Le Monde's 'Up yours Delors' moment: Barroso is 'a 57-year-old chameleon in search of a good job at NATO or the UN'

As we reported in our daily press summary, European Commission President José Manuel Barroso has drawn criticism from the French government after he described France's insistence to exclude the audio-visual industry from EU-US trade talks as "completely reactionary". Now, the French press has caught up as well.

And it's pretty harsh.

Le Monde has a tough editorial under the headline, "Monsieur Barroso, you're neither loyal nor respectful!" We thought it was worth translating it almost in its entirety. Here goes,

For once, the Europeans were united vis-à-vis the Americans […] The President of the European Commission, José Manuel Barroso, has torpedoed this unity by stating, right before the start of the [G8] summit, that France’s position on the cultural exception was “reactionary”. 

It is of little importance to know whether France is [reactionary]. Or whether or not one needed to exclude, in the name of the cultural exception, audio-visual services from the negotiating mandate handed to the European Commission. In order to be ready, the 27 [EU member states] negotiated at length and until late at night on Friday, 14 June. France ended up imposing its views and scored a political victory.

And whether Mr Barroso was satisfied with this outcome or not is of little importance, too. He’s the President of the Commission and is bound by the mandate he’s been given by the [member] states. By denigrating the agreement the day after it was concluded, Mr Barroso is not acting as the guardian of the [EU] Treaties, as his mandate requires.

[…]

The Trade Commissioner, Belgium’s Karel De Gucht, has adopted a comparable attitude. He didn’t manage to impose his views. A bad gambler, he pretends that it will be possible to re-introduce audio-visual services in the negotiation. That’s empty talk: everything is possible under unanimity. In reality, France retains its veto on the issue. But Mr De Gucht has an excuse: he will negotiate with the Americans and is afraid that the latter retaliate by excluding from the negotiations some domains that are strategic for the Europeans. He wants to be able to go back to the 27 [EU member states] to amend his negotiating mandate, if necessary.

Mr Barroso, on the other hand, seems to pursue far more personal ambitions. During eight years, the President of the [European] Commission has stood out for his ductility. Defender of small states as Portuguese Prime Minister, a liberal at the time of his appointment in Brussels ahead of the 2008 crisis, pro-Sarkozy during [former French President] Nicolas Sarkozy’s presidency, and incapable, since, of taking the smallest political initiative to revive the Union, he has accompanied the decline of the European institutions.

Today, aged 57, this chameleon is searching for a future. In search of a good post, at NATO or the UN – who knows? – he has chosen to pander to his Anglo-Saxon partners, the British Prime Minister and the US President. At the head of the Commission, Barroso has been a good reflection of Europe: a decade of decline. 

This is "Up yours Delors" territory - and arguably the strongest attack on Barroso until date.

A European Commission spokesman was quick to point out that Barroso didn't have France in mind when he made his remarks. There are several layers to this episode, but if anyone thought that the French are becoming any less sceptical of the Commission, they are mistaken. If anyone thought that turning the Commission into an all-powerful eurozone budget police was only one German election away, that is...

Full letter from the Cypriot President to the Troika slamming Cypriot bailout

As we reported last week in our press summary and which the FT is today reporting on (and presenting as a bit of a scoop), Cypriot President Nicos Anastasiades has sent a scathing letter to the EU/IMF/ECB Troika slamming the terms of the Cypriot bail-out/bail-in package and calling for it to potentially be re-examined.

Below we post the letter in full, courtesy of the Cypriot website StockWatch, which published it over a week ago (added emphasis ours):

I am writing to update you on the economic and banking system developments in Cyprus following the Eurogroup decisions of last March and to request your support regarding a number of very pressing issues which need to be addressed the soonest.

1. The Cypriot economy is adapting to major shocks

The Cypriot economy is adapting to major shocks. Substantial private wealth has been lost and a significant number of Cypriot firms have lost their working capital at the two systemically important financial institutions which were subject to the bail - in. Restrictive measures, including capital controls, are seriously hampering the conduct of business and confidence in the banking system has been shaken. As a result the economy is driven into a deep recession, leading to a further rise in unemployment and making fiscal consolidation all the more difficult.

2. Application of bail-in was implemented without careful preparation

It is my humble submission that the bail-in was implemented without careful preparation. Its form was changed drastically within a week. Originally designed as a general bail-in across the banking system, it eventually became focused on the two distressed banks, the Laiki Bank and the Bank of Cyprus (BOC). There was no clear understanding of how a bail-in was to be implemented, legal issues are being raised and major delays in completing the process are being observed. Moreover, no distinction was made between long-term deposits earning high returns and money flowing through current accounts, such as firms' working capital. This amounted to a significant loss of working capital for businesses. An alternative, Ionger-term, downsizing of the banking system away from publicity and without bank-runs was a credible alternative that would not have produced such a deep recession and loss of confidence in the banking system.

3. Cyprus was forced to pay the cost to ring-fence Greece but no reciprocity has been granted

Another feature of the current solution was that deposits at the branches of Laiki and Bank of Cyprus in Greece were spared from a haircut to prevent contagion. These deposits amounted to €15 billion. The wish to avoid contagion to Greece was also evident in the Eurogroup's insistence that Cypriot banks sell their Greek branches. In addition and as a result of the sale, the Cypriot banks have lost their Greek deferred tax assets. As understandable as ring-fencing may be, this was absent at the time of deciding the Greek PSI in relation to the Greek Government Bonds which cost Cyprus 25% of its GDP (€4.5 billion). The heavy burden placed on Cyprus by the restructuring of Greek debt was not taken into consideration when it was Cyprus' turn to seek help.

4. Imposition of Laiki's ELA liability to Bank of Cyprus

The implementation of the sale of the Greek branches of the Cypriot banks, as urged by the Eurogroup, resulted in Laiki selling assets that were pledged against its ELA liability to Piraeus Bank, without Piraeus assuming the corresponding ELA liability. As such, Laiki was left with the related ELA liability but without the aforementioned assets. The ELA liability which was left "unsecured" as a result of the sale amounts to around €3.8 billion and was imposed on Bank of Cyprus as a result of the Eurogroup decision. It is worth reminding that a substantial part (in excess of €4 billion) of Laiki's ELA liability was required in the first place in order to cover deposit outflows experienced by Laiki's Greek branches.

Bank of Cyprus itself has a total ELA liability of around €2 billion. By taking an additional €9 billion from Laiki, which was accumulated over the course of the last year under very questionable circumstances, BOC has substantially increased the vulnerability of its own funding structure, with its cumulative ELA liability reaching a very high €11 billion. BOC was called to pledge its own assets to cover for the collateral shortfall for the €3.8 billion liability carried over by Laiki. Such a high amount of ELA liability hinders BOC's funding sources as the room for obtaining additional ELA is limited. The imposition of Laiki's ELA liability on Bank of Cyprus is the main contributor to the liquidity strain Bank of Cyprus faces.

5. Urgent need for Troika to provide a long-term sustainable and viable solution to the liquidity issues Bank of Cyprus is facing as a result of the Eurogroup decisions

Instead of addressing the issue of severe liquidity strain on Cyprus' mega-systemic bank through a long-term sustainable and viable solution, the Troika partners seem to have chosen the path of maintaining strict capital restrictions. Artificial measures such as capital restrictions may seem to prevent a bank run in the short term but will only aggravate the depositors the longer they persist. Rather than creating confidence in the banking system they are eroding it by the day. Maintaining capital restrictions for a long period will inevitably have devastating effects on the local economy, will also affect the country's international business and will have an adverse impact on GDP. Under such scenarios spill over effects will no doubt register on other local banks through higher non-performing loans as a result of dampened economic activity. In addition, increased deposit withdrawals from other local banks, as fear of lack of liquidity of the only systemic bank will have a domino effect on the entire banking system.

