Another blow in the bank bonus debate - but there's something far more fundamental at work here

Yesterday saw the opening salvo of what is sure to become a heated debate over the new ‘technical standards’ for the EU’s banker bonus rules.

Why is this so important? Well, these rules will essentially determine how far reaching the EU's already controversial bankers' bonus cap will be. But this decision also encapsulates a range of other issues that will have a defining impact in the way Europe is governed in future - and whether there's a future for the UK in there somewhere.

With that in mind, the first draft produced yesterday to launch a period of public consultation on the standards would have been particularly worrying. The key points are:

Standard quantitative criteria: related to the level of variable or total gross remuneration in absolute or in relative terms. In this respect, staff should be identified as material risk takers if:

 (i) their total remuneration exceeds, in absolute terms,  €500,000 per year, or
 (ii) they are included in the 0.3 % of staff with the highest remuneration in the institution, or
 (iii) their remuneration bracket is equal or greater than the lowest total remuneration of senior management and other risk takers, or
 (iv) their variable remuneration exceeds €75,000 and 75% of the fixed component of remuneration.

As the numerous press reports today have highlighted, these are far more wide ranging than many expected and are likely to further raise concerns that these rules will have a substantial negative impact on the City of London (and therefore the UK economy). (For background on these concerns see here and here). There are several different things going on here:

Are the EU agencies already exceeding their mandate? As we flagged up at the time of their creation, there's a substantial risk of mission creep under the EU's three supervisory agencies - EBA, ESMA, EIOPA - due to the fluid nature of these bodies. Remember, under the ECJ court case which allowed these agencies to be established under the EU single market (via QMV and co-decision), they should be blocked from having any type of decision-making powers. But EBA's standards on remuneration comes worryingly close to legislation.

Politicisation of ‘technical standards’: Related to this, and as we also flagged up at the time, technical standards have a worrying tendency to become politicised - which clearly is the case here. This type of stuff should be decided through political negotiations and defined within the regulation. Any necessary technical background and info should be provided for and incorporated, even is this means delaying the legislation slightly.

Need for non-eurozone safeguards ASAP: Though this isn't strictly a eurozone vs non-eurozone issue, it does illustrate just how vulnerable the UK and other outs could be to eurozone caucusing in banking / financial rule-making. This is also exactly why the UK and other non-eurozone countries need to ensure that the agreement in principle for double majority at the European Banking Authority - that Open Europe first floated - are held up and pushed through.

Trade-off between "single rulebook" and control: The UK says it likes the EBA since it contributes to a single rulebook for the single market, and can, for example, contribute to stamping out protectionist implementation of banking rules in Europe. This is all true. However, it does, of course, assume that the UK itself is writing the single rulebook, which may or may not be the case.

Democratic accountability: As the Times noted today, with central banks such as the Bank of England (BoE) and the ECB taking over financial supervision they must become more transparent and accountable. In this case it is unclear what role the BoE played in drafting the rules or whether they raised the concerns pushed by the government and firms in the UK.

What next?

Again, this is only a first draft. The public consultation is open until August, after which the EBA will review the evidence and provide a new draft - so a lot of the issues we highlight below should be considered with this in mind. There will then be a vote in the EBA with the final standards needing to be submitted to the Commission (which will approve or reject them) in March. One final interesting point here is that any vote in the EBA could come close to coinciding with the introduction of any double majority rules, although there are a lot of hurdles to overcome before then.

Expect a summer of furious lobbying and behind the scenes discussions as the UK and others make a final push to water down these proposals.

The UK manages to water down the EU's north sea power grab - to Scotland's benefit

MEPs yesterday voted on a new safety regime for offshore oil and gas platforms. And what do you know, it appears that the UK has managed to come up with an acceptable solution.

Fears that the Commission's original plan to push its plans via a regulation (which have direct effect) have not materialised and it is now to be done via a directive, giving states some leeway, and through careful negotiation the final outcome is similar to the existing UK rules.

This is interesting on a number levels. Firstly it is a good example of the UK successfully pushing its case in the EU. It is also a good example of how the UK can use its weight to influence MEPs and the Council of Ministers - and for the benefit of an industry based primarily in Scotland.

One interesting question is whether an independent Scotland within the EU would have the same potential to succeed (This is of course if they were in the EU at all.)

Why not shrink the European Commission?

The online edition of German weekly Der Spiegel reports on "secret" plans by EU heads of state and government to stick to the 'one country, one EU Commissioner' principle, despite the number of Commissioners being set to rise to 28 following Croatia's entry in July.

Under the Lisbon Treaty, from November 2014, the number of Commissioners is supposed to correspond to two-thirds of member states, but national governments can agree to keep things as they are by unanimous decision. Der Spiegel estimates that keeping 28 Commissioners instead of 19 would come at an extra cost to European taxpayers of at least €13.5 million a year. So why, the article asks, are Germany, France and the UK keen to keep one Commissioner per country?

A couple of points need to be made here.

• The plans are hardly a secret. Going back to the days of the second Irish referendum on the Lisbon Treaty, Ireland was given reassurances that the 'one country, one EU Commissioner' principle would stay (see the conclusions of the June 2009 European Council summit). Also, a European Council decision on the subject was drafted last October - and only needs to be rubber-stamped by EU leaders (see here).

• In the UK, Parliament has already cleared the draft decision for approval via the European Union (Approvals) Act 2013.

That being said it is increasingly hard to defend the growing size of the EU Commission, not least because it gets increasingly difficult to find a credible portfolio for everyone. To accommodate for Croatia's entry, for instance, the Health and Consumer Protection portfolio will be split into two separate posts.

The big question is, would it be so bad if the number of Commissioners was reduced and the proliferation of Commission DGs slim-lined into more rational departments?

True, smaller memebr states may take offence (larger ones like the UK would virtually be guaranteed a Commissioner). However, member states without a Commissioner for one rotation period could be given deputy Commissioners instead. Surely, there would be more influence to be had as Deputy Commissioner for Internal Market than as Commissioner for Education, Culture, Multilingualism and Youth?

Nevertheless, EU leaders look set to rubber-stamp the 'one country, one Commissioner' decision - so we'll continue to have 28 EU Commissioners after 2014. At the very least, if we are going to have an extra Commissioner, the European Commission should be obliged to find savings so net spending does not increase. Our report on reforming the EU budget from last June included some suggestions. 

EEA plus: a model for the future of the UK in Europe?

For all the noise about Europe in the UK, British sceptics (with some exceptions) aren't necessarily great at thinking outside the box. 

We have previously looked at the existing models used by countries that have decided against/been refused EU membership (i.e. Norway's EEA membership, Switzerland's Free Trade Agreements, Turkey's customs union with the EU, or simply the WTO) and concluded that they would all have drawbacks for a country and economy as large and diverse as the UK. In particular, the Norwegian model is pretty much a non-starter.

However, there is another hypothetical model, which we will set out in a forthcoming briefing, that could be more attractive if it could be secured: let's call it 'EEA plus'.

Now, we don't necessarily advocate this particular option and this is only a blogpost, but intellectually and politically, it's far more attractive than anything we've seen so far in terms of a fundamental replacement for the current EU structure. 

Over the last decade, several figures, including Jacques Delors, former EU Commission President, and Valery Giscard d’Estaing, former French President and author of the EU Constitution, have suggested the UK be given ‘associate membership’ or ‘special status’. Neither concepts have been fully fleshed out, but Giscard d’Estaing suggested that a ‘special status’ could allow the UK to opt-out of future EU policies, which could allow it to continue to vote on policies it took part in but not on those it didn’t. Lord Owen has made a similar argument - which he will expand on in a speech today.

