Monday, September 29, 2014

Malmström impresses in her hearing, but is she on the same page as Juncker on TTIP?

Cecilia Malmström during her hearing today
The European Parliament kicked off its hearings of Commission nominees today, with most of the attention focused on Sweden's Cecilia Malmström, the current Home Affairs Commissioner who has been handed the hugely important Trade portfolio. The hearing was eagerly anticipated due to the controversy around certain aspects of the EU-Canada (CETA) and EU-US (TTIP) free trade deals; specifically around investor safeguard clauses (ISDS).

Indeed, the hearing managed to make waves in Germany (where the issue is particularly sensitive), after Malmström's written response to initial questions from MEPs suggested that she rejected the need for ISDS in TTIP. German Green MEP Sven Giegold posted the relevant section on his website:
As the President-elect Juncker has committed himself to in his Political Guidelines..."no limitation of the jurisdiction of courts in the EU Member States will be accepted in [TTIP]; this clearly means that no Investor-State Dispute Settlement mechanism will be part of that agreement."
However, this version - sent out to MEPs on Friday - was subsequently re-called, and the new version published on the Commission's website now reads:
As the President-elect Juncker has committed himself to in his Political Guidelines... he will "not accept that the jurisdiction of courts in the EU Member States is limited by special regimes for investor disputes."
In other words, a clear change from ruling out ISDS altogether to a much more qualified acceptance. This change was subject to much speculation on Twitter, and Malmström herself claimed it was "simply the wrong version".

However, at today's hearing, Dutch MEP Marietje Schaake claimed that the Microsoft Word version sent out on Friday contained 'track changes' made by none other than Martin Selmayr, Jean-Claude Juncker's chief of staff (seemingly confirming rumours in Brussels about Selmayr's "Rasputin-like qualities"). Malmström replied that she had agreed to Juncker's office inserting a quote from Juncker and tried to brush off the affair as a "misunderstanding" and an "over-interpretation", basically denying that she and Juncker were at odds over the ISDS question.

In her opening remarks and in answers to questions, Malmström strongly endorsed the principle of free trade and TTIP specifically, which rather dominated the debate, while also defending European social and environmental standards (there is always something for everyone in the European Parliament). On ISDS, she defended the principle, while clarifying that she was committed to transparency and qualifications - such as protections for national parliaments to legislate in the national interest. She claimed that there was no need to renegotiate ISDS in CETA, as without it the deal could fall apart, that the EU itself would want to include ISDS in future agreements with other parties, but added that possibly it could be excluded altogether from TTIP - so far from a coherent line overall.

Malmström put in a solid performance - with the right mixture of assertiveness and reassurance - and it is certainly good to have a pro-trade voice in that role. However, as the shenanigans over her written answers demonstrate, there are questions over whether Malmström and Juncker are on the same page on TTIP.

Saturday, September 27, 2014

Catalan President calls non-binding independence vote: legal battle with Madrid looms

The signature of Catalan President Mas on today's decree
The die is cast in Barcelona. Catalan President Artur Mas has just signed the decree calling an independence vote on 9 November.

The Spanish government will hold an emergency cabinet meeting on Monday, once Prime Minister Mariano Rajoy is back from his state visit to China, to officially announce that it will lodge a legal challenge at the Spanish Constitutional Court.

The immediate effect of the move will be that the decree signed by Mas today will be suspended until the Constitutional Court issues its ruling. However, Catalonia's pro-independence parties are expected to keep campaigning while waiting for the verdict.

It is important to bear in mind that, based on a separate Catalan law that came into effect this morning, the legal status of the 9 November vote is 'non-referendum consultation' (consulta no referendaria). This means the vote would not be binding.

The Catalan government believes this should provide a sufficient safeguard against legal challenges from Madrid, but is clearly also taking a gamble: even if non-binding, the outcome of an independence vote would be politically very difficult to ignore.

A legal battle is most certainly ahead, and we will keep monitoring the situation very closely. If you want more background on Catalonia, you can read our previous blog posts (see here and here).

Friday, September 26, 2014

European Parliament hearings of Commission nominees: Will MEPs claim any notable scalps?

Will Juncker's Commission survive unscathed?
(picture via @Gruene_Europa)
On Monday we will see the first hearings of European Commission nominees by the European Parliament committees responsible for their respective policy areas (full calendar here). The UK nominee, Lord Hill, will ironically be grilled by MEPs at the same time as David Cameron will be giving his closing speech to the Conservative party conference. 

MEPs are not able to strike down individual Commissioners but they do have a veto over the Commission as a whole and have in the past used this leverage to force member states to withdraw nominees that they did not like; Rocco Butiglione in 2004 and Rumiana Jeleva in 2009 (although Jeleva also faced considerable domestic opposition). There has also been a lot of speculation that one or more nominees to the Juncker Commission could also be 'taken out' by MEPs (Alex Barker of the FT has a good round-up here). There will certainly be a hell of a lot of posturing - but are any of the candidates at genuine risk? We asses the most 'problematic' candidates below:

Lord Hill - Financial Services (UK)

There has been a lot of speculation that MEPs will target Lord Hill (and some have already made it clear they will) but this is based less on reservations about his character or ability, and more to do with his record as a lobbyist, concerns about the UK being allocated the sensitive financial services portfolio, and hostility to the Conservatives' EU policies more specifically. While MEPs will not give Lord Hill an easy ride it is highly unlikely that he will face any major problems given that this would be seen as a huge and unnecessary provocation towards the UK (with no chance of Cameron backing down and putting forward somebody else). Juncker has further lessened the risk by transferring the contentious issue of bankers' bonuses from Lord Hill's remit into that of Vera Jourova, the nominee for the Justice brief. 

