JEAN-CLAUDE GSOH*

One knew, of course, that Jean-Claude Juncker is well possessed with a dry sense of humour. How delightfully on display is his sharp wit in the disposition of portfolios to his new college of Commissioners.

While claiming falsely, but as he must, that “I have given portfolios to people – not to countries”, Juncker has identified the trouble spots and appointed the Commissioner-designate from the most troublesome country to look after that very dossier.

So Frans Timmermans of the eurosceptic Netherlands, who has been agitating for less regulation, more subsidiarity and more powers for national parliaments (at the expense of the European Parliament), is put in charge of regulation, subsidiarity and ‘inter-institutional relations’.

The German Gunther Oettinger who hails from the country that is the most protectionist against US digital enterprise is given the digital agenda portfolio.

Jonathan Hill, who comes from the most eurosceptic country of all which also happens to have suffered Europe’s largest banking crisis, is put in charge of fighting the City of London over the harmonization of financial services. The Irish, like the British, are filled with self-congratulation about their Commissioners’ job. Both are equally deluded: Mr Hogan has the bankrupt CAP.

Pierre Moscovici, from the eurozone country with the most rickety fiscal stance, is put in charge of the excessive deficit procedure. It’s rather like putting a Greek in charge of immigration policy – Oh!

Johannes Hahn is to manage EU enlargement. He comes from Austria, a country which has scarcely recovered from finding the Turks at the gates of Vienna, and whose Crown Prince was recently assassinated by a Serb in the Balkans. And Tibor Navracsics, the nominee of Viktor Orban, that stickler for civil liberties, of course gets citizenship.

Overall can already admire Mr Juncker’s handiwork. His college promises to be edgy and more political than Barroso II. The elevation of all those ex-prime ministers to vice-presidencies may make this Commission more collegiate and less presidential than the last. Perhaps it is Catherine Day, the powerful Commission Secretary-General, who has most to fear from the new regime.

Given that Jean-Claude Juncker had to find 27 jobs for people he did not pick and hardly knew (if at all), he has filled almost every possible policy dossier, sometimes twice. One is left wondering what on earth would a new Commissioner be given to do were he or she to turn up soon from Scotland.
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* As you ask, GSOH is the abbreviation for ‘Great Sense Of Humour’ used by frantic lonely hearts in their personal ads.

WILL JUNCKER GET THE COMMISSION HE NEEDS?

Andrew Duff looks at the third, concluding phase of the Spitzenkandidaten experiment for the appointment of the new European Commission. He finds that the initiative now lies with President-elect Jean-Claude Juncker.

We have now entered the third and final phase of the constitutional innovation, introduced by the Lisbon treaty, on the matter of the election of the new European Commission.

The first two phases of the Spitzenkandidat experiment have been remarkably successful: the political parties duly put up champions to lead their election campaigns for the European Parliament; the more successful of those, Jean-Claude Juncker of the European People’s Party, was then nominated on 27 June by the European Council – despite some squealing – to succeed President Barroso. On 15 July, the European Parliament returned the compliment by giving Juncker an endorsement of 422 votes – a respectably larger vote than that the 409 votes it had accorded Martin Schulz, the runner-up Spitzenkandidat, for his election as President of the Parliament.

The third stage will tell us whether the new method really works. Will the President-elect, enjoying the strong dual legitimacy of both Council and Parliament, be able to shape the formation of the new Commission more or less to his taste?

Size and shape of the new Commission

Jean-Claude Juncker makes it clear he wants a gender balanced, pluralist college which delivers results. Good. But it is worth noting that his pitch for greater efficiency and effectiveness is already hampered by the decision of the European Council (of which he was then a part) to resile from the formula of the Lisbon treaty whereby the size of the Commission would be reduced in 2014 to two-thirds the number of member states. So he is lumbered with finding 27 colleagues for whom he needs to give respectable (if not always large) jobs.