From where we sit, there is one absolutely vital element that has to be added if this is going to work for the UK: voting rights. The great weakness of the EEA model at the moment is that a country like Norway, as we have noted repeatedly, is out of the EU but run by the EU. It just wouldn't work for the UK (which is home to 36% of the EU's wholesale finance market, for example).

So what 'EEA plus' would involve is single market access but with votes on all laws which are EEA relevant. For EU geeks, it would be a bit like EEA-EU co-decision over single market laws. There are several ways in which this could work. For example, an "EEA council" already exists with members from both the EU and EEA states. This could be expanded to be the effective decision-making body for the EU as a whole in the fields that apply to both constituencies. Alternatively, a majority could be needed in both the EU Council of Ministers and a comparable EEA body for it to become law in both. A range of other issues, such as an arbitrage mechanism and ECJ jurisdiction, would have to be thought through. Also, it would have to be designed so that only genuine single market measures made it into the agreement - not the add-ons such as employment laws (which Norway has to accept) - whilst the UK may wish to stay inside the EU customs union (which Norway and Switzerland are not part of). The UK may also want to be part of other areas, such as crime and police cooperation (perhaps on a bilateral opt-in basis) and there would also need to be consideration about the merits of retaining its veto over EU foreign policy for example.

But, crucially, such an arrangement would get around the massive drawbacks inherent in the Norwegian model. Another great advantage of this model is that it could provide an institutional wrapping for all those countries that for one reason or another cannot be full EU members, and certainly not eurozone members: the UK, Norway, Switzerland and maybe even Turkey. It would be a new mode of European membership - and, if the UK can get its act together, very much the "economic growth" tier.

If you think this is far-fetched, you might be right, but it's actually not a new idea. In 1989, ahead of the negotiations that would establish the EEA agreement, Delors mooted a “more structured partnership with common decision-making and administrative institutions”, which would have potentially given those countries market access and decision making powers, rather than the limited right of refusal that EEA countries currently have.

In a speech in 1989, discussing the potential approach to those countries who had remained in the European Free Trade Association (EFTA), Delors said:

“There are two options:

(i) we can stick to our present relations, essentially bilateral, with the ultimate aim of creating a free trade area encompassing the Community and EFTA;

(ii) or, alternatively, we can look for a new, more structured partnership with common decision-making and administrative institutions to make our activities more effective and to highlight the political dimension of our cooperation in the economic, social, financial and cultural spheres.

It would be premature to go into the details of this institutional framework. I have my own ideas, but they need to be discussed by the new Commission and then informally, without obligation, with the countries concerned. It should be noted however that the options would change if EFTA were to strengthen its own structures. In that case the framework for cooperation would rest on the two pillars of our organizations. If it did not, we would simply have a system based on Community rules, which could be extended — in specific areas — to interested EFTA countries and then perhaps, at some date in the future, to other European nations.

But if we leave the institutional aspect of such a venture aside for a moment and focus on the substance of this broader-based cooperation, several delicate questions arise. It becomes clear in fact that our EFTA friends are basically attracted, in varying degrees, by the prospect of enjoying the benefits of a frontier-free market. But we all know that the single market forms a whole with its advantages and disadvantages, its possibilities and limitations. Can our EFTA friends be allowed to pick and choose? I have some misgivings here.”

This option could probably qualify as both "in" and "out". For one, it would be very similar to the Single Market plus deal that Boris Johnson has argued for in the past and, could be defined as staying in the EU, although on a radically different basis.

A final sobering thought: the final result of the EEA talks only granted EEA states ‘decision-shaping’ powers through representation on non-legislative committees and consultation with the EU Commission and a right of refusal that is relatively weak becuase it can result in loss of market access – giving an indication that this will be a challenge to achieve.

The UK electorate is in the market for something more than the false choice of status quo or exit

When it comes to the question of whether the UK ought to stay in the EU there are two key considerations. Is continued membership the best solution from an economic perspective (trade, regulation etc) and also is it democratically sustainable? (Others will also cite 'influence' and geopolitical clout).

Leaving aside the first consideration for now, the second one has long generated a heated debate, not least in the comment section of our blog, with some regular readers pointing out to us that a majority of the UK public wants to leave the EU. End of story.

In his Europe speech, David Cameron warned that support for the EU was “wafer-thin” – which as we highlighted at the time was a long-term trend (albeit exacerbated by the crisis).

Recent polls have shown an ever larger margin in favour of exit, with a widely cited ComRes poll over the weekend showing that 46% would vote to leave, 24% would vote to stay in, with 30% undecided.

However, there is, of course, an important sub-story here. While this and similar polls have been interpreted by some as a mandate for withdrawal, when a supplementary question about restoring “some EU powers” to the UK is posed, the proportions change quite dramatically with 43% (including 48% of Conservative and 20% of UKIP voters) voting to stay in, 24% voting to leave regardless, and 34% undecided. These figures are consistent with the results of similar questions asked in a number of opinion polls in recent times.

In fact, restricting the choice in the EU debate to only In/Out is rather odd. How often does that happen in other areas of public policy? Would a choice between a 100%, all encompassing welfare state or no welfare state at all, for example, be a fair choice put to the British public? Unlikely, as most of the public wants something in between.

That we consistently see such a large swing in opinion from 'Out' under a straight In/Out scenario to 'In' under renegotiated terms shows that one of the clearest trends in UK public opinion is that the UK public wants to see new EU membership terms first, and only then withdrawal if that fails.

As such, for those who cite the issue of democratic legitimacy as their prime motivation, whilst they most certainly have a point, there is no reason not to at least give Cameron a good shot at his strategy of re-negotiation followed by a referendum.

The democratic question is also frequently cited by those who demand an immediate referendum, including the MPs who voted in favour of the amendment to the Queen’s Speech last week. However, buried in the poll data was an interesting finding that ought to provide some food for thought – 20% of voters (including 52% of Conservative voters) said they had more sympathy with David Cameron while 18% sided with backbench MPs. Meanwhile 48% said they did not have more sympathy for either side.

If there was an overwhelming support for an immediate UK exit - as opposed to substantially reducing the EU's powers in Britain - one would have suspected far greater support for the handful Tory backbenchers who are pushing for an early referendum bill. This isn't to say that there is a major trust issue when it comes to Europe, and that some Tory backbenchers didn't make valid points last week, but merely that the public, again, is basically quite content with the basic idea of the UK negotiating new membership terms followed by a public vote.

At the same time though, politicians and officials who think they can fudge this process or procrastinate over addressing the EU's involvement in too many areas of national life ought to be very careful. The electorate's desire to staying the EU is clearly predicated on substantial reforms taking place.

Howarth: It's Crunch Time for Britain and the EU

Open Europe's Christopher Howarth wrote the following article for Ireland's leading business paper the Sunday Business Post

With MPs in the UK passionately discussing holding a referendum on the UK’s membership of the EU you could be forgiven for thinking that the UK/EU relations have just taken a decisive turn for the worse. That should be a sobering thought.

However, in truth these issues have been a long time in gestation. Ever since the UK decided not to join the euro divergence between the UK and the EU became inevitable. Unease at the direction of European and eurozone integration is felt most acutely by Conservative MPs but poses questions for all UK parties. How can the UK find a role for itself in an EU increasingly dominated by the politics of the eurozone? How can a state reliant on services exports align its interests with an EU built around a single market in goods? How can the UK’s interests as a financial centre be reconciled with financial regulation set with other interests in mind? And above all, how can MPs in Westminster address the serious democratic deficit built up in the UK’s relationship with the EU over the past decades?