Prospects for survival = Strong

Pierre Moscovici - Economic and Monetary Affairs (France)

It is no secret that the appointment of former French Finance Minister Pierre Moscovici to this key portfolio is far from popular among conservatives in the European Parliament. Can Moscovici, whose country is consistently failing to meet the its EU deficit reduction targets, be credible enough to police eurozone countries’ budget policies? However, given that Moscovici will be effectively man-marked by two fiscally hawkish Vice-Presidents (Finland's Jyrki Katainen and Latvia's Valdis Dombrovskis), and also that it would be hugely unprecedented to reject such a high profile candidate from such a large member state (particularly given Francois Hollande's recent problems), he should be safe. The only serious threat to Moscovici would arise if the centre-left S&D group tried to veto one of the centre-right EPP candidates (see below) and the EPP decided to retaliate, and they've hinted that in that case they would target Moscovici. 

Prospects for survival = Strong

Karmenu Vella - Environment, Martime Affairs and Fisheries (Malta) 

European Voice suggests that Vella could also be in trouble as MEPs are unhappy at Juncker's decision to merge environment and fisheries and to give Vella a mandate for 'deregulation' in these areas, and also because Malta's track record in implementing EU environmental laws is poor. However, Vella himself is not responsible for the design of the Commission and it should suffice for him to assure MEPs he will give both parts of his role equal consideration. He may also face some awkward questions about long-standing allegations of "political thuggery, tax evasion and corruption" in his time in Maltese politics, but these have never been proved and so it is unlikely he will be placed under serious pressure.

Prospects for survival = Strong

Tibor Navracsics - Education, Culture, Youth and Citizenship (Hungary)

Hungary's nominee was always going to be controversial due to the strained relations between the EU and the Hungarian government headed by Viktor Orban who has been accused of anti-democratic practices such as undermining media plurality and the independence of the judiciary - particularly sensitive given the portfolio Navracsics has been given. Is is clear that Navracsics will face a hostile audience but with the backing of the EPP it remains to be seen whether enough other MEPs will actively try to see him axed from the Commission; in that case any Orban nominee would surely prove unacceptable, and this would trigger a wider political crisis. Moreover, as a former University lecturer Navracsics seems well qualified for this post and so we think that, ultimately, he will be safe.

Prospects for survival = At risk 

Miguel Arias Cañete - Climate Action and Energy (Spain)

Spain’s Cañete will come under fire for a number of reasons. In fact, it'll be open season. Firstly, there is his alleged bias towards fossil fuels compared with renewables. Secondly, there are concerns about alleged conflicts of interest; Cañete has sold his shares in two Spanish oil companies but Green MEPs have complained to Juncker that Cañete’s “wife, son and brother in law all remain as either shareholders or board members of these companies.” Furthermore, it has also been estimated that, during his time as Spanish Agriculture Minister, Cañete’s wife, Micaela Domecq-Solis and her siblings received around €1.8m in EU farm subsidies (though the same accusation could also embarrass some MEPs on the Agriculture Committee). 

Cañete will also very likely face questions about some remarks, widely interpreted as sexist, that he made after a TV debate ahead of the European Parliament elections in May. He said, “The debate between a man and a woman is very complicated. If you abuse [your] intellectual superiority, it looks as if you’re a machista and are cornering a defenceless woman.” There are enough ingredients for a lively hearing but as with Navracsics, the support of the EPP and the fact that he is a heavyweight figure within Partido Popular may be enough to see him through. However, he's definitely on the front line. 

Prospects for survival = At risk 

Alenka Bratušek - Vice President for Energy Union (Slovenia)

Where to begin? Former Slovenian PM Alenka Bratušek is seen by many as the weakest link in the new Commission and faces a raft of challenges. For a start, she nominated herself for the role as acting PM even though her party (appropriately named the Alliance of Alenka Bratušek) received a drubbing in the preceding parliamentary elections, picking up only 4.3% of the votes. The new centre-left coalition has launched in inquiry into her auto-nomination and would like to replace her with Tanja Fajon, one of their own MEPs (which would preserve the Commission's gender ratio).

Moreover, she has been allocated a hugely significant and sensitive role - Vice-President responsible for 'Energy Union' - despite having little experience in that area. As a member of the liberal ALDE group she lacks the protection of the two big centre-right and centre-left blocs (although ALDE's has joined the 'grand coalition' in the European Parliament). Her saving grace might be that not there will not be enough appetite in the European Parliament to reject the Commission outright, but if anyone will be substituted it is likely to be her.  

Prospects for survival = At risk

We will be covering the most significant hearings live so make sure to follow us on twitter @Open Europe.

Wednesday, September 24, 2014

Have the SPD and German unions endorsed TTIP? Not quite...

While the Labour Party's conference dominated the coverage in the UK over the past few days, its German sister party, the SPD, held its own 'mini' conference over the weekend. Opposition to TTIP - the EU-US free trade deal currently being negotiated - was a big factor at both, certainly we picked up on this in Manchester.

Ahead of the SPD's conference, several local and regional SPD associations tabled motions calling on the party leadership to suspend the negotiations due to concerns about investor-state dispute settlement (ISDS) - a mechanism which allows investors to sue governments - as well as the potential watering down of labour laws and environmental standards.

In order to head off the opposition, the Economy Ministry - headed by SPD leader Sigmar Gabriel - issued a joint position paper on TTIP along with the DGB - Germany's trade union confederation including the country's largest trade unions like IG Metall and Ver.di. The paper praises elements of TTIP but pledges that any moves to eliminate non-tariff barriers to trade (such as parallel regulatory regimes) will not threaten Europe's high employment, consumer and environmental standards, and calls on both parties to ensure "compliance with core ILO standards" - something which has little hope of getting past Congress.

On ISDS, they key passage reads:
“Investment protection provisions are generally not required… In any case, investor-state arbitration and unclear definitions of legal terms such as ‘fair and just treatment’ or ‘indirect expropriation’ must be rejected.” 
The SPD and German trade unions have therefore endorsed TTIP in principle, although the mass of caveats that made this possible will hugely complicate the negotiations and could wipe out many of its expected gains. It does however remain unclear to what extent the paper is binding on the SPD, as it includes the caveat that the German Economic Ministry and the DGB "do not have the same stance on TTIP on all points”.

