Out of the pigsty- Andrew Duff questions Italy’s new electoral law

Posted by Andrew Duff MEP on 13/03/14

The Camera dei Deputati has just voted (12 March), by 365 to 156, after 36 hours of debate, to reform Italy’s electoral law. Followers of Italian politics may jump with joy, because the current electoral system – nicknamed Porcellum (pigsty) – is a significant cause of the country’s perennial instability and economic weakness. But the new system needs careful examination before Evviva!

Modern European standards in electoral law and practice suggest, first, that seats won in a parliament should broadly match the votes cast in the ballot box. Second, electoral participation is strengthened where the voter can express an individual preference for a candidate with which he or she can easily identify. And, third, thresholds to exclude minorities, if they continue to exist, should be low. Even ‘Vlad the Bad’ Putin has lowered the threshold in Russia from 7% to 5%, although democracy in oriental Turkey is still hampered by having an electoral threshold of 10%. For the elections to the European Parliament, thresholds may not exceed 5%. The Bundesverfassungsgericht, by the way, has just abolished the German threshold for the European elections entirely.

Europe is becoming more pluralist and democratic. Electoral practices which were put in place in the shadow of Europe’s totalitarian age are anachronistic. Europe is also becoming more interdependent in constitutional terms, especially within the EU. What happens where domestic constitutional changes go wrong, as in Hungary, matters to the EU as a whole. As fellow EU citizens, we have a right to make our voice heard if democracy and respect for civil liberties are not everywhere reinforced.

So what has happened in Italy? Italicum, the proposed new system of prime minister Matteo Renzi is aimed at driving out the smaller minority parties and at producing a bipolar system of left and right. The first party winning 37% of the vote receives a prize of up to 15% extra seats to allow it to assemble a majority of 340 seats in the chamber (55% of the total seats). That arbitrary figure of 37% happens to be where the potential coalitions of both centre left and centre right stand now in the opinion polls.

The threshold for coalitions of parties is 12%, but every member of the coalition has to reach 4.5% in order to have their votes counted at all. Single parties have to cross a threshold of 8%. If no party or coalition reaches the magic 37%, the leading two coalitions or parties will go into a second round to fight for the precious ‘majority prize’.

Italy will be divided into a maximum of 120 constituencies, but seats are only to be allocated from short closed party lists on the basis not of the local vote but of the total national vote. These fictive constituencies have two consequences: first, regional parties are disadvantaged and, second, the link between the citizen and the deputy is at best indirect and imperceptible, and at worst random.

The funny thing about this stitch-up between Renzi and Silvio Berlusconi is that Italy’s Constitutional Court has already condemned, in previous judgments on electoral law, both the majority prize and the closed block lists. What the Consulta will do next is anyone’s guess, but if it wishes to intervene it will surely have the jurisprudential backing of both the European Court of Justice and the European Court of Human Rights on the matter of fair and equal franchise.

In conclusion, what Italicum amounts to is a fake proportional system. Smaller parties, a plethora of which Italy has enjoyed for decades, are to be used as a trampoline on which the big bosses of bipolarismo will bounce around.

Oh, and for the record, there are at the moment three and not two non-small political parties: Renzi’s PD at about 30%, Berlusconi’s Forza Italia at 23% and Beppe Grillo’s M5S at 21%.

Italicum now passes to the Senate, in which Renzi has a thinner majority and which he plans to abolish. The Senate itself is not touched by Italicum, but it will have to decide whether to approve a controversial reform which will, in effect, make Italy a rival with the United Kingdom for the prize of having the worst electoral system in Europe. Evviva indeed.

Andrew Duff MEP is the European Parliament’s rapporteur on electoral issues. www.andrewduff.eu

Scotland and Europe: both Cameron and Salmond must play fair with the voters

Posted by Andrew Duff MEP on 17/02/14

President Barroso’s intervention in the debate about the future of an independent Scotland in the European Union has made the point, forcefully, that nothing is certain other than that the situation is wholly without precedent and mightily complex. Mr Barroso is right to point out that Spain will be a reluctant party to any Scottish separatist negotiation because of Catalonia. The same applies to Cyprus and Greece because of the threat of recognition of the Turkish Republic of North Cyprus. Belgium, with its tetchy Flemish nationalists, is unlikely to be overjoyed.

The Scottish government leads us to believe that a liberated Scotland would not have to apply to join the EU under the provisions of Article 49 of the Treaty on European Union as if it were a third-country candidate. Alex Salmond, Scotland’s First Minister, hopes that an ordinary revision of the EU treaties under Article 48 would suffice. The controversy over treaty base is both interesting and important, although it is crystal clear that no matter which legal route is eventually agreed, the practical result will be the same: unanimous agreement by all 28 member states followed by ratification of that agreement by the 28 plus 1. In any case, what is largely overlooked is that the first, preliminary phase of the renegotiation will be subject neither to Article 48 (full-blown treaty revision) nor 49 (accession de novo) but will be governed, rather, by the spirit of Article 50, the Union’s new secession clause, usefully inserted by the Treaty of Lisbon in order to provide a departing state with the framework for its future relationship with the Union.

In the event of a Yes vote in the referendum on 18 September, the process of the internal demolition of the United Kingdom will start. In accordance with the procedures suggested in Article 50 TEU, the British government will have to inform the European Council of the dramatic news. The European Council at its October meeting will no doubt then invite the European Commission to come up with an Opinion about what should happen next. The Commission’s Opinion will make a recommendation as to the most appropriate legal base(s) for the conduct of the negotiations on the new arrangements, both transitional and final. The Council will then adopt a decision authorising the opening of negotiations and mandating the Commission to conduct them. The European Parliament will exercise its right to be consulted. And at some stage an application to the European Court of Justice for a preliminary ruling on whether the chosen procedures are compatible with the Treaties cannot be excluded (and may even be welcome).

If the rupture takes place in hostile circumstances the EU negotiations will surely be lengthy, and London can be expected to have the support of several revanchist allies. Nevertheless, even if fraught and protracted, the negotiations will conclude at some stage with Scotland emerging as the 29th member state of the Union. The legacy of having been within the EU for over forty years matters. European integration is not simply a matter of inter-state relations: the Scottish people are EU citizens and will remain so, and it is in everyone’s interest that the acquis communautaire, that corpus of EU law which applies now to Scotland because of its membership of the United Kingdom, will continue to apply throughout as well as after the hiatus. Happily, the EU treaties and the Charter of Fundamental Rights oblige its member states and its institutions to cooperate sincerely in the spirit of solidarity, not to discriminate on grounds of nationality and to respect domestic constitutional structures.

Beyond these steps, the situation will not be clarified unless and until both the UK and Scottish governments spell out in detail their negotiating positions. The critical decision for Scotland is the currency. Will Scotland seek to inherit the British derogation from the single currency (Protocol 15)? If it does so, will the rest of the EU agree? Strictly speaking (and why not?) as a member state of the Union Scotland will be expected to adopt the euro as and when it fulfils the Maastricht convergence criteria, according to the ordained timetable. We can only gauge Scotland’s progress in this regard once we know the extent of its legacy debt, courtesy of the UK. But why Mr Salmond would prefer to stick with the pound sterling instead of pitching into the euro as soon as possible, I cannot say. One may doubt, as Mark Carney, Governor of the Bank of England, has done that Scotland could truly claim to be independent if its monetary policy and fiscal disciplines were to continue to be set in London.

The deeper truth, of course, is that Scotland in the EU will be no more or less ‘independent’ than any other member state. In the EU, interdependence is the name of the game. ‘Scottish independence’ is a powerful slogan: the reality will be somewhat different whether it tried to stick with sterling or agreed to embrace the euro. As Ireland has found, although liberated from Whitehall, its autonomy under the terms and conditions of EU economic and monetary union is strictly conditional on decisions taken in Frankfurt and Brussels.

Beyond the question of the single currency are the UK’s plethora of other opt outs and exceptions which are governed by Protocol 20 on Schengen, Protocol 21 on justice and home affairs, and Protocol 30 on the Charter of Fundamental Rights. One can see that the common travel area of the British Isles should stay. But why the Scottish parliament and courts would wish to marginalise themselves like the English from the development of mainstream EU common policies in terms of immigration and asylum, the administration of justice, cooperation of police forces and the like is not self-evident.

