Wednesday 14 December 2011

Unreasonableness and the Rebate

While political battles are being waged over Cameron's veto, there seems to be at least one point of consensus within Britain: that the demands on the protection for financial services were reasonable. The Labour party hasn't set out exactly what it would have done (it says it would have stayed at the table and achieved a better deal, though it's hard to run a "what-if" scenario since the Cameron government's relations and those of a Labour government with the other 26 Member States over the last few months would need to be taken into account), but it seems that Labour basically supports the government's position on the treaty changes it was seeking, and that such changes were reasonable.

But today the Commission President Barroso told the European Parliament that Britain's demands were unreasonable and would have threatened the internal market.

Unreasonable Demands?

Financial services are part of the internal market, and are covered by Article 114 TFEU. This article provides for the regulation of the internal market, and the legislative procedure is the ordinary legislative procedure (i.e. the Commission proposes, and the Council and Parliament have an equal say in amending and passing the legislation). Britain wanted to insert a protocol which would grant every Member State a veto if the regulation was concerned with the financial services sector. Because every Member State would have a veto, the British government argues that it wasn't merely seeking to protect the City or asking for special treatment for itself.

However, this does threaten the legal and political basis of the internal market. To make it harder to regulate one sector of the internal market is to privilege one sector of the internal market over all other sectors. While it may be technically correct that Britain wouldn't be legally privileged over the other Member States, this would have created a separate legal procedure for introducing regulations for a separate sector of the market, so it would have introduced a legal division in the treaties between financial services and the rest of the internal market.

Then there's the political concept of the internal market. That internal market legislation is passed by majority voting is not only necessary to ensure that legislation can be passed at a pace that more closely reflects the pace of innovation in the market (compared with unanimity - we don't want to return to the days of waiting years for a single regulation to be passed), but also this politically underlines the mutual trust between the Member States in each other as they work on the internal market. If legislation is passed by qualified majority vote, then everyone has to work together to get legislation passed (and can't simply oppose all legislation outright to get its way) and Member States also have to be sensitive to the needs of the others (in other words: if you outvote me here, I'll outvote you there, so let's not play the zero-sum game). By introducing special protections for parts of the market that have been identified as a key interest by one Member State, in political terms you are privileging that Member State over the others in the overall internal market negotiations, and weakening the trust that is supposed to underwrite the market.

So Barroso was right to say that what Britain was asking for was unacceptable (or at least that it would be unacceptable for other Member States). Why should the financial sector be treated differently to other parts of the internal market? Should Germany have a protocol so there's a veto in the area of environmental policy when it comes to the car industry? Why shouldn't economic sectors of interest to other Member States be more protected? Because the more you reverse the integration in the internal market, the more you break up that market. Similarly, most other Member States see the social chapter as protecting their welfare states from a race to the bottom while entrusting their economies to the competition of the internal market. Yes the UK is one of the most committed Member States to free markets and a liberal internal market. But it fails to see how these trade-offs are part of the "Single Market Pact" sometimes, and how unacceptable its position can appear to others. If you can't understand the position of those you negotiate with, then you don't stand a good chance in negotiations.

It should also be noted that there are plenty of EU regulations that only set minimum standards, above which Member States may regulate more heavily. It should be easy to negotiate this minimum standard approach, rather than pitch for a full legal division of the internal market.

Finally, Barroso claims that he tabled a motion that should have met key British demands on protecting the internal market from a Eurozone caucus:

"In search of compromise, I tabled a clause providing, in the EU treaties, that any measures adopted by the Council and applying to the euro area only, must not undermine the internal market including in financial services. Unfortunately this compromise proved impossible."

The Rebate

Joseph Daul, the leader of the European People's Party group in the European Parliament, said:

"I believe that the British rebate should be put into question. Our taxpayers' money should be used for things other than rewarding selfish and nationalistic attitudes."

For the UK, the rebate is like the EP's Strasbourg seat for France or the protection of the low corporation tax for Ireland. For Britain the rebate is a question of fairness: otherwise it would contribute more to the EU, which isn't fair as others get back more in the Common Agricultural Policy.

But times have changed since Thatcher demanded Britain's money back. Back then the EU was a club of fairly wealthy countries, but now it has expanded to include the former post-communist, Warsaw Pact countries. During the negotiations for the "Big Bang" enlargement - which the UK was a huge supporter of - the question of the British rebate was raised. With 10 new Member States joining, which would all be poorer than the then-current members, there would be greater pressure on the EU budget to cover the structural funds and CAP costs. Would Britain, who supported this enlargement so much, not either give up or reduce its rebate to help cover the costs of greater solidarity with the new members? No. In fact there was the sad situation where Poland had to ask how much more the new members would have to pay to make membership a reality. Because the EU budget cannot be based on debt, so other countries have to fund Britain's rebate.