Significantly, in approving the paper, party delegates insisted that its provisions should also be applied to the EU-Canada free trade deal (CETA) which has already been largely concluded and due to be signed off by Commission President Jose Manuel Barroso and Canadian PM Stephen Harper later this month pending implementation. CETA, which many see as the blueprint for TTIP, includes ISDS and could therefore face last-minute opposition having largely flown under the radar up until now.

In a separate development, which could delay CETA even further, the German government and the European Commission are at odds over whether national parliaments will need to ratify the deal alongside the European Parliament; the Commission says no, but Berlin argues that as a "mixed agreement" with some of the issues, goods and services covered by CETA falling outside of the EU's sole jurisdiction, the Bundestag and Bundesrat should also get to scrutinise the agreement and vote on it. The German government has said that it is willing to go all the way to the ECJ.

All in all, it looks like progress towards concluding ambitious trade agreements with Canada and the US will be rather rocky.

Tuesday, September 23, 2014

Miliband vague on most EU issues but categorical on energy

Labour leader Ed Miliband addressed his party conference in Manchester this afternoon. While the focus was on ‘togetherness’, the NHS and his various encounters with members of the public with useful bits for his speech, there were a couple of mentions of the EU and related issues. On the topic he said:
“Let me say it plainly: Britain’s future lies inside not outside the European Union. And the way we reform the EU is by building alliances, not burning them. And it’s why all those who want to leave, including in the Conservative Party, are now a huge threat to the prosperity of our country.”
Miliband went on to add that he saw the need for EU reform in areas such as “the economy, migration and other big issues”. He also cited the UK’s failed opposition to Jean-Claude Juncker’s Commission Presidency as evidence that UK Prime Minister David Cameron cannot achieve reform in Europe, since all countries simply believe he is pandering to his party.

Ultimately the EU section was a side note to the main messages of his speech. Once again there was no detail about exactly which reforms Labour would pursue with regards to the EU, no mention of whether a referendum would be held or not and only vague talk of alliance building with no clear message of how this would be achieved other than by not being the Conservative Party. He also glossed over the fact that the Labour Party ostensibly supported the anti-Juncker push by the UK and that the negotiations over Juncker seem to have resulted in the UK securing a prime post in the new Commission – one many thought they would never get.

Interestingly, there was a bit more detail at one of Open Europe's fringe events with Shadow Europe Minister Gareth Thomas stating that he (and presumably his party) support a red card for national parliaments as well as a specialised European affairs committee to better scrutinise all EU legislation. Certainly commendable if they prove to be concrete Labour policy.

One final interesting point on substance from Miliband regarding energy:
“[We are] making a clear commitment to take the carbon out of our electricity by 2030.”
This is a pretty bold statement (although he did hint at something similar last year), which essentially says that all of the UK’s electricity consumption will be met by renewable sources in 2030. To put that into context current renewable share of electricity generation is around 16%, and is due to rise by to 30% by 2020 – that is if the UK meets its EU set targets (quite a big if at this point).



To achieve the current 2020 target, according to government impact assessment, the Renewables Directive costs £4.2bn per year over the course of a decade. Miliband’s target would essentially involve tripling the increase of renewables over the same timeframe up to 2030 – exactly how much would such a policy cost per year!? (We’d hazard a guess at…a lot). As the graph above from the National Grid shows, most forecasts expect the UK to still have a sizeable chunk of electricity generation from gas and coal, mostly due to the cost and complexity of overhauling the entire grid and the intermittent nature of renewables (note - we have an upcoming paper on these issues and more soon so stay tuned).

All of this also takes place in a context where carbon prices (via the EU ETS) and targets are set and negotiated at the EU level. Will Miliband unilaterally commit to such an approach when it seems likely few, if any, other EU members would sign up to it? We've highlighted before the potential conflict between Labour's energy policy and the EU. Again, more detail needed but at least here there are some interesting questions to chew over.

Monday, September 22, 2014

Yesterday Scotland, tomorrow the EU? Are there lessons for the 'In' and 'Out' camps?

Staying or leaving?
If David Cameron wins the May election he has promised an In/Out EU referendum by 2017. Even if he does not it is still probable there will be one at some point. National referendums are rare in the UK so with the Scottish vote we have a rare glimpse of what the EU referendum campaigns could look like. What should the nascent In/Out camps take away from it?

In trying to understand the motivations of the Scottish voters Lord
Ashcroft's poll, conducted after the vote, sheds some interesting light. Voters made up their minds late in the day - 52% of voters made their mind up this year with 18% in the last month. The main issues driving independence voters were disaffection from Westminster and concerns about the NHS. Uncertainties over the pound and pensions drove the No side. 70% of Yes voters said they agreed with "The principle that all decisions about Scotland should be taken in Scotland" while No voters also felt the risks of independence were to great and conflicted with their attachment to the UK.

So are these findings and the Yes/No campaign relevant to a UK referendum on EU membership? here are some key issues:



Scottish Yes/No
EU In/Out
The need for a clearly thought out alternative to the status quo
The Scottish 'Yes' campaign came unstuck on some key elements of their proposition. Notably confusion over the £ and EU membership. The difficulty ‘Yes’ had with these key policies dogged their campaign
The nascent EU ‘Out’ campaign has a similar problem as there is no settled view. What relationship will the UK have with the EU after exit? Will it be the EEA, a new free trade agreement, what will access to the Single Market be etc and what are the political trade-offs. 
Harnessing optimism
The 'Yes' campaign was good at harnessing the ‘future’ and ‘change’ as a campaign weapon. The ‘No’ side failed to put forward a comparable future vision for the UK focusing instead on the risks of independence leading them to be portrayed as ‘negative'.
It will be difficult for the ‘In’ campaign to portray an optimistic vision of an EU future, given the likelihood of ongoing problems in the Eurozone – it will probably stick to pointing out what it sees as the risks of leaving.