All these issues are beginning to find their way into the mainstream of UK political debate. In Ireland a series of EU referendums provided an avenue to openly discuss the EU. In the UK we have not had the same level of public debate. Instead of debate we saw the Lisbon Treaty, like those before it, rolled into law at the behest of Government whips. These European chickens are now coming back to roost.

When the Lisbon Treaty came into force the then shadow foreign Secretary William Hague said cryptically that “we will not let matters rest there”. King Lear would perhaps have added “I will do such things. What they are, yet I know not: but they shall be the terrors of the earth” but the effect on EU Governments would have been the same. Demanding treaty change, except of course for the centralising type, was unthinkable.

Now after three years in power we are a little clearer as to what terrors the Conservatives had in mind. David Cameron has said he wishes to attempt to reform the EU, renegotiate the UK’s membership terms and then hold a referendum on the UK’s membership after the next election but no later than 2017.

Despite setting out this plan frustration among Conservative MPs has continued to build. In an attempt to defuse weeks of pressure Cameron has now agreed to back and vote for a Bill to put the 2017 referendum into law. Why legislate now? You might be forgiven for thinking Cameron’s MPs do not trust him. Some don’t. But, what concerns them most is that the electorate will not trust them to deliver a referendum after the 2015 election. That matters with UKIP gaining 26% of the vote in the recent local elections.

The desire for a referendum is real but a referendum only allows for a yes/no answer. There are those in the UK, in both the ‘pro’ and ‘anti’ EU camps who want this and dismiss the possibility of reform. Some pro-EU integrationists believe that the status quo does not need to be changed and a referendum will (if it cannot be avoided) will deliver an ‘in’ vote without any substantial changes. This is referred to as the Harold Wilson gambit, after his token 1975 renegotiation. Those in the ‘out’ camp also hope that reform is impossible believing EU intransigence will convince people to leave. Like the Baptists and bootleggers in prohibition US, both sides have a common interest in reform failing.

However, public opinion in the UK is not yet that polarised. The majority of business and public opinion does not wish to leave the European Union but is also not happy with the status quo. Instead they wish to see reform.

The task David Cameron has set himself is achieving new terms that the majority of the UK public would be happy to endorse. This is a tough task, but Cameron believes that if pushed, states such as Germany who value the UK’s advocacy of free trade and liberal economics would back reasonable reforms. So the million euro question is what could a durable EU-UK settlement look like?

First, the power of national parliaments over EU decisions needs to be radically strengthened, to reconnect the EU to voters. Secondly, as the Eurozone integrates further, the UK and other non-eurozone countries need safeguards to make sure euro countries don’t start to write the rules for all 27 member states, in which the case the UK almost certainly will have to leave. There’s also a very strong case for revisiting areas where the EU’s powers have gone too far, such as in crime and policing or employment law.

However, in some areas “more Europe” may be needed. For example, a big move on liberalising services would help make the EU more relevant to an increasingly sceptical business community. The EU services sector is one of the bloc’s great untapped resources, but for too long, protectionist-minded member states and the European Parliament have blocked a dynamic single market in services, to the disadvantage of services-oriented economies like Ireland and the UK. A quirk in the EU Treaties – so-called enhanced cooperation – could be used to press ahead with more services liberalisation involving like-minded countries. If only 12 countries did this, it would still lead to a 1% permanent boost to the EU economy.

Make no mistake, the risks of reform failing are profound. Advocates of ‘in’ would be deprived of their best tune and a UK exit would be far more likely once the British public is finally asked. States in favour of open markets and free trade would lose a strong ally.  The EU could then chart a new course more centralised and protectionist than before. 

But rather than engage and negotiate with Cameron perhaps the best strategy is to sit tight and hope for a Labour victory in 2015? That may paradoxically be the worst option for those wishing to avoid a UK exit. Not only would the Labour party come under immense pressure to hold its own referendum, but would be destined to hold a referendum without having attempted or achieved any meaningful reform. Worse, a mid-term Labour Prime Minister campaigning for an ‘in’ could be faced with a new post-Cameron Conservative leader campaigning for an ‘out’. As for the Liberal Democrats, Nick Clegg recently told Parliament that treaty change is a matter of “when not if” and would trigger a UK referendum. The worst of all worlds, a treaty change dreamt up with no UK input being put to the British people – the answer to that would be a decisive ‘out’.

So will the UK leave the EU? This is not a certainty but the real possibility should concentrate the minds of those who share some, if not all, of the UK’s interests. Rethinking the EU’s direction of travel, re-centring it on a single market that works for services as well as goods, economic competitiveness, less regulation, decentralisation and the legitimisation of the positions of non-euro states could be useful in reconnecting not just with the UK public but with others as well.

 

This is welcome stuff: David Lidington says national parliaments could be given a 'red card' over EU proposals

National Parliaments' should be allowed
to show the EU the red card

This is an idea that's very close to our hearts - and an idea that we have promoted for a very long time.

The first bits of UK Europe Minister David Lidington's interview with German daily Die Welt have just been published on the paper's webpage. We'll have to wait until tomorrow to see the full version. But from what we can see so far, Lidington's interview is likely to reverberate quite a bit across Europe.

He said,

"Perhaps we should lower the threshold for national parliaments to take action against initiatives from Brussels; perhaps we should introduce the principle of a 'red card' so that a given number of national parliaments can block initiatives from the [European] Commission."

Sounds familiar? Well, the 'red card' was first advocated by Open Europe in 2011 in our report 'The case for European Localism'. And again by Lidington's PPS Tobias Ellwood MP in a publication for Open Europe in December 2012, where he argued:

"Any future [EU] Treaty change should include some system of the red card system with the right quota and powers."

A red card is an improvement over a yellow

Open Europe's Director Mats Persson pushed the idea in the Telegraph here in January. Under the Lisbon Treaty, if a third of national parliaments show the Commission the current 'yellow card', the Commission is obliged to reconsider its proposal and explain why it wants to change it, scrap it or push ahead with it. To date, the Commission has withdrawn a proposal in only one case after being shown the 'yellow card' - the so-called 'Monti II' Regulation on the right to strike.

However, this provision has several weaknesses. First, it doesn't oblige the Commission to actually drop the proposal, but only to reconsider it. So it's a far cry from a veto. Secondly, it's only supposed to happen on 'subsidiarity' grounds - and not on 'proportionality'. Thirdly, a third of parliaments are supposed to agree within an eight-week window, meaning that if the Commission tables a proposal in August or September - when most parliaments are in recess - it can basically push ahead with anything.

In other words, it really doesn't do that much to close the EU's infamous democratic deficit. Nor to strengthen the powers of national MPs - an aspect which, as we've argued repeatedly, is absolutely vital if the EU is to regain democratic legitimately.

Therefore, a 'red card' provision giving a certain number of national parliaments acting in unison (the threshold needs to be discussed) an actual veto right, would be an absolutely massive improvement. This is also an area where the UK will have support from Germany and others if it pitches it right.

In the interview, Lidington also pointed out that several times in the past,

"the content of [EU] treaties has been interpreted in a way which was not desired or expected at the time the treaty changes were decided on. Sometimes, the European Commission or the European Parliament try to expand the boundaries of their competences." 