The first shoes to fill are those of Cathy Ashton, the first Vice-President of the Commission who is also the EU’s High Representative for foreign affairs and who chairs the Council of Foreign Ministers. The treaty gives the power of this appointment to the European Council, with the consent of the President-elect. On 16 July, as we saw, the European Council failed to make the appointment of the High Rep. There are several reasons for this failure, mostly good, and all highly political: party, region and gender are all relevant factors in reaching a decision on top of the question of individual expertise and inclination. The fact is that nobody yet quite fits the bill. The problem is that without Ashton’s successor in the frame the rest of the package deal will be elusive.

The European Council cannot be envied, not least because the size of the package deal is smaller than it used to be. The Spitzenkandidat exercise has deprived the prime ministers of their former freedom of manoeuvre over the Commission presidency itself. There is also a sequencing problem: not all the jobs they have to fill come up at once. The precipitate decision to appoint a new NATO secretary-general earlier this year deprived the leaders of another useful bargaining chip. Herman Van Rompuy, the current President of the European Council, appears to be in no hurry to see his successor appointed (his term continues until the end of the year), while the post of chair of the Eurogroup does not need to be filled until next summer. And nobody dare speak of the identity of the President of the Convention which will have to be called in due course to revise the EU treaties.

So having failed to find a foreign minister, the European Council has left the matter officially until reconvening on 30 August. In the meantime, each government must make a formal nomination to the new Commission. Several prime ministers are rather unhelpfully pitching for specific (and often the same) portfolios. Most, including Cameron, Hollande and Merkel, are ignoring the need for gender balance. Renzi, while proposing a woman, is going for broke on the High Rep.

Jean-Claude Juncker, whose job it is to distribute jobs within the college, can – and, by all accounts, will – stand up to these unseemly demands from national capitals. His role has subtly changed, in this third phase of the process, from being the President-designate of a political party into President-elect of the Commission, whose task it is from now on to seek and find the general interest of all states and citizens.

Each Commissioner-designate will run the gauntlet of European Parliamentary hearings in September, where they will be tested for their competence, European commitment and indubitable independence. Then the entire Juncker college, plus its full political programme, is subject to a vote of MEPs – an open ballot by simple majority – in October. No national government in Europe is subjected to such a thorough inquisitorial parliamentary process.

The direction to take

Juncker already has the advantage of having published his ‘A New Start for Europe: Political Guidelines for the next Commission’, with ten political priorities covering jobs, growth, fairness and democratic change. These offer an intriguing contrast to the ‘Strategic Agenda for the Union in Times of Change’, which was offered up by the European Council at its June meeting. The latter document fulfils the European Council’s role of defining the general political directions and priorities of the Union for the next five years. The European Council wants an EU which is ‘stronger outside, more caring inside’. It advocates ‘stronger euro area governance and stronger economic policy coordination, convergence and solidarity’. But couched in such (inevitably) wide and ambiguous terms, it falls to the new Commission, and especially its President, to set the real political and legislative agenda – not least in terms of democratic renewal.

On the High Rep, Juncker says he wants ‘a strong and experienced player to combine national and European tools, and all the tools available in the Commission, in a more effective way than in the past’. He will establish a cluster of Commissioners under the new High Rep for the dossiers of trade, aid and development as well as for the key geographical regions. He also wants Commissioners with specific portfolios on rights issues and on immigration policy.

In terms of economic policy, Juncker will take forward the 2012 (but since seemingly abandoned) paper of Van Rompuy on ‘Genuine EMU’, and pursue enhanced convergence in the economic, fiscal and labour market policies of the eurozone. In legislative and budgetary terms, there will be a new special fiscal capacity for the eurozone, more emphasis on the social dimension, and better parliamentary control of the EU’s economic governance at both European and, where relevant, national levels.

Come the autumn much more flesh will be needed on a programme for the Commission if it is to serve Europe usefully for its full five year term. If the second term of Jose Manuel Barroso was characterised by crisis management, the first (and only?) term of Jean-Claude Juncker must be a time of steady reform and consolidation – the era of internal enlargement of the Union. In particular, a further round of budgetary reform (including revenue) is badly needed, and new financial instruments created to bolster investment beyond the €300bn so far envisaged.