I stress the systemic importance of BOC, not only in terms of the banking system but also for the entire economy. The success of the programme approved by the Eurogroup and the Troika depends upon the emergence of a strong and viable BOC. It is for this reason that I urge you to support a long-term solution to Bank of Cyprus' thin liquidity position. Such a solution will re-instate depositor confidence in the banking system and will allow the full functioning of the economy away from restrictive measures and capital controls. It will also facilitate the attraction of foreign direct investment in Cyprus.

My Finance Minister has alerted the Troika Mission Chiefs in writing on 19 May 2013, in relation to the need to implement a long-term viable solution to Bank of Cyprus' liquidity position. No response has been received yet.

A possible long-term solution could be the conversion of part of Laiki's ELA liability into long term bonds and the transfer of these bonds and corresponding assets into a separate vehicle. Another solution could be the reversal of the Eurogroup decision in relation to the merger of Good Laiki (carrying the €9 billion ELA liability) into Bank of Cyprus. In any case the BOC should exit resolution status without any further delays and should be granted eligible counter-party status by the ECB. Of course more options need to be examined. I should mention that an interim Board and an interim CEO is already in place at BOC and the final asset valuation is progressing according to schedule.

I urge you to review the possibilities in order to determine a viable prospect for Cyprus and its people. The new government of Cyprus, despite its expressed disagreements, has abided by the Eurozone decisions and remains determined to implement the programme fully and effectively. I am personally determined to lead Cyprus out of this dire situation and towards a path of sustainable growth and development. We are also fully committed to re-establishing Cyprus's stance as a credible EU partner. However, at this crucial juncture, we are calling upon you for active and tangible support.

Very strong stuff indeed. We can't imagine the Troika will take to it too kindly.

Europe's most important political party hits the campaign trail: a sneak peak at the EU section of CDU/CSU's election manifesto

We've managed to get our hands on the CDU/CSU's draft manifesto for September's federal elections, which is not due to be officially presented until Sunday. Given that the CDU (which always runs jointly with its Bavarian sister party CSU) is the single most important party in European politics by a mile, this is definitely one to watch.

Interestingly, the first section of the manifesto is entitled "Germany's future in Europe", indicating how closely these two issues are linked.
Aside from the obligatory pro-European rhetoric, here are the key points we've picked out regarding what the parties will campaign for and against on the EU/eurozone:

CDU/CSU support:

-  More EU oversight over national budgets with sanctions for breaching the Growth and Stability Pact,
-  So-called ‘Competition Pacts’, i.e. enforceable contracts between the Commission and member states on economic reforms,
-  Increased labour mobility, including greater co-ordination on the recognition of academic degrees and professional qualifications, as well as on access to social security,
-  Retaining the Franco-German axis as the "motor" of European integration, while at the same time wanting to draw Poland - described as the most important partner among the new member states - closer into this fold,
-  Pushing German as one of the main EU languages (along with English and French).

CDU/CSU oppose:

-   Sovereign debt-pooling via 'eurobonds',
-   An EU-wide guarantee scheme for bank deposits,
-   A split between the eurozone and the wider EU (“We would prefer to progress with all EU partners”).

So broadly no big surprises, German support for economic reforms and budgetary restraint on one hand and opposition to debt-pooling on the other is well established, although we note the concept of giving the Commission greater powers was not included in the recent Franco-German proposals on the eurozone. The explicit commitment to pushing for greater use of German within the EU hints at a more assertive Germany that is more at ease with itself.

Tellingly, the UK is not mentioned explicitly in the EU section, although the co-operation between the two countries on tax transparency is mentioned elsewhere in the document. From a wider UK perspective, the focus on economic reform and competitiveness is welcome, although the UK would not want to give the Commission greater competence in this area. The UK would also welcome any moves to clarify the rules governing EU migrants' access to domestic welfare systems - though it's going to be very interesting to see more details on transferability of benefits, as that's something many in the UK are keen to limit.

We will of course keep you updated as the campaign progresses.

Berlusconi: Let's breach EU deficit rules, no-one would throw us out

With the next meeting of EU leaders only one week away, Silvio Berlusconi has stepped his anti-austerity rhetoric up by a few notches. He said yesterday,

"We need someone from the [Italian] government to go to Brussels and tell those gentlemen, ‘We are in this situation because of your damn austerity policies. We must put things back in their place. From now on, you can forget about the fiscal pact and the deficit limit of 3% of GDP. Do you want to throw us out of the single currency? Go ahead. Do you want to throw us out of the EU? Well, we’d like to remind you that we pay €18bn a year [into the EU budget] and only get €10bn back’. Who would throw us out?"

As usual when Berlusconi is involved, these incendiary remarks form part of a broader communication strategy. Following his party's poor showing in the latest round of mayoral elections, Berlusconi wants to make clear to his electorate that he is still dictating the agenda to Italy's coalition government - and that he means business when it comes to keeping his flagship electoral promises, be it about scrapping a property tax on first homes or putting an end to EU-mandated austerity.

However, this time the explicit invite to ignore EU deficit rules is in clear contradiction with the line taken by Italian Prime Minister Enrico Letta so far: Italy does want an easing of austerity at the EU level, but will keep its deficit below 3% of GDP and respect all its commitments. Therefore, Berlusconi's words risk shaking the coalition government at home, and undermining Italy's credibility vis-à-vis its eurozone partners.

It will be extremely interesting to see if, once in Brussels next week, Mr Letta pretends his coalition partner Berlusconi never said those words or takes Il Cavaliere's advice on board and adopts a tougher anti-austerity stance with German Chancellor Angela Merkel and the other Northern eurozone leaders.  

Another UK win on single market safeguards in financial services?

An interesting report popped up on Reuters this afternoon. According to internal documents seen by the news agency, the UK has secured another important safeguard on financial services.

Specifically, during last week’s negotiations over the controversial revision of the Markets in Financial Instruments Directive (MiFID), an agreement was reached which saw the insertion of the following clause:

“No action taken by any regulator or the European Securities and Markets Authority (ESMA) should discriminate against any member state as a venue for the provision of investment services and activities in any currency.”

This is important given the on-going dispute between the UK and the eurozone concerning the location of institutions engaging in the clearing of euro-denominated financial transactions outside of the single currency bloc.

Quick recap: the UK has launched a case against the eurozone and the ECB at the European Court of Justice after an ECB legal opinion suggested that all transactions in euros should be cleared within the eurozone. This raises questions over the City of London’s position as the financial centre of Europe, and could force trillions of euros worth of financial transactions away from the city.

Although this is a very technical issue it could be a very important one in terms of the debate about the UK’s position in Europe.

That said, we’re hesitant over getting too excited for a couple of reasons:

• Firstly, this is just a preliminary agreement between officials. The final text still needs approval from the European Parliament and EU political leaders, meaning it could well be subject to substantial revision.
• Secondly, even if it is kept in, it’s not clear whether it will be legally binding, particularly when it comes to the ECB. Since the ECB is independent and currency issues usually fall under its purview, it may retain jurisdiction and authority over this decision.

Some important caveats then, but there is no doubt this is a positive step and highlights that progress can be made if the UK explores all of its political and legal options to boost its position. The government must continue to do so.

The show(down) must go on: Coalition row over closure of Greece's public broadcaster continues

Last week, we noted on this blog that the abrupt closure of Greece's public broadcaster ERT risked opening a rift in Greece's ruling coalition - as Prime Minister Antonis Samaras took the decision without the approval of his junior coalition partners, PASOK and Democratic Left.

