Downing Street goes for much needed shock therapy

With the eurozone destined for years of navel-gazing, as it struggles through the current sovereign debt and banking crisis, the UK is actually very well placed to push for EU reform. Its own economic challenges aside, Britain now has a chance to use the debt and competitiveness predicament facing several European countries and the EU as a whole as a springboard to get Europe back on the road to growth.

In other words, this could be turned into a benign crisis for those of us who are in favour of a growing and competitive Europe (it's hard to argue that Europe doesn't need reform when several countries are on the verge of bankruptcy).

Encouragingly, Downing Street has moved today to try and push this agenda, with a new initiative entitled "Let's choose growth" - and there's lots of good stuff in there (and the format is refreshingly innovative and easy to grasp, including this You Tube clip). Besides the proposals to liberalise the single market further, by creating a common market for digital and service industries and calling for deregulation, there also seems to be an emphasis on 'shock therapy'. Cameron and Co have made it plain to EU leaders that standing still is not an option as the rest of the world moves on.


This chart should be all the motivation Europe needs. As you can see, by 2050, only Germany and the UK are predicted to remain among the world's economic elite, and they will only be hanging on to the bottom two rungs of the ladder.

The rise of the likes of China, India and Brazil is inevitable but this is no excuse for Europe to give up. The big question however is whether the UK and other like-minded governments, such as the Scandinavians, the Dutch and the Czechs, will be able to keep the eurozone's attention long enough to make the point.

For this to happen, the British government needs to roll up its sleeves and get down to business: form alliances (cultivate, cultivate, cultivate the Scandies, new members - and the biggest prize of them all - Germany), horse-trade, manage the European Parliament, convince through pursuing best practice at home (such as the 'Better Regulation agenda', and a strong, healthy economy), on EU proposals get in early and get in low - but be tougher and shrewder when negotiations get rowdy.

Downing Street should be given credit for raising its game on EU reform. But now it must show it can turn a catchy pamphlet into concrete action.

What conclusions should we draw from Germany's abstention on no-fly zone?

Last night's UN resolution authorising the creation and enforcement of a no-fly zone over Libya, and Germany's abstention in the Security Council's vote in particular, is stirring quite a debate.

Iain Dale has been quick to denounce the German abstention as "shameful" and an act of "cowardice".

The Spectator's Alex Massie has countered that:

Having doubts is not shameful and I don't see why we are supposed to think that Germany should have supported the resolution simply because Britain, France and other countries were doing so.

Perhaps I'm missing something, but if sovereignty means anything it must permit sovereign, friendly nations to disagree on matters of major international importance. (And if the Germans are bad europeans for preventing a common EU approach doesn't that just mean they're fulfilling the traditional British role? Which in turn means they must, from the eurosceptic position, be the Good Guys in this instance.)

Germany's aloofness when it comes to matters of foreign policy and military action can be extremely frustrating. Take its unwillingness to get fully involved in Afghanistan, despite providing the third largest contingent of NATO troops, as an example. The legacy of the Second World War still looms large in the German psyche and that is somewhat understandable.

But, whatever one's views about the merits of Germany's perceived pacifism, Massie makes surely the most important point: that countries should be free to make up their own minds and, if they disagree with each other, so be it.

The real problems arise when you try to force these different views through the funnel/sausage machine that is the EU in the hope of a single common position.

At last week's summit, we should remember, it was Germany that blocked EU endorsement of a no-fly zone. This, in the words of the Independent, left France and the UK "isolated" in their call for intervention. This was, of course, nonsense because, as we have seen, it was never going to be the EU that decided on the use of force. The Franco-British defence pact, agreed last year outside the auspices of the EU, was an admission - however small - on the part of France that to get things done militarily, the EU is just too slow, indecisive and unwieldy.

And it was the Frankfurter Allgemeine Zeitung that today noted "the tensions in foreign policy between France and Germany are remarkable," adding that the lack of Franco-German consensus was "paralysing the EU".

The Franco-German relationship will always be the most important in the EU (they share a border, a turbulent history and the same currency), but on more and more issues, be it defence or the future of the euro, as France and Germany get up close and personal, the more they start to grate with each other. The FAZ article started by noting that newly appointed French Foreign Minister Alain Juppe's first visit to Berlin was cancelled, albeit with the "plausible excuse" that he had to fly to the UN in New York.

Alright, it's only in one area, and hopefully it won't come to the use of force, but if France begins to see the benefits of a flexible approach to European cooperation, sometimes outside the EU, this could prove to be important in breaking down the EU's monolithic approach to many other issues.

