Once again the day is saved...

...At least for now. It's hard to escape the feeling that each time an agreement is made at a European Council summit, it's only a matter of time (usually 3-6 months) before we're back in superhero mode again. Still, there seems to be something more to this deal than the simple bail-outs (or loans as they're normally called). The agreement's outline can be found here (PDF).

Greece.

First of all, Greece will get more loans - and more cheaply - to help fight its economic crisis: €109 billion. Structural funds and European Investment Bank funds will be directed towards helping Greece stimulate growth, and there will be some voluntary private sector involvement which will be for Greece only (a bizzare situation where creditors are seemly asked to take a partial default on the basis of what they can afford out of the goodness of their hearts).


And the rest...

All three countries will benefit from a interest rate reduction on the loans to 3.5% (for Ireland this is a 2% reduction), and the loans will have to be paid off in 15 years (at a minimum) rather than the previous 7.5 years. This should make it easier for the countries to implement their austerity programmes as it eases the economic and political pressure on the governments.

In Ireland the interest rate reduction is a great victory for the government. During the election campaign the (now) coalition parties had been campaigning for a negotiation of the EU/IMF deal for lower interest rates and for the burning of some bondholders. The restriction of voluntary private involvement in the scheme to Greece means that partial defaults on the private debts in Ireland are unlikely for now. I say for now because there's resentment in Ireland at having to pay back all the private debt and that the private sector is not taking any hit, and now it will be harder to argue morally, and politically, why there should be movement on this in Greece but not elsewhere. It gives the impression that being the golden pupil of the bail-out class doesn't win you any rewards. I wonder if the market will really see private investor involvement in the Greek deal as a one-off.

Also important is what Ireland might have conceded for this interest rate reduction, and hat it means for the Eurozone's economic policy. The Eurozone heads note:

"[W]e note Ireland's willingness to participate constructively in the discussions on the Common Consolidated Corporate Tax Base draft directive (CCCTB) and in the structured discussions on tax policy issues in the framework of the Euro+ Pact framework."

Since Ireland's corporate tax rate has become iconic and synomous with Irish economic success, the scale of this concession will be heavily debated: is it just a commitment to negotiate? Does it commit us to common tax policies?

I actually think that this is a victory of sorts for Irish diplomacy (well, good use of circumstances at least). It seemed like a raise of Irish corporate tax might have been a condition for a drop in interest rates - in other words, Ireland would unilaterally raise its tax rates without European harmonisation. Since this would have been Ireland and not the EU deciding this, no referendum would need to be held. However, if it comes to a EU Directive, then the Irish government could hold a referendum on the subject, citing it as a constitutional requirement (although I doubt the extent to which it might be one). It's hard to know if that's exactly the case yet, but by having the discussion at a pan-European (or pan-Eurozone) level, Ireland's diplomatic position is improved, not least because it can try to build coalitions around its positions.


Biggest loser: ECB?

The Europeans Financial Stability Fund willbe given several new powers. It can:

"- act on the basis of a precautionary programme;

- finance recapitalisation of financial institutions through loans to governments including in non programme countries;

- intervene in the secondary markets on the basis of an ECB analysis recognizing the
existence of exceptional financial market circumstances and risks to financial stability and on the basis of a decision by mutual agreement of the EFSF/ESM Member States, to avoid contagion."

If the EFSF is able to intervene in non-programme countries to be a lender of last resort to the banks,* then this would dilute the power of the European Central Bank. It's been widely noted that the ECB's loans of €120 billion to Irish banks gave it a lot of power, and that it was a big player in the events leading to the Irish EU/IMF deal. With another institution, created without treaty change, able to provide alternative credit in a crisis, it could be a way of Member States preventing the ECB gaining a strong hand in their economies during times of crisis. It will be interesting to see if this will change the institutional balance in the Eurozone.


*Technically it can't lend directly to the banks, but it lends to the Member State who then lends to the banks. This would also be done at a higher interest. It also means that there are aspects of EFSF loans to banks which make them less attractive than ECB loans, but it does show how wary the Member States are becoming of the ECB's power if they've created a way of circumventing its role as a lender of last resort, even in non-programme countries.

