Ahead of the General Election next May, the UK Government is focussing on the 'sunny uplands' of economic growth, falling unemployment, and low inflation etc. But the Prime Minster needs to look over his shoulder and see some inky-black clouds rolling over the horizon behind him. The logical consequences of his `EU policy’ may blot out the sun all too soon.
The timeline of the divergence between David Cameron’s attitude to the EU and mainstream EU opinion stretches back at least a decade. The enduring characteristic of the `Cameron policy’ is a lack of strategic thinking about the longer-run implications. Instead, he seems to focus on the immediate short-run benefits - as seen through the eyes of the public-relations specialist that was his pre-politics career. The schism with Europe became definitive once he promised Eurosceptic Tory MPs in 2005 to leave the EPP group in the European Parliament to win their vital support for his bid for the Party leadership. They continue to extract a high price from him, and it seems to be rising exponentially.
The UK business community is now showing signs of serious concern about the commercial implications – as well they might. In particular, the City is becoming uneasy about being caught in the cross-fire that seemed to be unleashed by Prime Minster Cameron’s decision at the December 2011 European Council to `veto the Treaty’ designed to save the euro. In the middle of the night, he suddenly sprang a demand on fellow-leaders to give the UK an effective veto over financial services legislation as his price for agreeing to a Treaty that would not affect the UK anyway. They refused to be blackmailed, the Prime Minister informed the UK Parliament that he had vetoed a Treaty and, three months later, the euro-zone states signed a Treaty amongst themselves that achieved their original objectives. The Prime Minster stopped nothing – but the gloves started coming off!
Since then, the Prime Minister’s failure to empathise with the more collegiate approach to EU politics practised by the other Member States has been progressively marginalising the UK – at least as far as finance is concerned. This failure become very obvious in the debate about the next President of the EU as it was not even clear that the Prime Minister had absorbed the relevant (and brief) legal texts in the TFEU. Subsequently, the total failure to grasp the significance of the principle of free movement of people – one of Mrs Thatcher’s greatest achievements – is rapidly alienating the other members, even though most are keen to limit `benefit tourism’ to the extent that it really exists on any significant scale.
The table below sets out some key events in the chronology of the meltdown – but is restricted to those that are relevant to financial services.
1. Leave EPP – May 2009 ahead of EP election: The move followed directly from Cameron's commitment to the right-wing Cornerstone group of Tory MPs in the 2005 leadership election to leave the EPP.
2. Veto a Treaty – December 2011: Subsequently, the Treaty on Stability, Coordination and Governance in the EMU (TSCG) was signed on 1 March 2012 and now ratified by 25 EU States
3. Attack on free movement of persons – November 2013 onwards
4. Short–selling - January 2014: action dismissed by ECJ.
5. FTT – April 2014: action dismissed by ECJ
6. Veto Juncker – June 2014 onwards: Juncker is now President of the Commission
7. Surcharge – October 2014: Was it really 'halved'?
8. Bankers Bonus - November 2014: link to ECJ decision
9. The United Kingdom versus ECB on CCPs – perhaps in May 2015?
President Juncker has recently said that Prime Minister Cameron “has a problem with other Prime Ministers”. After Chancellor Osborne’s direct contradiction of what other Finance Minsters think was agreed about the infamous `surcharge’ – and the facts stated in the official communique - will they 'have a problem with him'? This can only damage the UK’s credibility even further when it comes to discussing `reform’.
For the financial services industry, the real commercial problem is now looming. With UK political clout minimal, the Government is resorting instead to suing the rest of the Members in the European Court of Justice (ECJ). So far, the UK has failed in every financial services case – with its arguments almost entirely rejected. Reading the ECJ decisions, even a layman can understand why the flimsy arguments have been rejected. Political expediency seems to have over-ruled legal rigour – as shown in the latest 'bankers’ bonus' case. But the same weak analysis came to the fore in the 'budget surcharge' fiasco. First, the manner in which it exploded into the public debate smacked of incompetence. Second, the Chancellor’s subsequent claim to have `halved’ the surcharge leaves him looking exceptionally economical with the truth (see Appendix).
