Saturday, 10 December 2011

Questions from the EU summit

We are told that 26 out of 27 European leaders agreed to amend the Lisbon treaty, but David Cameron exercised Britain's veto.  So the 26 will do as they wanted, but it won't be an EU agreement.

The leaders' statements raise more questions then they answer.  Among them:

- Were they really hoping to revise the Lisbon treaty?
A revised treaty would have to be approved by all 27 parliaments, and the Irish would probably have to have a referendum (unless the Supreme Court decided the revision didn't substantially alter the character of the Union).  It took two years and two Irish referendums to get the original Lisbon treaty ratified.

Cynics, including me, will have at least a passing suspicion that none of the countries really wanted unanimous agreement.  It would suit everyone if the deal could be kept just this side of requiring an new referendum in Ireland.  The 26 countries want to be seen to be tough on banks, especially Germany which has spent much more (Figure 1.6) than the UK on bail-outs.  Cameron wants to be seen to be tough on the EU.  This looks like a separation made in heaven.

- What exactly was it Merkel and Cameron couldn't agree on?
Sarkozy has made the clearest statement about this: he says the sticking point had been Mr Cameron's insistence on a protocol allowing London to opt out of proposed change on financial services. "We were not able to accept because we consider quite the contrary - that a very large and substantial amount of the problems we are facing around the world are a result of lack of regulation of financial services and therefore can't have a waiver for the United Kingdom."  The word 'because' is being strained to breaking point there: there's nothing about the substance of the plan that requires new powers to regulate financial services.

This document gives an outline of the plan.  The first ten clauses are concerned with the enforcement of budgetary discipline in the member states.  The rest is about the new "European Stability Mechanism" (ESM).  Clause 15 provides for qualified majority voting when emergency assistance is needed.  There's nothing about financial regulation.

The major disagreement between the UK and the others has been on the proposed European Financial Transactions Tax: the rest of the EU wants a tax on business in London to be paid directly to Brussels and the UK doesn't.  It's plausible that (unpublished) details of the proposed agreement would remove the UK's veto on this, and Cameron wouldn't agree.

- Why wouldn't Cameron tell us?
He said "We have protected Britain's financial services, and manufacturing companies that need to be able to trade their businesses, their products, into Europe. We've protected all these industries from the development of eurozone integration spilling over and affecting the non-euro members of the European Union". Which seems to be a suggestion joining the other 26 would make it harder for the UK to sell them stuff. Colour me sceptical on that one.

If the real sticking point was that he wanted to retain a veto on a Financial Transactions Tax, why not say so?  OK, banks are not popular, but neither is giving money to the EU.  Couldn't he have said "they want to impose a tax on business in London that would be paid directly to Brussels.  I wouldn't agree to let them do that."?  The only explanation that makes sense to me is that the 27 agreed not to be specific about the problem, so that each could spin it in their own way.

- What is Merkel's plan to save the Euro?
No one seriously imagines that austerity alone is going to do it.  Cutting government spending never achieves the intended savings, because the government gets some proportion of its spending back in tax revenues.  The underlying problem is in the balance of trade: if each country had its own currency then FX rates would have adjusted to prevent the imbalances getting too large.  As it is, Italy, Spain, Portugal and Greece are all running large deficits.  It would in theory be possible for austerity to reduce imports enough (except perhaps in Greece which has a problem collecting taxes), but that's a theory that requires people not to mind having their living standards crushed.

Last time I wrote about this I guessed that the markets guessed that she was going quietly to allow the ECB to undertake a massive programme of Quantitative Easing, using the money to buy PIGS bonds.  There's still no sign of that.  The plan as it stands seems to be to calm down the bond markets with more or less believable promises of austerity, with the ESM - a slightly souped up EFSF - to contain any local difficulties: it's hard to see that's going to be sufficient to let Italy refinance its debt at affordable interest rates.

What might work in the medium term would be for Germany to spend (you might prefer to say 'invest') its trade surplus in the PIGS.  For example, it likes solar power: how about building solar cell factories in those countries, buying up land there where the sun shines a lot (this is not the hardest part) and covering it in solar power stations?  That would help meet any undertakings the EU may make in Durban, and I think it would be a lot easier to persuade German voters to spend money on saving the planet than on supporting pensioners in Greece.

- Whose hand did Nicolas Sarkozy want to shake in Le Snub?
Sarkozy air kisses the hand of Dalia Grybauskait─Ś, president of Lithuania, then seems to swerve a handshake with Cameron, in favour of Dimitris Christofias, president of Cyprus.  According to the Telegraph it was just a trick of the camera angle - "Mr Sarkozy was making eye contact with a man beyond Mr Cameron". According to me, Sarkozy was making a beeline for one man in the room whose hand he could shake without having to look up.  (It's interesting that none of the newspapers' European correspondents is able to identify minor European presidents.)

- Has Ed Miliband got a plan?
According to Miliband, Cameron "mishandled these negotiations spectacularly".  But how would he know, he wasn't there?  Miliband has got a real chance of becoming Prime Minister in three years or so: he needs to start behaving like someone who can be taken seriously in that role.  When commenting on international affairs, he should be saying something statesmenlike, along the lines of "it's unfortunate for Great Britain that the Prime Minister was unable to reach an agreement in the best interests of the country.  I will be meeting with Mr Cameron to find out why he was unable to do so."

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