It remains unclear whether the ‘Out’ campaign will be able to manage to transform itself from campaigning against the EU’s negative record to wholeheartedly putting forward its own positive vision.
Who leads the campaigns matters - can they claim to be the anti-establishment?
In Scotland the ‘Yes’ campaign was united, had message discipline and was led by the First Minister of Scotland. This gave it the credibility of office and the ability to set the scene while remaining an outsider/underdog in relation to Westminster at the same time.

By contrast the ‘No’ campaign was cross-party, divided and although ‘backed’ by the UK government was simultaneously seen as 'the Establishment' while being in opposition in Scotland.

It is unclear who the ‘In’ and ‘Out campaigns will be led by. However, on the basis that David Cameron is content with his renegotiation, the ‘In’ will have the advantage of the head of government and all the main party leaders.This could leave the ‘Out’ campaign run by UKIP and a number of backbench MPs.

Although the ‘Out’ side would have the advantage of being ‘anti-establishment’ there would be a large imbalance in credibility and official resources that could tell in the campaign.

Foreign interventions helpful /

unhelpful?
The ‘Yes’ campaign had to endure a series of interventions against them from UK allies and others including the USA, Australia, Germany, Spain, NATO and the EU.  
While foreign interventions in the EU referendum are inevitable some will be more effective than others. While UKIP will not lose any sleep over an admonition by Mr Juncker, Germany or France, they may suffer some damage if Commonwealth allies or the US express a desire for the UK to stay in the EU.
Business interventions - do they matter?
'Yes' had to put up with major Scottish and UK companies threatening to relocate out of Scotland in the event of independence. To counter it Yes managed to organise some pro-independence business voices but the overwhelming balance of the warnings weighed on the campaign.
‘Out’ like ‘Yes’ is likely to have to endure a slew of major companies questioning the case for exit, particularly larger businesses. This too will be countered by pro-exit business voices. Without the currency issue to worry about, the business question will be about what market access the UK would have to the single market (see alternative to the status quo section above).
Emotional appeal of staying / leaving?
While 'Yes' managed to mobilise significant emotional appeal for independence the residual emotional appeal of the United Kingdom was also considerable.
The emotional appeal of the EU institutions in the UK is close to zero. While it is clear that the emotional desire to leave the EU is felt strongly by confirmed 'Outists', it is less clear what role political identity will play among the undecideds.
Devo Max / EU Devo Max - key to the middle ground voter?
While the campaign started as a polarised Yes/No campaign it quickly switched in the last week into a No+Devo Max v. separation. This managed to win over some of the wavering middle ground to No. For that to work the credibility of the offer being delivered was key.
The In/Out campaign will start from the basis that ‘EU Devo-Max’ has either been achieved or has failed. This will have a huge repercussion on the campaign. If the negotiation is still on-going and is in the form of a last minute ‘EU Vow’ it is unlikely the credibility of those offering it will be enough to swing the result.
Turnout and the undecided voters - Age groups voting
The Yes/No campaign had a very high turnout and a high level of voters who made their mind up in the last month.

Older people tended to support the UK and younger people independence. As turnout was universally high the normal higher turnout among older voters probably did not tell.

An In/Out referendum is likely to have a lower turnout and a higher level of undecideds, making the last month and weeks of the campaign key.

Older voters are more likely to vote for 'Out' and younger for 'In'. However, with a lower turnout older voters are more likely to make their voice heard.

Wild card issues
The Yes/No campaign spent a lot of time discussing the supposed ‘privatisation’ of the NHS - a policy area already devolved to Edinburgh.
Immigration aside, the dry nature of EU policy could mean the In/Out campaign comes to focus on unpredictable issues.
Rogue polls - who might they help?
The close nature of the polls probably drove turnout and drove ‘shy unionists’ who may have taken the result for granted to vote.
Polling is also very likely to be a large driver of the 'In' / 'Out' campaigns but it is unclear who this might benefit.

Friday, September 19, 2014

Once the dust from Scotland's 'No' settles, what are the implications for the UK's EU renegotiation?

Act in haste - repent at leisure?
The big question over Scottish independence may have been settled but the campaign has thrown up a whole host of further questions concerning the UK's constitutional settlement that will need to be addressed in the near future. We look at some of these questions and at how they could impact on the UK's EU reform agenda. 

What’s the plan and schedule for devolution negotiations and implementation?

When it looked like a 'Yes' vote might be on the cards, the Tories, Labour and the Lib Dems pledged a new raft of powers for the Scottish parliament over areas like taxes, spending and welfare, with proposals due to be tabled in January. Speaking this morning, Cameron announced that discussions over a new settlement for the rest of the UK and England in particular - would take place "in tandem with, and at the same pace as, the settlement for Scotland".

Given that this will include - in Cameron's words - "a decisive answer" to the long-standing West Lothian question (ensuring "English votes on English laws"), it remains to be seen whether this timetable is realistic (some MPs are calling for a full constitutional convention). Labour have said they are committed to "looking at the issue" but the party is divided, with some senior figures including Gordon Brown and Douglas Alexander rejecting the option of Scottish MPs being excluded from votes only affecting English matters (which could deprive a potential Labour government of a majority on such votes). We simply do not know how far-reaching this shake-up will be and a quick and amicable cross-party consensus cannot be taken for granted.

Could this spill over into the general election campaign?

If the devolution question isn't on the way to being settled, it could conceivably play a large role in the general election campaign; the Tories and UKIP would take up the English cause, Labour and the Lib Dems would be stuck somewhere in the middle while the SNP would play the 'another broken promise by the Westminster establishment' card (unless the Scottish and English questions are considered separately). Not only would this displace debate about EU reform from the campaign, but growing English resentment at Scotland's privileged position within the UK could further boost the UKIP vote. Nigel Farage is already deftly positioning himself to take advantage. A strong UKIP vote would of course put pressure on any government (particularly a Conservative one) to take an even tougher line during the EU renegotiation.  