The Europe Minister also stressed that the EU's single market for services is "painfully underdeveloped". echoing similar remarks on the importance of deepening the single market before. However, this time they come after he said that Open Europe's proposals to reignite the EU's services sector and boost EU-wide GDP by up to €294bn were "interesting" and "worth exploring".

More please!

Hollande goes on the offensive - two years to achieve political union in Europe

The French media called it François Hollande's "grand oral exam". The French President has just held a big press conference at the Elysée palace marking his first year in office. And he said a couple of very interesting things about his vision for the eurozone and Europe.

Hollande pledged to launch an "offensive" to "drag Europe out of its lethargy".

He called for an "economic government" for the eurozone,

"which would meet every month, with a real president appointed for a long term and who would be assigned this as his only task."

According to Hollande,

"This economic government would discuss the main economic policy decisions to be taken by the member states, would harmonise taxation, would start convergence in the social [policy] domain...and would launch a plan to fight tax fraud."

As if these remarks weren't controversial enough, Hollande re-stated his belief that the eurozone should have its own "budgetary capacity" and "the possibility to, gradually, borrow money". In the Q&A session he also suggested the ECB could be doing more on liquidity.

The French President concluded the EU-related part of his keynote speech by saying,

"Germany has said several times that it is ready to move to a political union, to a new stage of [European] integration. France is willing to provide the content to this political union."

With a real coup de théâtre, Hollande gave himself "two years to achieve" this political union. 

It will be extremely interesting to see what the response from Berlin will be. For the moment, Hollande's press conference is another reminder of how distant France and Germany are in the debate over the way ahead for the eurozone - with Paris sticking to its 'solidarity/integration first and supervision/discipline later' line, and Berlin insisting that things should evolve the other way around. 

EU Referendum Bill faces many hurdles

Now the Conservatives have published their EU Referendum Bill there only remains the small question of how it could become law.

It will not be a Government Bill but will now be taken forward as a "Private Members Bill". As such its chances of survival are limited and at the mercy of Parliamentary procedure [specifically Standing Order No14 (SO 14) which allows some Parliamentary time to be allotted to the winners of a Parliamentary ballot]. Here is how it works.

 

First hurdle (passed) - win the ballot. The ballot has picked 20 'winners' (out of c.400 contestants) who will gain priority in getting their Bills past the formal presentation and 1st Reading and on to a 'real' 2nd Reading on an allotted Friday. Top of the list announced today is James Wharton MP who has said he will pick up the Conservatives Bill as his own.  The Bill will now be presented on the "fifth sitting Wednesday" i.e the 19th June 2013. At this point we will only formally know the name of the Bill.

Second hurdle - get a Friday sitting allotted. The presentation of the Bill is a formality. However once past it will be allotted a Friday sitting (9.30am to 2.30pm). The first date available is 5 July 2013 but they continue through to February.

Third hurdle - assemble 100 MPs to vote through a "closure motion". If the Bill is still being discussed at 2.30 on its Friday an MP must move that "the Question be now put" otherwise the Bill will be adjourned. For this to happen 100 MPs are needed - no small task normally given Friday is normally an MPs constituency day but in this case this would not be a problem as it will be a three line whip.

Fourth hurdle - win a vote on the Bill's second reading. Once the closure is secured a vote on 2nd reading will follow. This will be the crucial vote supporters of the Bill will need to win.

Fifth, sixth and seventh hurdles etc - survive the Committee and report stages and Lords. If successful in a 2nd reading vote the Bill will go into a Commons public bill committee. If it survives this it will then come back to the House of Commons for report stage (where there could be a vote), a third reading and then onto the Lords...

All quite drawn out. It is safe to assume there is little chance of the Bill becoming law but there could potentially be a vote, and that is perhaps what its proponets really wanted all along.

Where do EU member states stand on bank bail-in plans?

It’s been pretty tough to follow where countries stand on the latest proposals for the EU’s Recovery and Resolution Directive, not least because the debate has lasted three years with people mostly talking past each other.

But the Cypriot crisis has now focused minds and a deal is top of the agenda. The proposal will lay out rules for bank bail-ins and dealing with cross-border banks, while it also links closely with plans for a eurozone banking union. To clear up the differences, we have put together a table.

(The table is broadly ordered by how strongly the country is in favour of uninsured depositor preference and how strongly against flexibility it is. Hence Spain which is strongly for depositor preference and little flexibility is near the top, while Sweden which barely favours a bail-in plan and wants significant flexibility is near the bottom – click to enlarge):

As you can see, there are some big splits remaining. The ECB, Spain, Portugal and France (amongst others) want a clear depositor preference regime – where uninsured depositors are the last to be written down. On the other hand, Germany, the Netherlands and the UK want more equality between senior bondholders and uninsured depositors. Going even further, there are Sweden, Poland and Denmark - which have already clearly defined national schemes which do not fit well with the EU plans for a bail-in hierarchy.

Another area of disagreement is the amount of national flexibility. Sweden, the UK and the Netherlands are pushing hard for flexibility, particularly for non-euro members. This has some backing from Germany. Further disagreements over the timeline for implementation and the level of resolution funds needed remain a bit of a free for all.

The few points they do agree on include: complete protection for insured depositors, a broad bail-in scheme and (somewhat ironically) the fact that this legislation is urgent.

We will keep updating the table as the negotiations develop. There is a lot of talk of compromise but as of yet there is a long way to get there.

Nick Clegg: EU referendum a question of "when not if"

With David Cameron away in the US, Nick Clegg took to the dispatch box for Prime Minister’s Questions today. Unsurprisingly, there was no shortage of references to EU referendums, most of them of a hostile nature. Ahead of today’s debate on the ‘referendum amendment’ to the Queen’s Speech, Clegg was repeatedly asked why he would not support the calls for an in/out referendum as pledged in the infamous 2008 Lib Dem leaflet (calling for a “real” referendum on Lisbon) and in the party’s 2010 manifesto.

Clegg responded that this issue had been settled by the passing of the 2011 EU Act which contains a ‘referendum lock’ in the event of EU treaty change, and accused the Tories of “moving the goalposts” with their policy of an in/out referendum in 2017.

But, within this bit of rhetorical politicking, Clegg said something rather interesting. He said that, due to the 'referendum lock', it was a matter of "when, not if" there is an EU referendum "because the rules are bound to change" as a result of developments in the eurozone.

Clegg accuses Tories of moving goal posts on EU referendum BUT says matter of 'when not if' as EU rules bound to change triggering a vote
— Nick Robinson (@bbcnickrobinson) May 15, 2013

Well, if the rules are "bound to change" why aren't the Lib Dems actively supporting David Cameron's proposals to reform the UK's relationship with the EU - or at least putting forward their own vision - and then putting that to a referendum ? Or would the Lib Dems rather the rest of the EU changed the rules without active input from the UK Government? Good luck winning any kind of referendum on that basis Mr. Clegg.

Cameron: Before the 2015 election, we will do everything we can to make an EU referendum the law

David Cameron just sent out this note to Conservative members and activists:

In January, I set out our party’s position on Europe. I made clear that the EU needed fundamental, far reaching change - and that Britain would lead the way in negotiating that reform. I also promised an In-Out referendum once those negotiations were complete, and at any event by the end of 2017.

That's the right time to have a vote - it is wrong to ask people whether to stay or go before we have had a chance to put the relationship right. But make no mistake - my commitment to a referendum is absolute. If I am Prime Minister after the next election, there will be an In-Out referendum. No ifs, no buts. And before the 2015 election, we will do everything we can to make it the law. That’s why today the Conservative Party is publishing a draft bill that would legislate for a referendum by the end of 2017.