Tensions have actually mounted within the coalition, and all eyes are now on a meeting later on today between Samaras, Evangelos Venizelos and Fotis Kouvelis (the leaders of PASOK and Democratic Left respectively). Here's a quick update of what happened over the weekend:

• After both PASOK and Democratic Left hinted at snap elections as a possible outcome of the on-going coalition row over ERT, Samaras came up with a compromise proposal: have a cross-party committee hire a small number of workers so that a basic broadcast service (mainly news bulletins) could resume as soon as possible;

• Samaras's coalition partners have both turned the offer down. They concede ERT needs restructuring, but want the state broadcaster to stay open while such a restructuring takes place;

• This makes today's meeting (scheduled for 5.30pm GMT) very interesting. Venizelos and Kouvelis are apparently not planning to make doorstep statements after the meeting with Samaras, but will wait to speak until they are back at their respective party headquarters - possibly another sign that tensions are running high;   

• German Chancellor Angela Merkel yesterday spoke to Samaras over the phone and reminded him that "it is of vital importance" for Greece to stick to all its commitments with the EU-IMF-ECB Troika, including "those relating to public sector reform." Just a coincidence? Or an invite to Samaras to stick to his guns on ERT closure? 

• Meanwhile, Alexis Tsipras, the leader of the largest opposition party, SYRIZA, is to deliver a speech in Syntagma Square this evening - right in front of the Greek parliament. No doubt he will use it to call for the government to resign.

• Finally, it's worth keeping in mind that ERT workers have appealed to the Council of State - Greece's highest administrative court. The Council of State should issue its verdict later on today, and many expect it to order that ERT be immediately re-opened. Paradoxically, the ruling could help put an end to the coalition row. However, it would almost inevitably also weaken Samaras's position - given that his initial decision to shut down ERT would be overturned.  

We will keep a close eye on any future developments, so make sure you follow us on Twitter @OpenEurope if you want to stay on top of the latest events in Greece.   

Mervyn King on the solutions to the eurozone crisis

The FT has just posted an interesting and lengthy interview with outgoing Bank of England Governor Mervyn King (pictured), conducted by the FT’s Martin Wolf. Many pressing topics are covered but the short discussion about the eurozone caught our eye (as might be expected).

When asked about the solutions to the eurozone crisis, King sums up the options very succinctly and without the usual qualifying statements needed by those directly involved in the crisis:

 “I think there are four [solutions]. One is to continue with mass unemployment in the south, in order to depress wages and prices until they’ve become competitive again. The second is to say, ‘Well, we have to get rid of this imbalance in competitiveness, so we need inflation in Germany.’ That seems unattractive, certainly to the Germans.

“The third is to give up on this question of restoring competitiveness quickly and accept that this is an indefinite transfer union. That requires two things: one is for people in the north to give money to people in the south; the other is for people in the south to accept the conditions imposed on them, which will limit the size of the transfer.

“The fourth is to change the membership. Now, I don’t know what the right answer is, and it will depend on their political objectives, but economics tells you that you have to have one or some combination of these.”

A very concise and accurate summary we’d say. Obviously each option can be tinkered and altered but the broad truth is all there.

However, we might go so far as to narrow the options down even further. Option one (which is currently being employed) seems unlikely to be politically or socially acceptable – countries such as Greece, Portugal and Cyprus in particular would struggle to regain competitiveness this way. It would also leave the structural flaws of the eurozone untouched, leaving it incredibly vulnerable to future crises.

Option two also seems unlikely to be sufficient, even if it were an option politically. We would say some element of it is probably necessary for the eurozone, but far from sufficient to solve the crisis. It could also create the ‘uncompetitive union’ which Germany fears most, as although internal imbalances in the eurozone may be eased the actual competitiveness of the bloc as a whole would be much worse than previously. There are also questions about how much such an approach would spillover into growth in the struggling eurozone countries - as we discussed in detail here. Again it also does not tackle the institutional flaws.

Therefore that leaves us with options three and four – something we have noted before.

Before the crisis can ever be solved the true choices facing the eurozone need to be realised. Let us hope that this weekend some of the eurozone leaders read King’s interview.

Deliberations begin as hearings draw to a close in Karlsruhe

The hearing at the German Constitutional Court into claims against the ECB's crisis policies is now over. Day one saw verbal jousting between the two men to the left (Bundesbank President Jens Weidmann and ECB Executive Board Member Jörg Asmussen) which we covered on our live blog. Day two of the hearing was a bit more cagey and less political but possibly more revealing in terms of the Court's thinking.

Constitutional Court Judge Peter Müller kicked off by reiterating the strict rules of the game:

“it is clearly defined in which china shop the elephant of monetary policy is not allowed – monetary state financing.” 

Clemens Fuest, Research Director at the Oxford University Centre for Business Taxation, shrugged his shoulders and replied:

“If OMT is ECB’s commitment to buy state bonds to a non-defined extent, than I wouldn’t know how to prevent the contact with the china shop”  

Being slightly more direct (as might be expected), Head of the Ifo Institute Hans-Werner Sinn said that the ECB engages in “regional fiscal policy” and that the Central Bank’s OMT programme is basically “a free insurance for investors when a state goes bankrupt”.

It's clear the Court remains concerned that the ECB could overstep its mandate. President of the Court Andreas Vosskuhle suggested that the current conditions attached to the OMT, the ECB’s bond-buying programme, are on a “very abstract level” but if correctly applied “could be a good middle way…of distinguishing between monetary and fiscal policy”.

A rather diplomatic construction but conditionality is a key issue here, as we’ve pointed out. The fundamental problem is that since there is no legal documentation and the OMT has never been tapped, it is very challenging for the court to judge how strictly the conditions will be applied. They could make a value judgement over whether they trust the ESM and eurozone politicians to fully implement the conditions but this could well be beyond the scope of the legal judgements the Court is allowed to make.

As Süddeutsche Zeitung's Markus Zydra points out, there is significant ambiguity around one of Asmussen's key points - that the OMT is practically limited since it can only purchase short term bonds. This is especially true given ECB President Mario Draghi's (and other's) previous remarks that there are no ex-ante limits to the OMT. Chief economists of DZ Bank Stefan Bielmeier put it nicely saying, “there is a dual rhetoric of the ECB…[they] tell everybody what they want to hear” - exactly as we noted here.

A running theme of the coverage following day two has been the signfiicant time given to those arguing against the ECB. ECB proponents reportedly told Handelsblatt “we feel like at an away game”, given the level of opposition support. The paper even goes so far as to question the neutrality of the court's referees given the line-up of known ECB critics it had called to provide evidence at the hearing (e.g. Hans-Werner Sinn, Kai Konrad, Harald Uhlig, Franz-Christoph Zeitler, Clemens Fuest).

How the Court will rule remains to be seen. It's clear they have some serious concerns about the policies but are struggling given the hypothetical nature of the case - the OMT remains undefined and unused, so any claims against it rely on second-guessing its implementation. Ultimately, it could be a question of whether they take the ECB at its word or not. Approval of policies but with some extra constraints remains the most likely outcome.

A final ruling is due for September although many involved expect a delay until after the German Federal Elections on 22 September. In the meantime, there are already those calling for a re-match in Luxembourg.

Why France can hold up EU-US free trade talks

David Cameron wants to use the gathering of G8 leaders in Northern Ireland next week to launch formal negotiations on the planned EU-US free trade agreement. But progress depends on breaking the deadlock in talks today over France's insistence that any agreement must include protections for its film and TV industries against American imports. These talks are to give the European Commission a mandate to start negotiations.