After the question is settled of how ‘British’ Scotland wishes to be, there will still be real and somewhat tough negotiations between London, Edinburgh and Brussels about the number of MEPs each state will elect and about both the actual and relative size of their budgetary contributions.

Finally, one should note that the Scotland question will not be taken in isolation, and that the new EU arrangements for a non-UK Scotland will not be based on things as they are now. The European Union is changing fast. Over the next five years the eurozone is bound to construct a fully-fledged banking union and deepen its fiscal integration. These reforms will require in any case a constitutional Convention whose likely timetable will start after the British general election in May 2015 and finish after the French presidential elections two years later. At the same time, the UK Conservative Party seems strangely determined to loosen the ties that bind the UK to the EU in time for a British referendum in 2017. To be fair to the referendum voters, not only Alex Salmond and the Scottish nationalists but also David Cameron and the English nationalists must spell out clearly the catalogue of demands that they each intend separately to perpetrate on the rest of the European Union.

Andrew Duff is the spokesman on constitutional affairs for the Alliance of Liberals and Democrats for Europe (ALDE). @Andrew_Duff_MEP

My Parliamentary Questions to the Commission about Scotland’s EU bid

Posted by Andrew Duff MEP on 27/11/13

In its recent White Paper, the Scottish Government says that an independent Scotland would seek to continue membership of the European Union on the basis of a negotiation conducted under Article 48 TEU.

Does the Commission agree with this proposal?

Why would Article 49 not be the appropriate legal base for an independent Scotland to apply for EU membership?

The Scottish Government also says that an independent Scotland would emulate Sweden and choose unilaterally not to join the euro.

Would the Commission welcome an application for EU membership from a country which had already presumed that it would not conform to the Treaties with respect to economic and monetary union?
PQ Scotland 27-11-13 – signed

Cyprus débâcle: Commission and ECB reply to my questions

Posted by Andrew Duff MEP on 14/05/13

Last month, I blogged some questions which, I thought, needed answering by the Commission and the ECB about the chaotic circumstances surrounding the Cyprus bail-in/out. The questions were tabled by my colleague Sharon Bowles before the ECON meeting on 8 May with MM. Rehn and Asmussen.  The Greens also tabled some questions. Here are the joint answers of the Commission and ECB to those questions. They are useful and revealing, and deserve to be read.


(1) Questions raised by Ms Bowles (ALDE, Chair of  ECON Committee) and Mr Duff (ALDE)

1. Why was the situation allowed to worsen until such time as the two largest Cypriot banks collapsed?

• The Cypriot banking sector was too large for the size of the Cypriot economy. At the heart of the Cypriot crisis was the poor state of the country’s two largest banks. It was the problems of these banks which caused the troubles for the sovereign and the subsequent economic decline – not the other way around. An earlier acknowledgment by the Cypriot authorities of the size of the problem in the two biggest banks and quicker remedial action would no doubt have helped to contain the impact on the economy.• One major issue was that the banks were able to use certain loopholes in the national regulation to delay recognition of losses. Furthermore, the Cypriot authorities waited too long before taking action and it took too long for the Cypriot programme to fall into place.This is regrettable because it increased the cost for Cyprus.

• Already in autumn 2011, the Commission warned Cyprus that, unless urgent action was taken, a programme would be difficult to avoid.Even though Cyprus had lost access to markets, the authorities were able to obtain a loan from Russia in late 2011, enabling them to temporarily prolong the unsustainable situation in the country. In June 2012, Cyprus eventually asked for financial assistance. Their need for assistance came essentially from problems in the banking sector, but also from a deteriorating fiscal situation.

• The Commission remained constructively engaged in negotiations with the former government, but of course made no public comment on the situation as long as talks were under way. The Commission has done its utmost to assist Cyprus and to work for a constructive and managed solution. The Commission has facilitated and supported viable solutions in the interest of the people of Cyprus and the euro area as a whole throughout this process and we will continue to do so.


2. What lessons were learned from the previous experience in Iceland, Ireland, Spain and Greece that could have been deployed to good effect in Cyprus?

• In all these countries, the banking sector was in deep trouble. In Iceland, Ireland and Spain the banking sector was at the root of the economic problems, while in Greece public finances were out of control with dramatic consequences on the banking sector.

• An important lesson from these countries is the interconnection between the sovereign and the banking sector. On the one hand, via their government bond holdings, the banks are exposed to the state of public finances. On the other hand, when the government has to rescue a bank through a public capital injection, its debt sustainability may be at stake. Additionally, these cases demonstrate that rapid asset expansion on the basis of cheap access to volatile funding sources coupled with imprudent lending practices can lead to the build-up of huge financial sector imbalances. The build-up of such imbalances in the financial sector must be resolved well ahead of the crisis stage.• In the case of Cyprus, the size of the two largest banks was too much for the sovereign to bear. Ultimately, it was not able to finance the losses of the banks by itself, because the sovereign liabilities would have become so large at the outset of the programme that debt would have been unsustainable from the start. Therefore, it was undisputed that the size of the banking sector needed to be reduced and that there had to be some burden-sharing. The question was how this should be done.

• The peculiarity of these Cypriot banks is well known, namely that their liabilities consisted to a large extent of deposits.

• That’s why the classic recapitalisation route followed in Ireland,Spain, Portugal and Greece was not applied in Cyprus. A key lesson to be learned from all these experiences is that it is very difficult to protect taxpayers from a systemic banking crisis. The fiscal cost can be either direct (through public recapitalisation) – as in Ireland, Spain– or indirect, as in Iceland and Cyprus (through steep output losses). In order to minimize the costs it is essential that losses are recognized and allocated early in the process. This shows once again the importance of financial sector reform: to minimize the risk of such crises happening in the future and to ensure that if they do occur,they are solved at the lowest cost to taxpayers.


3. In particular, was the adverse spill-over to Cyprus of the measures taken in Greece taken into proper consideration? If not, why not?

• The Cypriot banks have been very negatively affected by the Greek crisis because of their exposure to private and public debt. However,many of the sector’s problems were home-grown and related to over expansion in the property market as a consequence of poor risk management. Furthermore, the financial sector was vulnerable because of its size relative to the economy.

• Cyprus has been under increasing pressure in financial markets,against the background of rising concerns about the sustainability of its public finances, including its weakened financial sector and the scale of potential public support measures.

• The Commission recommended – in country-specific recommendations starting in May 2011 – that Cyprus take measures to strengthen further the prudential framework for the supervision of banks and cooperative credit societies to ensure early detection of risks. The Commission also drew the attention of the Cypriot authorities to these risks in various contexts in autumn 2011. Further recommendations and warnings were included in the Alert Mechanism Report in February 2012, and in the in-depth review and in the country-specific recommendations addressed to Cyprus by the Council in July 2012.


4. How did the Eurogroup meeting on the night of 15-16 March reach its conclusions? How was the meeting prepared – and by whom?

• For various reasons it was exceptionally difficult to reach an agreement on the Cypriot programme. There were several rounds of discussions between the Troika and Cyprus, in continuous consultation with the euro area Member States, which are, as you know, the owners of the ESM.

• In the course of these discussions an idea had emerged of a levy on interest income on deposits, which could have been potentially combined with other fiscal measures to avoid a disorderly situation. For instance, a levy equivalent to a 100% withholding tax on one year’s interest income was under consideration, since Cypriot bank shave been paying account holders around 3% interest, or even higher, which is of course much higher than the average rates available elsewhere in the euro area.

• This low levy did not however fulfil the parameters set by the Eurogroup, which required that Cyprus mobilise internal resources in order to limit the size of the financial assistance to no more than 10 billion euros. The subsequent negotiations led to an agreement based on the Cypriot authorities’ decision to impose a one-off levy of 6.75%on deposits below 100,000 euros and of 9.9% on those above that threshold.

