FT / Brussels Blog

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It is finally here. After months of negotiations, threats, Nazi-comparisons, pasty-waving and even rapping by politicians, voters will head to the polls today to answer a simple question with profound implications: should the United Kingdom remain a member of the European Union?

The bickering will come to a close and a surreal peace will break out on British airwaves during the day due to reporting restrictions for mainstream outlets. Even swings on the markets – some in the City have paid for private exit poll data – will not be analysed in depth.

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As everyone who has played the famous video game knows, Super Mario is not always super. Temporarily able to boost his size and powers, he is nevertheless, for much of the time, just regular Mario.

What to make then of ECB president Mario Draghi? The eurozone crisis has seen the ECB repeatedly expand its operations in its bid to stimulate the euro area economy. As Mr Draghi has repeatedly said, these “extraordinary measures” were meant to provide a temporary breathing space for governments. Instead, politicians have proved all too willing to let the ECB permanently shoulder the load.

In a hearing before the European Parliament yesterday, Mr Draghi cut a frustrated figure as he set out the steps nations need to take to finish building their “incomplete” and “still fragile” monetary union, and to make their economies more competitive.

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Some sovereignty obsessed people with little practical economic sense are preparing to make a decision with the potential to seriously spook European markets. And no, we don’t mean the Brexit referendum.

In a few hours Germany’s highest court will rule on the legality of the European Central Bank’s most contentious weapon in fighting the financial crisis. At 10am local time, Mario Draghi’s ‘whatever it takes’ scheme will meet the ‘whatever we say’ of the Karlsruhe.

This is the finale of a long legal saga that has dogged the ECB’s Outright Monetary Transactions programme for most of its 4-year existence. Mr Draghi’s promise to, if necessary, buy unlimited eurozone bonds has never been used, but its effects were palpable. Mr Draghi challenged the speculators to bet against him, and they blinked.

The FT’s ECB watcher Clare Jones does a fine job of explaining the issues and the ping-pong between the Karlsruhe and the European Court of Justice that preceded this decision. The bottom line is that the Karlsruhe has already voiced reservations about the design of OMT – and may today take a stricter line than the ECJ. At worst it could legally hobble the scheme.

The timing is extraordinarily. On an economic level, markets are already fretting over the referendum. The ECB and the Bank of England are preparing to flood the market with liquidity and take some edge off a negative reaction. But if investors seriously turn against the eurozone periphery – as officials in Brussels and Frankfurt fear – OMT could be crucial. Its credibility matters.

On a political level, too, this is an unusually sensitive moment. What are the implications of a national court thumbing its nose at the ECJ on such an important EU policy decision? For decades the Karlsruhe has coexisted with Europe’s highest court in an uneasy legal truce, with each one claiming supremacy and the final say on law but never testing the premise to the point of destruction.

If the Karlsruhe imposes its will – and takes back control, as the Brexiters would say – what will British eurosceptics think? It could certainly inspire some interesting lawmaking in Westminster, even if there is a Remain vote on Thursday.

BREXIT MARKET RALLY

The polls are looking better for Remain. It is still close, but the apparent swing was enough for sterling made its biggest one-day gains in eight years.

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Europe’s four most powerful men are in peril, fighting for their political lives in some choppy and unusual electoral waters. Whether this week in the case of Britain’s David Cameron or Spain’s Mariano Rajoy, or in the coming months with regard to Matteo Renzi and Francois Hollande, each one is nearing a career-defining reckoning with voters. The four cover opposite ends of the mainstream political spectrum, but share a common fear: being undone by primal anti-establishment forces. Such is the lot of Europe’s political princes.

David Cameron’s verdict There is a touch more optimism in Downing Street on the EU referendum. After a tumultuous week, poll momentum has swung back to Remain (as well as defections). Mr Cameron also delivered a solid TV performance on Sunday night, channelling his inner Winston according to the FT’s Henry Mance. Note the emphasis on this referendum being a no-turning-back decision on the EU – but not on Mr Cameron. His approval ratings have plummeted but he insists this vote is not a verdict on him. It appears he may try, against the odds, to hold on to power after a Brexit win. Given what it would do to his legacy, what does he have to lose?