The French, though, have a pretty strong bargaining position. The EU Treaties (Art 207) set out the procedures for opening and concluding free trade agreements under the so-called Common Commercial Policy.

The Commission makes recommendations to national governments, which authorise it to open negotiations. The Commission then conducts the negotiations in consultation with a special committee appointed by ministers.

In principle, trade agreements are negotiated and concluded by qualified majority voting. However, there are a number of exceptions where unanimity (and therefore national veto) still applies, including “in the field of trade in cultural and audiovisual services, where these agreements risk prejudicing the Union's cultural and linguistic diversity.”

In a bid to break the deadlock, the European Commission and the Irish EU Presidency have proposed asking EU member states to give unanimous approval to any parts of the draft agreement affecting the audio-visual industry once the negotiations on that specific sector are concluded. However, Le Figaro quotes a source from the office of French Trade Minister Nicole Bricq as saying, “We already have a veto on the conclusion of the agreement, so [the offer] doesn’t change anything for us.”
 
In a world where trade agreements are increasingly all-encompassing affairs, ranging across the entire economy, this gives France in particular a great deal of leverage.

Have the EU Referendum Bill's chances just improved?

Labour won't be there on 5 July

We have heard today that the Labour Party have decided not to turn up and vote on 5 July on the Conservative-sponsored Private Members Bill on an EU referendum. As we have written before, the Referendum Bill faces many hurdles before it has a chance of becoming law but if Labour abstain on 5 July it does help its chances. So what are its chances now - here is a recap.

1st Reading  - 19 June - We will get the name of the Bill but not necessarily the final text. At this stage there is no vote as all that happens is the Bill is lodged before Parliament.

2nd Reading - 5 July  - 100+ Conservative MPs are needed to turn up on the Friday to secure the closure of the debate. This is followed by a vote on the Bill itself - which now, without Labour opposition, will presumably pass.

Committee Stage. A lot might depend on who chairs the Committee and whether anyone tries to bog it down but it is still possible the Bill will survive the Committee and get to report stage.

Report stage. At report stage any MP can table amendments. If the Labour Party wish to derail the Bill this could be their chance. If it passes it would then be voted on at 3rd reading.

3rd Reading. If it has survived to this stage it would be interesting to see what the Labour Party and the Liberal Democrats do next. Do they change their mind and vote against the Bill or risk it passing and heading off to the Lords unopposed? But if the plan is to vote against at 3rd reading why not vote against on 5 July on the principle of the issue? And what of Conservative MPs - will some be tempted to table their own amendments on issues such as timing and the meaning of renegotiation?

As always with matters EU it is likely to become a political football. So will the Bill get to the Lords? On balance, it is still difficult, but its chances have just improved.

Services liberalisation: David Cameron has one more reason to love Spain

We reported in today's press summary that Spain's Prime Minister Mariano Rajoy and opposition leader Alfredo Pérez Rubalcaba have agreed to adopt a common position ahead of the 27-28 June EU summit. The full document - a draft resolution due to be voted on by the Spanish parliament a couple of days before the summit - is now available online.

We found the following paragraph very interesting (the emphasis is ours). The Spanish parliament urges the government to,

"Favour progress on the completion of the internal market through the swift adoption of the pending legislative proposals under the Single Market Act I and II. Particular attention shall also be paid to the full and effective implementation of the Services Directive."

We couldn't agree more. As we stressed in a recent report, the services sector represents a huge untapped source of growth for the EU. A quick reminder of the figures we're talking about:

• Further liberalisation of services by fully implementing the existing Services Directive and implementing a new 'country of origin' principle would result in a permanent boost to EU-wide GDP of up to an extra €294 billion a year;

• If Spain, the UK and the other ten EU countries that signed a 'pro-growth letter' in February 2012 decided to press ahead among themselves and open up their services markets under the so-called 'enhanced cooperation' procedure, this would still drive EU-wide GDP up by some €148 billion a year.

¿Por qué no?

A pan-European desire to clarify rules on free movement and access to welfare?

To some, the Commission's decision, two weeks ago, to take the UK to the ECJ over its rules on EU migrants' access to welfare was further evidence of an 'isolated' UK. However, there are a whole host of other countries concerned and eager to discuss the issue.

At last week’s meeting of EU Home Affairs Ministers, it was agreed to look at the concerns raised by the UK, Austria, Germany and the Netherlands on this very issue.

But it is not simply the wealthier member states (that are the main destinations for intra-EU migration) that want this deeply sensitive debate around access to welfare to be clarified. Yesterday, Dutch Foreign Minister Frank Timmermans and his Polish counterpart Radosław Sikorski, discussed this very issue. Here is what Timmermans said on the matter:

“The Netherlands strongly believes that the free movement of people is one of the fundamental matters of the EU…We are not talking about restricting this freedom but we believe that a discussion is necessary on whether this freedom should entail full access to the social security systems of member states.” 

This is what Sikorski said during his subsequent speech at Leiden University:

“I tell you frankly, we will veto any attempt to compromise on one of these four freedoms of the single market. But this not to say that the member states should not be able to regulate their social provisions. You are a richer country then we are, so you have more generous unemployment benefits... if you have gaps in your social security system, you are free to plug them”.

Both countries (the host and sending state) have an interest in ensuring that the rules governing access to welfare are clear and transparent and not open to abuse. As we've argued, this could help to restore public confidence in free movement.

And all the more reason for the Commission to sit up and listen to national governments rather than taking them to court!

Bernd Lucke sets out his alternative for Germany and the EU

The new German anti-euro party Alternative für Deutschland’s radically different take on the eurozone compared with the rest of the German political establishment has generated a lot of interest both inside Germany and beyond. As such it was no surprise that today’s Q&A session with AfD leader Bernd Lucke (hosted by the Bruges Group in Westminster) was packed. Here are a few key points from the event:

On the formation of AfD and its prospects 

Lucke admitted that as a young Economics professor in 1999 he supported the euro because he believed it would lead to structural reforms in Southern European countries, and because he took the ‘no bailout clause’ in the Maastricht Treaty at face value. It was the breaking of this that led him to leave the CDU and eventually establish AfD.

He also said that the German political system is structured to keep out new parties – including state subsidies for established parties - with the Greens being the only successful entrant onto the scene in recent years. However he said he was encouraged by polls suggesting AfD’s potential support could be as high as 30%, and that the key would be attracting lower educated blue collar workers in particular.

On the Eurozone

Lucke said that he had reached the conclusion that the current eurozone policy was fatally “mis-conceived” and would never work because financial markets’ fears of a sovereign default could never be squared with the kind of tough conditionality necessary to ensure that member states met their obligations with regards to structural reforms and fiscal consolidation (the failure of the fiscal pact to enforce its 3% deficit limit suggests he could have a point).

Instead, he argued that the Southern member states should leave immediately in order to allow for the devaluation of their new currencies, after which the remaining member states could decide whether to maintain a currency union between themselves or to go for a full break up.

On the UK and the EU

Lucke said that despite his opposition to the euro, he was not opposed to EU integration, adding that as a German he valued its role as a peace project. He even suggested that he was not opposed to transfers between European states per se but that the current system was flawed – for example indirect transfers via the ECB’s bond buying programmes, which happen without democratic approval. However, he added that there was much to be reformed about the EU from its overbearing bureaucracy and appetite for regulation which stifle economic growth to its undemocratic practices. He added that as such he broadly supported David Cameron’s critique, and that he valued British ‘euroscepticism’ as a positive force in ensuring better decisions being reached at the EU level.