Lowest common denominator

EU leaders - still visibly split - have just agreed on a trade-marked "least common denominator" statement on Libya, following today's summit in Brussels. Speaking at the end of the summit, David Cameron said that the EU's 27 leaders were "united, categorical and crystal-clear" that Gaddafi had to go - which is a welcome statement (Gaddafi is a maniac after all) but not much different to what the EU leaders who matter had already called for.

In terms of substance, EU leaders agreed new sanctions against financial institutions linked to the Gaddafi family, adding the Libyan Central Bank and Libyan Investment Authority to the EU asset-freezing list. It also agreed that "contingency planning" involving "all options" should continue, in case Gaddafi and his LSE-educated son, continue to act crazy.

The communique didn't refer to a no-fly zone, however, despite Nicolas Sarkozy calling for "defensive" and "limited" air strikes - something he said he had British support for.

Before the summit, Sarko said,

"We the French and the Britons have given our availability – under the explicit condition that the United Nations want it, the Arab League agrees to it and the Libyan Authorities that we want to be recognised wish it – to carry out targeted, purely defensive actions, and only in the event that Mr. Gaddafi used chemical weapons or the aviation against people who are demonstrating without violence."

The reluctance of other leaders to subscribe to this reasoning means that the UK and France were sidestepped on this point. The EU remains all over the place on a no-fly zone (and France still stands alone in recognizing the Libyan opposition).

This also appears to be the first time that Cameron has openly clashed with EU 'foreign minister' Cathy Ashton, who according to PA, is now warning against a no-fly zone. An EU diplomat is quoted saying:

The efficiency of a no-fly zone is very questionable. Apart from anything else, European command and control facilities would not be able to get a no-fly zone up and running in less than five or six weeks, and Nato is suggesting it would take at least three to four weeks.

All of this is of course being played down by Downing Street.

That the EU's two most credible military powers and only permanent members of the UN security council are seemingly at odds with the other 25 member states illustrates the limitations on the EU's foreign policy ambitions. Although a no-fly zone would almost certainly require US approval and firepower, in Europe, the UK and France are the only game in town if things get really nasty. But still, everyone must be included, no one left out.

Today's meeting was all about EU self-assurance and will have little bearing on on how things turn out on the ground.

One challenge down, many to go

EU member states have today agreed to impose sanctions on the Gaddafi regime. The decision follows on from a UN Security Council Resolution adopted over the weekend.

Italy, who only a few days ago strongly rejected talk of sanctions, has apparently backed down with Italian Foreign Minister Franco Frattini saying that the Libyan crisis has reached “a point of no return”. It is “inevitable” that Gaddafi steps down, he added.

The sanctions agreed by EU leaders consist of the following:

• a ban on the supply to Libya of arms, ammunition and "equipment which might be used for internal repression".
  
• a ban on 26 individuals from entering the EU, including Gaddafi, his closest family and a handful other people associated with the regime.
  
• a freeze on the assets of Gaddafi, members of his family and ten other individuals.

EU Foreign Policy Chief Catherine Ashton also said that the "complex issue" of creating a no-fly zone over Libya is being explored by EU and world leaders. UK PM David Cameron just gave a statement before the House of Commons, setting out the UK's role in the sanctions.

In other words, following a slow start EU countries are now picking up the pace. The pro-democracy protests in Libya and the subsequent violent crack-downs by Gaddafi, kicked off on 15 February. It took the EU roughly two weeks to reach a common position on some form of concrete measures.

That isn't exactly acting with the speed of lightening, but given the complexity of the situation, it could've taken them a lot longer as well (after all, EU member states are still disagreeing fundamentally on how to deal with Cuba).

What's clear is that the EU institutions themselves - such as the External Action Service - have added very little value to Europe's response to the unrests in North Africa. As ever, what was needed was political will, not institutions.

Now, a common EU policy isn't a goal in itself - a fallacy that EU federalists consistently commit (see Romano Prodi in today's Handelsblatt for an example). What matters is real policies and outcomes. And these sanctions could hurt Gaddafi in a real way if implemented in full, though we shouldn't overestimate their importance either.

Cutting off the links to what quite clearly is a Mugabe-type dictator shouldn't be that controversial (we're not talking intervention after all). A bigger challenge, however, might be around the corner if the violence in the region escalates and there are calls for something more.