Matteo Renzi’s star falls Once the golden-child of this political quartet, the restless Italian Socialist is facing a ballot-box revolt. The Five Star movement routed Mr Renzi in Rome’s municipal elections last night, making Virginia Raggi the eternal city’s first female mayor. In a big upset Turin was lost as well to a 31-year old Five Star insurgent, Chiara Appendino. Mr Renzi’s Democratic party did manage to draw the line there, hanging on to Milan and Bolgna, where it was facing a more traditional run-off with centre-right opponents. All eyes are now on the October referendum on constitutional reform that Mr Renzi said he would win or quit. His enemies are circling.

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“Which debt relief agreement are you talking about?”

If anyone had any doubts that Christine Lagarde, the managing director of the International Monetary Fund, doesn’t think much of the debt relief deal for Greece that was struck last month by the Eurogroup, these should have been firmly laid to rest by her comments at a press conference in Luxembourg on Thursday.

Asked about what she thought of the outcome of euro area finance ministers’ marathon meeting last month on Greece, which reached some tentative agreements on easing Athens’ massive debt burden, Ms Lagarde appeared to question whether it amounted to a meaningful breakthrough at all.

“Which debt relief agreement are you talking about?,” Lagarde said, before smiling conspiratorially. “I think you have my response in my question actually.”

The issue of debt relief has become central to the roll out of the €86bn euro area bailout of Greece that was agreed on by euro area leaders last summer. The IMF has refused to take part in the programme unless relief is granted, and has challenged what it says are over optimistic EU predictions for the recovery of the Greek economy.

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Westminster is in mourning. Campaigning is on hold. The grief over the murder of Jo Cox MP is raw and palpable. The implications for Britain at this historic juncture are hard to predict. Six days out from the referendum, in the midst of an angry and shrill campaign, politics has suddenly taken a different hue. This was a dark moment for democracy in Britain and an unbearable tragedy for one young family. Start your reading with Alex Massie of the Spectator on a day of infamy.

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One of the most striking quotes ahead of Britain’s referendum was Michael Gove’s claim that “people in this country have had enough of experts”. As this polling data shows, the Brexit backing justice secretary was on to something, at least when it comes to Leave supporters.

The YouGov pollsters gauged public trust in the views of “experts” and politicians when they speak about the EU referendum. It is no surprise that both Leave and Remain supporters are wary of politicians – both at home and abroad – albeit by different margins.

When it comes to experts, though, there is an chasm. Remain supporters tend to believe academics, economists and people from the Bank of England. Leave backers mistrust them all, especially if they come from Threadneedle Street (net trust minus 45 per cent). You can add business leaders to that list too (plus 28 per cent trust among Remainers, and minus 28 for Leavers).

There is a paradox to this. As the FT’s Chris Giles notes today, there has rarely been such “expert” consensus on an issue. While economists argue over how harmful Brexit would be, there is near unity that it would be harmful to the economy. The dismal science is in speaking in concert for once and the public just don’t seem to be listening. As Tobias Buck found in a report from revolutionary Bracknell, middle England is in an iconoclastic mood.

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Nearly six months after knuckling down to work on the next stage of overhauling EU bank rules, finance ministers will meet in Luxembourg on Friday to acknowledge that they aren’t where they want to be.

Rather than being able to hail progress in the next steps of the euro area’s ambitious “Banking Union” reform programme, instead they have to tackle fundamental splits over how to take the project forward. If they can.

The divisions are laid bare in a package of documents prepared by the Netherlands, which holds the rotating presidency of the EU, and which is trying to chart a course for future negotiations before handling the reins over to Slovakia at the end of the month.

To pick through the splits, the FT Brussels blog has posted an annotated copy of the main Dutch document here (just click on the parts highlighted yellow:)

You need a frames-capable browser to view this interactive graphic.

At the centre of the ruckus is the Commission’s proposal for the euro area to create a centralised system to guarantee bank depositors, known as the EDIS.

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There are 8 days left of the campaign. Little wonder contingency planning is in overdrive. Three different perspectives are laid out today in the press: from the Leave side on the divorce; from the Remain side on the consequences; and the worried Remain side on last-ditch offers to save the campaign.

First for the Brexiters. Chris Grayling, leader of the House of Commons, outlines a detailed vision of Brexit to the Financial Times. It is a complex but significant insight on how a divorce may proceed, and it doesn’t match expectations in Brussels. The Leave side would legislate in the UK to leave by 2019, but would not necessarily invoke Article 50 of the EU treaty, aiming instead for an “informal” process that sets future trade termsat the same time. In other words, they do not want a trade deal taking longer than the EU break-up. So two years to do it all.