Got Milk? Writing the nanny-state into EU law

Cute babies banned from formula packaging

The European Parliament has agreed new rules that will regulate the labels and content of baby milk and foods.  Under these new rules, “pictures of infants, or other pictures or text which may idealise the use of such formula” will be banned from the packaging of baby formula – so no pictures of cute babies on the front.

In the UK, the use of babies’ pictures is already illegal for ‘infant formula’ (for those between 0-6 months), but is legal for ‘follow-on formula’ (for those between 6-12 months). The new EU rules will ban the use of pictures of infants for marketing on both types.

Why is this necessary? Well, according to the European Parliament’s view-point, mothers may not understand the value of breastfeeding, and thus need to be guided in case they are ‘discouraged’ from doing so by attractive formula packaging.

This just goes to show the extent to which EU legislation now touches on the most unexpected areas of people’s everyday lives. The recent attempt to ban re-usable olive oil containers from restaurants is another example. Thankfully, this ridiculous idea was dropped after widespread ridicule.

But the sheer volume of law and regulation emanating from the EU institutions shows why we need to strengthen the powers of national parliaments to properly scrutinise and block unwanted EU rules and, more importantly, to question whether these are things the EU should be doing at all.

Will the closure of public broadcaster set the scene for a coalition showdown in Greece?

Imagine a Number 10 spokesperson announcing during the afternoon news bulletin that the BBC has become too expensive to run and will be shut down with immediate effect. You would be excused for thinking that the Government and the Corporation have joined efforts to take you for a ride.

Well, this is exactly what happened in Greece - and it wasn't a joke. Greek government spokesman Simos Kedikoglou went on TV yesterday afternoon to say that the country's public broadcaster ERT would go off the air a few hours later, because it had become a "refuge of poor transparency and waste."

As a result, ERT's almost 3,000 employees have been temporarily laid off. The Greek government says that a revamped and slimmed-down broadcaster (NERIT SA) will be up and running by the end of August. Protests were staged outside ERT's headquarters yesterday and are continuing today, while ERT journalists are still putting programmes on air via digital frequencies and the internet.

A couple of points are worth making at this stage:

• The decision to shut down ERT is clearly linked to Greece's commitment to firing 15,000 public sector workers by the end of next year under its EU-IMF bailout deal, although it's up to the Greek government to choose where to cut. Therefore, it's probably not entirely fair to blame the Troika for this (admittedly pretty extraordinary) decision;

• The fact that the Greek government prefers shutting down ERT altogether and then opening a brand-new company, instead of trimming the existing company down, could be seen as further evidence of how difficult it is to fire public sector workers in Greece - even in cases where inefficiency and waste are evident (at least according to what the Greek government spokesman said);

• On the domestic politics front, Greek Prime Minister Antonis Samaras has decided to go ahead with the closure of ERT despite open opposition from his coalition partners - PASOK and Democratic Left. The latter now want to submit a draft bill to scrap the decision, meaning that there is a risk of a coalition split - unless someone blinks.  

As the Troika has long suggested, it is clear that Greece's bloated public sector needs to be downsized significantly. That said, it is also clear that this situation has been poorly handled, particularly given the wider political and social tensions already at play in the country. The fallout of this story might be worrying - further splits in the governing coalition and wider public backlash against an austerity programme for which there is already very little buy-in.

We will keep monitoring the situation and give further updates on Twitter @OpenEurope.

German Constitutional Court live blog: One of the most important cases in the Court's history?

The German Constitutional Court in Karlsruhe

The German Constitutional Court’s (GCC) hearings into the legality of the ECB’s actions to combat the eurozone crisis – and specifically the OMT bond buying programme – kicked off this morning. (See here for the background). In a front page leader, FAZ describes the case as one of the “most important” in the court’s history.

Public opinion in Germany is mixed, with a Forsa poll for Handelsblatt finding that 48% of Germans hope that the Court will put a stop to the OMT, while 31% believe that the complaint against the ECB is unjustified. As we noted in our flash anaylsis on the topic yesterday, the GCC can't actually stop the ECB. At worst, it could remove Germany from the ECB's bond buying programme and probably, therefore, from the eurozone itself. (A poorly phrased poll question, then, but a very telling result nonetheless).

With Schäuble, the German Finance Minister, and the ECB's positions already well known (that OMT is within the Central bank's mandate), we can safely say that the highlight of the day will come  from the opposing side, in testimony of Bundesbank President Jens Weidmann. In terms of their specific grievances, it will be the first time we will hear a detailed, public explanation of where the Bundesbank stands on this issue, while the tone of Weidmann's comments will also be interesting. Will there be any more Faust references we wonder?

Check our twitter feed for live updates from Karlsruhe throughout the day. We will also continue to update this blog as things develop.

17:45

Bundesbank President Jens Weidmann has now had his say - and again his points were very much as expected (his full statement is here but only in German for now).

• Warned that ECB OMT blurs the line between monetary and fiscal policy - this makes it more difficult to achieve price stability and spreads solvency risks amongst eurozone countries, but does so without any parliamentary or democratic approval.
• Pushed for a narrow interpretation of a central bank's primary mandate, with a complete focus on price stability.
• Suggested that the OMT does represent potential losses for taxpayers, arguing that if the ECB took on significant amounts of risky debt, it may face large a loss which it cannot absorb and may require aid from member states.
• Argued that even secondary market purchases can overturn the force of market discipline and undermine fiscal autonomy.
• Issued a warning over the interpretation of the real-risk premiums for bonds, which he suggested was very subjective and dependent on future policies.
• Accepted that the inflation outlook in the eurozone fits with price stability at the moment, but still expressed serious concern about comprising the ECB’s focus on this.

It seems to us that, of the two sides, Weidmann had the tougher case to make. Ultimately, as much of the above shows, he is forced to consider hypothetical scenarios and potential worst cases. These are undoubtedly risks that should be highlighted, but it does leave one feeling that his argument is slightly less clear cut than Asmussen’s.

Having heard the key testimony of both sides, we still expect the court to side with the ECB, but with some caveats (although how strict they will be is very much up in the air). Of course, this could still develop more tomorrow. 

16:20

Asmussen has now concluded his testimony and subsequent Q&A, and the ECB has also helpfully put a transcript on their website. Here are the key points he made:

• the OMT will have the ability to sell bonds as well as buy them, and it will not take them off the market permanently, unlike its forerunner the SMP (in fact Asmussen repeatedly highlighted the differences between the two);
• the OMT is pari passu (equal to) other creditors,
• the OMT seeks only to reduce unwarranted interest rate spikes and is not aimed at harmonising financing conditions of member states,
• the ECB would react if a country were to try to game the system by converting all its bond issues to a short maturity (of up to three years), but that in any case markets themselves would "see through and deny" such attempts,
• the only risks associated with the programme stem from countries operating "un-sound" policies, but that those states that fail to comply with the OMT's conditionality could be faced with the prospect of having to leave the eurozone.

The comments were more or less as expected. However, there are a couple of interesting points. First, the fact that the bonds purchased under the OMT will be judged at market value suggests that, if they are purchased and then decline in value, the ECB could be facing losses on its balance sheet. A tricky technical and political issue. Second, the point about 'un-sound' policies leaves us feeling slightly uneasy. Its clear that even with an ESM bailout programme, implementation may not be up-to-scratch. Meanwhile, it also highlights the clear link that would be established between ECB policies and the fiscal (and other) policy of national governments. This surely raises questions about the ECB's independence.

Asmussen also admitted that the policy did have de-facto practical limits given that it will only purchase short term debt, as reported over the weekend.