We understand that we are in a Coalition government - but we are going to examine every opportunity to bring it before Parliament and try to get it on the statute book. For too long the British people have had no say about their future in Europe. I am absolutely determined to put that right. Our action today is further proof we’re serious. You can pledge your support for the bill here. 

So does the "if I become Prime Minister" include also being a PM in a coalition? 

"Do you think that the United Kingdom should remain a member of the European Union?” - the Tories publish their EU Referendum Bill

The Conservative Party has just published its EU Referendum Bill which would provide for a referendum before 31 December 2017.

The Question will be:

“Do you think that the United Kingdom should remain a member of the European Union?”

Doesn't get more straightforward than that. It'll presumably be an In/Out referendum on the existing (reformed) terms when the vote takes place.

Some observations:

• Some have suggested that the question is biased towards a "Yes", as it entails "think" rather than a simple "should the UK..."

• For the referendum to take place, there still would need to be a further vote in both Houses of Parliament after the next election (even if hypothetically, the Bill would pass in this Parliament). So the Bill could still be subject to future Coalition politics and Lords opposition. This is the relevant section:

"An order under this section may not be made unless a draft of the order has been laid before, and approved by a resolution of, each House of Parliament"

• It is far shorter than the only precedents, Labour's ill-fated 2004 Referendum Bill or the Conservatives' last Bill. This is because more issues are left to subordinate legislation. Either this Bill will need amending during its passage through Parliament or detailed legislation on issues such as election spending and BBC immpartiality will be required at some point.
• To get this Bill through the Lords, either now or in the future, would require either a) majority (unlikely now as the Lords have a Lib Dem / Labour majority, but may look completely different after 2015 elections) b) a manifesto commitment to allow the Salisbury Convention to be invoked or c) time to use the Parliament Act. 

Curiously, we note that Gibraltarians have been excluded from voting in this referendum...

Lord Leach: EU reform is the best option, even for us sceptics

Open Europe’s chairman Lord Leach of Fairford has an op-ed in today's Times, where he argues:

Fifteen years ago, when a handful of businessmen set up Business for Sterling to stop Britain joining the euro, we were cold-shouldered by the BBC, patronised as Little Englanders by the Establishment and attacked relentlessly by the CBI’s leadership. 

By the time the previous Government dropped the idea of entering the eurozone, we had nearly 1,000 chairmen or chief executives on our supporter list. 

The centre of gravity has shifted as politicians today line up to argue that the EU in its current form has exhausted its usefulness, and exit is no longer to be feared. Even the most ardent Europhiles pretend amnesia about their former enthusiasm for the single currency. “More Europe” as the answer to every problem has become a bad joke. Even “Thus far and no further” has been replaced by serious questioning of the status quo. In short, the game is up for the Europhiles. 

I disagree, however, with Nigel Lawson and others who have given up on reform and want us to head for the exit. Procedurally, withdrawal would be a nightmare. The famous Article 50 in the EU Treaty would give us two years to negotiate, during which time EU laws would still apply to the UK, without us having any effective say, as we would be sidelined in the EU institutions. That alone should make us pause before pushing the eject button. 

The majority of the public, the political class and business, as shown by multiple polls, are sceptical about the EU but rather than leaving it they want a new deal to reduce its power over their lives. With good reason, for there are two jokers in the pack. First, none of the recent “outers” has set out a credible alternative. It is easy to say “Europe needs us more than we need it” or that if Asians and Americans can trade happily with the EU from outside it, so can we. 

 But this glosses over the reality that without free trade agreements many of our businesses would lose a chunk of their market. The car industry and the City would be especially hard hit. In theory, free trade agreements could cure that, but they would take time to negotiate and the EU would see no advantage in protecting our lead in those business areas. The eurozone’s attack on the City has been brutal enough; and the French would be particularly keen to block British financial services firms from having access to EU markets in perpetuity. 

But it is the second joker in the pack, Germany, that is far more important. Angela Merkel is a cautious leader and doesn’t shoot from the hip. She knows that without radical reform the risk of Britain leaving is huge. She also knows what the consequences would be, as do the Netherlands and Sweden. The EU would lose half its military capacity, nearly 15 per cent of its budgetary contributions, its financial powerhouse, its principal channel to the Anglophone world and its main opponent of protectionism. Berlin would be in a voting minority against the French-led, high spending, uncompetitive Club Med countries. 

Both David Cameron and Chancellor Merkel would therefore be playing with fire if they tried to buy off the British electorate with trivial concessions, as Harold Wilson did in 1975. The public won’t wear it and Germany would risk finishing off its dream of European unity and losing its most effective fellow reformer. 

The first necessary step to a new order would be to redefine the EU as the Single Market, not as a vague aspiration to political union, still less as a currency union. Safeguards would have to be put in place to ensure that the eurozone does not write the rules for the rest of the member states. The next step would be to strengthen the powers of Westminster over EU decisions. 

There is already support for these two reforms in Europe. With those in place, Europe could move to much greater flexibility. Member states could group together in passport unions, fishing or agricultural regimes, defence arrangements or tax and currency unions, but none of this would be obligatory. Subsidies, employment law and energy policy would no longer be micromanaged from Brussels. 

These kind of reforms would ensure that Britain would be at ease in Europe for the first time for 30 years. Norway and Switzerland could join such a structure and the Turkish issue would become more soluble. The euro problem would not go away, but the taboo that makes any change to the eurozone unmentionable would be broken. 

We cannot go on as we are, firefighting crises and ill-judged regulations inside a Union that has become the world’s economic laggard. Most of the necessary reforms have been identified and discussed across the continent. Now we will have to see whether Germany and its Nordic allies will be willing or able to deliver them. 

None of us knows what will happen next. There is still all to play for, and this complex game with so many other players should not be reduced today to a black-and-white argument about staying on the pitch or going home.

Splits in Germany (and beyond) over banking union?

It’s been a week of 'splits' over Europe and it looks like another one may be emerging – although this time in Germany.

German Finance Minister Wolfgang Schäuble had an article in the FT arguing:

"While today’s EU treaties provide adequate foundation for the new supervisor and for a single resolution mechanism, they do not suffice to anchor beyond doubt a new and strong central resolution authority.

We should not make promises we cannot keep. The overly optimistic predictions about a single supervisor starting work as early as January 2013 cost the EU credibility.

A two-step approach could start with a resolution mechanism based on a network of national authorities as soon as the new supervisor is operational, the resolution directive has been adopted and the Basel III capital requirements are in place.

A banking union of sorts can thus be had without revising the treaties, including a single supervisor; harmonised rules on capital requirements, resolution and deposit guarantees; a resolution mechanism based on effective co-ordination between national authorities; and effective fiscal backstops, also including the European Stability Mechanism as last resort."

Essentially, pointing out that a full centralised banking union is some time away, post EU treaty change. This potentially has implications for the UK, as much of Schäuble's solution, with the exception of the common eurozone supervision, would apply to all 27 members - the question for non-eurozone countries, including the UK, is how they will be affected by the 'second stage' of his solution. On the other hand, treaty change, as we've noted before would potentially enable the UK to put forward its own amendments.

However, German ECB Executive Board Member Jörg Asmussen espoused a different view in comments to the German press this afternoon:

"It is the aim [of the banking union] to make the Eurozone more robust against banking crises with an orderly, cross-border resolution of systemically relevant banks without leaving the burden on the taxpayer or the central bank."