A separate, but related, challenge is the growing calls for a common EU policy on immigration and asylum, in the wake of the unrest in North Africa and the potential flow of people from that region. This is an uber-controversial policy area which in the past has split Europe right down the middle.

One challenge down, many to go.

Policy before institution, please

In regards to Egypt, institutional Europe was lacking a clear line until [French President] Nicolas Sarkozy, [German Chancellor] Angela Merkel and David Cameron decided to put pressure on [Egyptian leader] Hosni Mubarak to implement the ‘political, economic and social reforms’ he had pledged. Until then, Catherine Ashton, the voice of [the EU’s] diplomacy, and Herman Van Rompuy, President of the [European] Council, had been grinding topical phrases about the rejection of violence and the necessity of dialogue.

- An article in today's Le Figaro criticises the EU’s response to the recent crises in the Arab world and summarises the problems inherent in the EU's confused foreign policy set-up, i.e. institutions without real policies.

What should Cameron be pushing for at the EU summit?

We answer that question over on the Spectator's Coffee House blog - read it here.

When the driving force of policy is not to cause a fuss

Over on his blog, the WSJ's Iain Martin is today making clear what he thinks of Cameron's performance at the EU summit last week, and the Coalition's Europe policy more widely:

Cameron’s priority on Europe has been, as it has been throughout his leadership, that it shouldn’t flare up and cause him a problem. In coalition with the Lib-Dems, he now has even more reason to avoid the issue. Around him are former Euroskeptics, such as William Hague, who are prepared to go along with the European project (as currently constituted) in return for a quiet life and the perks of office.

But it’s been obvious for a while that the tectonic plates are shifting in the EU. The sovereign-debt crisis was only dealt with because Germany agreed to underwrite the temporary arrangements put in place to allow for a bailout. Angela Merkel was always going to come back and demand that permanent arrangements be put in place, and that other members of the single currency start to play by German rules...

...Last week Cameron indicated that Merkel could get the changes she wanted to Lisbon, etc., in return for… er, nothing. This is what happens when the driving force of a policy is the desire to not cause a fuss.

Has Cameron underplayed the UK's hand in Europe?

Over at Conservative Home, we examine how David Cameron is getting on in Brussels - the performance so far is a mixed bag, but there's a clear risk that he has underplayed the UK's hand in the negotiations.

Meanwhile, German media praises Angela Merkel's "poker skills". She has now achieved backing from EU leaders, in principle at least, for changing the Treaty in order to introduce a permanent crisis mechanism for the eurozone.

Cameron gives way on new treaty for 2.9% budget increase?

Die Welt is reporting that Cameron has done a deal with Merkel on treaty change.

The article notes that Merkel signed a letter penned by Cameron stating that the Council would not accept a budget increase higher than 2.9% in negotiations with the European Parliament. In return, Cameron will back Merkel's demand for a treaty change, reportedly assuring Merkel that he will secure the passage of a new treaty through the UK Parliament without a referendum.

As we argued earlier today, even if Cameron were to achieve a freeze to the EU budget, there’s nothing stopping MEPs and other member states from pushing through a substantial increase in 2012 or 2013 to make up for it.

If the reports are true, Cameron may well have severely underplayed the UK's hand, missing the opportunity to get real concessions in return for treaty change. A one-year 2.9% budget increase certainly doesn't cut it.

If true, Cameron has just given away the greatest leverage the UK has had in EU negotiations in a very, very long time...

How Cameron should play his cards in Europe

Over at the Spectator's Coffee House blog, we take a look at how David Cameron should approach today and tomorrow's EU summit - and how he should play his cards in negotiations in Europe moving forward.

We argue,

The British media woke up this week, realising that Europe still exists. As David Cameron travels to Brussels, questions loom over what, exactly, he can achieve in Europe – at this summit, and more importantly, moving forward.

Much of the commentary surrounding the summit has focussed on the increase to the EU’s 2011 budget, which Cameron is fighting. And for good reason. It’s insane that Britain – or any other net contributing state – should be forced to accept any increase to the EU budget, at a time of tough austerity at home.

Cameron has spent considerable time talking up the negotiations on the budget increase, so he may have an ace up his sleeve to achieve a cash freeze tomorrow or in the coming weeks. But a 2.9% hike is not unlikely, meaning that an extra £430 million would be added to UK taxpayers EU bill – or even more once the European Parliament has had its greedy hands on it.

However, as outrageous as it is, the annual budget increase is only a side show in a far bigger act.