In constitutional terms, the EU must be let to evolve logically so that its capacity to act effectively and legitimately keeps pace with the demands made on its system of government, at home and abroad. Not least among the challenges is Britain’s problem with European integration – a problem which grows larger by the day, and remains to be confronted, not least by the British themselves.

In this context, Jean-Claude Juncker has made a good start on his mandate. He is making a serious pitch for the appointment of a more political Commission whose task is to drive an agenda aimed at building a stronger, more united and democratic Union. As a federalist, I wish him well. Were I a nationalist, I should be worried.

@AndrewDuffEU
andrewduff@andrewduff.eu

The European Union’s Leadership Crisis: who’s to blame, and why it matters

Posted by Andrew Duff on 23/06/14

I’m actually getting a bit bored by the argument over the rights and wrongs of the Spitzenkandidat adventure. But as I and my federalist friends have been accused of manipulating a ‘power grab’, and even of instigating a coup d’état, and in the interest of record, here we go. (Those tempted to boredom should go and watch the tennis.)

The idea that the new President of the Commission should enjoy the dual legitimacy of having been elected by both the European Council and the European Parliament surfaced at the Convention on the Future of Europe in 2002-03. It was an idea promoted by the federalist camp in the Convention – led by revolutionaries like Elmar Brok and me – as a counter to the more radical and headline grabbing proposal from the Convention’s president, Valéry Giscard d’Estaing, that the European Council of heads of government should have a ‘permanent’ full-time chair.

So it was that Article 19(1) of Part I of the Treaty establishing a Constitution for Europe (2003) says that the Parliament ‘shall elect the President of the European Commission’. Article 26(1) goes on to say: ‘Taking into account the elections to the European Parliament and after appropriate consultations, the European Council, deciding by qualified majority, shall put to the European Parliament its proposed candidate for the presidency of the Commission’. This constitutional treaty was agreed at an Intergovernmental Conference by the then Labour government, as well as by the Liberal Democrats. The agreement of the British government was not irrelevant because it had been John Major who in 1994 had vetoed the appointment as Commission President of arch-federalist Jean-Luc Dehaene (whom we recently mourn), and it was Tony Blair who, ten years later, vetoed the appointment of arch-federalist Guy Verhofstadt (happily still with us). (Just for the record, we got the illustrious Jacques Santer and José Manuel Barroso instead.)

In 2005 the constitutional treaty was sunk by the referendums in France and Holland – though probably not because of outrage provoked by the proposed new system for the election of the Commission President. By the end of 2007, Giscard’s scuppered treaty had transmogrified into the Treaty of Lisbon, which was fully ratified in 2009 by the British Parliament. Two substantive changes were made to the procedure for the election of the Commission President. First, the European Parliament was to vote by an absolute and not a simple majority of its Members (Article 17(7), Treaty on European Union). Second, the Lisbon Intergovernmental Conference added a Declaration to the treaty to provide more detail on the electoral co-decision between Council and Parliament. Both changes served to consolidate the constitutional character of the procedure.

Declaration 11 is worth citing in full:-

‘The Conference considers that, in accordance with the provisions of the Treaties, the European Parliament and the European Council are jointly responsible for the smooth running of the process leading to the election of the President of the European Commission. Prior to the decision of the European Council, representatives of the European Parliament and of the European Council will thus conduct the necessary consultations in the framework deemed the most appropriate. These consultations will focus on the backgrounds of the candidates for President of the Commission, taking account of the elections to the European Parliament, in accordance with the first subparagraph of Article 17(7). The arrangements for such consultations may be determined, in due course, by common accord between the European Parliament and the European Council.’

In the light of the controversy surrounding the emergence of Jean-Claude Juncker, it may be regretted that Herman Van Rompuy, the President of the European Council, did not see fit to execute the common accord on the detailed arrangements provided for in the last sentence.

Who’s Your Candidate?