How will it impact the EU renegotiation/referendum timeline?

If the Tories end up back in government but still have to wrap up the constitutional questions it could prevent the government from hitting the ground running on EU reform and renegotiation. Given the scale of the challenge this is far from ideal. Furthermore, as we have warned before, we believe that Cameron is already behind the curve on finalising targeted reforms and road testing them with governments and business across Europe. In the end though, it is hard to see how Cameron could get away with shelving his planned 2017 EU referendum, given the pressure he would be under from his own party.

Thursday, September 18, 2014

Scotland votes, Catalonia waits: Will there soon be another independence referendum in Europe?

FC Barcelona supporters waving Scottish flags at Camp Nou
The world is watching Scotland today, and the Catalans will watch closer than most.

Spanish news sites are featuring pictures of FC Barcelona supporters waving Scottish flags during their team's Champions League game yesterday, and it is widely reported that delegations from the Catalan (and Basque) nationalist parties have travelled to Scotland to follow the latest developments on the ground.

This is because the debate around Catalonia's independence referendum is approaching its own moment of truth:
  • Catalonia's ruling parties agreed long ago that the independence referendum (carefully described as la consulta, the consultation) would take place on 9 November. However, the Catalan government has yet to officially call such a referendum. 
  • The Spanish government maintains the referendum is unconstitutional (and as we explained here, the Spanish Constitution is actually on Prime Minister Mariano Rajoy's side).
  • The Catalan government will tomorrow try to get around the legal obstacles by asking the Catalan parliament to adopt a new law on 'non-referendum consultations' (consultas no referendarias). Catalan President Artur Mas is then expected to convene one of these consultations for 9 November. However, the legal status of the result of such a consultation is unclear at the moment.     
  • Reports in the Spanish press suggest the Spanish government has everything ready to launch a legal challenge against la consulta at the Spanish Constitutional Court, as soon as it is officially announced.
  • If the Spanish Constitutional Court were to strike down the referendum (which is what Rajoy expects), the 'Plan B' of Artur Mas would be to resign and call early regional elections - and then present the election results as a referendum on Catalonia's future. Recent polls suggest the strongly pro-independence Catalan Republican Left (Esquerra Republicana de Catalunya, ERC) would come out as the largest party, albeit short of an absolute majority. For Rajoy, having to deal with ERC instead of Mas would be like jumping out of the frying pan and into the fire.
Are the Scottish and the Catalan cases similar?

There are similarities between Catalonia and Scotland. Both are proud regions with long histories of independence movements, and both have also been embedded in decentralised systems. Also with respect to the consequences of leaving there are similarities, not least the prospect of joining the EU and the difficulties that could potentially arise.

However, there are at least two fundamental differences:
  • The Spanish government has never considered accepting the outcome of an independence referendum in Catalonia. On the contrary, it is determined to use all the legal instruments at its disposal to stop the referendum taking place. Spanish Foreign Minister José Manuel García-Margallo has not even ruled out making use of Article 155 of the Spanish Constitution - which gives the central government the power to "adopt the necessary measures" to force a regional government to comply with its constitutional obligations. In practice, despite the planned date for the referendum being less than two months away, the Catalans still don't know whether - and in what form - it will actually happen.
  • Constitutional reform and greater devolution of powers to Spanish regions as an alternative to independence has so far not been discussed properly, mainly because the Spanish and Catalan governments have never really engaged in negotiations. 
Will there be a 'contagion effect'?

Pro-independence Catalans would no doubt get a boost in case of a 'Yes' victory in the Scottish referendum, whilst, naturally, Madrid would love to see the 'No' camp win. Irrespective of the outcome in Scotland, the status quo doesn't seem to be an option anymore for Catalonia. Just think of the 500,000 to 1.8 million people, depending on the estimates, who took to the streets last week to celebrate La Diada, Catalonia's National Day.
Sooner rather than later, the Spanish and Catalan governments will need to give up posturing and start talking to each other. At that point, reforming the Spanish Constitution to give regions greater power to set and collect taxes may well appear as a valid alternative. The Scottish episode, whichever way the referendum goes, may ultimately serve to accelerate further devolution in Spain.

Wednesday, September 17, 2014

Confidence vote won, absolute majority lost: not the best start for the new French government

The new French government, led by Prime Minister Manuel Valls, yesterday won its first vote of confidence in the National Assembly. That was expected, but the big news is that Valls and his government have fallen well short of winning an absolute majority.

269 MPs voted in favour, 244 against, and 53 abstained. The absolute majority is set at 289 votes.

Most importantly, the voting records reveal that 31 MPs from the Prime Minister's Socialist Party chose to abstain. Back in April, when Valls sought the confidence for his first government, he got 306 votes in favour. Hence, yesterday marked a substantial step backwards.

The outcome of the confidence vote seems to confirm that the 'left wing' of the French Socialist Party remains opposed to the economic policies being pursued by Valls - which in substance means remaining critical of the approach defended by the European Commission, Germany and other northern eurozone countries.

Incidentally, these divergences forced a cabinet reshuffle at the end of August - which saw the ousting of the three most left-leaning ministers, notably including Economy Minister Arnaud Montebourg.

French history shows that it is possible to govern without an absolute majority in parliament. Another Socialist Prime Minister, Michel Rocard (widely seen as one of the political mentors of Valls), did it between 1988 and 1991.

However, it remains to be seen to what extent Valls will be able to push through the wide-reaching reforms and sizeable spending cuts demanded by the EU if he fails to win back the full support of his own party. As an alternative, he may try and strike deals with the smaller centrist parties in parliament - but the success of such a move would be far from guaranteed.