Even if he were to achieve a freeze to the EU budget, there’s nothing stopping MEPs and other member states from pushing through a substantial increase in 2012 or 2013 to make up for it. The EU budget is negotiated in seven-year periods (though that can vary), with minor adjustments being made on an annual basis. Sadly, negotiations over this budget period have already been lost – courtesy of Tony Blair in 2005.

So the bigger prize – which may or may not be discussed in corridors at the summit – is clearly a reduction in the size of the budget from 2014 onwards. Cameron has rightly stated that this is his priority moving forward.

But here Cameron could be committing a strategic mistake. The temptation is to try to ask for concessions on the post-21014 EU budget, in return for supporting Merkel’s repeated calls for a Treaty change to fix the eurozone.

Thing is, the UK already has a veto over the negotiations on the post-2014 budget. If the UK refuses to agree, an effective cash freeze will be achieved anyway as the previous budget will be carried over. Secondly, member states are desperate to get rid of the UK’s rebate from the EU budget – in itself a powerful bargaining chip.

So if Cameron trades budget concessions for Treaty change, he will effectively be giving his EU partners two for the price of one.

A better way forward for Cameron is to horse trade on the EU budget and possible Treaty change separately.

Despite strong opposition from EU leaders, German Chancellor Angela Merkel continues to push for a Treaty change to fix the eurozone. And she won’t cave in easily.

As we’ve argued before, Cameron should back Merkel’s calls for Treaty change in return for repatriating powers to Britain. It Treaty change actually materialises, the whole package can then be put to a public vote in a genuine referendum on EU reform. Many Tory backbenchers are now picking up on this idea as well.

Cameron and Merkel will meet on Saturday night over dinner to discuss the way forward for the EU. The Prime Minister must think carefully about how to use the unusually fluid European situation to put Britain’s relationship with the EU on a more sustainable path.

The scope for a new Anglo-German grand bargain is greater than in a long-time. But for Cameron to give away his hand this early would be a serious mistake.

Frosty

The Franco-German axis, which for so long has defined the European Union, has taken some serious hits lately. Following the trauma of the eurozone crisis, the relationship between the two countries is heading towards a historic post-war low - to the point that Angela Merkel and Nicolas Sarkozy are no longer on speaking terms according to whispers in Brussels. This wasn't helped by Sarkozy's comments the other week that "95 percent" of the bailout package deal agreed corresponded to French demands.

Today Wirtschaftswoche takes an interesting look at the strains, quoting one "experienced" CDU source saying that "In this government one can talk anti-French without being punished...that wasn't the case at the time of [Chancellor] Kohl".

Quite extrordinarily, the article also suggests that relations between Sarkozy and Merkel are at such a low ebb that "Merkel likes to imitate the vain behaviour of the little Frenchman, thereby making friends in her party laugh during the late hours." Harsh!

Apart from the huge implications for the future of the EU, Merkel's more assertive stance - and the power vacuum left by the radical weakening of the Franco-German axis - is also proving very confusing for journalists. Particularly anglo-saxon ones. In today's FT, Philip Stephens is so perplexed by this new order that he desperately searches for some sort of familiar point of reference and finds....Margaret Thatcher! Stephens argues:

"Mrs Thatcher spoke the language of the small shopkeeper from her native Lincolnshire. Ms Merkel, as determined as was Britain’s Iron Lady that Germany should no longer pick up Europe’s bills, has her own exemplar of the virtues of provincial thrift."

He also seems very pleased with his phrase "anti-European invective", using it twice to describe what he sees as the mood in the UK and Germany - without engaging with any of the actual arguments about the sustainability of the current model for European integration. Stephens is obviously struggling to get with the programme. If Merkel sounds like Thatcher, what exactly is that a sign of? German taxpayers are potentially liable for some €120 billion in eurozone loans and have just seen the independence of the ECB kissed goodbye - after having been promised that neither could ever happen. Whining over the fact that the Germans are not acting like this is 'business as usual' just isn't serious.

In Stephens' eyes the whole world is turning 'anti-European', apart from Sarkozy and a freemasonry of like-minded Eurocrats in Brussels (to steal a phrase from a thought-provoking piece by Simon Jenkins the other day). His views sound almost...provincial.

A leader in today's IHT is also struggling to come to terms with the changing nature of Europe:

"Now, at the worst possible moment, Germany is turning to nationalist illusions. Europe’s past economic successes are now viewed as German successes. Europe’s current deep problems are everyone else’s except Germany’s. That is neither realistic nor sustainable. But German politicians and commentators are callously and self-destructively feeding these ideas."