"We think this is best ensured by a common resolution regime, a joint resolution fund that is financed by banks' contributions and a common resolution scheme…The entire tool kit should be available along with the Single Supervisory Mechanism."

So, much stronger on the need for a clear centralised authority as soon as possible, preferably when the ECB takes on its supervisory role at the start of next year. This also seems to imply then that such a move could be done without changing the EU treaties.

To be honest this is not an entirely new position, it is something other members of the ECB have previously called for. Nevertheless, it represents a fairly significant split between two leading political voices in Germany over what is now the key policy for reforming the eurozone.

It's also worth noting that at a press conference earlier today the Spanish and Portuguese leaders both put forward a similar argument to that of Asmussen on the need for an immediate 'full' banking union. Meanwhile, Eurogroup Head Jeroen Dijsselbloem said that the issue of treaty change could be dealt with "later on" but admitted that "understandable questions" were being asked on this front.

We, as with all those following the crisis, wait with bated breath for German Chancellor Angela Merkel to declare which side she comes down on. So far she has managed to dodge taking any big eurozone decisions ahead September's election in Germany, but with key discussion on banking union coming up next month its not clear whether she can continue to do so on this one.

Number of MPs backing referendum amendment grows - we see where they're coming from, but what are they backing?

47 MPs have now put their name to an amendment to the Queen's Speech that begs "leave to offer our humble thanks to Your Majesty for the Gracious Speech...

but respectfully regret that an EU referendum bill was not included in the Gracious Speech."

This will be voted on Wednesday but what are they backing? There are any number of permutations:

A) An in/out referendum now
B) An in/out referendum in 2017 (Conservative policy)
C) A mandating referendum now (to back a renegotiation)
D) A mandating referendum in 2017
E) A Confirmatory referendum (post renegotiation)

Or perhaps a combination of the above. So by backing this amendment you could either be in favour of renegotiation for a reformed EU or exit. As we've said before, we see where the backers are coming from on this, but this amendment may merely be a prelude to a bigger legislative battle down the tracks.

The real question is not whether, like Gove and Hammond and others, you would vote to leave the EU if a referendum was held today - the question is what level of reform/renegotiation would convince them to argue in favour of staying. On this there is a wider spectrum of opinion within the Conservative party, as there is within the UK generally. On one end you have those for whom only a return to a trade-only relationship would suffice while on the other end there are some for whom a token renegotiation along the lines of Harold Wilson might be enough.

But all that said the vote itself is not meaningless. It is really a response to a fear by Conservative MPs that although they believe David Cameron is resolved to renegotiate a better EU deal that can accommodate UK public opinion, they fear that there have been so many false promises on the EU that their winning policy will not gain the traction with the public it should.

Again, you can see where these MPs are coming from.

Going global: Germany is slowly shifting its trade away from the EU (or why German growth alone cannot save the eurozone periphery)

On top of the release of UK trade data, Germany has also put out its latest trade statistics. As this is Germany we're talking about, the figures are interesting on all kinds of levels.

As the graph above shows German trade has recovered since the start of the year, although exports and imports remain well below their March 2012 levels. Exports have recovered slightly quicker allowing for Germany’s significant trade surplus to widen further.

But where is this new demand coming from? The eurozone remains mired in recession, so there is little chance that the turnaround in trade is being driven within the single currency bloc. Looking at the graph below may provide some clue.

As we can see, of Germany’s top trading partners only five on the import side and four on the export side are from within the eurozone. These are from the end of last year, but with growth in the US picking up and Asia still doing relatively well, it’s likely that much of the upswing in German trade was with these countries rather than the eurozone. This is confirmed to some extent by the table below which shows that trade with non-euro EU countries and third countries was either positive or less negative relative to a year ago.

What’s the significance of all this?

• Firstly, it raises interesting questions about Germany’s role in the eurozone and the crisis. Trade with eurozone countries, especially those in the periphery, is becoming less important for Germany on both the export and import side. The knock on conclusion of this is that even if Germany were to boost domestic demand or import more (as many southern European leaders have called for) it’s not clear it would actually have a huge benefit for the struggling country.

• A report by Deutsche Bank in February found that an additional 1% growth in German GDP would only provide a 0.1% boost to the current account of struggling economies. Far from enough to have any material impact on overcoming the crisis.

• The second interesting point, in terms of the UK-EU debate, is that Germany is proving incredibly successful in cultivating trade with countries outside the EU, despite at times a stifling European regulatory environment (including meddlesome EU rules) and the eurozone crisis. This is likely due to its focus on manufacturing and its strong ‘Mittelstand’ (the undervalued euro also helps). In turn, this suggests the choice presented by some - either you trade with the EU or you trade with the rest of the world - is clearly false. Warts and all, you can cultivate trade with the rest of the world from within the EU - what you need is economic assets which appeal to these fast developing economies. And of course, a more, liberal, outward-looking EU would certainly help as well. 

New ONS Figures show the trade deficit with the EU is widening - but total volumes show the EU market is still important

The ONS has today released its latest monthly UK trade statistics. They show that despite growing UK trade and a slight narrowing of the trade deficit, the problems in the eurozone are still hampering UK exports to the rest of the EU.

Here’s some extracts from the UK's ONS bulletin of the 1st quarter of 2013:

The value of UK exports increased by 3.5% between February 2013 and March 2013. The value of imports increased by 2.6% over the same period.

The widening of the deficit with the EU in the first quarter came mainly from trade with Germany and the Netherland. Outside the EU, the UK’s surplus in trade with the US improved by around £1.1 billion in the first quarter, largely due to a recovery in exports.

Within EU countries, imports from Belgium & Luxembourg increased by £0.4 billion and imports from Germany increased by £0.1 billion.

Within EU countries, exports to Germany decreased by £0.3 billion.

So in general UK trade is up but exports to the EU are down. The decrease in UK exports to the EU has increased the UK's deficit with the EU as eurozone states have managed to increase their exports to the UK - if not to each other.



UK trade in goods the EU remains at 50%

So what conclusions can we draw from this?

Firstly, although the EU remains a vital market for UK goods the eurozone crisis has led to a diversification into other markets.

Secondly, the eurozone crisis has let to a widening in the UK's EU trade deficit. This appears to be due to a  fall off in eurozone demand for UK exports combined with a continued appetite in the UK for EU goods.

However, it is important to note these figures are for goods only. As we set out in our report Trading Places the picture for the UK's services exports differs substantially. The UK has a world class services sector that produce a substantial trade surplus. The best growth markets for this sector is undoubtedly in the growth markets outside the EU. For UK services, as long as the EU remains a fragmented market the relative merits of doing business in the EU over other global markets are small. All the more reason to push on with EU Services liberalisation as we propose here.

EU referendum: What will the Tory backbench motion actually achieve?

Unlikely to care if her speech is amended - but will anyone else?

Politicians do not as a rule like other politicians amending their speeches especially after they have been delivered. The Queen is not a politician and is usually spared this indignity - but not if one group of (mostly Conservative) MPs have their way. Although, strictly speaking, the MPs have not tried to amend the speech per se, they merely tabled a motion to "express regret" that it did not include legislation for an EU referendum.

This is unlikely to upset the Queen, she will not have had any personal commitment to the political mush written for her by Number 10 (in case any non-UK readers were confused). The amendment states that the House:

"respectfully regrets that an EU referendum bill was not included in the Queen's Speech".

This means that even if passed by a majority of MPs, it wouldn't actually force the Government to table a bill. So what's the point? John Baron, one of the MPs tabling the amendment, said the objective is to show that:

"there is a large body of opinion inside and outside this place that believes that legislation is right for a EU referendum."