15:10

Handeslblatt reports that Philip Rösler, the German Minister for Trade and Vice Chancellor is coming under increasing pressure from his own FDP party to take a stand against the ECB, following the Handelsblatt/Forsa poll showing that almost 50% of Germans hope that Karlsruhe will stop the ECB’s OMT programme (despite this actual course of action not being possible, see blog intro above on this).

Frank Schäffler, the financial expert of the FDP parliamentary group, told Handelsblatt Online that "Working towards a market-economy is widespread among the followers of the FDP. Liberals know that prosperity cannot be printed from the ECB.”

The irony of clinging on to central bank independence, while using political pressure to change the course of the ECB is not lost on us - nor on Rösler it seems, who said: “We must not allow this course toward stability to be broken up through the the attempt to exert influence on the European Central Bank.”

13:55

These comments from ECB Executive Board member Yves Mersch seem to confirm our feelings that the ECB is trying to have it both ways over its refusal to publish the OMT documentation (see 13:30):

Mersch: "controlled uncertainty on the OMT is necessary"
— zerohedge (@zerohedge) June 11, 2013

13:40

Germany's new anti-euro party Alternative für Deutschland has just put out a press release citing Professor Joachim Starbatty - one of the original plaintiffs in the case and now one of AfD's top candidates in September's elections - warning that under the OMT, German taxpayers will be responsible for liabilities that are "no longer the responsibility of any government or parliament". The party is clearly hoping the publicity around the hearings will boost its poll ratings.

13:30

Asmussen is clearly channelling Draghi in his comments below. The ECB's continuing refusal to simply publish the legal documents relating to the OMT is at best strange and at worst downright obstructive. It does beg the question: what are they trying to hide? Maybe nothing, but at the very least it seems they are trying to have the best of both worlds. By refusing to reveal the exact terms and conditions, the ECB can try to address German concerns over the extent of the OMT (as we have seen them doing in the run up to this case) while also being able to continuously reassure markets that the scheme is in fact "unlimited".

Such a balancing act is tough to pull off and may add to confusion if it breaks down. Some transparency would be welcomed. It needs to happen at some point, who's to say it would be better revealing the legal documentation just when the OMT is being tapped, surely by definition that would be a period of crisis?

13:05

The ECB's Jörg Asmussen is up now making the point that the ECB would actually adopt a legal ordinance before any bonds were purchased:

#ECB's Asmussen: #OMT Documentation Ready For Publication When Needed. OMT Documentation Can Be Published Within Days
— Holger Zschaepitz (@Schuldensuehner) June 11, 2013

#ECB's Asmussen: #OMT Cannot Be Activated Before Publication Of Guidelines
— Holger Zschaepitz (@Schuldensuehner) June 11, 2013

11:15

German Finance Minister Wolfgang Schäuble has spoken, and as expected, he backed the ECB:

German FinMin Schäuble: #ECB Independence Gives It Wide Scope For Decision-Making
— Holger Zschaepitz (@Schuldensuehner) June 11, 2013

Schäuble tells court government sees no evidence that the ECB has overstepped the bounds of its mandate. #karlsruhe
— Michael Steen (@michaelsteen) June 11, 2013

German finance minister Schaeuble argues the court shouldn't even be considering the OMT case, as they've no jurisdiction there. #karlsruhe
— Jeff Black (@Jeffrey_Black) June 11, 2013

Foreign Affairs Select Committee welcomes "Double Majority" voting at the EBA as concrete example of UK influence in Europe

Double majority lock voting at the EBA was a
significant and valuable use of UK influence

In a report published today the influential cross-party House of Commons Foreign Select Affairs Committee commended David Cameron "for launching an ambitious agenda for EU reform". The full report, including evidence presented by Open Europe, also makes a number of sensible observations such as:

"the point of a Member State having influence in the EU is to achieve EU policy outcomes that realise its interests and objectives."

We agree - too often the EU is described by politicians in terms of "influence" and being "at the table" something that looks (and often is) of more benefit to politicians than those they serve - something we pointed out in our evidence:

"Open Europe contended that 'influence’ is a term too often used in a rather lazy and undefined way”. Open Europe argued that the debate on UK influence in the EU should focus on identifying the concrete cases where the UK should exercise influence and had or had not done so."

One case made of very tough concrete we brought to the MPs attention is the tricky issue of EU voting weights:

"Open Europe reminded us that from 2014 the Eurozone states will command sufficient weighted votes in the Council of the EU to muster the qualified majority required to take Single Market decisions alone."

For this reason we have argued consistently that the UK needs a new safeguard to protect itself from Eurozone caucusing. The test case for this was the adoption of "Double majority" voting in the EBA - originally proposed by Open Europe.

The achievement of this new "double majority" was therefore a genuine success for UK diplomacy and has a significance well beyond that of the EBA. We are therefore glad the Committee picked up on it. As they conclude:

"The agreement on the Single Supervisory Mechanism (SSM) which was struck among EU Finance Ministers in December 2012 was significant on several grounds. It shows what the UK can achieve, in terms of protecting its position in the Single Market, through close and constructive engagement and innovative policy solutions."

"We note that the deal went some way towards entrenching the kind of safeguard against discrimination in the Single Market that the Government failed to secure in the December 2011 negotiations on the ‘fiscal compact’. We also note that the arrangements that were agreed to protect non-Eurozone states—on this occasion, for ‘double majority’ voting in the European Banking Authority—responded directly to a concrete proposal (in this case, one which gave rise directly to a risk of caucusing)."

They could not have put it better.

Great speeches, Prime Minister, but now make EU reform happen

David Cameron delivered a new speech on Europe today (it was not exclusively Europe but much of the pre-speech briefing focussed on this aspect). It was not quite as startling as the last one. The policy of reform, renegotiation and a referendum remains the same – and this clearly is an attempt to show that he can lead on Europe, rather than being pushed around by his backbenchers. However, it does raise important and interesting questions.

This is the part relevant to the UK's EU membership:

Membership of these organisations is not national vanity - it is in our national interest. The fact is that it is in international institutions that many of the rules of the game are set on trade, tax and regulation. When a country like ours is affected profoundly by those rules, I want us to have a say on them. That doesn't mean supinely going with the flow of multilateral opinion - the lowest common denominator approach to democracy, as we've seen in the past.

...our policy on the EU is clear. In the modern world, you need to work every advantage you’ve got. A single market of 500 million people on our doorstep, that worked properly, that was competitive, that was unbureaucratic and dynamic – that would be a huge advantage in this world. The EU is a way off that goal yet. But I say – let’s try and realise that vision for all our sakes.

That is why we are seeking to shape a new settlement in Europe; to get a better deal for Britain in it and to equip Europe as a whole to compete in the world. And when we have negotiated that new settlement, as I said in my Bloomberg speech, we will give the British people a referendum with a very simple in or out choice: To stay in the EU on these new terms; or come out altogether. It will be an in-out referendum.

Firstly, note the subtle change in tense from the beginning: "it is in our national interest" to be in the EU to saying a "single market... that worked properly... would be a huge advantage in this world". Which is right.

We have argued that there are compelling reasons for the UK to seek to remain within a reformed EU, such as full access to the Single Market and voting rights on the terms of trade within the Single Market. However, unless the drift towards greater political and economic integration in the eurozone can be accompanied by a looser and more flexible relationship for countries such as the UK – whilst the EU as a whole needs to become more competitive and outward-looking – the British electorate will increasingly look to the exit.