In the 2009 elections, the federalists had a campaign aimed at the EU level political parties entitled ‘Who’s Your Candidate?’. But the fact that the incumbent Commission President, José Manuel Barroso, was destined to have a second term blunted its effect. During the course of the 2009-14 mandate, I attempted to go one step further and introduce, by a change to EU primary law, a pan-European constituency for which a certain number of MEPs would be elected from transnational party lists. Lacking a majority for this radical change to the electoral procedure, in 2012 Parliament fell back on a resolution, also drawn up by me, which invited the European political parties to nominate champions to lead their election campaigns. In doing so, Parliament was putting some political flesh on to the constitutional skeleton. Our purpose was to bolster the role of the European political parties in the election campaign, and to raise the European dimension of the electoral debates which had previously been entirely national. The nomination of party champions, we believed, would help to personalise the campaign in a way which would be easier for the media to report and more recognisable to the electorate. Turnout mattered.

Some months later, President Barroso and his Commission formally agreed to support Parliament’s initiative. When the matter was discussed in COREPER (the conference of the ambassadors of the EU member states) no decision was taken either to support or to deflect Parliament’s interpretation of the new Lisbon rules. The new approach was hotly debated in COSAC (the conference of EU national Parliaments), and promoted by the European Parliament’s communication campaign: ‘This time it’s different: Act. React. Impact’.

The European political parties, obliged to respond, broke new ground. Rules had to be invented for the internal selection of top candidates, and special congresses held. Martin Schulz was first into the ring at Leipzig in November. The Greens held a primary election. At the EPP congress in Dublin in March, Jean-Claude Juncker won in an open contest against Michel Barnier, the unsung hero of the Spitzenkandidat exercise. If Angela Merkel had wished to stop the process, she could have done so then and there.

London, as usual, was in denial. The British have never really understood the political nature of the Commission. Nor do they seem to grasp that the EU has a bicameral legislature. Constitutionally illiterate and driven by off-shore domestic obsessions, few in Whitehall or Westminster woke up to the changes afoot. Having withdrawn from the European People’s Party in 2009, the Conservative Party has no engagement with mainstream mainland party politics – making risible its desperate claim to see in the German CDU its natural fraternal party while, at the same moment, they admit the right-wing conservative AfD to their group of MEPs. Labour abstained in the process by which Martin Schulz eliminated all potential rivals to emerge as the nominee of the Party of European Socialists. The Liberal Democrats were divided by Nick Clegg’s peremptory decision to support Olli Rehn as Guy Verhofstadt’s rival in the race to become the Spitzenkandidat of the Alliance of Liberals and Democrats for Europe (ALDE) – but at least the Lib Dems took part in the process, and accepted the outcome.

This Time, It’s Different

The astonishing thing, at least to me, is that the Spitzenkandidaten experiment has worked so well. Admittedly, Juncker, Schulz and Verhofstadt have not become federal folk heroes overnight, but their presence, and that of the Greens’ top candidate Ska Keller, was certainly felt in the election campaign among the intelligentsia. This time the European Parliamentary elections were indeed a bit different. After thirty five years, turnout rose. The sharper electoral contest has led to a larger understanding of the importance of the choice of the Commission President. Witness the media frenzy.

Throughout the adventure, the European Parliament has acted within the letter and spirit of the Treaty of Lisbon. It is natural that the four mainstream pro-European parties which took part in the election are now backing the lead candidate of the EPP, the largest group, to become Barroso’s successor. The ball is in the court of Van Rompuy, who acts in the Belgian way as informateur. Later this week, he will propose to his colleagues in the European Council that they nominate someone who commands a qualified majority among heads of government and an absolute majority in the Parliament. Having been heard in the groups and in the plenary, the parliamentary election will take place by secret ballot in Strasbourg in 16 July. If the nominee has not won over 376 MEPs, the European Council has one month in which to come up with an alternative name – all in accordance with the Treaty.