This will no doubt make the 'ditch the EU' story run for another week, but the problem for those who genuinely want to legislate for a referendum in this parliament is that even the early referendum enthusiasts all want different things. Tory MPs who have put their names to it have several aims: legislation enshrining Cameron's 2017 referendum, a mandating referendum to enable re-negotiation, or most simply a straight in/out referendum now (though many oppose this on the basis that it would generate an In vote and thereby kill the issue - and any prospects for substantial reform - for a decade or more).

So this vote is unlikely to achieve much since it suffers from a lack of political  focus. It seeks to be all things to all people.

However, this is not to say that from a Tory point of view, there aren't any benefits from such a 'stunt vote' on a referendum of some sort (we've looked at the different options here). It could demonstrate that David Cameron can be trusted to keep his word - no good making a popular promise if people don't believe you. The second attraction for the Conservatives is that in the 2015 general election, they could use the vote both to target specific Liberal Democrat and Labour MPs who vote against, and also as a shield when faced with a buoyant UKIP threat.

But again, the amendment tabled today won't achieve any of that.

There are, however, more clever routes. For the stunt to work, it probably will have to be included in draft legislation that is going somewhere - and with sharper wording. There are two ways. First, a Private Members ballot: this is basically a giant raffle where MPs put in requests for all kinds of stuff. If this is successful, an MP could chose to put forward a referendum, possibly just cutting-and-pasting the draft legislation that the Conservative leadership has promised to publish before the election (but not put to the vote). Absent a successful ballot MP-led legislation has virtually zero chance to succeed. The other way they could achieve a vote is to table an amendment to another EU-related Bill. Here, MPs could be exceptionally creative. There's one coming up:

European Union (Approvals) Bill: will provide Parliamentary approval under the European Union Act 2011 for ministers to vote in favour of various proposals in Brussels: Pericles (anti-euro counterfeiting); Europe for Citizens (EU civic integration); and EU Archives (formalising the depositing of EU documents in an archive).

If the draft legislation is thought to be general enough, it's conceivable that the clerks (who will ultimately decide whether the amendment is allowed) could allow an MP to add an amendment calling for a referendum. There could also be other legislation, such as on the EU budget.

Given that even if passed next week's amendment is non-binding, and that its vagueness allows people to vote in favour for a variety of reasons, we are not sure how much this initiative will actually achieve.

When ideology meets economic reality (Part III): Opposition to the FTT grows at the heart of Europe

As we noted recently with the exclusive release of  internal documents on the Financial Transaction Tax (FTT), even amongst those who are championing the proposal, there are a huge number of concerns. Well, those concerns are growing by the week, it seems. The last few days have seen several new interventions. 

First, there is a report from the Deutscher Aktieninstitute (DAI), an organisation representing German listed companies and investors, which warns that the FTT will cost German companies up to €1.5 billion per year. Blue-chip companies, including Siemens and Bayer, say they will face tens of millions of euros of additional cost from the tax due transactions they make to hedge currency and other risks.

What makes this intervention to significant is that we're talking wholesome, exporting German businesses - in the German public mind the very opposite to ‘speculative’ finance. As DAI chief-executive Christine Bortenlaenger put it, the tax is “a direct strike against the export-oriented German economy”.

This comes not long after the important intervention by Bundesbank President Jens Weidmann where he warned, as we did a few days before, that the FTT could impact monetary policy. With the German elections only a few months away, these concerns will be hard to dismiss.

Secondly, the Dutch Central Bank has issued a warning that the tax will cost the Netherlands a minimum of €500m, half of which will be paid by its large pension fund sector. This is all despite the country not taking part in the FTT directly. Dutch Finance Minister Jeroen Dijsselbloem hinted that the country is looking for a change in the way that the tax is structured so that it does not impact those not directly taking part.

Lastly, Financial News notes that MEPs – who have generally been the most stringent defenders of the tax – may be changing their minds somewhat. Over 100 amendments have been submitted to the current FTT proposal in the European Parliament. Changes include exemptions for pension funds and repo markets as well as calls for a more extensive cost benefit analysis of the impact of the tax  (though the EP doesn't have a binding vote on the FTT, it's still politically signifcant).

This cacophony of voices are strengthened by the fact that many of the concerns raised fall on the same points again and again – the impact on repo markets, the cost to pension funds, the knock on costs for retail borrowers and the reduction in lending to the real economy.

As we have long expected, there seems to be a growing feeling that the FTT will need to be watered down or altered in places if it is to come into force and not have a huge negative impact. The populist rhetoric of the tax seems to be finally butting up against the economic and financial realities which many long warned about.

The real Europe question: how to kick-start growth

We appreciate that Westminster and the media are occupied with the Queen's speech and internal tory divisions over Europe (be them real or overblown), but real story in Europe lies elsewhere: where will the EU's and UK's growth come from?

Well, we know it's not fashionable, but here's a constructive idea.

Open Europe has today released a new report calling for the liberalisation of the services sector across Europe, both through the implementation of the current services directive but also by widening its scope. The report argues that this could boost EU GDP by €300bn and if it cannot be done with all 27 members, the UK and its allies should look to pursue it under ‘enhanced cooperation’ - allowing a smaller group of countries pressing ahead with more integration if not possible at the level of all 27 member states.

See here for the full report and here for a video with British Chambers of Commerce’s Director of Policy and External Affairs, Dr Adam Marshall, discussing the issue and OE’s proposal. That organisation represents thousands of businesses and knows a thing or two what's needed for economic growth, beyond the navel-gazing of the Westminster village and the platitudes of some politicians.

Key points of the report:

- Fully implementing the existing Services Directive and implementing a new “country of origin” principle, a trade-boosting measure that was removed when the Directive was originally negotiated, would boost EU cross-border trade and produce a permanent increase to EU-wide GDP of up to 2.3% or €294bn, in addition to the €101bn already gained under the Services Directive (0.8% of EU GDP).

- If agreement among all 27 member states isn’t possible, a smaller group of EU countries should now press ahead with greater integration in services under the EU’s so-called ‘enhanced cooperation’ procedure, which is being used to pursue the financial transaction tax. This was an idea first floated by Mark Rutte, the Dutch Prime Minister, in 2011.

- In a “pro-growth” letter in February 2012, twelve member states – the UK, the Netherlands, Italy, Estonia, Latvia, Finland, Ireland, Czech Republic, Slovakia, Spain, Sweden and Poland – all committed themselves to “open up services markets”.

- We estimate that if only this group of countries were to fully liberalise their services markets, it would still produce a lasting boost to EU GDP of up to 1.17% or €147.8bn. If other countries, such as Germany, were persuaded to join, the economic benefits would be increased further. Ultimately, this measure should serve as a springboard to achieve services liberalisation for the entire EU.

- The political benefits of further services liberalisation are threefold:

1) It would be a positive, constructive, and pro-European means by which to secure continued engagement in the EU from non-euro countries, particularly the UK.

2) It would provide a new legally enforceable framework to improve competitiveness and growth in the Southern euro member states and therefore boost the economic prospects of the eurozone, but without costing an extra cent of Northern countries’ taxpayers’ money.

3) It would improve EU-wide growth, competitiveness and employment at a time when Europe is at risk of global economic decline.

Is Lord Lawson's intervention likely to be a game-changer?