That takes goodwill on the EU side – and it will probably be in short supply. Mr Grayling says the UK will curb the powers of the ECJ straight after the referendum vote – andcurtail free movement rights before 2019 to avoid an influx into the UK. There is not much the EU can do about that; the EU is a sovereign club based on law and good faith. But it may be hard asking for favours. More positive for Brussels: Mr Grayling said budget payments would continue. “I don’t want to break the law as part of the process”. A cheeky European Commission may ask: can we have £350m a week please?

The fiscal contingency George Osborne, chancellor, has set out his post-Brexit budgetto The Times. Unsurprisingly there is no attempt at sugar coating. Income tax up, fuel duty up, inheritance tax up, beer tax up, dramatic cuts across the public sector, all aiming to fill a £30bn fiscal gap he argues was identified by the Institute of Fiscal Studies. The Leave side dismissed this as “hysterical” fear mongering (and think the chancellor will beout of a job anyway). The question is whether it is a sufficiently brazen a claim to move the subject back to the economy, rather than immigration. Remain’s fate may rest on it.

The panic contingency The poll momentum is against Remain and the panic is showing. Tom Watson, Labour’s deputy leader, raised the idea of pushing for urgent reforms to EU free movement – setting off speculation in Westminster about desperate last-ditch measures to rescue the campaign.

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This is a day of reckoning for France’s union barons. Thousands of protesters are expected to take to the Paris streets again today, seeking to shame politicians into dumping already watered-down plans to reform labour laws. But all that noise may belie a more uncomfortable reality for Philippe Martinez, the union ringleader for the strike. He may have badly overreached.

The gruff, mustachioed boss of the General Confederation of Labour (CGT) said the demonstrations would be “massive”. His reputation is on the line in what Le Journal du Dimanche has dubbed the “final round” of his battle with the government. The New York Times does a smart job of looking at the stand-off. The piece highlights the complex undercurrents in the French labour movement – notably a bloody succession battle to lead the CGT as its fortunes have waned – that are driving militant action in what is ironically “one of the least unionised countries in Europe”.

And here lies the danger for Mr Martinez. The CGT-led strikes have been a costly nuisance but the disruptions don’t seem quite as bad this week. The rubbish in Paris is finally being collected again. The government seems to be standing its ground (albeit to protect far weaker reforms). Public patience is wearing thin. And most importantly, attention has turned to the football – and France won its first game. If turnout is mediocre on Tuesday, what Mr Martinez described as a protest airplane “just taking off” in late May could appear to be running low on fuel.

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The polls are tightening, markets are jittery, and Downing Street is so alarmed it is relyingon Gordon Brown to save the Remain campaign. It may be time to start talking about the day after Brexit, and whether there is a way to engineer a soft-landing.

The “what happens next” issue is tackled today by Donald Tusk, the European Council president, in a typically punchy interview with Bild Zeitung.

“The leave campaign contains a very clear message: ‘Let us leave, nothing will change, everything will stay as before’. Well, it will not. Not only economic implications will be negative for the UK, but first and foremost geopolitical. Do you know why these consequences are so dangerous? Because in the long-term they are completely unpredictable. As a historian, I am afraid this could in fact be the start of the process of destruction of not only the EU but also of the Western political civilisation.”

He later says divorce will be “sad” but manageable within 2 years. But he notes a parallel trade deal – setting the future EU-UK relationship – will be far tougher, and take at least another 5 years after the divorce, if it can be agreed at all. Long as it seems, this 7-year drift is actually optimistic version of the “decade of uncertainty” that David Cameron and Whitehall have described.

If markets react badly to a Brexit vote, there will be huge pressure to find a quick EU fix for a smooth transition (what Wolfgang Münchau calls letting the Brits go in peace). But even under such market duress the political options look poor.

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History is full of great projects left half finished – the Sagrada Família cathedral in Barcelona, the Beach Boys’ Smile album, the last Tintin book … could the euro area’s banking union join them?

Forged at the height of the debt crisis as a way to restore trust in the financial sector, the banking union remains very much a work in progress, and it’s increasingly unclear whether its architects are all working off the same plans.

While the European Central Bank is firmly installed as the currency bloc’s banking supervisor (something examined in-depth in this new study by Bruegel,) and new rules on handling financial crises are on the statute books, discussions are becoming bogged down over the banking union’s third pillar – a centralized scheme for guaranteeing bank deposits. That plan, known as EDIS, is loathed in Berlin while strongly supported by the ECB and governments in southern Europe.

