29 June 2014

Cameron at Ypres: Shooting Britain in the foot while the EU reforms?

Prime Minster Cameron has just lost the first round of his widely-ridiculed tactic to force the rest of Europe to enact his definition of “reform”.  

Regrettably, the UK Government is quite unable to explain what its version of the term means – with the possible exception of a brief, vague newspaper article in March. So the massed ranks of the commentariat have concluded that the latest debacle has taken Britain a significant step closer to “Brexit”. If this is a tactical game, then it is an exceptionally dangerous indulgence for a state that is addicted to capital inflows to fund its chronic current account deficit. The picture painted by the ONS of Britain’s trading performance in recent years shows probably the most frightening trend in the UK today. The deficit in the past twelve months reached 4.5% of GDP (£74 billion) – even after crediting a £61 billion surplus in financial services trade.

Historically, a more rapid expansion of the UK economy versus its trading partners has resulted in a major worsening of the current account deficit. Such a development is all the more likely  given the abysmal and inexplicable productivity record of the UK – see the recent chart from the Bank of England.  So the dependency on the City’s earnings is set to increase as it benefits from banking union and, in the next phase of deepening EMU, “capital market union”. Could the “Cameron tactic” backfire? So far, the City has observed a rapid decline in Brtiain’s influence in Brussels after the last gambit of vetoing the fiscal compact Treaty in December 2011. An equivalent Treaty amongst the 27 came into force in January 2013. The make-up of the new ECON committee of the European Parliament may underline the virtual disappearance of Britain’s influence in the EU legislative body that is most vital to the City.

What reform is “Europe” planning?

The UK media in London seem united in the view that the politicians on the mainland have ignored the message from their electors and have decided to carry in with business as usual. Moreover, these commentators comfort themselves with the view that the anti-Europeans in the Parliament will render it incapable of action. However, the combined leadership of the EPP (the political family that Cameron left when he became Tory leader), the S&D and ALDE issued a statement this week: "The EPP, S&D and ALDE groups in the European Parliament agree to work to create a stable, pro-European majority in the House to defend the values and principles of European integration whilst striving, jointly, for reforms that will strengthen and improve the workings and transparency of the institutions and their effectiveness in delivering economic growth and meeting the EU's future challenges. " MEPs from these three groups account for 64% of the Parliament and have a record of reasonable party discipline, voting and committee involvement. The EP is unlikely to be hamstrung in delivering reform.

Jean-Claude Junker set out his personal priorities shortly after the EP elections so that his guiding philosophy would be clear. Unsurprisingly, these priorities closely matched those of the EPP that he led through the election campaign. So it is reasonable to assume these priorities reflect the choices of the largest single group of voters in Europe. In any case, the Commission President is not some all-powerful dictator but faces many democratic checks and balances. The first and most basic step is to get the support of the other 27 Commissioners in the College. Then any proposal has to be agreed by both Council and Parliament.

The June 26/7 Council Conclusions (see summary and extracts on the GrahamBishop.com website) laid out the strategic direction of the EU for the next five years. Presumably any Commission proposal that flies in the face of this would attract a blocking minority – presenting an opportunity for Britain to build coalitions on any given subject to draw policy back to what the Heads of State/Government have just agreed. These Conclusions were agreed unanimously – thus including Prime Minister Cameron. If he did not agree with this strategic direction, why did he not say so? Where are his counter proposals – even in corresponding outline??

The table below sets out the publicly-stated headline policy priorities of the probable Commission President, Parliament and Council. Which ones does Prime Minister Cameron object to?

Appendix: Council President van Rompuy

After the Council meeting, he said “ In our Strategic Agenda we set out five overall priorities:  stronger economies with more jobs; societies enabled to empower and protect all citizens;  a secure energy and climate future;  a trusted area of fundamental freedoms; effective joint action in the world.

On all these points, we indicate actions to be taken. However, the main purpose was not to go into details, but to set the direction for the legislative work in the next five years; to achieve what people expect Europe to do. These five priorities must guide the action and planning of the EU institutions in the years ahead, and it is important that all institutions organise their work accordingly. All five points are forward-looking, and I could expand on each, but it is fair to say we paid particular attention to economic priorities.

There was a wide consensus in the room that we need at the same time to continue on the path of reform and fiscal consolidation and to carry out the investments needed for the future. Both are essential for a healthy economy. To balance fiscal discipline with the need to support growth, the EU's existing fiscal framework offers possibilities, which should be used.

What does it mean? That we are all committed to the Stability and Growth Pact and that it is a matter of making best use of the flexibility that is built into the existing Stability and Growth Pact rules. Our economic discussion this morning also marked the end of the European semester, by now a well-established exercise. The European Council agreed and generally endorsed the key messages for 2014… – on which no doubt President Barroso will say more.

Our extracts of relevant commitments for economies and financial markets are here