• In the end, while this did not protect insured deposits, not reaching an agreement would have put all deposits in Cyprus at risk in the absence of a funded Deposit Guarantee Scheme and have led to a disorderly default of the sovereign. This would have been far worse for both Cyprus and the eurozone.

• At the Eurogroup teleconference preceding the vote in the Cypriot parliament, the Troika made it clear that an alternative solution without a levy on deposits below 100,000 euros would be preferable, while respecting the financial parameters set by the Eurogroup. The Cypriot authorities did not accept this advice.

• Subsequently, rapid corrective action was taken by the Eurogroup and the Cypriot authorities.


5. How and when were the Russian authorities involved in the settlement?

• It is Cyprus that has undertaken the negotiations with Russia about changing the current loan contract. The talks have been going on since autumn 2012 and continued after the current Cypriot Government took office.

• We are looking forward to an agreement between Cyprus and Russia on a financial contribution in this respect.


6. Did the Cypriot authorities provide or withhold all relevant information at all stages of the crisis?

• The Cypriot authorities, particularly the Ministry of Finance and the Central Bank of Cyprus, have generally collaborated well by duly providing relevant information, including statistical data and pertinent legal documents, where necessary. In some cases, in particular for the banking sector data, the quality of the data has been less than optimal.


7. Did the national central bank fail in its supervisory role? If so, why?

• There are many challenges for a small country to supervise a large banking sector. Banking sectors that act as regional financial hubs, as the one in Cyprus, require vigilant supervision to ensure undue investment risks are not taken on the basis of volatile funding sources. Problems in the Cypriot banking system were manifold.

• First, the Cypriot banking sector was allowed to become very large compared to the size of the economy (above 700% of GDP including foreign banks operating in Cyprus) against the backdrop of an expansion abroad and a business model based on non-resident funding.

• Second, a large exposure to Greece (160% of GDP in loans and bonds in 2011) was built up, partly the result of inadequate liquidity regulations which did not sufficiently prevent an excessive concentration of exposure in Greek sovereign debt.

• Finally, as established in the course of the independent due diligence exercise, the governance rules for credit origination and the recovery of bad debts were not strict enough, which contributed to high non performing loans and insufficient provisions.

• These shortcomings are addressed in the Memorandum of Understanding underpinning the financial assistance programme.


8. What was the role of the troika in the sale of the Cypriot banks?

• The Greek branches of the three large domestic Cypriot banks are large. The sale was necessary for three reasons:

• First, the sale was a key contributor to decrease the size of the Cypriot banks and to break the channel of contagion between Cyprus and Greece.

• Second, given the overall situation in Cyprus, it was feared that the Greek depositors might move their money elsewhere. The viability of the Greek branches would have been definitively impaired and the value of its assets depleted. Therefore, for the Cypriot banks, a sale of their Greek branches, even if costly, was cheaper than keeping them and seeing them melt down through a bank run.

• Third, such deep difficulties of the Greek branches could have put into question the restored trust in the Greek banking sector, which is regaining deposits after two years of steep decline. A failure of the Greek branches would have therefore created a risk of contagion to the Greek programme.• For these three reasons, from the beginning, the Troika was supportive of the Cypriot authorities’ idea of a quick sale of the Greek branches to a bank able to absorb them and to inspire the trust of depositors.

• From early March, the Troika therefore encouraged the Greek side and the Cypriot side to negotiate a sale of these branches, at a fair price reflecting the value of their loans, taking into account the future losses which had been identified by the consultant PIMCO.

• The parties entered into bilateral negotiations, for which the Troika acted as facilitator, and they signed the sale contract on 26 March.


9. How did the Emergency Liquidity Assistance (ELA) operate in the Cypriot case?

• The provision of Emerging Liquidity Assistance (ELA) aims at supporting solvent banks facing temporary liquidity problems. This principle, as well as all other rules governing the provision of ELA, was complied with in the case of the Cypriot banks.

• Regarding Laiki: see detailed answer below to the question by ALDE.

• Regarding Bank of Cyprus: in November 2012, the ECB Governing Council decided to suspend Bank of Cyprus as counter party for monetary policy operations on the grounds of insufficient capital, and Bank of Cyprus started to receive ELA from the Central Bank of Cyprus. The Governing Council considered that the Cypriot banks receiving ELA could not be considered solvent in the absence of an EU/IMF programme for Cyprus, because there was no credible recapitalization perspective without such programme. In accordance with the prevailing rules, on 21 March 2013 the Governing Council decided and announced that the continued provision of ELA could be only considered if a programme was in place that would ensure the solvency of the concerned Cypriot banks. After the agreement between the Cypriot authorities and the Eurogroup on 25 March 2013, the Governing Council decided not to object to the request for the provision of ELA by the Central Bank of Cyprus.


10. What is the impact of the Cyprus crisis measures on thebanking sector in other EU states?

• The policy applied in Cyprus is in line with the principle that deposits below 100,000 euros are guaranteed and they were therefore not subject to any bail-in.

It is worth noting that deposits have remained stable elsewhere in the Union.

• The measures enacted to date appear to have had limited impact on the banking sectors of other EU member states. This in particular was achieved thanks to the successful ring-fencing of the Greek operations of Cypriot banks. More broadly, contagion via other channels, such as confidence, appears to be limited, in particular regarding deposit outflows, funding conditions, and issuance of medium and long-term debt.

• However, weak financial institutions across Europe will likely remain vulnerable to external shocks. This demonstrates the importance of making progress on all crucial components of the EU banking union, including the implementation of the Single Supervisory Mechanism,and of a European framework for resolution, restructuring, and recapitalisation of the financial institutions.


11. How can a bail-in of investors be sustainable in the absence o fa common deposit insurance fund and a common resolution authority?

• Bail-in, as set out in the Commission’s proposed Directive on Bank Recovery and Resolution, aims at ensuring that shareholders and creditors are first in line – not the taxpayer – when it comes to assuming the costs of resolving banks. In that sense this concept should be introduced regardless of whether we create any common fund or common resolution authority.

• However, it is true that the practical credibility of the proposed bail-in tool depends on certain conditions such as a sufficient quantity of bail-in-able liabilities within banks or properly funded financing arrangements. The current proposal acknowledges this and provides for a progressive build-up of bail-in-able liabilities and funds.

• Finally, a common resolution authority and a common resolution fund would bring about tremendous progress in two areas. First, whereas the current system suffers from the fragmented decision-making by Member States, an integrated authority would ensure swift,independent and consistent decisions. This is essential when dealing with cross-border bank failures. Second, a common fund would increase the fire power available to deal with a failure as compared to separate national funds.

• However, it needs to be taken into consideration that the build-up of the Single Resolution Mechanism, including a common resolution fund financed by the industry, will take some years to be completed.


12. Who exactly proposed (and who opposed) the levy on small depositors?

• In the search for a workable compromise, the idea had emerged of a levy on interest income on deposits which could have been potentially combined with other fiscal measures to avoid a disorderly situation.

• For instance, a levy equivalent to a 100% withholding tax on one year’s interest income was under consideration, since Cypriot banks have been paying account holders around 3% interest, or even higher, which is of course much higher than the average rates available elsewhere in the euro area.

• This low levy did not however fulfil the parameters set by the Eurogroup, which required that Cyprus mobilise internal resources in order to limit the size of the financial assistance to no more than 10 billion euros. The subsequent negotiations led to an agreement based on the Cypriot authorities’ decision to impose a one-off levy of 6.75%on deposits below 100,000 euros and of 9.9% on those above that threshold.

• In the end, while this did not protect insured deposits, not reaching an agreement would have put all deposits in Cyprus at risk in the absence of a funded Deposit Guarantee Scheme and have led to a disorderly default of the sovereign. This would have been far worse for both Cyprus and the eurozone.

• At the Eurogroup teleconference preceding the vote in the Cypriot parliament, the Troika made it clear that an alternative solution without a levy on deposits below 100,000 euros would be preferable,while respecting the financial parameters set by the Eurogroup. The Cypriot authorities did not accept this advice.• Subsequently, rapid corrective action was taken by the Eurogroup and the Cypriot authorities.