However, the most significant ECJ case is yet to come. In September, I explained that the ECJ will pronounce judgment on three cases brought by the UK Government against the ECB on the location of CCPs. (European Court of Justice: The United Kingdom versus ECB on CCPs) At first glance by a layman, the UK’s case is as weak as the other three. If the ECJ does find against the UK, then the eventual ramifications for the City – though far from clear - may be immense.
British business now faces an excruciating dilemma: should it support its traditional political ally (the Conservative Party), or the Labour Party, do something entirely different, or sit on its hands? The Balance of Competences review found that the City is broadly happy with current regulatory arrangements in the EU, though looking for some specific `reforms’. A City campaign against the Prime Minister’s plans for “re-negotiating the Treaty” would probably diminish the chances of a `successful’ re-negotiation. However, if the Prime Minister succeeds, then the option of maintaining the current broadly-acceptable status quo might disappear, presenting an unpalatable choice of leaving the EU altogether or accepting a worse situation than now: “Hobson’s choice” to the power of two!
APPENDIX on the Surcharge: `Exceptionally economical’ George digs Dave even deeper into the EU budget hole.
The facts from ECOFIN:
The Council took note of the following presidency conclusions on the budgetary issues in the current year and on the request to the Commission to submit a proposal for amendment of regulation:
“The Commission has informed of the outcome of the annual corrections to the VAT- and GNI– based own resources, pursuant to Article 10, paragraphs 4 to 8 of Regulation (EC, Euratom) No 1150/2000. In particular due to the major revisions of the GNI of several Member States, their additional contributions to the EU budget will be substantial. In addition, the regulatory delay until the payment date of the first working day of December is short. This may result in exceptionally high fiscal implications for those Member States.
The Council therefore invites the Commission to come forward with a proposal for a targeted and limited amendment to the Council Regulation No 1150/2000 to take account of such exceptional circumstances. This should allow for the Member State concerned to defer the required payment over a reasonable period of time (no later than 1 September).
For the sake of equal treatment of all Member States, deferral should then be an option for all if the overall sum of the GNI balances is exceptionally high. Taken into account the tight deadlines, this amendment should come into effect by the 1 December this year (retroactively if needed).”
EU Budget Commissioner Kristalina Georgieva: She told a news conference the historical adjustment to national income meant Britain would still have to pay the additional amount it owed but that would be offset by a similarly increased rebate. “As a result of the adjustment, the UK has to pay more but also as a result the UK rebate will go up. Preliminary calculations show it will be around 1 billion euros,” she said of the increase in the rebate next year when payments are made. (Press conference)
Jeroen Dijsselbloem, who chairs meetings of euro zone finance ministers, said Osborne had not negotiated a cut in Britain’s payment, adding: “This is the application of a very old agreement negotiated by (then-prime minister) Margaret Thatcher, that Britain gets a certain discount. No discount has been awarded.”
Asked why Osborne was presenting the application of the rebate – an automatic annual process – as a success for his negotiations, British officials said it had not been clear to London that the rebate would apply to the surcharge. It was also unusual to pay out the rebate in the same year as the payment.
`Exceptionally economical’ George on the Today programme: Link
His main defence seemed to be that nobody on the Today programme had spoken in the last two weeks about the likelihood that the rebate system would be applied to the surcharge. The Budget Commissioner cited the various precedents about such situations. An ordinarily-competent Treasury is one of the few bodies that has the resources to look back at the details of earlier occasions and consider the application of the precedents, as well as review the fine print of the relevant Directive.
So `exceptionally economical’ George has some questions to answer:
As he walked in to the ECOFIN meeting, what was the advice to him about the gross surcharge and the payment net of the rebate?
As he walked out, were the numbers any different (bar minor interest payments)?
Several other Finance Ministers at the meeting have gone on the record as saying that the amount of payment did not change – only a minor agreement to spread the payments until next September.
© Graham Bishop
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