Indeed, this is hardly great news at a time when the French economic situation is not encouraging, making it essential to move forward quickly with the necessary measures.
 
The road to recovery may have just become longer and bumpier for France.

Tuesday, September 16, 2014

German fingerprints on Juncker's Digital Agenda?

The 'digital agenda' was a key plank of Jean-Claude Juncker's 'campaign' to become European Commission President and will be one of the top priorities for the next five years. Indeed, his new look Commission has its own dedicated 'digital single market' cluster, which incorporates a large number of the Commission departments:


The Vice-President overseeing all this is Estonia's Andrus Ansip, a former Prime Minister of the country which styles itself as a 'digital society', with e-elections and online tax returns completed in five minutes. Former Energy Commissioner, Germany's Günther Oettinger, will take on a new role as Commissioner for Digital Economy and Society, which much of the German press saw as an embarrassment, particularly given the high-profile roles secured by France and the UK.

However, with online privacy and data protection such big issues in Germany, particularly following the NSA scandal, his appointment could be significant - not least because he is likely to have very different priorities to Ansip. Oettinger, along with the Czech Justice Commissioner Vĕra Jourová, will be responsible for ensuring passage of new data protection regulations and a revamp of the EU's e-Privacy Directive. He will also work on copyright. In turn, many of these issues will be integral to the US-EU free trade (TTIP) talks currently under way, another area of intense debate in Germany.

It has been noted by some that the CEO of Axel Springer, the owner of German tabloid Bild, publicly backed Juncker's candidacy (heaping pressure on Chancellor Merkel to do the same) and has a long-running beef with US internet giant Google. Whether this was a purely altruistic move we will leave up to you to decide...although we would note that one of Oettinger's first moves after the announcement of his appointment was to warn Google over its market power - a stark change in tone and approach from the previous administration, whatever the motivation.

In short, while Oettinger's appointment may not have been greeted by spontaneous cheers on the streets of Berlin, those in the corridors of power are likely to be quietly pleased. How 'German' the European Commission will be in this area will be interesting to watch.

Monday, September 15, 2014

The AfD bandwagon rolls on - what are the implications?

Germany's anti-euro AfD party has hit a rich vein of electoral form building on its success in Saxony two weeks ago (where it scored 9.7% and won its first seats in one of Germany's 16 regional parliaments) to win 12.2% in Brandenburg and 10.6% in Thuringia; a considerable improvement on pre-election polls.













As the graphic below shows, AfD won votes across the political spectrum, In net terms, its success came at the expense of the left - Die Linke in Brandenburg and the SPD in Thuringia - although in gross terms it also won a lot of votes from the CDU and FDP.

Where did the AfD's votes come from in Brandenburg and Thuringia?
This reflects the nature of the AfD campaign in these areas which combined an explicit pitch to Die Linke voters emphasising Ostalgie (nostalgia for East Germany), AfD's opposition to TTIP and to the sanctions on Russia with more traditional 'small c' conservative messages on crime and immigration (for example, AfD wants to re-impose border checks). On the whole, the question of Europe and the euro barely featured.

While AfD's recent successes should not be over-interpreted, inflated as they are by higher rates of disaffected voters in East Germany and low turnouts, it does nonetheless pose difficult questions for the established parties. This is particularly true for the CDU/CSU for whom, as we've noted, AfD is too big to ignore, yet too controversial to team up with. In the longer term however this might change if it becomes evident that the AfD is the only alternative to permanent 'grand coalitions' at the regional and federal level, a scenario which would arguably strengthen AfD even more.

We expect that this will be hot debate within the CDU in the coming months and years. Meanwhile, the AfD itself faces a big test; 12 months on from narrowly missed out on winning Bundestag seats the party has performed well in European and regional elections, however, with next year's Hamburg regional elections the only significant entry in the electoral calendar over the next year and a half, can the party sustain its recent momentum? If it stalls, could we see deeper splits between the economic liberals and protectionists/social conservatives who make up the party's uneasy internal coalition?

The Swedish election results may be a net neutral for Cameron’s EU renegotiation plans

The Swedish election results were a mess. The Social Democrats and two other opposition parties, the Greens and Left, garnered 43.7% of the vote, against 39.1% for the sitting centre-right Coalition. The anti-immigration Sweden Democrats won 13% of the vote, up from 5.7% in 2010. The leader of the Social Democrats as well as two minor centre-right parties have ruled out a grand coalition, meaning that the most likely outcome is a fragile, minority centre-left government.

There’s a lot one can say about the result. Without a doubt, the big story is the rise of the Sweden Democrats. It’s fair to say that Swedish media and politicians are this morning pretty much panicking, at the prospect of SD holding the balance of power – despite an absolutely massive media campaign against the party leading up to the elections. As expected, all seven mainstream parties have declared that they won’t deal with the Sweden Democrats but, with the party now controlling 49 out of 349 seats in the Riksdag, is this sustainable? And will it hurt or help SD in future? The metropolitan elite ganging up on SD hasn’t worked well so far. In several Councils in southern Sweden, SD won around 30% of the vote, which is concerning.

Some UK media has gone with the headline “Cameron has lost a key EU ally”. Others have argued that the leftist shift in Sweden has further undermined Cameron’s prospects for renegotiation. This is not quite telling the full story. As a whole, a centre-left government including the Greens, drawing on support from the Far Left – two parties that up until recently opposed Swedish EU membership – may in fact become more Eurosceptic. Swedish unions, at least on a membership level, are a hotbed for euroscepticism. On the euro, the Left is much more sceptical than the right. Though the euro debate is dead, this matters politically as the less Sweden perceives itself as a “pre-in” (remember, Sweden doesn’t have a legal opt-out from the euro), the more sympathetic it might be to UK objectives to define the EU as a club beyond the euro. Remember, Moderaterna still had people like Carl Bildt who recently said that Sweden should and will join the euro. On issues like the EU budget, democracy and transparency a centre-left government will be just as helpful as the Reindfeldt government.