13. Is this is still part of the wider instrument set?

• The Commission’s proposed Directive on Bank Recovery and Resolution entirely preserves insured deposits, which are excluded from the bail-in tool or any form of burden-sharing.


14. What aspects of the Cypriot deal apply elsewhere?

• The Cypriot agreement consists of a fully-fledged and ambitious economic stabilisation programme, which is grounded in solid financial sector conditionality. The strengthening of banks’ capital buffers, the improvement of their liquidity condition, the enhancement of prudential regulation and of supervision are elements which have been common to all programme countries.

• The bail-in of creditors, write-downs or conversions of subordinated debt and hybrid capital instruments have been implemented, or are in the course of being implemented, in Ireland and Spain. The Irish programme included very strong own contributions by bank creditors.More than 5 billion euros of subordinated junior debt was bailed in. At the same time, the Pension Reserve Fund contributed close to 10 billion euros. The specificity of the Cypriot case is that given the heavy reliance of Cypriot banks on deposits, standard creditor contributions could only deliver a part of the needed funds. The bailing in of uninsured deposits followed from this.

• Given the unique nature of the Cypriot case, the approach followed in Cyprus should not be seen as a blueprint for future interventions. Indeed, there are no templates as such. While each programme may have its similarities, each is tailored to the needs of the country in question.


15. How do the capital controls in Cyprus that were eventually applied (and still apply) conform to EU rules?

• For the first time since the introduction of the euro, a Member State has introduced temporary direct restrictions on the free movement of capital. The legal provisions introduced by Cyprus impose limits on cash withdrawals, a ban to the termination of term deposits,prohibitions of certain payment orders, restrictions on the use of credit/ debit / prepaid cards, restrictions on banking transactions as well as a submission of some operations to the approval of a Committee established at Ministry of Finance and the Central Bank and other measures. Although in the meantime these restrictive measures have been considerably relaxed, their implementation represents a major challenge for the principle of free movement of capital under Article 63 TFEU.

• However, Member States may introduce unilateral restrictions on movements of capital, including capital controls in certain circumstances and under strict conditions, for reasons of public policy  or public security. According to the jurisprudence of the European Court of Justice, the measures can also be introduced for compelling reasons of general interest. Such exceptions to the principle of free movement of capital, must be interpreted very strictly and be non discriminatory, proportionate and applied for the shortest period possible.

• The restrictions imposed by the Republic of Cyprus seem reasonable in the circumstances, in particular taking into account the high risk of uncontrollable outflow of deposits that might lead to the collapse of the credit institutions and the immediate risk of a complete destabilization of the financial system of Cyprus. Therefore, the Commission considered that risks that are imminent for the stability of financial markets and the banking system in Cyprus are a matter of overriding public interest and constitute a public policy justification for imposing temporary restrictions on capital movements.

• Although the initial assessment of these measures has confirmed the rationale and relevance in the given circumstances, this assessment will be reviewed on a regular basis to ensure that the remaining restrictions are strictly proportionate to the legitimate objective of preventing the risk for the financial stability of Cyprus and apply for a strictly limited time period necessary for that purpose.


(2) Questions raised by ALDE

16. Taking into consideration that according to the European Central Bank, the Emergency Liquidity Assistance is a tool «consisting of liquidity assistance provided by central bank in exceptional circumstances and on a case-by-case basis to temporarily illiquid but solvent institutions» and according to the rules concerning the Emergency Liquidity Assistance, the Central Banks provide assistance against adequate collateral. How have the Central Bank of Cyprus and the European Central Bank complied with the rules governing the process of Emergency Liquidity Assistance in the case of Laiki Bank of Cyprus?

• The provision of Emerging Liquidity Assistance (ELA) aims at supporting solvent banks facing temporary liquidity problems.The three successive steps in the provision of ELA to Laiki Bank:

• First step: In 2010 and 2011, Laiki Bank gradually lost access toprivate funding sources in relation in particular to the euro areasovereign crisis and losses made on its Greek government bondholdings. By September 2011, Laiki Bank faced more severe liquidityand collateral constraints and started to receive ELA from the CentralBank of Cyprus.

• Second step: At the end 2011, as a result of the recognition of the full amount of losses resulting from the Greek PSI and a significant increase in the amount of loan provisions, Laiki Bank’s solvency ratios fell below the minimum capital requirements set by the Central Bank of Cyprus. On 29 June 2012 the Republic of Cyprus issued a bond to raise EUR 1.8 billion of new capital for Laiki Bank to meet statutory capital requirements. On 2 July 2012, in view in particular of the unfunded nature of this government bond, the Governing Council decided to suspend Laiki Bank as counter party for monetary policy operations on the grounds of prudence. From that day on, the entire central bank funding of Laiki Bank was provided via ELA granted by the Central Bank of Cyprus, and it increased further as a result of deposit outflows.

• Third step: The Governing Council considered that the Cypriot banks receiving ELA could not be considered solvent in the absence of an EU/IMF programme for Cyprus, because there was no credible recapitalization perspective without such programme.Page 21 of 28In accordance with the prevailing rules, on 21 March 2013 the Governing Council decided and announced that the continued provision of ELA could be only considered if a programme was in place that would ensure the solvency of the concerned Cypriot banks.On 25 March 2013 the Cypriot authorities, in agreement with the Eurogroup, decided upon the resolution of Laiki Bank and the transfer of its good parts to Bank of Cyprus. After this agreement on 25 March 2013, the Governing Council decided not to object to the request for the provision of ELA by the Central Bank of Cyprus.


(3) Questions raised by the Greens group

17. Against the background of the initial decision to levy a tax on Cypriot bank deposits of less than 100.000 Euros, which threatened the credibility of European deposit guarantee schemes, the following question merits to be answered:

17. 1) What was your role in the process, which led to the above mentioned decision?

17. 2) In which meetings did you participate and when and with whom did you meet during the decision-making process?17. 3) Which positions did you defend?

17. 4) Why did you allow that such a bad deal was passed?

• See replies to questions 4 and 12, as well as the Commission Press Statement of 20 March: http://europa.eu/rapid/press-release_MEM…

18. According to the leaked final report on the public debt sustainability assessment of Cyprus prepared by the Commission in liaison with the ECB in compliance with article 13.1(b) of the ESM Treaty, the Cypriot real GDP growth is projected to contract by 12.5% cumulatively in 2013 and 2014. The same document points out that the banking sector has been immediately and significantly downsized to 350% of GDP (from more that 700% before the agreement on financial assistance) by means of the bail-in and asset transfers operated within the sector. Having in mind that:

- the banking sector represents around 40% of domestic GDP;

- additional fiscal consolidation measures are foreseen in the same document as well as in the updated (and also leaked) MoU on top of the efforts already foreseen in March 2013 and November 2012;

- the adjustment process foreseen, (including inter alia spill-over effects of wealth reduction and the spill over effects related to temporary capital controls) will have drastic and immediate effects on money circulation speed and therefore in aggregatedemand;

18. 1) How does the Commission manage to forecast such a modestcumulatively contraction whereas several other independentestimations point out to a much more severe GDP contraction overthe same horizon?

• The total size of the Cypriot financial sector was above 700% of GDP(including foreign operations), while the domestic financial sectoramounted to 550% (including branches of the Cypriot banks abroad).The downsizing of the Cypriot financial sector was 200% of GDP,about 130% of that happening via the ring-fencing of the Greekoperations of the Cypriot banks.

• The forecast for Cyprus over the horizon period of 2012-2016constitutes a joint assessment by the EC/ECB/IMF on the economicdevelopments over these years. The Commission services’ forecastpublished on 3 May reflects this joint assessment for the years 2012-2014.

• The immediate restructuring of the banking sector, tight credit conditions, fiscal consolidation pursued, rising unemployment, and the high degree of economic uncertainty have all been assessed and projected to weigh on private and public consumption and investment(final domestic demand). Only little reprieve is expected from exports(tourism being most promising) amid uncertain external conditions and a shrinking financial sector. Cyprus is a small open economy. Its degree of openness also affects the adjustment in economic activity as the contraction in domestic demand is partially compensated by the significant reduction of imports. By looking at the contraction of the domestic demand, it gets close to 20% over 2013 and 2014

.• The EC/ECB/IMF forecast takes also into consideration the impact of the temporary imposition of capital controls which are expected to hamper international capital flows and to reduce business volumes in both domestic and international-oriented companies. As these capital restrictions are meant to be temporary and proportional, and of an exceptional character, the forecast assumes that these will be removed as soon as the economic conditions, in particular the liquidity situation of banks, permits it.