Now that Cameron has promised that the electorate that it will decide, as we’ve argued before, he really does need to crack on with the reform work. We know that Downing Street has invested a lot of time touring Europe to sell Cameron’s vision of reform – this should be acknowledged. Again, this is right thinking. However, it still remains unclear to most national capitals what, exactly, Cameron wants in Europe. William Hague’s Königswinter speech, in which he called for a "red” card for national parliaments, was a major step in the right direction, and one which is drawing sympathy. This needs now needs to be pushed around national capitals. Likewise, the under-sold reforms to the EU’s fisheries policy are good news, as was the EU budget cut.

However, there are many more things the UK government could do – even within the Coalition agreement. For all Cameron’s talk of a reformed and reinvigorated single market, we still haven’t seen the political investment needed to really press ahead with more liberalisation in services. We have outlined a strategy for how to break the deadlock in this area.

Polls show that Cameron’s EU policy enjoys public support but is suffering from a 'credibility deficit'. There’s only one way to close that gap: get on with it.

So by all means give speeches, but now is the time for action.

ECB gears up for German Constitutional Court scrutiny

This is set to be an important week for the ECB and therefore the eurozone.

As we noted in a flash analysis this morning, the German Constitutional Court (GCC) will hold a hearing on the 11 and 12 June focusing on whether the ECB’s policies have infringed either its own or the Bundesbank’s mandate, and if these have created fiscal risks without democratic approval.

The focus of the case will be the OMT, the ECB’s flagship bond buying programme, the announcement of which is widely seen to have played an important role in easing the eurozone crisis.

Why is the case important?

1. Highlights the tensions at the heart at the eurozone: the case is a microcosm of the wider debate as to whether Germany is willing and able (in terms of legal constraints) to do what is seen as necessary to save the eurozone. It also puts pay to the idea that once the German government has a fresh mandate following September’s election, there will be a swift move towards more eurozone integration – these legal questions will remain and will continue to crop up.
2. Pits the ECB against the Bundesbank: linked to the point above but this is also a very awkward division within the eurozone architecture, as personified by the confrontation of the ECB's Jörg Asmussen on one hand and Bundesbank President Jens Weidmann on the other. The Bundesbank will likely have to keep implementing ECB policies despite it now being well known that it fundamentally disagrees with them. 
3. Further constraints on crisis policies: in the end, the GCC will likely rule in favour of the ECB. However, as with previous rulings, it could set out red lines and restrictions to protect the German Constitution – this could throw a new element of risk into the crisis.
4. Increased transparency on ECB actions: this is something which we, and others, have been calling for for some time. One benefit of the case is that it has increased scrutiny on the OMT with the ECB now admitting it may be forced to published the legal documents which will layout the practical functioning of the OMT. This could generally be beneficial, although if markets do not like what they hear then it could actually contribute to market jitters.

With this final point in mind, there was an interesting story in FAZ over the weekend, which suggested that the OMT is not in fact as “unlimited” as had first been thought. Indeed, FAZ claimed that it is limited to €524bn, since the ECB will only be allowed to purchase debt with maturity between one and three years.

This constraint was always known, as we noted when the programme was announced. The cap essentially arises because this is the total amount of debt from Italy, Spain, Ireland and Portugal (i.e. those countries most likely to access OMT). The cap doesn’t seem to be hard and fast then, since countries could simply issue more short term debt. However, this does come with its own risks (another point we raised at the time), and the ECB has suggested it would look to prevent such an approach, although it hasn't said how.

Handelsblatt goes even further, suggesting that there is an internal rule which limits the ownership of bonds by the ECB to 50% of the given market, suggesting this means the cap is even lower at €260bn.

But even if the cap isn't quite what it’s cracked up to be, it’s very interesting that the ECB itself is selling it to the GCC as a limit. Clearly, there is some concern about the outcome on its part.

Despite a definitive ruling not expected until the end of the summer at the earliest, and more likely after the September elections, there could well be plenty of interesting revelations and disputes aired over the next few days, which we will of course be covering in detail.

Open Europe publishes Commission regulation which seeks to move Libor oversight to Paris

As the FTT threat wanes (a sizeable victory for the UK we might add) another battle threatens to flare up in the wider debate about financial regulation within the EU – albeit a smaller but still concerning one.

As the FT reported yesterday, there is a regulation in the pipeline in which the Commission proposes significantly stepping up the regulation of benchmark indexes and rates used in financial markets and contracts. In particular though, it proposes moving the supervision of key benchmarks, such as Libor, to the European Securities and Markets Authority (ESMA).

As we did consistently throughout the FTT debate, we have got our hand on, and have exclusively published these latest plans – see here.

What are the key points of the plans?

• The main focus of the regulation is to move the oversight of thousands of benchmarks used in trillions of dollars’ worth of financial contracts and instruments away from self-regulation (or from being unregulated) to being under direct supervision.
• However, importantly, the proposal sees the most important benchmarks, such as Libor and Euribor, being supervised by ESMA since, in the Commission’s view, fractured oversight harms the single market.
• The plan also looks to step up the legal liability involved in the benchmarks (making any manipulation a criminal offence across the board) but also allowing supervisors more control to compel participation in certain benchmarks and allow for consistent oversight.

Open Europe's take on the plans

• First, let’s make it clear that Libor has patently failed and needs to be reworked. Everyone accepts that. However, the UK is currently in the midst of doing just this, following the recommendations of the Wheatley Review earlier this year (which happen to line up closely with those of IOSCO the international body looking into this issue).

• This makes the proposal particularly badly timed. It is ultimately based on an outdated view of Libor which is already under review and beign changed. In fact, if you look at the substance of the UK review and the international recommendations (upon which the Commission based its proposals) they line up fairly closely with the EU plans other than where the control rests.

• The Commission justification for needing an EU regulation on this issue also seems a bit of a stretch to us. Sure, some of these benchmarks are used in the rest of Europe but they are also used all over the world. However, all those involved in Libor will have a presence in London. As is well known, the large majority of European trades which involve many of these benchmarks will also take place in London. Why the oversight should not be focused there is still not clear.

• There is also rightly a significant concern over the rigidity of the Commission proposal. Firstly, the plan to base all submissions off actual transactions seems unrealistic. This issue came up in the initial debate about reworking Libor – ultimately, there are not nearly enough interbank transactions to actually produce the rates for the ten currencies and the 15 different maturities which Libor currently covers.

• Linked to the above point is the concern about the ability to force banks to comply and take on significant legal and regulatory responsibility for their submissions. Ultimately this is a large liability to take on off the back of what is still an estimate.

• This is a very technical subject. It is almost impossible to lay down all the rules and structures for how various benchmarks should be judged. Surely, the approach varies wildly depending on the benchmark and may even change depending on the wider economic and financial circumstance. This raises two concerns: the rigid framework presented may leave substantial grey areas but more importantly a lot of power for setting the technical details will be left up to the Commission, after the political negotiations have finished. As we saw with the bankers bonus’ regulation this can has a very large impact on the scope and practical implementation of the rules.

• It sets a worrying precedent, especially as the ECB is set to take over as the single eurozone supervisor and the potential for eurozone caucusing on this issue increases. As we saw with the regulation over Credit Rating Agencies (CRAs) over the last few years this can be dangerous. The initial drafts of the CRA regulations are quite similar to this one, however, worryingly it has extended and escalated over time. The UK government should look to tackle this issue head on to avoid a similar scenario.

Overall then, although Libor needs to be reworked and better supervised, it’s not clear why this needs to be done at the EU level, particularly when the UK is in the middle of its own reworking. The rigidity of the proposal also raises questions about its practical implementation. At the very most, there could be an EU directive on this issue setting out a broad approach with room for national flexibility. Ideally though, this should be left to individual states where the rules can be drawn by those who are most impacted by them and closer to the stakeholders. This should of course be combined with on-going global cooperation as is already underway.