The row between national capitals over EDIS is only part of a larger, and extremely complex negotiation – one that is hampering efforts by Jeroen Dijsselbloem, the Dutch finance minister, to sign off his country’s EU’s presidency by getting a deal on a banking union workplan. The split is likely to be a topic of discussion among policymakers at today’s Brussels Economic Forum.

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Voters are growing disenchanted with the EU – and Britain is far from being an outlier. That is the bottom line of Pew’s latest survey, which offers one of the best guides to opinion across the continent. For EU supporters it makes for sobering reading. We’ve picked out four charts.

 

Within the general decline in positive views of the EU over the past decade, one country stands out: France. While French views of the EU have see-sawed over the past few years, there was an extraordinary 17 point drop in respondents having a positive view of the EU this year. Only Greece – not included on our chart – has a more negative view (71 per cent have a unfavourable view of the union).

What explains the slide in support? Any gains that came from economic rebound seem to have been wiped out this year by the migration crisis.

Views of how the EU has handled the situation range from poor (Netherlands and Germany) to catastrophic (Sweden and Greece).

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For many of us, the idea of Germany getting tough on its own carmakers is about as likely as a French minister admitting he prefers Australian wine, or Viktor Orbán offering free hugs to asylum seekers.

But over the past few months, German regulators have been making a good show of doing exactly that. Chastened by the discovery in the US that Volkswagen had been cheating in emissions tests, officials have leapt into overdrive, probing manufacturers including Daimler’s Mercedes-Benz, General Motors’ Opel, as well as Fiat.

In Germany’s latest move, the country’s transport ministry is calling on the EU to tighten its ban on emissions test cheating – a far cry from its efforts last year to water down EU plans for more realistic environmental testing of cars. Ministers will discuss the German requests today in Luxembourg, as part of a debate on the dieselgate scandal.

So what exactly is going on?

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A select group of foreign media were ushered to the Matignon palace on Wednesday evening for a reassurance session with Manuel Valls, the French prime minister battling union opposition after ramming a jobs bill through parliament without a vote.

The goal? Try and fix the fast deteriorating image of France abroad after a week of messy protests. Do not draw the cliched conclusion that France is a chaotic and unreformable country, he pleaded, even if the country’s largest union – headed by thegrumpy-looking, mustachioed Philippe Martinez – threatens to disrupt transport and fuel supplies during the Euro 2016 football championship. “Tell your readers: ‘Come by plane. Come by car. Come by train’,” Mr Valls urged.

It was also an attempt by the 53-year old to quash mounting suspicion in Brussels and Berlin — perhaps rising as fast as the Seine levels after a week of unusually heavy rains — that the much-awaited jobs reform may not be one after all. “The CGT knows my determination,” Mr Valls insisted. “I won’t change a thing.” What Mr Valls really meant was that he would refuse to touch article 2 of the reform, a key provision stipulating that companies’ deals with their unions and employees on overtime would supersede sectoral collective bargaining.

There were personal political motives too: to reclaim his place as reformer and taboo breaker of the French left, which the iconoclastic, younger and more popular Emmanuel Macron now seems to occupy. Since being appointed by François Hollande in 2014, Mr Valls has had to be loyal and defend whatever the deeply unpopular president initiated — including the controversial and failed attempt to change the constitution to strip Frenchterrorists of their citizenship. As a result, Mr Valls’ popular backing has sunk to levels almost as low as the president’s abysmal approval ratings.

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In countless zombie movies there is the classic moment where a member of the dwindling band of survivors is cornered and desperately opens fire on the oncoming tide of walking dead. Despite firing off round after round, to the despair of our hero, the enemies keep approaching until the fateful click of his empty gun that tells him the game is up.

It’s a predicament not unlike that of German Finance Minister Wolfgang Schäuble as he fights a rearguard action to ward off Brussels plans for a common eurozone scheme to guarantee bank deposits.

The idea, known as EDIS, is loathed in Berlin on the grounds that it could force Germany to help cover the costs of bank failures elsewhere in Europe. At the same time, perhaps unsurprisingly, it is lauded in Southern Europe as a guarantee that capitals will be helped to cope with financial crises.

So far, Mr Schäuble has thrown all kinds of obstacles at the proposal, which was unveiled by the European Commission late last year. He has insisted on a tough programme to close loopholes in existing regulations which he says must be fulfilled before EDIS is even considered. He has also questioned the very legal foundations of the plan – saying parts of it have budgetary implications for nations that go beyond what is allowed under the EU treaties.

