Monday, October 21, 2019

Speech to the Bundestag's EU Affairs Committee on the long-term EU budget 2021-2027

Here's a video and summary of my talk to the Bundestag's EU Affairs Committee on the long-term EU budget 2021-2027 (MFF).

My Bundestag briefing on EUBudget reform, proposing to impose drastic cuts to overall bureaucratic spending as well as to "direct payments" to agricultural landowners and to failing EU regional funds, which are vulnerable to corruption can be found here:

English version

German version

Summary of my talk.


Thursday, October 17, 2019

Just how much does Boris Johnson's deal concede to the EU?

Publish on The Daily Telegraph

Despite endless claims that it would refuse to renegotiate the binding part of Theresa May’s deal, the EU has finally engaged, and granted Boris Johnson some important changes. Here’s an overview of both the “wins” the PM secured as well as the concessions he made. Though the DUP are not yet on board, these proposals are likely to form the basis of any final deal.
First of all, British negotiators managed to persuade the EU to agree that Northern Ireland will remain a part of the UK’s customs territory permanently, meaning that residents of Northern Ireland will enjoy all the benefits of trade deals negotiated by the UK. It will gain the right to an independent trade policy, from 2021 on at the earliest, or 2023, if the transition is extended.
In return, however, the UK government conceded to customs checks in the Irish Sea, on top of regulatory checks; Northern Ireland will, de facto, remain in the EU’s single market.

But for that to be acceptable and democratic, however, both sides have agreed a mechanism to provide “consent” to the residents of Northern Ireland. This would involve giving the Northern Irish Assembly the right to leave the arrangement, if there is a simple majority for that - but, only six years at the earliest after the end of the transition period, meaning in 2027 or 2029. A “cooling off period” of two years would follow any vote to leave the arrangement, four years after the transition. That the EU and Ireland have conceded to a unilateral exit mechanism linked to a time limit is a significant compromise.
DUP MPs are clearly unhappy at failing to secure a “veto” over this, claiming that it contravenes the Good Friday Agreement because “majority rule on this single issue alone” is provided in the deal instead. If this were the case, however, then surely the DUP should realise that any veto for the unionist side would necessitate a “veto” for the republican side too?
From the point of view that the Good Friday Agreement requires both sides to agree to fundamental changes to Northern Ireland’s status, what has been agreed would represent a compromise. This Brexit would deliver meaningful change, alongside serious steps to mitigate trade disruption and ensure that the Northern Irish can enjoy any fruits of EU departure, such as lower tariffs.
The DUP wants a vote before the arrangement enters into force, but surely the Irish-minded community would also need to be on board? If they are not, perhaps something closer to the status quo – reconciled with Brexit being delivered – isn’t such an unfair compromise?
Any goods entering Northern Ireland will face EU-level tariffs but a system of rebates will be worked out so that Northern Irish businesses and residents can enjoy lower UK tariffs. Goods travelling from Great Britain to Northern Ireland will be subject to checks, all to prevent checks on the land border on the island of Ireland.
To soften all this, the EU has made an important concession, that personal goods and goods that “will not be subject to commercial processing in Northern Ireland” will not be checked. The details will all be decided by a “Joint Committee” of EU and UK officials, so the EU will still have a say in this, another argument for the DUP not to agree to the deal, even if they seemed quite open to the idea of intra-UK customs checks.
In this way, the EU is effectively tolerating some leaks in its already leaky external barrier. The EU's Chief Negotiator Michel Barnier openly admits that "we cannot totally eliminate the risks". This is exactly the kind of flexibility needed to solve the complex Northern Irish puzzle, so perhaps with more flexibility from the EU’s side, the DUP could be brought on board after all.
Another issue that presented itself at the last minute was VAT, even if one diplomat did claim that this really was a sideshow or smoke screen for another problem in London (the DUP). Here, the agreed compromise is that EU law on VAT will apply in Northern Ireland, the UK will be responsible for collecting it, but the UK will be able to apply Ireland's VAT reduced rates and exemptions in NI, so the “tampon tax” can remain abolished there.
Throughout the negotiations, the EU – and in particular France – has been pushing for so-called “level playing field” arrangements. In theory at least, the UK conceded to such an arrangement, which involves not diverging greatly from EU environmental and social regulations. In practice, however, this won’t be enforceable, given that it is only part of the non-binding political declaration. Theresa May’s level playing field was still part of the binding part of the deal and by getting rid of the backstop, Boris Johnson can also claim to have removed the role of the European Court of Justice, at least for Great Britain, as otherwise the UK would have outsourced its trade policy to the EU – and therefore also its top court.  
In any case, Boris Johnson's strategy of showing that the UK was serious about no-deal, has - fundamentally - worked, even if the EU and Ireland need to be credited for having engaged. The question is whether DUP will get another chance to influence the process. Should a majority in Parliament vote this down, then EU leaders could perhaps make one final move in the direction of the DUP, just before the end of October. Yet changing parliamentary arithmetic could well see the DUP MPs lose their strategic clout, should a general election follow the failure to deliver Brexit on October 31. 
Finally, the EU has dropped all talk of further extension. Just yesterday, German officials were arguing that at least another two months were needed, yet Jean-Claude Juncker came out emphatically against the idea of delay when questioned about it earlier today.   
If the House of Commons agrees this Saturday, Brexit will be done on time.