• This joint forecast foresees that growth is to rebound in 2015-2016 on the assumption of potential gains from the restoration of a sound and well-capitalised banking system, of competitiveness gains resulting from the alignment of public wages, and the boosting of consumer and business confidence in the medium-term with the full implementation of fiscal consolidation.

• Indeed, given the particular uncertainties in forecasting the Cypriot economy at the current juncture it cannot be excluded that economic developments will turn out worse than projected by the joint forecast.The uncertainty is also evident in the strong swings of the estimates for the potential growth and actual growth in the successive forecasts undertaken. The Commission services have been clear that risks are tilted to the downside, relating inter alia to the implementation risks of the adjustment programme, increased unemployment and to any further losses of the banking sector.

• The close monitoring of the economic developments, and thus the revisions of the forecast, are to be pursued regularly, not least every three months when the review missions are to take place. Should available data at the time of these missions point to the need of revisions, then the forecast would be adjusted accordingly.Page 25 of 2818. 2) In compliance with the recently agreed ‘two pack’ will the Commission fully disclose the economic model used for reaching such a forecasts and transmit such model as an annex to an officially transmitted debt sustainability assessment to the Parliament so as to avoid having to refer to leaked versions transmitted by the press?

• This new provision will apply only after the entry into force of the twopack and for new requests for financial assistance or amendments to an existing adjustment programme. As such, it will apply to Cyprus if and when its macro-economic adjustment programme is revised.

• The Commission services’ economic forecast for Cyprus is based on the same forecasting system as for all other Member States. The most recent forecast for Cyprus has been published on 3 May. The main difference is that the period covered in the full programme forecast is 2013-16.

• Even if the Two-pack is not applicable to this case, the Commission services intend nevertheless to anticipate on the obligation established by the Regulation and to publish the assessment, as part of the full programme documentation during the month of May. This documentation will be sent to the European Parliament.18.3) As the same debt sustainability assessment acknowledges,the baseline scenario is extremely sensitive to lower growth and that downside risks appear dominant. What does the Commission foreseen as precautionary additional measures from the European side in case of slippage from the current forecasts in the short and the medium term taking proper account of high fiscal multiplier effects?

• It is indeed correct that important macroeconomic risks remain and they are tilted to the downside.• On the domestic front, downside risks are associated with domestic credit conditions and further deterioration of confidence in the banking system. Moreover, there is a non-negligible risk of a cycle of household and corporate defaults propagating through the economy,leading to further banking sector losses, worsening of labour market conditions, stronger than expected fall in house price and a prolonged loss of business and consumer confidence. Also, the deeprestructuring of the Cypriot banking sector could have strong spillovers on related professional business services and financial services exports.

• More generally, the transition to a more varied growth model will be challenging for the economy in the coming years and will imply a reallocation of economic resources across sectors, which may take time and will require flexible factor and product markets. Upside risks for the Cypriot economy are limited, relating mainly to higher investment activity in the energy sector and possible improvements in the external outlook, should the euro area economic activity strengthen beyond expected.

• Where necessary, the policies of the MoU can be adapted to changing macroeconomic or other circumstances. The integrity of the programme design relies, however, on certain key policies that are considered necessary to re-establish sustainable growth in Cyprus.Addressing the banking sector problems upfront and ensuring that financial institutions are well-capitalised will contribute to the trust in the financial sector and secure its long-term ability to intermediate savings and investment. The restoration of a sound banking system is therefore expected to gradually loosen the tight credit conditions in the economy.• Fiscal consolidation is expected to help restoring consumers and investors’ confidence in the medium-term. In the event of under performance of revenues or higher social spending needs, the government should stand ready to take additional measures to preserve the programme objectives, including by reducing discretionary spending, while taking into account adverse macroeconomic effects.

• The on-going deleveraging of both household and corporate balance sheets will over time remove the impediment to a more balanced growth. Also, in the medium-term, investments projects related to the energy sector and the prospects of exploitation of natural gas could contribute increasingly to economic growth. The recent reform of Cyprus’ wage-indexation mechanism will contribute to align public wages with developments in economic activity, improve competitiveness, and support the economic recovery. This is expected to have a positive impact on the external balance, with the current account deficit contracting over the programme period and external debt, in particular related to external liabilities of financial institutions, expected to decline.

• The policy efforts should focus now on steps to facilitate the emergence of new sources of economic activity and to alleviate the social consequences of the economic shock.

• The Commission stands by the Cypriot people in this time of deeptrouble and is committed to help Cyprus to get through the toughtimes and overcome the current difficulties. The Commission decidedto set up a Support Group for Cyprus with the implementation of theadjustment programme. It is now mobilising the resources to providetechnical assistance. An immediate priority is to identify the relevantresources available from the current structural funds

A Committee of Inquiry into the handling of the Cyprus bail-out

Posted by Andrew Duff MEP on 09/04/13

Do you think the European Parliament should launch a formal inquiry into the Cyprus débacle? This is the procedure. And here are some questions.


Under Rule 185 of Parliament’s Rules of Procedure, Parliament ‘may, at the request of a quarter of its Members (186 MEPs), set up a temporary committee of inquiry to investigate alleged contraventions of Union law or alleged maladministration in the application of Union law which would appear to be the act of an institution or body of the European Union, of a public administrative body of a Member State, or of persons empowered by Union law to implement that law’. The request is subject to a vote in plenary on a proposal of the Conference of Presidents.

The inquiry will report within 12 months.

The charge

The allegation is that the critical financial situation in Cyprus was badly mishandled by the European Council and the troika. The deterioration of the banking situation in Cyprus was exposed at least as long ago as 2010.

The European Parliament has a duty to call to account the executive authorities which are complicit in failing to manage the crisis. These include the European Commission, the European Central Bank, the Eurogroup, the Euro Summit, the President of the European Council, the European Stability Mechanism, the IMF and the European Banking Authority. We have a role, too, in scrutinising a failure of governance at the national level, in this case, both the Cyprus government and the Central Bank of Cyprus.

  • Why was the situation allowed to worsen until such time as the two largest Cypriot banks collapsed?
  • What lessons were learned from the previous experience in Iceland, Ireland, Spain and Greece that could have been deployed to good effect in Cyprus?
  • In particular, was the adverse spill-over to Cyprus of the measures taken in Greece taken into proper consideration? If not, why not?
  • How did the Euro Summit meeting on the night of 15-16 March reach its conclusions? How was the meeting prepared ‑ and by whom?
  • How and when were the Russian authorities involved in the settlement?
  • Did the Cyprus authorities provide or withhold all relevant information at all stages of the crisis?
  • Did the national central bank fail in its supervisory role? If so, why?
  • What was the role of the troika in the sale of the Cypriot banks?
  • How did the Emergency Liquidity Assistance (ELA) operate in the Cypriot case?
  • What is the impact of the Cyprus crisis measures on the banking sector in other EU states?
  • How can a bail-in of investors be sustainable in the absence of a common deposit insurance fund and a common resolution authority?
  • Who exactly proposed (and who opposed) the levy on small depositors?
  • Is this is still part of the wider instrument set?
  • What aspects of the Cypriot deal apply elsewhere?
  • How do the capital controls in Cyprus that were eventually applied (and still apply) conform to EU rules?



Making the Case for Associate Membership of the European Union

Posted by Andrew Duff MEP on 07/03/13

And why Britain and Turkey may end up in much the same place

A longer version of this article may be found on LSE EUROPP at http://bit.ly/Zpjs75

The Great Recession pitches the European Union full tilt into a period of great change. In all probability, a Convention will be called in spring 2015 to install a federal economic government for a fiscal union. The chance will also be taken to rectify some of the mistakes made in the Lisbon treaty. A large majority of EU member states, the European Commission and the European Parliament already support that general approach. Angela Merkel may prefer only to make more surgical strikes at the treaties rather than a full-scale revision, but she must know that that option is rapidly disappearing.

