right to reside test would do, if successful. This is why the UK and other member states are so concerned.

So, in summary, no there is not a welfare tourism crisis at present, but this is no reason for the European Commission to seek to remove the UK's welfare safeguards. It is the European Commission that is moving the goalposts here.