Still, a centre-left government might be less keen on free trade and dynamic financial markets, though in truth, any Swedish minority government would and will have to work hard to get through an ambitious services directive for example. And by simply belonging to a political family, the willingness to strike deals may be tempered. Also, Reinfeldt and Cameron did get along on a personal level, though that relationship was strained recently (as it became between Anders Borg and George Osborne).

Instead. the significance of the Swedish elections was the fragmentation of the centre, and the rise of an anti-establishment party, that the mainstream still has no convincing answers to. In that sense, Sweden just became a bit more European – and we don’t mean that in a good way in this instance.

Friday, September 12, 2014

What impact could this round of Russian retaliatory sanctions have on Europe?

In our continuing effort to bring increased transparency to the murky issue of sanctions we’ve compiled some initial thoughts on the likely Russian retaliatory response to the EU’s latest sanctions – published in full here and which we already analysed in detail here.

There are a few key measures which Russia is said to be considering:
  1. Banning or limiting the import of cars (and possibly all automobiles) from Europe.
  2. Banning or limiting the import of certain manufactured goods.
  3. Banning or limiting the import of certain types of clothing manufactured in Europe.
  4. Restricting the access of European flights to Russia airspace, probably over Siberia.
With the previous round of Russian retaliation we saw uproar from the industries involved and some questionable claims for compensation – a process which now looks to have been halted. The response also seemed to weigh on the minds of certain countries, such as Finland and Czech Republic, which in turn played a role in delaying the latest round of sanctions.

With that in mind its worth delving into what impact these mooted measures could have.

In terms of exports of cars, Russia remains quite an important destination for European exports as the graph above from the European Automobile Manufacturers Association shows. In 2012 Russia accounted for 8.1% of EU exports in this sector in terms of value – around €8.7bn. Ultimately, the impact will depend on exactly how the sanctions are structured – we doubt Russia would ban all exports of cars, it could be focused on only used cars or certain types or price brackets. In terms of countries which would be hit the obvious answer is Germany, but other countries such as the UK, France, Belgium and Spain could feel the pinch (albeit on a much smaller scale). Its also important to remember that, even without any sanctions we are already seeing a sharp fall in the level of cars being exported to Russia.


The story for clothing is similar. Russia remains quite an important export market for EU members, with exports to Russia totalling €3.185bn in 2013, making it the second largest destination for exports of EU clothing (graph above from European Fashion and Textiles Export Council). Meanwhile, as the graph below shows, the main countries exposed are Italy and Germany. This area could be particularly sensitive since we have already seen companies such as Adidas warning that the ongoing hostilities between the EU and Russia could severely hamper its business.


Comparing this to the previous round of retaliation, the figures do look a magnitude larger, although it does ultimately depend how broad the sanctions are and how long they last for. The potential sanctions on manufactured goods remains too vague to really assess, however, we can look a bit deeper into the airspace issue.

As the data to the left from FlightRadar24 (compiled by Bloomberg) shows there are lots of flights which use Russian airspace. This map from the Times, highlights that having to fly around Russia would be no small inconvenience and would certainly increase fuel costs and flying times.

So how likely are all these sanctions?

The feeling in Russia seems quite hostile this time around, compared to previously when they have more or less shrugged off the sanctions. This could be because Russia had hoped the ceasefire process would appease the EU, not least after the delay. Furthermore, the EU’s decision to target Rosneft, a key player in the energy market, may be seen as crossing a rubicon, since large energy firms had been largely off limits.

That being said, in the longer term, Russia probably has more to lose out from economic sanctions. Take for example the airspace ban – European firms pay around $185m per year for access to this airspace. Russia would also have to spend additional funds to enforce and police its airspace. Furthermore, the number of Russian flights which use European airspace is far higher, meaning a tit-for-tat sanction in this area would be particularly painful.

Some retaliation seems inevitable but Russia will still need to be cautious of further escalating the growing economic divide with Europe.

Thursday, September 11, 2014

What to expect from the Commission's new economics team

Will France's Moscovici (left) be effectively shackled by
Finland's Katainen (centre) and Latvia's Dombrovskis (right)?
The new European Commission (EC) also sees the overhaul of its approach to the Eurozone. While Pierre Moscovici holds the Economic and Financial Affairs post (essentially Olli Rehn’s successor), he will be overseen by the Vice Presidents (VPs) for Jobs, Growth, Investment and Competitiveness and the Euro and Social Dialogue – Jyrki Katainen and Valdis Dombrovskis respectively.

An edge has been added to all this with quick German criticism of the decision to give former French Finance Minister Moscovici such a prominent economic post.

We have already pointed out in our full response to the new Commission that, contrary to popular belief (at least in some quarters in Germany), this does not necessarily change much – a lot of Eurozone rules are already set in stone. However, it is important to delve a bit more into who has what powers or controls which areas?