After her recent visit to Turkey, the Chancellor will be confirmed in her view that, with the exception of Iceland, the prospect of early enlargement of the Union is remote. Turkey in any case appears to have changed its mind about accession, not least because the problem of Cyprus remains intractable, but also because the ruling party is more overtly Islamic in its orientation. And although they keep the aspiration to join the Union, no country in the Western Balkans is ready to assume the responsibilities of EU membership soon.

As the federal process quickens within the Union, the threshold of membership is raised. For candidate states, the Treaty of Lisbon is no longer the benchmark.

At the same time, the United Kingdom has called for a renegotiation of its own terms of membership in the hope of loosening the ties that bind. The UK, which will have to approve any revised treaty in a referendum, has the legal right to veto deeper integration for everyone else. Even if the Conservatives do not form the next government in 2015, there are few in Britain ready and willing to campaign for UK membership of the federal union which involves, above all and in the first instance, sterling joining the single currency.

Multi-Tier Governance

Despite these strong centrifugal forces, it is in everyone’s interests that the EU which emerges from its present troubles is capable of providing a pole of stability, liberty and prosperity on a continental scale. This matters for Britain just as much as for Eastern Europe. There is a similar perception of the need for a strong Europe in the Mediterranean and the Middle East.

In the past, it has been assumed that all current and future states of the Union can proceed along the same chosen path, albeit at different speeds. Palpably, this is no longer the case. Lisbon itself bastardised by the failure of the earlier constitutional treaty may prove to have been the last treaty to corral all member states.

It is therefore time to use this critical situation to introduce the EU to more sophisticated multi-tier arrangements. Although some elements of more differentiated integration can be rendered by using the enhanced cooperation provisions of Lisbon, a more radical change is needed if Europe’s variable geometry is to acquire solid constitutional legitimacy.

The Brits, the Turks and the Rest

Over the years, the UK has won a large number of opt-outs and derogations from the core of the acquis communautaire. It declines to join the euro or Schengen. It now wants even less Europe. Mr Cameron wants to repatriate powers and competences from Brussels to London. His demands, which are to be spelled out by the end of 2014, are sure to jeopardise the cohesion of the single market and the integrity of EU law.

This UK government is prepared, as no predecessor has been, to absent itself from the Council when matters of fiscal union are being negotiated. It has declined to participate in the single supervisory mechanism of the banking union. The Conservative Party wants fewer rights from the Union in exchange for fewer duties. At the same time, its leaders preach about ‘the remorseless logic of fiscal union’, and encourage other EU countries to go forward to deeper integration without the UK. Missing the point, the Labour leadership accuses the Tories of sleep-walking towards the exit. In fact, the Tories are wide awake and have found the emergency stairway.

At the other end of Europe, the Turks look for a new relationship with the EU. The nostrum of a ‘privileged partnership’ outside the Union is unacceptable to Ankara, not least because it is difficult to find privilege in such an ambiguous concept. AKP ministers make it clear that Turkey is not prepared to pool national sovereignty in a federal EU. Like the British, the Turks want to opt out of the euro, and want of Europe a common market and a security relationship. Neither the Turks nor the Brits seem to like European fundamental rights. It does not go unnoticed that the UK is the strongest advocate of Turkey’s membership of the EU, but the suspicion is rife that the British Tories want further enlargement mainly in order to dilute further integration.

There is a third category of European state for which associate membership might prove to be amenable. In the European Economic Area, Iceland, Norway and Liechtenstein are virtual member states of the Union without any of the political or institutional trappings of full membership. Because this situation is unsatisfactory, Iceland is negotiating full accession and Norway is seeking to upgrade the terms and conditions of its EU partnership.

The Swiss, who declined even to accept EEA membership, are tied by a number of untidy bilateral deals to the EU’s internal market. The EU is right to insist that if Switzerland wishes to benefit from the fruits of European integration, it must at least recognise the jurisdiction of the European Court of Justice over that which is jointly agreed.

How To Do It

At the next revision of the treaties in 2015, a new clause should be added to establish the formal category of an associate state of the Union. Associate membership would require fidelity to the values and principles of the Union. However, it would not require adherence to all the political objectives of the Union, which include joining the euro. Nor would associate membership confer the duty to engage in all the activities of the EU.

For some, associate membership would be a spring board for full accession; for others, a long stay parking place; and for yet others a decent alternative to leaving the Union altogether. Associate membership would need to be negotiated on a case by case basis, and would be determined by the dynamics, as it were, of whether a state was coming or going. Participation by the associate state in the EU institutions would necessarily be limited, and would vary relative to the degree of EU regulation agreed. Each associate state would have to specify the policies and functions of the EU in which it intended to participate, and to accept terms and conditions, financial and institutional, on its participation.

Participation by an associate state in the internal market should not risk the operation of the market. Nor should its participation in the external action of the Union or in an international agreement of the Union prejudice the cohesion or limit the scope of the Union’s position. Associate states will agree contracts with the Commission and EU agencies for the delivery of policy in certain specified fields. These arrangements will contain reciprocal rights and obligations as well as the possibility of undertaking activities jointly.

As far as institutional arrangements are concerned, there could be an annual summit meeting, and associate state governments would have observer status in relevant Council meetings. Associate states would take part in appropriate consultations of the Commission and in working groups of the Council. They should participate as observers in comitology. National MPs of associate states should be observers at the European Parliament. Associate states would acknowledge the jurisdiction of the Court of Justice, and could intervene in cases before the Court. They should nominate judges to the General Court.

The Alternative

There will be many who resist the notion of associate membership. Yet nobody should underestimate the risk, in that case, that one or other existing member state will block the revised treaty either at its negotiation or during its ratification. Endless concessions by those who need more Europe towards those who want less Europe in an attempt to buy off hostility to the federal package are also unlikely to achieve optimum results.

Moreover, to condemn candidate countries to ever more complex, long-winded and challenging accession negotiations will not be edifying. Neither is the EEA option attractive. EEA members cannot shape EU policy in any way whatsoever. And EEA membership means being a net contributor to the EU budget while receiving no benefit from the CAP or structural funds.

So the Convention in 2015 needs to craft something other than privileged partnership outside the Union, something more than the EEA, yet something less than full membership. The European Union has proved itself over the years capable of great constitutional ingenuity, and it is reasonable to assume that, given the political will to work together for the good of all Europe, it can continue to do so.


A longer version of this article appears on the LSE EUROPP blog at http://bit.ly/Zpjs75

Andrew Duff MEP is President of the Union of European Federalists and co-chair of the Spinelli Group of MEPs. He is the rapporteur of a new Fundamental Law of the EU which will be published shortly.

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European Council worse than Papal conclave

Posted by Andrew Duff MEP on 12/02/13

Reacting to the deal reached at the European Council on Friday, the President of the UEF, Andrew Duff MEP, concludes that the deal is not fit for purpose. In a statement today (Tuesday) he says:

“Once again the huge quarrel over such a small amount of money showed the European Union at its worst. Indeed, the row over the multi-annual financial framework (MFF) is almost a caricature of Europe today.

“27 men and women emerge exhausted and exasperated pretending to have triumphed on behalf of their own nation state. The result is they have left the EU without enough money seriously to promote its political objectives at home or abroad. They have not dared to introduce much-needed reform. They have failed to identify economies of scale by pooling effort or eliminating costly duplication. They have clung to past practice, most of it bad.

“The leaders have comprehensively missed the opportunity to increase investment at the European level to off-set the decline of investment at national level. The Commission’s proposals to boost Europe’s competitiveness have been watered down.

“The European Council has failed even on its own terms. Future spending commitments are now actually programmed to outstrip payments, the cumulative effect of which will be to throw the EU budget into deficit ‑ thereby risking a breach of the Treaty. The idea that this puny MFF can last for seven years is a fiction.