If this is a ‘power grab’ by the European Parliament, I am proud to be complicit in it. Time was when a parliamentary blow against autocratic rule would have been lauded by the British Establishment. It is ironic that what is deemed fine by the UK for, say, Burma is considered to be scandalous for the European Union.

David Cameron argues that Juncker is too much of an old-fashioned federalist to be Commission President. Yet he has no other candidate to put up. And, despite vain claims, Cameron has no coherent reform programme of his own. He has engineered for himself a presumably deliberate defeat at the hands of (mostly) continental federalists. What profit this brings him, his party or his country I am not able to say.

Those who wish the European Union well, however, can expect to get out of this crisis of leadership a stronger and more legitimate European Commission.

@AndrewDuffEU
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On 1 July my fifteen years as an MEP come to an end. I will continue to blog here from time to time as and when I have something intelligent to say on how a more united Europe might best be governed.

Cameron’s battle against Juncker is futile and misguided

Posted by Andrew Duff on 11/06/14

Well, this time it certainly is different. The furious row about who should succeed José Manuel Barroso as President of the European Commission, and how and by whom that person should be chosen, vindicates those who have long argued that each of the EU level political parties should field champions in the European Parliamentary elections.

The Spitzenkandidaten experiment has raised the stakes. The competition between the top candidates has introduced a real EU dimension which previous electoral campaigns for the European Parliament have lacked. Admittedly, these guys have not become federal folk heroes over night, but their engagement in a party political contest at the European level is a useful first stab at making a reality of post-national parliamentary Europe. The ball now lies, where the Treaty says it should, in the hands of Herman Van Rompuy who acts as informateur (in the Belgian sense) on behalf of the European Council. He must propose a candidate who can command a qualified majority in the European Council and an absolute majority in the European Parliament.

Van Rompuy’s job is eased because the top candidates Jean-Claude Juncker, Martin Schulz and Guy Verhofstadt are of a calibre to be Commission President. David Cameron, feckless as ever, may continue to protest that all three are too federalist, left-wing or old-fashioned for the British voter to stomach in his threatened referendum. But the British prime minister has no veto on the nomination. Angela Merkel, at the end of the misconceived mini-summit at Harpsund, was quite right to tell him: ‘We cannot just consign to the backburner the question of the European spirit. Threats are not part and parcel of that spirit’.

The quartet in the Harpsund rowing boat was correct in one sense, however, in that personalities are not everything and that Commission programmes also matter. This may be particularly so for the next five years because the new European Parliament, more fractious and incoherent than before, is unlikely, at least at first, to be able to act strategically. In the absence of any obviously strong candidate to take over from Van Rompuy at the European Council, it is to the Commission that we must look for leadership.

What they stand for

It is odd, given these circumstances, that so little attention has actually been paid to the published political programmes of the three main Spitzenkandidaten.

Jean-Claude Juncker has five priorities as Commission President. They are, in order, the creation of a digital single market, the development of a common EU energy union, the negotiation of the trade and investment partnership with the USA, and the continued reform of the economic and monetary union, where he wants to strengthen the eurogroup, which he once chaired. Juncker the Social Christian would introduce a social impact assessment to future troika programmes for the weaker eurozone countries, and create a ‘targeted fiscal capacity’ for the eurozone to work if necessary as an automatic stabilizer – ‘a shock-absorber’. This implies that the new fiscal capacity is a large one, requiring a proper treasury facility, funded with revenue raised by autonomous federal taxes. Juncker would also insist that the Commission represent the eurozone at the IMF.

His fifth main priority is to sort out the British problem. That is bold. He promises to ‘work for a fair deal with Britain’, while preventing the UK from blocking the deeper fiscal integration that is required by the eurozone. Despite Cameron’s insults, Juncker intends to talk back to him ‘in a fair and reasonable manner’. He identifies the British specificities which need to be catered for in the renegotiated terms of British membership: rejection of the euro and Schengen, and opt-outs from justice and home affairs. But he makes it plain that the UK will not be allowed to jeopardise the integrity of the single market, including the principle of free movement.