Katainen’s key responsibilities:
  • Helping bring together an investment package to mobilise €300bn in additional public and private investment via the European Investment Bank within the next three months – expected to be discussed at tomorrow’s eurogroup meeting and unveiled soon.
  • Coordinating the mid-term review of Europe 2020 strategy and long-term EU budget.
  • Pushing economic policy coordination in line with view of “social market economy” while also pursuing a strong structural reform agenda.
Dombrovskis:
  • Steering the ongoing reform of the Economic and Monetary Union and, importantly, in charge of pursuing the work of the four Presidents' report on creating a 'deep and genuine' EMU. This suggests he will play a significant role in the bid to create a sounder eurozone and finding a way to marry the existing currency union with greater political union. It's important to note that this will bring him into regular contact with Lord Hill who is responsible for banking union in the new Commission - exactly how the financial stability aspect and the eurozone prosperity aspect will fit together here will be interesting to watch.
  • Formal oversight of the European semester – the mechanism through which budget rules are enforced in the eurozone. Also tasked with reviewing the mechanisms for achieving structural reform.
Moscovici:
  • As might be expected there is significant overlap with those above. He has also been tasked with handling the European semester. It is expected he will handle the day to day evaluation and, in cooperation with others, will sign off on national budgets and reform plans.
  • The language around the Stability and Growth Pact is also in line with previous thinking, tasking Moscovici with making “best possible use of the flexibility that is built into” the rules.
  • The focus of this role seems to be on the macroeconomics and fiscal coordination of the eurozone. With that in mind, its expected Moscovici will attend eurogroup meetings on behalf of the Commission.
Overall then, while France may have got what it wished for, Moscovici looks firmly shackled to two fiscal conservatives. None of his tasks relating to the Eurozone are separated from these two VPs. More broadly, as the FT has pointed out, Moscovici (a French socialist) is also severely ideologically outnumbered not only within the broader Commission but specifically in the economic and financial posts.

Furthermore, the language used in the text of the letters remains quite Germanic and in line with the thinking of the current Commission:
“Combining growth-friendly fiscal consolidation, structural reforms and targeted support to investment will be key to a sustainable and strong recovery.”

“Sustainable growth cannot be built on ever-growing mountains of debt. We also know well that it is mainly companies that create jobs, not governments or EU institutions.”
There are also numerous mentions of “sound public finances” and the “social market economy” both core elements of the prevailing German economic thinking.

What to expect from the new Commission in terms of eurozone economic policy?

Finally, there are a couple of hints of what key proposals may be coming in the future. We have already mentioned the reference to a new investment package and the desire to push ahead with reviewing the current surveillance system. A further development seems to be for all those involved to try to engage a “broader range of actors at national level”, make the measures taken to improve the Eurozone more “socially legitimate” and find a more democratic alternative to the EU/IMF/ECB Troika. This suggests fostering national support for the likely continuation of significant structural reform and fiscal consolidation will be a key task for these Commissioners.

With that in mind, there is one final interesting line which is found in both Moscovici’s and Dombrovskis’ letter, they are tasked with forming:
“Proposals to encourage further structural reforms, possibly supported by financial incentives and a targeted fiscal capacity at Euro zone level”
This sounds eerily like a revival of the reform contracts, which Germany has been pushing for some time. The idea has been gaining ground once again after ECB President Mario Draghi suggested that structural reform should have similar oversight to that currently seen for national budgets. The latter part is also interesting, albeit very cryptic and vague. It could refer to the creation of a eurozone budget, possibly focused on tackling unemployment and related costs. Equally, it could refer to something along the lines of a wider assessment of the eurozone’s fiscal capacity and using it where there is scope to do so – meaning some kind of fiscal expansion in Germany (and other strong states) to offset fiscal contraction elsewhere.

Expect movement on these issues in coming months.

Wednesday, September 10, 2014

Lord Hill is the EU's new financial services Commissioner - but what is his remit and who does he report to?

With the future of the UK seemingly hanging by a thread it is understandable that events north of the border are dominating attention, but today's announcement of the new European Commission also has far-reaching consequences for the future of the UK's EU membership and the EU itself.

As we set out in our flash analysis, the appointment of Lord Hill to the key financial services portfolio (pending approval by MEPs) is a win for the UK, and the general reformist outlook of the Commission, with other crucial posts (Internal Market and Competition) held by liberal, pro-free trade, non-eurozone countries, provides grounds for cautious optimism.

What will Lord Hill's portfolio include?
  • Overseeing the creation of the banking union – a crucial policy for the eurozone but also one which threatens to split the EU into euro-ins and outs. In his new role, Lord Hill can ensure this does not happen. That being said, this is a very tricky role to manage (with numerous competing interests), especially for a non-eurozone country.
  • Power to review the role of the European supervisory authorities, institutions which have been controversial in the UK since their creation.
  • Responsibility for a 'Capital Markets Union'. While this remains vague it could be a good initiative for the UK since London is already the centre of European capital markets. Lord Hill can base the union around the single market rather than the eurozone.
As the charts below show, the Commission has also been re-organised with a series of policy clusters, with the UK being at the heart of all the major decisions relating to the single market, jobs and growth and the Eurozone. Each 'cluster' will be headed by a Vice-President, previously a largely meaningless role but now with additional agenda setting powers and the ability to stop legislative proposals from other Commissioners.



Lord Hill will 'report' to two Vice Presidents who will "steer and co-ordinate" depending on the issue at hand - the new "Jobs, Growth, Investment and Competitiveness" VP Jyrki Katainen and the "Euro and Social Dialogue" VP Valdis Dombrovskis (both of whom are former PMs). In terms of the two VPs, Dombrovskis is likely to supervise the banking union aspects of Lord Hill's post while Katainen will oversee the more single market aspects, although even here, there is plenty of scope for overlap.

Lord Hill's portfolio also has some overlap (and therefore potential conflict) with France's new Economic and Monetary Affairs Commissioner Pierre Moscovici .The potential for Anglo-French clashes within the Commission is relatively limited since Moscovici will be primarily tasked with macroeconomic eurozone policies rather than financial markets, but one potentially fraught area could the be Financial Transaction Tax or a Common Consolidated Corporate Tax Base. Juncker has asked Moscovici to finalise negotiations over both.

It remains to be seen how the relationship between VPs and different clusters will work in practice, especially as Juncker himself has insisted that "In the new Commission, there are no first or second-class Commissioners", and since decisions in the College of Commissioners have traditionally been taken by a majority of all Commissioners in a secret vote. However, Juncker also made clear that the Vice-Presidents “can stop any initiative, including legislative initiatives” of other commissioners – effectively acting as “a filter”.

Time will tell how potential disputes play out or are resolved and to what extent the VPs can truly veto proposals. What is clear is that the relationship between these four men could be crucially important.