Tuesday, October 15, 2019

Mario Draghi's legacy as ECB President

Mario Draghi's last months as President of the European Central Bank have been tumultuous. He managed to push through more bond purchases or "quantitative easing" on 12 September, despite the fact that Central Bank governors representing a majority of eurozone economic output opposed it, also because it was “open-ended”, without a time-limit. Not only was there open opposition by German and Dutch Central Bankers, but also France's Central Bank chief resisted. The ECB’s monetary policy committee had also advised against restarting QE, arguing long-term interest rates were already low.
Only days later, a prominent German ECB official, Sabine Lautenschlaeger, resigned, while two former German ECB chief economists, along with former heads of the Central Banks of Germany, Austria and the Netherlands, criticised Draghi's record in a new publication.

Remarkably, also German tabloid Bild waded into this otherwise rather technical debate, depicting Draghi with “dracula teeth” as "Count Draghila”, mentioning that “we have lost billions because of him”. 
Also governments waded in. Belgium’s Finance Minister warned the ECB’s policies hit savers and increase inequality. Ahead of the decision, the Dutch government had stated that these “suppress” interest rates, with the Christian democratic coalition partner even accusing the ECB of endangering Dutch pensions, which have had to be cut due to ongoing low rates, further questioning whether the ECB is respecting its mandate.

Draghi and his acolytes have been denying all accusations, arguing that interest rates are low amongst others due to ageing. Research by Claudio Borio, the top economist of the Bank for International Settlements, the "Central Bank of Central Banks,", has however demonstrated that "the decline in real interest rates over the last 30 years is not explained well by non-monetary factors but monetary policy seems to play a more significant role".

The ECB has been using various methods to keep interest rates low. Apart from its general interest rate setting policies, whereby it also set negative rates, and “Quantitative Easing”, which amounts to creating new money, which is then used to buy bonds, including government bonds issued by Eurozone governments, it has been lowering collateral requirements for banks in Eurozone countries to receive financing from the ECB.

When interest rates decrease as a result of this kind of manipulation, even if this is also partially the result of natural, “non-monetary factors”, the benefactors are excessively indebted governments that have a hard time refinancing their debt. At least in Zimbabwe things are more honest, with the Central Bank paying out subsidies directly with printed money.

There is no such thing as a free lunch, however, so someone has to bear the cost. David Folkert-Landau, the chief economist of Deutsche Bank estimates that negative interest rates, amount to an annual tax on Eurozone savings equal to 160 billion euro. Not very democratic, given that Parliaments have no say over this kind of “inflation tax”. Historically, central banks have been used to finance when taxpayers would refuse to pay for, most notably war, which is why the Bank of England was set up, but nowadays runaway welfare spending.

Of course central banks in the U.S., Japan and the UK engage in similar practices, but tellingly, Greece, a country with a debt burden that would be unsustainable without external Eurozone and ECB support, currently pays less to borrow over ten years than the United States, whose currency underpins the world economy. Greece now also enjoys negative rates, meaning investors pay the Greek government for the privilege of lending to it. This makes clear how far the ECB has gone.

The official line of the ECB is that we need all this to “achieve” a 2 percent inflation target. Originally, this was interpreted as a maximum limit, but somehow the ECB gets away with reinterpreting this as a goal to achieve. As if anyone aims for their investments to lose 2 percent per year.

It’s not only an issue however that savers are hit or that asset prices are distorted, given that people buy hard assets to avoid debasement of their savings. Some countries are also hit worse than others: Belgium has a lot of savings, the Netherlands a lot of pension funds that are banned from taking big risks, while a relatively low percentage of Germans own real estate. These are all reasons to be hit worse. Just like fiscal transfers, these monetary transfers ultimately also threaten the Eurozone, as they create more disunity: those having to pay aren't happy and those haven't to accept conditions linked to the payments aren't.  

Politically attached conditions linked to monetary action have already been a thing in the Eurozone, as the ECB has been sending various letters to governments with instructions in the past, suggesting otherwise monetary support may end. With the arrival of Draghi’s successor, Christine Lagarde, who’s a politician, an even more politicized ECB can be expected. A few days after Lagarde’s nomination, the French government watered down its commitment to trim the country’s bloated ranks of civil servants, in a sign how all that easy money does not enable space to reform, but instead provides an incentive to avoid reform. Politicising the central bank will in any case not change the fact that there is insufficient political unity underpinning the Eurozone. The clearer the effects of the ECB’s policies become, the more evident this is.