In two interesting codicils to his five main points, Juncker spells out what he would like to see in the way of common asylum and immigration policies. These include burden sharing for asylum seekers, an extension of the ‘blue card’ system for legal migration (which excludes the UK), and a stronger role for Frontex. As far as foreign policy is concerned, Juncker wants to turn the High Representative into a proper Foreign Minister and to move forward to develop, under the terms of the Lisbon treaty, a core group for military cooperation, including arms procurement.

The comparable policy programmes of the other Spitzenkandidaten are similar. The Liberal Guy Verhofstadt would put more emphasis on the development of federal democracy as a corollary to fiscal integration. He stresses the need to complete a proper banking union and on the capacity of eurobonds to finance Europe’s infrastructure. Verhofstadt proposes an EU unemployment insurance scheme to encourage the mobility of labour.

Social Democrat Martin Schulz wants to fight against tax evasion and to give greater latitude to the application of EU competition policy. He pledges to ‘enhance the growth dimension of the Stability and Growth Pact’. Like Verhofstadt, Schulz emphasises the importance of European values and fundamental rights.
So all three programmes outline proposals for structural reforms and strategic projects whose purpose are to deepen Europe’s integration. Before the full programme of the new Commission is launched at the end of the year, the President-elect, whomever it is, needs to reflect in greater depth on how exactly the step change is to be made away from the over-centralised coordination of national economic policies towards the delivery of a common macro-economic policy, democratically accountable at the EU level.

Contrary to British claims, none of the three top candidates to replace Barroso is saying ‘business as usual’. All are committed in one way or the other to the internal enlargement of the Union – expansion of the membership of the eurozone and Schengen areas, a gradual reduction in the number of opt-outs and exceptionalisms which litter the treaty, the development of core groups in foreign policy, security and defence, the better use of the enhanced cooperation provisions of the treaties to complete the single market, and a deepening of collaboration in police and justice policy in the fight against crime.

The British problem just gets worse

The result of the European elections leaves the UK with even fewer friends in Brussels than it had before. The UK’s insistence on a revision of the treaties to loosen its ties with the EU compounds the problem. The new European Parliament has the right to insist that the overhaul of the treaties is conducted in a full-blown constitutional Convention. David Cameron’s renegotiation of Britain’s terms of membership will have to find its place on the agenda of such a Convention whose main purpose will be a push in the federal direction.

The British prime minister should know that a Convention provides no hiding place: only good proposals for reform which command a consensus on their own merits will surface at the end of the process. We wait with trepidation to see the catalogue of demands Cameron is to make on his partners. If his bid is not pitched at settling Europe’s British problem for good, he will be laughed out of court. His antagonism against Juncker hardly starts the British renegotiation off on a good footing besides making it even more likely that the former Luxembourg prime minister ends up in Barroso’s job.

@AndrewDuffEU

A WEAKER EU WILL BE LESS DEMOCRATIC

Posted by Andrew Duff on 27/05/14

Andrew Duff says that those leaders who come to Brussels tonight wanting to weaken the European Union are not serving democracy.

In a statement he says: ‘It is right that the European Council takes stock tonight of the political situation in the European Union following the elections. They will trigger the appropriate consultations with the European Parliament on the nomination of the next Commission President, as prescribed by the Treaty. By respecting the Spitzenkanditaten experiment, Europe’s leaders have a chance to confound the argument that the Commission is stuffed with ‘unelected bureaucrats’.

‘There should be no panic about the outcome of the European Parliament elections. While the results must be respected, it is also true that many of the voters who took refuge with populist parties peddling simplistic policies made a bad call. In many countries it is the pro-Europeans who won. A retreat to nationalism by government leaders would only compound Europe’s problems.

‘During the election campaign certain prime ministers indicated that the answer to the perceived problem of the EU’s democratic legitimacy is to return law-making powers from the European Parliament to national parliaments. Such a dismantling of the legislative structure of the Union would destroy the ‘Community method’ on which the advance of European integration rests.’