Some journalists should really get out more and see some ordinary people outside of the political bubbles in a few selected capitals. A more sensible take on the situation can be found in the Economist's Charlemagne column today:

"Anger and denial are hardly surprising. Germans were promised that the single currency would be the old Deutschmark in new clothes, backed by Teutonic discipline and a fiercely independent central bank. Arguably, that fantasy Deutschmark died early on May 10th, when a euro-zone bail-out mechanism was agreed and the European Central Bank started buying government bonds by the bucket load. Germans are now in mourning. How they recover is not just their problem, but Europe's".

In any case, the broken Franco-German engine certainly opens up the playing field for new alliances in Europe - and a new, more sustainable and healthy European agenda. Is the UK's Con-Lib coalition government ready to go to work?

Threat or opportunity?

The German-led calls for an IMF-style bailout fund for the EU have caught most people on the hop, including the French, and the lack of detail suggests that the practicalities are only now being worked on inside the German Finance Ministry.

French officials have said that there are two fundamental issues still up for debate: whether the European Monetary Fund would cover only the eurozone or all of the EU's 27 member states, and whether the EU treaties should be amended to create the fund. Plainly, there is a long way to go before the EMF gets off the ground and the current debates are highly speculative.

But as far as the first question goes, if the proposed EMF were to include all 27 member states, rather than just the eurozone, this would obviously have significant implications for the UK as British taxpayers would be asked to underwrite other EU governments’ debts. It would also draw the UK into a system of EU 'economic government' that would potentially give the EU greater powers to interfere in monitor the Government's handling of the economy.

For both of these reasons, any UK government is likely to stay well clear of any participation in the EMF.

The second issue, over whether an EMF would require treaty change, is far from clear but there are a few hypothetical scenarios.

Paris appears cautious about any proposal for an EMF that would require treaty change. French Finance Minister Christine Lagarde reportedly said that "Other avenues should be explored" that are in line with the existing Lisbon Treaty. This suggests one of those creative legal EU solutions which confuses everyone (possibly involving the Lisbon Treaty's ratchet clause which allows for amendment of the Treaty without it being considered an actual treaty change).

However, Chancellor Angela Merkel yesterday made it clear that she thought that the creation of a bailout fund would certainly require changes to the EU treaties. "Without treaty changes we can't form such a fund," she said. And given that it would amount to a breach of the current 'no bailout' rules in the treaties, it is hard to argue with her.

Commentators are already suggesting that new EU treaty negotiations would present both Labour and the Conservatives with big problems. Gordon Brown promised MPs that after Lisbon there would not be any institutional changes in the next Parliament:

I can confirm that, not just for this Parliament but also for the next, it is the position of the Government to oppose any further institutional change in the relationship between the EU and its member states. [Hansard, 22 October 2007]

Similarly, the Conservatives announced last year that they would give voters a referendum on future transfers of power to the EU.

However, depending on how this plays out, an EMF that didn't include the UK could actually present the UK with a sizeable bargaining chip, particularly a future Conservative government. Treaty change would require the Government's consent, whether the UK is involved in the EMF or not. In other words, this could be an opporunity for an incoming Conservative government.

The Conservatives have said they want to renegotiate areas of the UK's membership, notably opt-outs from costly EU employment regulation and intrusive justice and home affairs legislation. In addition, an incoming UK Government has a lot of work to do on the EU budget and the single market issues, including financial legislation.

There is possibly a deal to be done here – the Tories could say "if want to go ahead with the EMF and closer economic integration of the eurozone you need to give us something that we want in return." In Cameron's own words, it would be the ideal opportunity to argue and demonstrate "that European integration is not a one way street and that powers can be returned from the EU to its member countries".

The tricky issue is of course that the Conservatives' promised - or at least are now percieved to have promised - that any siginficant treaty change leading to further integration would trigger a referendum in the UK. And the establishment of an EMF would be a big change, as it would create a whole new EU institution and a lender of last resort at the EU-level. This, in turn, is a clear step towards fiscal federalism, regardless of whether the UK takes part.

At the same time, if not involving Britian at all, the argument can be made that it does not involve a transfer of powers from the UK to the EU per se. Indeed, if put in the right context, it could be presented as a method of regaining powers from the EU, by taking the creation of EMF 'hostage' in EU negotiations.

The critics were quick to say that Cameron's policy was unrealistic and undeliverable, but if the proposal for an EMF gains speed he may be presented with an early opportunity to prove them wrong.

If all the pieces fall into place, he should take it.