Despite all this, discussions on the text have rumbled on for months in the EU’s Council of Ministers.

Now, however, Germany is seeking to hit Brussels where it really hurts: with its own rules of procedure.

In a joint paper with Finland, obtained by the FT, Germany seeks to hoist the European Commission up by its institutional petard, accusing it of failing to respect “requirements under primary law and the Better Regulation principles” by not carrying out a full “impact assessment” before presenting the EDIS plan in November.

It’s the Brussels equivalent of trying to take down Al Capone for tax evasion. But hey, it worked.

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A political saga that is reaching Hollywood levels of incremental sequels and rehashed storylines lumbered on yesterday when the European Commission made good on its threat to officially accuse Poland’s conservative government of endangering the rule of law.

In a feat of diplomatic gymnastics, Brussels published a “negative opinion” of the government’s paralysis of Poland’s highest court, which has left the country in constitutional crisis. But it stopped short of calling for a resulting punishment, stressing that “dialogue” would still continue.

Warsaw is keen on dialogue: dialogue can last a long time, and is cheap. It is under little threat at home from a weak opposition, and paying lip service to strongly worded letters from the EU is a small price to pay for a reform human rights groups say infringes Poles’ democratic rights.

Diplomatic chatter suits Brussels, too. Having threatened Warsaw with punishment only for the Poles to call its bluff, Brussels is left looking distinctly powerless and needs a way out. In the end, Poland’s governing Law and Justice party may agree that a quiet climbdown and compromise is the smartest outcome. But they hold the cards.

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Alongside Boris Johnson’s Brexit metamorphosis, it must be the transformation of the referendum campaign. For close to a quarter-century, Britain’s control-obsessed Treasury was the EU’s most eurosceptic finance ministry. Yet in recent months it became the go-to armoury for Remain campaigners, churning out ever more harrowing economic warnings on the consequences of Brexit. Whitehall’s broody power centre saw the light – or at least the costs of leaving.

Should Britain vote to stay in the EU, eternal optimists in Brussels – and there are a few left – might take this as a positive sign. In theory, the vote should “settle this European question in British politics” – just as David Cameron promised. The europhile Treasury could lead a mini-renaissance in British EU influence. The UK’s ambitious 2017 EU presidency could press for trade deals and deepening the single market. A multi-tier EU would give Britain the reassurance it craves; London’s defensive crouch on EU policy could end. The Economist’s Bagehot outlines just such an initiative.

Many will find it hard to believe.

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Here comes the digital cavalry. The European Commission will this week weigh-in on the side of business prodigies like Airbnb and Uber, warning European authorities to stop stifling the “sharing economy” with blatantly protectionist rules. It is only guidance. It may well be ignored. But it is a start.

Whereas free-wheeling Silicon Valley tends to see EU regulators as a nuisance or business risk, some companies actively want Brussels to intervene. That is especially true for businesses upending traditional models for selling transport or accommodation. Airbnb and Uber are trying to harness whatever pro-market forces they can to end incumbent-friendly, competition-killing rules from Paris to Barcelona.

By that measure, the Commission guidance is positive for the sector. Outright bans or quantitative restrictions on services are cast as unnecessary and harmful. So, for instance, it is seen as a bad thing to fine Berliners up to €100,000 for renting out their homes on Airbnb. The decision of a Milan court to ban the “unfair competition” posed by Uber probably falls into that category too. Equally hard to justify: a Madrid court ruling asking telecoms operators to disable access to Uber.

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Britain’s administration is now in hibernation. The civil service has entered Purdah – a term derived from the Persian word for curtain and the practice of shielding a woman from prying eyes. In practice in Brussels the pre-referendum asceticism means British diplomats must doggedly stick to their pre-agreed positions, show no flexibility or original thinking and avoid socialising with foreigners. Some EU types may joke: has anything changed?

The polls are looking slightly better for the Remain side. But it is close and European leaders aren’t taking chances. As we report today, Plan B is being worked up: how should the EU respond to Brexit?

The topic has been raised at high levels in Hanover, Rome, and Brussels (all slightly different configurations). Discussions were expected on the sidelines of the G7 too (the communique has depicted Brexit as “a serious risk to growth”). A small group of leaders’ sherpas also met on Monday at the European Commission. And this wouldn’t be a crisis unless the Commission’s anti-populist Martin Selmayr had a Plan B locked in his safe – right next to the Grexit one that was never used.

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