Mr Duff, who was not re-elected on Sunday, added:-

‘In particular, Mr Cameron will get nowhere by making careless propositions, based on no evidence at all, that the elevation of the sovereignty of the Westminster Parliament will help make the governance of the European Union less complicated and more effective. His calling into question the fundamentals of the EU will get no support in Brussels because he is well known to be marching to the beat of UKIP’s drum merely to shore up his electoral support. There are higher things at stake in Europe than the future of one or other British political party.

‘Only stronger government within the EU will guarantee its democratic legitimacy. The electorate is right to demand more of the EU in terms of financial stability and economic recovery. Every effort should now be made to raise the capacity of the EU to take effective action across a whole range of issues and, above all, to deliver for its citizens public goods in terms of social and environmental policies.

‘If he is to be taken seriously, Mr Cameron needs to come up with a comprehensive package of constructive proposals which will make Britain part of the solution to Europe’s problems – and not Europe’s biggest problem.’

END

Andrew Duff MEP has been spokesman on constitutional affairs for the Alliance of Liberals & Democrats for Europe (ALDE) since 1999.
Contact him on +322 284 7998 or +44 7703 471659.
@Andrew_Duff_MEP

What this election is really about

Posted by Andrew Duff on 07/05/14

This time it is at least a bit different. Thanks to pressure from the European Parliament, the main European political parties have selected champions to compete for the job of President of the European Commission. This raises the stakes. The numerous debates between Jean-Claude Juncker, Martin Schulz, Guy Verhofstadt and the Green leaders have introduced a European dimension which previous electoral campaigns for the European Parliament have lacked. The media report some clear lines of differentiation emerging between the transnational top candidates.

In the UK things are also a bit different, but in a different way. The British political parties are not so keen to be seen campaigning with or for the champions of the EU level parties to which they are technically affiliated. Labour seems struck dumb on Europe. The Conservative Party, marginalised in the European Parliament, is not even offering up a candidate to succeed President Barroso. The British debate on Europe amounts to a rehearsal for the In/Out referendum the country will supposedly one day have: the clashes between Lib Dem leader Nick Clegg and Nigel Farage of UKIP have polarised the campaign neatly, accentuated by a row about the relative toxicity of UKIP’s poster campaign. UKIP is torn between campaigning to get more MEPs and dismissing the European Parliament as a waste of space, but its vociferous populism goes down well in a country that is suffering from a severe bout of nationalism.

So what does this rather different type of European election herald? Get set for a battle royal in June and July between the new Parliament and the European Council over the nomination and election of the Commission President. Watch how the increased numbers of eurosceptic deputies immediately change the dynamics and landscape of the new House. But, at a deeper level, who and what will really be making the political weather in Europe over the next five years?

Over the last decade there have been two drivers of European integration, namely enlargement and treaty change. Today, the accession of new member states is no longer an imminent possibility. Instead, the critical next phase of unification will be that of internalised enlargement – expansion of the membership of the eurozone and Schengen areas, a gradual reduction in the number of opt-outs, cop outs and exceptionalisms, development of core groups in security and defence, use of the enhanced cooperation provisions of the treaties to complete the single market, and a deepening of collaboration in police and justice policy for those who can cope.

Serious candidates for election to the Parliament, therefore, might sensibly be asked where they stand on the internal enlargement of the Union. The priority, which must be addressed immediately by the new Parliament and Commission, concerns the completion of banking union. The EU needs to do much more to restore financial stability and consolidate economic recovery. Although the regulatory framework is in place, big steps are still needed to break the link between bad banks and the public purse. As things stand, EU banking legislation is half-baked: while surveillance and supervision is centralised at the EU level, national governments retain a veto on issues of restructuring and resolution of failing banks. This year’s more stringent stress tests conducted by the European Central Bank (ECB) should expose the continuing fragility of Europe’s banks.