Of course it's not as simple as saying that Britain should have surrendered its rebate at that point. It's not to say that there are not other interests that are protected in the EU budget and that these shouldn't be seriously negotiated over. But it is an odd policy to drive forward enlargement, while demanding the EU budget to remain static on the one hand, and defending the British rebate on the other. If Britain is to make the case for the fairness of the rebate, it will have to move on from the arguments of Thatcher.

The key point is that the EU is a compromise. The internal market isn't something that can be viewed in isolation, and it is a mistake of British politics that the EU is often only presented in that way. Without the solidarity with poorer regions, opening them up to the competition from the more advanced economies is a hard sell. A minimum level of solidarity is required to ensure that the welfare states and the communities in Member States won't be too negatively affected by the downsides of the internal market - and in some countries where euroscepticism is mainly on the left it is argued that the EU is neo-liberal and there isn't enough solidarity. So when discussing the internal market, social policy and the budget, we need to have a more nuanced and fuller idea of the fairness that's required in the EU for even a minimalist internal market to work.


  1. Thank you, once again, for a thoughtful post. However, the UK Parliament yesterday adopted a motion (sponored by DUP) which goes in the opposite direction with regard to the EU and its member states:

  2. A balanced post, but until I know more I support Cameron. As understand it, what actions are to be proposed regarding financial regulation are largely unknown. In effect the 'group of ministers' will regulate as they go along. That 'The City (London)' needs tighter regulation is in my mind quite justified. That the application of such regulations would be applied equitably is suspect.

  3. @ Grahnlaw and Peter


    @ Peter

    I'm a bit confused: how has Cameron addressed that threat if it exists, or do you mean that you support the idea of introducing an extra veto?

  4. No - I think the idea of doing away with the veto is sound. I'm inclined towards the notion of an EU Cabinet (if you will) of elected government ministers. I'm oppossed to any such cabinet having unfettered authority to make regulations that are not endoresed by a parliament.

    PS - Unless you know of an EU country that I can research where such a system works

    To me there is the issue of the UK constitution, or lack of clarity with it, and the 'Supremacy of Parliament'. It is this 'supremacy' that I believe makes the UK probably the only state where transposing EU Law supercedes any recorded constitutional law.

  5. The regulations would have to be passed by the European Parliament and a qualifed majority of Member States - the Commission cannot make then up on its own. (The Parliament now has a say on pretty much everything accept foreign policy, so if QMV is mentioned, it generally means that the Parliament has equal legislative power).

    I'd support a Commission that was completely elected by the EP - instead of nominated by the Council (though all nationalities would need to be represented and the High Representative would probably have to remain a Council appointee since foreign policy is likely to remain an intergovernmental area).

    I'm not sure what you're getting at with the UK constitution point. Even if you enshrined the principle of parliamentary sovereignty in written law (which was discussed when the Sovereignty Bill was being debated in parliament), it would still have to be interpreted by the courts, and they'd likely reach the same conclusion: that EU law has the effect it does because Parliament has proclaimed it so, and Parliament is still supreme because it can undo it. In some ways it's linked to the idea of dualist legal systems (international law has to be transposed into national law to have effect, whereas in monist systems treaties only need to be ratified to have the same effect as national law). Ireland has a dualist system too, and its constitution has to be amended to permit the legal effects of membership. In the Irish system sovereignty is vested in the people, so they could undo it via referendum if a referendum bill was passed in the Oireachtas. (Or have I missed your point?).

  6. I've posted on the sovereignty debate in the UK Parliament here.

  7. I don't believe that we are talking about the 'Commission'. I believe that the issue is the authority that the 'council of ministers' wish to exercise. If I have missed something in the negotiations where the UK exercised its veto, then perhaps you can link me to an explaination?

    As Council(of ministers) meetings on issues that do not relate to legislation can still be taken in secret, it can be difficult for national parliaments to keep track of changes that are being made.
    QMV means that countries sometimes have decisions forced upon them that they do not support and may not be able to pass through their national parliaments.

  8. The Council should be more transparent (it's always hard to bring diplomatic processes out into the light, but it is a legislative process, so this shouldn't be an excuse). The UK's veto didn't change the current treaties (you can read Articles 114 and 294 on the voting procedures for passing regulations in the internal market), and any regulations passed by the EU for the financial sector will be by qualified majority in the Council and must be passed by the European Parliament. Tax issues like the FTT are still governed by unanimity so there's still a veto. Neither of these areas were mentioned in the "new fiscal compact" statement.

    I'm against bringing the veto back for internal market legislation because of the reasons I wrote about in the post, and because it would seriously dilute the power of the European Parliament in this area. I don't get your point on the authority of the Council, because giving countries the power to block such legislation would mean that the Council would have *more* power in the EU institutional system, and strengthens the tendency towards diplomacy behind closed doors. I'm guessing that you mean you're suspicious of further decision making powers for the EU (since veto or not the Council would be involved if the EU is), but these issues weren't on the table.

    You can read the statement here (PDF).