The big political news of the day happens to be strongly EU related – former Chancellor Lord Lawson’s piece in the Times (£) in which he argues in favour of a UK exit from the EU. So what to make of the piece – is it a game-changer or just a Westminster village story?

Lord Lawson rightly sets out many of the flaws inherent in the status quo - which we have looked at in detail numerous times,  from the democratic deficit through to the economic cost of over-regulation and the wasteful EU budget. He also draws particular attention to the threat of onerous and disproportionate costs from impending EU financial services regulation, with particular focus on eurozone-tailored rules imposed through an inbuilt majority in the EU's decision-making process. Familiar stuff. The key question is whether the UK is better off fighting to address these issues from within the EU or leaving altogether? Lord Lawson argues that:

“The changes that Wilson was able to negotiate were so trivial that I doubt if anyone today can remember what they were… I have no doubt that any changes that Mr Cameron — or, for that matter, Ed Miliband — is able to secure will be equally inconsequential… That is why, while I voted “in” in 1975, I shall be voting “out” in 2017.” 

The media have really gone to town on this story - it’s an otherwise slow news day and everyone loves a good ‘Tory splits on Europe’ narrative. No doubt, it has further heated up an already hot debate - and if there's one consequence, it's that the intervention has made 'better off out' a slightly more respectable position. Lord Lawson remains a respectable figure.

But a game-changer, it is not. The responses to the article have conformed with already well marked-out positions: UKIP says its delighted, Dan Hannan tweeted that "we can really win this guys" while those who usually object to this kind of proposition, have objected.

Leaving aside his pessimism about a new EU deal (which we take major issues with), Lord Lawson - whose eurosceptic views are hardly a secret - actually doesn't really tell us anything new. In particular, like most others who say the UK should leave the EU, he completely dodges the most important question of all: what's the alternative? This is the weaker part of his piece:

“Over the past decade, UK exports to the EU have risen in cash terms by some 40 per cent. Over the same period, exports to the EU from those outside it have risen by 75 per cent. The heart of the matter is that the relevant economic context nowadays is not Europe but globalisation, including global free trade, with the World Trade Organisation as its monitor.”

“Today too much of British business and industry feels similarly secure in the warm embrace of the European single market and is failing to recognise that today’s great export opportunities lie in the developing world, particularly in Asia.” 

While Lord Lawson makes a fair point about British business not making the most of global opportunities, he creates a false choice between one or the other (we've been through this before). The point is not the global market place versus the European market, the point is to maximise the total volume of trade - this is what the Germans do very effectively.

While claims about 3 million jobs being at risk in the event of the UK leaving the single market are way overblown, the truth is, as we've pointed out numerous times, all the existing alternatives, from the Swiss and Norwegian models to the WTO-only model, suffer from major flaws. It is unclear which of these Lord Lawson proposes but, judging from the second paragraph above, he seems to suggest we fall back on the WTO regime. So he is arguing for a raft of extra costs slapped on UK exports, including a 10% tariff on car exports to the EU, in addition to barriers to market access for all UK financial firms (absent new deals, which Lord Lawson, again, doesn't mention)?

Until those who advocate the mythical "UK option" actually flesh this concept out into a concrete and sell-able policy proposal, interventions like Lord Lawson's will primarily be something that the Westminster chattering classes can have some fun with.

Exclusive: Internal docs give first look at EU plans to regulate 'shadow banking'

The Times reports today on another round of exclusive documents leaked by Open Europe, this time regarding European Commission plans to regulate the ‘shadow banking sector’. See here and here for the docs.

A rather niche story you might think but it could have important implications for the way money is lent throughout the economy. Below we provide some background and our thoughts on the proposals.

What is the shadow banking sector?

“The FSB defined the shadow banking system as "the system of credit intermediation that involves entities and activities outside the regular banking system". This definition implies the shadow banking system is based on two intertwined pillars.

First, entities operating outside the regular banking system engaged in one of the following activities:

• accepting funding with deposit-like characteristics;
• performing maturity and/or liquidity transformation;
• undergoing credit risk transfer; and,
• using direct or indirect financial leverage.

Second, activities that could act as important sources of funding of non-bank entities. These activities include securitisation, securities lending and repurchase transactions ("repo").”

Essentially, it is made up of institutions outside the banking sector but which provide paths for borrowing and lending as well as significant financial investments. According to the Financial Stability Board (FSB) in 2011 it totalled €51 trillion worldwide.

Why are there concerns regarding it and are they valid?

• Shadow banking came to light in the aftermath of the financial crisis where it is thought to have played an important role in allowing the financial sector to hide the true level of risk in the system.
• There are some valid concerns over shadow banking. It operates outside but closely related to and interlinked with the regular banking system. This means it falls outside of scope of regular supervision and regulation.
• Often pursue highly leveraged activities, search for high yields and transform maturities from short to long (can cause a mismatch in funding if a crisis hits). There is significant use of opaque securitisation, hard to judge real value.
• Often have very low levels of capital, funded in the short term by lending and investments which needs to be regularly rolled over. This is used to fund long term assets. Helps boost profits but also magnifies losses. Due to this set up, the system very exposed to liquidity crises which can hit hard and fast.
• IMF recommended recently that key aims should be to reduce spill over from shadow banking to regular banking system (reduce prospects for rapid contagion in a crisis) and to reduce the procyclicatlity of the shadow system.
• All that said, it does provide a valuable service in many cases, particularly as an alternative method for distributing credit to the real economy when the banking sector is failing to do so sufficiently.

Thoughts on the EU proposals so far

• The proposals are still at an early stage and subject to change. A key issue is how any shadow banking regulation will fit with the raft of other financial regulation in the pipeline or already in force – AIFMD, CRD IV, EMIR, UCITS, and Solvency II to name but a few.
• Importantly, many of these other regulations already cover many of the institutions involved in the shadow banking sector. Avoiding double regulation and inefficiency is vital, therefore judging and implementing the current regulations is important before a shadow bank regulation is brought in.
• Shadow banking is not part of regular market and those involved do not have deposits so there is no question of a government backstop or bailout scenario. Can and should go bust. The main point is that any shadow banking crisis should not transform into a ‘systemic crisis’. The approach should therefore be ‘macroprudential’, taking an overview of the market and ensuring it is not overly risky and/or that it is not too heavily intertwined with regular banking sector.
• This may be more effectively done by setting out guidelines for supervision and cross border data collection that a strict regulation.
• The EU must also be wary of regulating against specific financial instruments, which could have perverse effects. For example, ‘securitisation’ has become a hot topic. This tool was misused during the financial crisis but is not an inherently bad thing. As ECB President Mario Draghi pointed out recently, effective securitisation of SME loans could help boost lending to SMEs and increase level of quality assets in Europe.
• Money Market Funds are different to many other parts of this sector. They are essentially pools of deposits or excess funds from finanical firms which are invested in the short term to gain small gains above what standard deposits would reap. They invest heavily in short term government, corporate and finanical debt and play a key role in providing liquidity to the market. The Commission looks to be regulating these separately, which is the right way to go. However, any small increase in costs could hamper the whole industry since their margins are so low - in fact some have already been closed due to the record low interest rates. 

As we said the proposals are just getting going so all this is still open. Regulation of the shadow banking sector is necessary but its also vital to note that it plays an important role in providing credit to the real economy (despite its rather ominous sounding name). At this point in time its not clear that a regulation is needed immediately and it may be more effective to improve and work with what is currently on the table. Furthermore, in an ideal world, any attempt to tackle it would be done on a global level in the form of a set of guidelines and plans for data sharing and increased transparency.