Thankfully, it seems we are not the only ones with these concerns and some watering down of these rules already looks likely.

Hey Berlin, this is what an EU without Britain would look like

Open Europe's Director Mats Persson writes on his Telegraph blog,

One of the biggest questions in today’s European politics is what price Germany is willing to pay to keep the UK in the EU. One school of thought – which strangely sees an over-representation of retired Europhiles and hardcore Eurosceptics – claims virtually no price at all. Berlin will choose Paris – and Warsaw – any day of the week. David Cameron might as well throw in the towel now.

Well, the past week may have given Berlin a taste of what an EU without Britain could look like. And it ain’t pretty.

The looming EU-China trade war has again pitted Europe’s north against its south, with Beijing pursuing its patented ‘divide and conquer’ strategy. The dispute was triggered by Brussels’ decision to impose anti-dumping tariffs on heavily subsidised solar panels from China. Beijing’s retaliation was swift: you Europeans spend an awful lot of cash subsidising wine. Is that really legal under World Trade Organisation rules?

It hasn’t been lost on anyone that the biggest wine producers in Europe also are the strongest proponents of the solar panel tariffs: France, Italy and Spain. Given the symbolic importance of wine in these countries, this is no longer only business: it’s personal.

A trade war with China would hurt everyone but, wine exports notwithstanding, it would be particularly bad for Germany. With demand in the eurozone drying up, the boost in German exports is largely due to a rise in its share of the Chinese market. A disruption in these export flows now, when the European recovery is balancing on a knife’s edge, would be a disaster for Germany.

It’s therefore not surprising that Berlin has gone to town over the anti-dumping tariffs, and it has been backed by the UK and other liberal countries.

However, since the EU has so-called “exclusive” competence in trade policy, the European Commission negotiates on behalf of all EU member states and Germany is hostage to majority decisions amongst EU ministers.

The way EU trade policy is decided is complex. A final decision on whether to keep the tariffs in place will be taken at some point towards the end of the year, though it could well be solved before then. But clearly, without the additional pressure and weight of the UK, Germany would struggle to get its way on this one. Any short-team decision to remove the tariffs requires a so-called Qualified Majority. Germany would find it extremely difficult to reach the necessary voting share absent the UK (and may even struggle with it, though the final decision is taken by a simple majority).

And this is where Brexit meets the German economy. At the moment, under a Qualified Majority Vote the Northern, liberal bloc has a “blocking minority” in the EU’s Council of Ministers, which means it can stop the many attempted protectionist measures originating in the Mediterranean. The southern group, too, has a blocking minority – meaning the two blocs balance each other. However, should the UK leave, the Mediterranean block would substantially strengthen its collective voting weight, whilst the German-led North would lose its blocking minority altogether. The field would be wide open for a barrage of anti-dumping tariffs and tit-for-tat trade wars (think “Buy European”) with China and other crucial destinations for German products.

There are several other reasons why Berlin fears a UK exit more than it lets on – prospect of paying even more to the EU, extra costs to UK-bound exports, losing a financial gateway to global markets, geopolitics and more. But as Germany increasingly goes global, it’s the fear that a more protectionist EU could prevent it from doing business across the world which really hits home.

Berlusconi wants to say 'basta' to EU diktats

Silvio Berlusconi's interviews never go unnoticed. Yesterday evening, he told Italian TV channel T9 that:

"We now have a strong government…also vis-à-vis Europe. We need this government to go to Brussels and say ‘I’ll do it this way’. We can no longer accept certain diktats. It’s for us to decide what needs to be done to put our economy back on its feet." 

Our regular readers know this is not the first time Berlusconi uses this type of rhetoric (see here and here for similar remarks). But his words have a much greater significance now. The electoral campaign is over, and Berlusconi's party holds a number of key ministerial posts in the new Italian government - on which he can pull the plug whenever he likes.

As we noted before, Berlusconi's blackmailing power could lead to Italy taking a tougher anti-austerity stance in Brussels - and this is exactly what Il Cavaliere is trying to achieve. Pressure is now on Italian Prime Minister Enrico Letta, who has so far been a lot milder in his demands for an easing of austerity and has consistently stressed that Italy will stick to its EU commitments.

Letta can't ignore Berlusconi's requests, or the survival of his 'grand coalition' will be at risk. But he will also have to make these requests sound acceptable to German Chancellor Angela Merkel - who faces a general election in three months' time. Not the easiest of tasks.

More of the same expected from the ECB despite eurozone economic malaise

The ECB holds its monthly meeting tomorrow. Below we look at the main topics of discussion, with the ECB weighing some important decisions.

Could the ECB cut its main interest rate again?

• Possibly. It is certainly considering it. As with last month, growth and inflation have remained subdued, providing further incentive and scope for the ECB to cut rates.
• There has not been a significant downturn on either front however, meaning many do not expect further action.

The ECB is considering a negative deposit rate
Most reports suggest the ECB Governing Council is split on this issue. At the least this means it is unlikely to push ahead with it. We also believe the problems and complications outweigh the benefits. There has been much written about this but below we summarise the key points.

Logic: banks are now charged for holding large excess reserves (deposits) with the ECB, this will hopefully encourage them to make loans on the interbank market and make more loans to the real economy rather than holding the money at the ECB.

In favour:

• Banks and investors look for higher returns and begin lending cross borders again. This aids financial integration and could help tackle other issues such as the large Target 2 imbalances.
• Increases the amount of times money is circulated through the economy (the velocity of money) as lenders try to avoid getting stuck with excess cash. This could in theory help boost inflation and growth.

Against:

• Contrary to prevailing logic it could actually cause a drop in liquidity. As excess reserves become more expensive banks begin repaying loans they have taken from the ECB. All the while they are deleveraging (may even speed it up), causing less money to flow to the real economy.
• Rates could actually rise for a number of reasons. Larger number of weaker banks forced onto the interbank market. Banks may simply look to pass on increased costs to consumers.
• If banks do not pass on costs or deal with them, then profits will be hit – in many cases they are already worryingly low.
• Could increase the flood of money to safe assets, particularly from the core eurozone countries. The return on these would become even more negative, increasing their costliness and driving divergence with the rest of the eurozone.
• The large money market fund industry, which plays an important role for liquidity in bond markets, could struggle to stay afloat since it relies on small positive returns on safe short terms assets (see above points).
• The euro is likely to weaken, this combined with the other effects could cause a large outflow of cash to other parts of the world, exacerbating problems.

What about all the talk of boosting lending to small businesses?
This focuses around the creation of a new market for securitised loans to small businesses. The logic being: banks make these loans, package them together into securities and then sell them on to other banks and investors. There is a clear demand for quality assets which provide a decent return meaning there could be demand for such securities.

However, the ECB has backed away from grand plans on this issue. As we pointed out previously it was always very hesitant about purchasing such securities itself, with the Bundesbank in particular opposed to such action.

More of the same seems likely
With things ticking over the ECB is likely to hold off on any further drastic action at its meeting tomorrow. It will continue to emphasise that monetary policy will remain loose for some time (the concept of forward guidance which it began to adopt last month to some extent). It may also put more flesh on the bones of schemes to work with the European Investment Bank (EIB) to boost lending to small businesses. Some easing of the collateral rules as we predicted last month is also a definite possibility.

As we’ve said before, the ECB continues to look constrained. It does of course have a few more tools, however, they are in many cases quite extreme and have potential side effects. These are best suited to very extreme scenarios (euro break-up) rather than the wider malaise and long term endemic crisis which the eurozone now faces, particularly given that often (as we are now seeing with banking union) any ECB action sparks complacency and inaction on the part of politicians.