What kind of Free Trade do the Tories believe in?

The news that a government contract for the Thameslink project worth £1.4 billion has been awarded to Siemens rather than Bombardier. It's become a big news story because Bombardier has announced plans to cut over 1,400 of its UK-based jobs. The EU has been singled out for some of the blame:

"The government has said that the Siemens bid represents the best value for money, and that it was following EU procurement rules, which do not allow where companies are based to be taken into account."

The deal with Siemens will reportedly create 2,000 jobs, though:

"...Siemens will build the trains in Germany and only 300 of the UK jobs it creates will be directly employed manufacturing posts, at a factory in Hebburn, South Tyneside."

The article shows that manufacturing jobs are seen as the goal for the UK economy. With services far outpacing manufacturing in the UK economy, job cuts in this area are seen as a further sign of failure. Interestingly, the BBC just produced a good 3-part documentary called "Made in Britain", the premise of which was that manufacturing jobs will leave the UK anyway and that the UK should (and is) moving into higher value economic activities. It's very strange that there is little debate on how Germany actually retains its manufacturing sector and whether the social and economic policies they use would work in the UK or if they are desirable.

[It seems that the loss due to the failure to win the contract is 200 jobs (as Bombardier wrote to the government stating that it would lay off 1,200 workers anyway). Talking about jobs in terms of "net gains" is not to dismiss the tough time these 1,400 workers are facing at the moment, but it does seem that making the deal with Siemens has the effect of creating more jobs than would have been saved had Bombardier won the contract (2,000 versus 200).]

Anyway, the fact that EU law on procurement (you can read the PDF of the legislation here if you have a spare week) prevented the government for picking Bombardier has been flagged as one of the (if not the) main reason for the loss. Under these rules, Siemens won the contract because they represented the best value for money under the criteria set out for procurement. Where the company was based was not allowed to be a factor in determining which company got the contract.

This raises some questions about how the internal market is really viewed, because the anger seems to be directed at the rules in different ways. The impression from the news is that either (a) it's Labour's fault for drawing up the contract criteria; (b) the rules are good in principle but other Member States don't apply them as well as Britain does; or (c) it's the evil EU, goddamnit!

(a) & (b) are linked - how contract competitions are run (what the criteria are) would depend on the sector/work. There have been suggestion from within the government that the rules should be changed. Via Conservative Home:

"[Transport Secretary Philip Hammond] did tell the BBC's Evan Davis that he wanted to look at whether similar contract processes could be rewritten in future so that successful bidders were, in some way, committed to the "domestic supply chain". Noting that French building contracts tend to be awarded to French manufacturers and German contracts to German manufacturers he promised to explore how British industry could be supported in future tender processes without compromising EU procurement laws."

So some Tories would like commitment to the "domestic supply chain" to be a factor. It's hard to see how this can be interpretated in any other way than that government should be able to value national over European companies purely on the basis of nationality or the level of establishment within the Member State. After all, the contract is awarded to those who can provide goods or services to the government's criteria and requirements. It's not like the companies create their own system and then, if they aren't rehired in a new contract, the system breaks down and needs to be rebuilt by another company to its different standards.

There are 2 options:

1. Weaker rules that permit more protectionism.
2. Keeping the rules and ensuring better implementation in other Member States IF that is a problem.

So what kind of internal market do some of these Tories want? What is their vision of free trade? Are they really going to pick a political fight over this?

Am I the only one bemused that Tories are complaining that the "socialist and bureaucratic EU" has prevented government from watering down market competition to engage in soft protectionism?

Lovers' Tiff?

On the Council of the European Union's website a document called "Relations with the European Parliament (July 2011)" only has an image of a shredded piece of paper next to it.

Hopefully given the positive vision of the Polish Presidency, Warsaw can relight the spark of passion and return Brussels to its natural state of a lovers' paradise. ;)