“The Union must now recognise that its financial system, based merely on national contributions, is bust. The inevitable obsession with unanimity and juste retour means that the common interest of all Europe is out of sight. Even the papal conclave votes by qualified majority ‑ and we have to assume that many of the cardinals will be preoccupied by the welfare of the Church as a whole rather than by their own naked self-interest. The secret conclave of EU leaders last week pales by comparison.

“The Spinelli Group and the UEF will shortly be presenting a new draft treaty which proposes among other things, a new financial and budgetary system. Under our proposals, the Union will have genuine financial autonomy and national treasuries will be relieved of the burden of making direct contributions to the EU budget. Decision making will be fluent, transparent and democratic.


A new band of ‘euro-realists’ has appeared on the scene. Who are these people? They are mostly British and mostly Tory British. In the European Parliament, the euro-realists cluster in the group of European Conservatives and Reformists (ECR). Here Tory MEPs are joined by Czechs from the party of outgoing President Vaclav Klaus and Flemish nationalists.

From the world of think-tanks, we know Open Europe. A new blogging organisation has been set up, to much trumpeting, with the funky name of the Centre for British Influence in Europe (CBIE). This should not be confused with the CBI (business) or the C of E (clergy). The CBIE line seems to be that if the UK would only and merely assert its own national interest in EU affairs, all will be well in the best of all possible worlds. As it tweeted recently (and one might think tactlessly) ‘All David Cameron has to do is lead. Europe is for the taking’. According to the CBIE, the rest of Europe is waiting breathlessly for the intervention of the Brits to lead us all to the promised land of an open, de-regulated common market run by pragmatic political cooperation between national governments.

CBIE will be launched properly at the end of the month, and threatens to ‘act as a central hub for those who would seek to protect and build British influence in Europe’, and to ‘articulate and communicate … a British Blueprint for how Europe should develop’. In this it follows the same rationale of the coalition government’s policy of a unilateral British review of EU competences conducted without any apparent reference to what the EU is actually for. William Hague’s competence review is intended to prepare a catalogue of British demands of things to repatriate at the EU’s constitutional Convention, which is scheduled to open in spring 2015. George Osborne, doubtless another arch-priest of euro-realism, wants the UK to leave the EU unless the EU is reformed presumably along British Tory lines.

The difficulty the euro-realists face is that their unilateralism, however bold, simply does not fly in the context of a legal system which only works through the building of large and complex political consensus. No treaty change, however minor, can be made without the agreement of all other member states. Such unanimity implies a basic understanding, first, on where the Union stands now and, second, on where it is destined to go in the future. Here euro-realism looks terribly out of touch, rather as if it has not realised how much the EU has changed since 1973 or how strong the federal forces are today. The true reality is that the EU is getting on with the gritty business of salvaging the euro by creating a banking and fiscal union which will be run by something akin to a federal economic government.

It is this new Union, and not the old one of their fond but lazy imaginings, to which British politicians of all hues have got to engage. The self-styled euro-realists may mean well, but they will not be convincing at home or abroad by arguing for ‘more of the same – but less’. There is no mileage left in pretending to be a ‘critical friend’ of Europe, or in being defensive about the EU. A more flexible, pick-and-choose approach to the single market will surely ruin the single market. Rejection of more fiscal discipline blocks further moves to fiscal solidarity. Refusal to let the City of London join in the single supervisory mechanism of the European Central Bank will jeopardise the resolution of the banking crisis. Opting out of the EU’s efforts to integrate justice and home affairs policies will subvert the fight against international organised crime. Resisting moves to develop common foreign and security policy will blunt the EU’s role on world affairs. Objections to strengthening the executive authority of the Commission will stymie the emergence of democratic government at the federal level.

If Britain’s pro-Europeans are seriously committed to keeping Britain in Europe, they have some serious catching up to do with the real state of the Union.

How not to improve European parliamentary scrutiny for the Euro

Posted by Andrew Duff MEP on 17/12/12

Martin Schulz, President of the European Parliament, is among those who want to improve Parliamentary scrutiny of what goes on in the eurozone and suggests we could do this by removing British MEPs. He’s right on the first point but wrong on the second ‑ and risks having his Parliament sued in the European Court of Justice. Here’s why.

As fiscal integration deepens, there is a strong case for improving the way the European Parliament scrutinises budgetary, financial and economic affairs especially across the eurozone. The eurozone is the core feature of Economic and Monetary Union and as such deserves special treatment at the level of parliaments just as its gets from governments. In particular, the European Parliament needs to have a close, regular and systematic watch over the troika programmes and the activities of the Eurogroup.

Special treatment for the eurozone should be seen as a supplement to and not a substitute for broader parliamentary scrutiny of the issues affecting EMU, such as the monetary dialogue, the single supervisory mechanism for the banking union, the work of the other supervisory bodies in financial services, and issues affecting the integrity of the single market.

Another important challenge is how the European Parliament proceeds to track the implementation of the Fiscal Compact Treaty, and itself to manage the implementation of Article 13 which requires there to be interparliamentary cooperation between the European Parliament and the national parliaments of the 25 signatory states.

A Sub-Committee on the Euro

The ECON Committee is undoubtedly over-stretched at the moment by the weight of complex legislation. The proposal to form a sub-committee of ECON to help manage the workload is not a new one, and makes a lot of sense in theory. Membership could be drawn more widely from across Parliament than from the ECON committee alone (BUDG and EMPL, for example). In practice, however, it will be difficult to find the time and personnel (both MEPs and staff) to hold many extra meetings. In due course, however, once the workload of ECON eases off, the sub-committee should be a useful extra forum for specialist eurozone work.

It makes no sense whatsoever to try to form a completely new main committee of the Parliament carving out some formal competences of ECON. Indeed, there is every risk that such a new committee would fracture Parliament’s work on Economic and Monetary Union as a whole, resulting in the very incoherence and inconsistency that we have criticised in other bodies.

The most difficult decision concerns the division of responsibilities between ECON on the one hand and the Sub-Committee on the Euro, on the other. Whatever happens, it would be important to avoid more time-wasting squabbles between the two chairs: some flexibility should therefore be built into the new arrangement to enable the Sub-Committee to take on special tasks as and when the need arises. One suggestion which may work is to keep the monetary dialogue and supervision policy with ECON, and to delegate the Eurogroup and the European semester to the Sub-Committee. The Sub-Committee can be prepared to take on other aspects of economic governance, like the EU treasury, which have yet to emerge. In any case, it should be made clear that the sub-committee reports to the main committee and that any legislative decision is reserved, as now, for the plenary.

Cohesion between euro and non-euro MEPs

Were the ECON sub-committee to be formed, the question arises whether it is either possible or desirable to limit the participation in any enhanced scrutiny procedures of MEPs elected from states which are not members of the eurozone. The non-euro states divide into at least four different categories, as follows:

  • Six states (plus Croatia) which intend and are trying to join the euro in their own time;
  • Sweden and the Czech Republic which should be trying to join the euro but are not;
  • Denmark which has a treaty-based exemption from the euro until it adopts a referendum (Protocol No 16);
  • The UK which has a treaty-based derogation from the euro unless and until it changes its mind (Protocol No 15).

It is important to recall that the euro is the currency of the Union (Article 3 TEU) and that the Parliament is the parliament of the Union (Article 14). The special treatment of member states with a derogation (the ‘pre-ins’) is strictly delineated in Article 139 TFEU under the title ‘Transitional Provisions’. Once the worst of the crisis is past, one can expect the eurozone to expand its membership again.

Even the UK is not immune from the integrative dynamic of EMU. The UK is part of the European System of Central Banks, and alongside all other member states is committed to regarding its economic policies as a matter of common concern and to coordinating them within the Council according to broad guidelines (Article 121 TFEU). The British have participated in the EFSM bail-out for Portugal, have given bilateral aid to Ireland, and continue to contribute via the IMF to the troika programmes.

At the level of the Council and European Council, where member states are formally represented, arrangements have been made for eurozone governments to meet on their own (Eurogroup and euro summits). However, such differentiation is not applied or permitted by the authors of the Treaties to the European Commission, European Parliament or European Court of Justice, where member states as such are not formally represented. The integrity of EU law, its effective and uniform implementation across the Union as a whole, and the guarantee that the Treaties are respected, would seem to require unitary or collegiate action by Parliament, Commission and Court.