Although David Cameron has sought to exclude the UK from EU banking union for reasons of ‘national sovereignty’, he cannot isolate the UK entirely. The City of London, where most of Europe’s banking is done, is neither blameless for the financial crash nor immune from its consequences. Since 2007 the British tax-payer has coughed up €60 bn to bail out bad banks, not all of them British. Contrary to the prevailing view, it seems very much in the long-term national interest for the UK government to negotiate its way into the single supervisory mechanism run by the European Central Bank, and to accept the pooling of risk at the European level. The British could indeed be exerting great influence on the hesitant Germans to accept, for starters, the establishment of a large common resolution fund for all Europe’s banks.

The imperative for sharing some part of the financial burden across the internal market goes further than banking. Despite some recent adjustment in the bond markets, the borrowing costs for the eurozone’s poorer members are still too high for their hapless governments to be sure of completing their respective austerity programmes. Social dislocation caused by the crisis means that those same governments risk being destabilised if these European elections advantage the protest parties of the far right and left.

By way of crisis management, for example in the European Stability Mechanism and the Outright Monetary Transactions of the ECB, the EU has already begun the gradual mutualisation of a portion of sovereign debt among members of the eurozone. Unless and until this process is accelerated decisively, the risk of a break-up of the euro will not be negligible. Some joint form of debt redemption is still needed. Eventually, the EU will have to create its own treasury capable of managing a large, liquid eurobond market – what the Barroso Commission calls ‘stability bonds’. The current, over-centralised coordination of national fiscal and economic policies, with all its attendant moral hazard, needs replacing by a genuine common economic policy of the Union to complement its common monetary policy. The EU treasury will enjoy a fiscal capacity of its own, with revenue raised by autonomous federal taxes, and be empowered to apply contra-cyclical measures at the macro-economic level. In a fully-fledged fiscal union, the ECB will assume the role of lender of last resort.

Neither the European Court of Justice nor the German Federal Constitutional Court will brook such fiscal integration by dissembling or by stretching the interpretation of the Treaty of Lisbon beyond tolerance. The shift in sovereignty from the states to the EU level implied by banking and fiscal union must not be evaded, disguised or understated. The fact is that a new polity is being born at the core of the European Union, based on the eurozone. Radical treaty change is absolutely necessary to give legal effect and democratic legitimation to these reforms. The main thrust of the treaty revision will be to concentrate executive authority in the Union, now opaque and diffuse, on the European Commission. The new Commission selected this autumn should ready itself to assume the credentials and culture of a proper parliamentary government, held to proper account in the two chambers of the EU legislature, Parliament and Council.

How to accomplish such a deepening of the federal character of the EU will dominate the agenda during the next decade. The MEPs elected on 22-25 May will have the power to insist that the overhaul of the treaties is conducted in a constitutional Convention made up of themselves, the Commission, the governments of the member states and representatives of national parliaments. They must use this power wisely. No self-respecting elector should vote for a candidate who does not pledge his or her vote for a Convention. David Cameron’s own proposals for ‘renegotiation’ of Britain’s terms of membership will have to find their place in such a democratic Convention. He should be warned, however, that a Convention is no hiding place: only good reforms which command a consensus on their own merits will surface at the end of the process. Cameron’s EU partners wait with trepidation for the catalogue of demands he threatens to make with the aim of loosening the ties that bind the UK to Europe. If his bid is not pitched at settling Europe’s British problem for good, he will be laughed out of court.

British candidates for the European Parliament in this election – from all parties will no doubt be able to explain what they intend to do in these interesting times. There will not be a referendum on whether to stay in or leave the present European Union because the present state of affairs will not long prevail. The pertinent question to put to new British MEPs, therefore, is what kind of Europe do they really want. Indeed, where does the UK stand on internal enlargement? If the British do not want to participate directly in this latest phase of integration, will they at least waive their veto against treaty change to allow others to go ahead?

Originally posted on LSE EUROPP Blog

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

Posted by Andrew Duff 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.
http://espresso.repubblica.it/palazzo/2014/03/06/news/italicum-il-paradosso-dei-partiti-piccoli-deputati-eletti-dove-prendono-meno-voti-1.156240

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 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 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 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

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