According to the Treaty, MEPs do not represent their states but are ‘representatives of the Union’s citizens’ (Article 14 TEU). Article 13 TEU establishes the institutional framework of the Union for the Union as a whole and stresses the need to ensure ‘consistency, effectiveness and continuity’ of policies and actions. Article 9 TEU lays down that: ‘In all its activities, the Union shall observe the principle of the equality of its citizens, who shall receive equal attention from its institutions, bodies, offices and agencies’. Article 10 TEU reminds us that citizens are ‘directly represented at Union level in the European Parliament’, and, moreover, that ‘every citizen shall have the right to participate in the democratic life of the Union’. Article 18 TFEU and Article 21 of the Charter of Fundamental Rights prohibit discrimination on the grounds of nationality, while Article 4 TEU says that the Union shall ‘respect the equality of Member States before the Treaties’.

While Parliament is organised in different groups and committees, all those bodies are always open to all Members, and all Members have the legal right to vote. The mandate of Members is not divisible or segmented according to or on behalf of the policies of the member states in which they are elected. No differentiation is possible in other sectors of policy: Bavarian MEPs vote on maritime policy, for example, just as Baltic MEPs vote on policy for the Mediterranean. Under the enhanced cooperation rules (Articles 20 TEU & 329 TFEU), all MEPs vote both on the consent to establish the core group and thereafter on legislative proposals which may emerge from that group. According to the Protocol on Privileges and Immunities and the 1976 Act introducing direct elections, and in accordance with Rule 1 of Parliament’s Rules of Procedure, each MEP has an equal, individual and independent mandate. In short, there is no precedent for excluding MEPs elected in any one state from participation in all Parliamentary activities, and any move to do so would certainly be challenged on firm grounds in the European Court of Justice.

Changing the Treaties

Looking further ahead, should a full fiscal union and federal economic government emerge from the present discussions, there will be the prospect that the Eurogroup is formalised at the level of the Council and that taxes are imposed directly by the EU on the citizen-taxpayers of the eurozone. That being the case, it may very well be necessary to allow for a special formation of Members elected from those states directly affected as the first legislative chamber of the Eurogroup. But such an institutional adjustment to the deepening of federal union requires treaty change – and treaty change requires further reflection.

In any case, a Convention is envisaged to open in spring 2015. The internal disposition of the European Parliament, as well as its mode of election, will be an important item on the agenda of that Convention ‑ not least if one or other member state opts for associate membership. Other items which will require institutional adjustment include the incorporation of the Fiscal Compact Treaty and European Stability Mechanism in the EU framework.




Groping for government

Posted by Andrew Duff MEP on 11/12/12

The leaders (or most of them) make their way from the high Nobel rhetoric at Oslo to the low cunning of the meeting of the European Council in Brussels this Thursday and Friday. This is a more important summit than usual because it is supposed to take the definitive decisions to install the triptych of banking union, fiscal union and political union, first outlined by Herman Van Rompuy in June. The goal is ‘Genuine Economic and Monetary Union’ ‑ not to be confused with the actual Economic and Monetary Union, in whose pursuit we have been since the Treaty of Maastricht was negotiated in 1991.

More work

The first report of Van Rompuy and his presidential colleagues from the Commission (Barroso), Eurogroup (Juncker) and Central Bank (Draghi) was not swallowed whole by the European Council. The quartet was sent away to do more work. A second ‘Interim Report’ appeared in October, and a third, presumably final draft last week (5 December). Each re-write has had the merit of putting more detail into the banking union and fiscal union package, even if the ingredients have not been consistent. Some elements have lost prominence, such as the deposit guarantee scheme for banks, and others, notably the resolution mechanism, have been put on hold until such time as the disciplinary arm of the single supervisory mechanism is in place.

The European Parliament, meanwhile, has been slaving away to improve the legislative package on banking union, adding clarity where the Commission’s initial drafts were vague, and enhancing the scope and force of the supervisory mechanism. If Parliament gets its way (Thyssen and Giegold reports), all Europe’s banks and not just the obvious ones will be subject to supervision, and all member states which aspire and intend to join the euro will be expected to sign contractual agreements to obey the instructions of the ECB. In return, the Bank’s Governing Council will be expected to accept the decisions of the Supervisory Board, on which all participating states will have equal status. Van Rompuy’s paper thanks Parliament for ‘a valuable contribution’. One supposes that gratitude will become more heartfelt once we unpickle the Two Pack.

Get ready to be disappointed

However, the level of anticipation in this week’s European Council meeting is such that we might be wise to prepare ourselves for disappointment. The governments seem strangely ill-prepared after months of discussion to commit themselves even to the more diluted proposals of Van Rompuy III. Mixed messages from Germany are spectacularly unhelpful. Angela Merkel comes to Parliament to praise the Community method (7 November) ‑ and bury her Bruges speech of two years ago in which she proclaimed her fondness for a more intergovernmental ‘Union method’. Wolfgang Schäuble, however, dishes the hope of even a partial mutualisation of sovereign debt via the redemption fund until all the building blocks of a federal union are in place. François Hollande looks merely muddled. The dreaded Berlusconi threatens to return. David Cameron labours on A Great Speech which, we are told, will spell out how far and fast the UK wishes to withdraw from Europe.

Goaded into action, the European Commission published its own Blueprint for a deep and genuine EMU on 28 November, spelling out the large volume of secondary legislation to come. José Manuel Barroso also promises his agenda for treaty change, although apparently not before the spring of 2014, just when Parliament dissolves into election mode. That is too late if Barroso hopes to influence the electoral campaign which will be driven by those candidates for his job who are to be nominated by the European parties. The Commission’s should quicken its pace and bring forward its plans for treaty revision at the latest to next autumn.

The draft conclusions of the European Council on political union are even more lame than those of the Commission. The heads of government merely commit to discuss these constitutional questions ‘after the election of a new European Parliament and the appointment of a new Commission’ in 2014. That is hardly a bold orientation.

Who’s afraid of government?

Both Commission and European Council make the usual platitudes about the need for more parliamentary democracy. But there is also a tantalising glimpse of what the EU needs by way of more government. Van Rompuy III talks of the need for ‘stronger mechanisms … to ensure trust in the effectiveness of European and national policies, to fulfil vital public functions, … to protect citizens from the effects of unsound economic and fiscal policies, and to ensure high levels of growth and social welfare’. The report admits that ‘an integrated budgetary framework would require the establishment of a Treasury function with clearly defined responsibilities’. It calls for ‘adequate arrangements’ to reinforce the ‘capacity of the European level to take executive economic policy decisions’.

What is this executive thing with ‘vital public functions’ to perform? In plain language, we would call this ‘government’. Is it gradually dawning on our leaders that fiscal union needs to be run by a federal economic government if it is to secure confidence in the financial and political market place?

The Commission is naturally reticent about the emergence of a new level of executive authority in the Union, higher to itself. The heads of government fear to speak the truth to their voters about the pooling of sovereignty required under ‘genuine’ EMU. So it falls to the European Parliament to make the waves. MEPs should understand, at least, that fully fledged parliamentary democracy will only thrive as a counterpoint to fully fledged government. Can Parliament prove it is serious by using its new Lisbon powers to embark on constitutional reform?

The best we can hope for is that by Friday the European Council will manage to commit itself to the opening of a constitutional Convention in the spring of 2015. Such a decision would dispel the fog that enshrouds all these disorientating roadmaps.

EU treaty change, of course, is risky and complex. Blueprints need to survive the most rigorous critique. As Europe gropes for government, another useful decision of the heads of government would be to set up, in the course of 2013, a group of reflection to explore the parameters of the Convention’s mandate and to suppress silly or simplistic ideas. The Laeken Declaration in 2001 which led to the Giscard Convention was prepared in just such a way. Reflection worked then. It is much needed now.

Andrew Duff MEP is President of the Union of European Federalists (UEF) and co-chair of the Spinelli Group of MEPs. @Andrew_Duff_MEP