Thursday’s European Elections Explained

By Phelim Brady

This week citizens across the European Union’s 28 member states will go to the polls to elect MEPs for the next five years. The UK votes in 12 regional constituencies and here in Cambridge, as part of the Eastern Region, we elect seven representatives to the European Parliament from party lists.

The European elections are a bit different this year as, for the first time, national EU governments are meant to take into account the results of the vote in choosing the new head of the European Commission, the EU’s executive arm and civil service. To this end the major pan-EU parties have all nominated candidates for Commission President, although it remains to be seen whether the continent’s prime ministers and presidents will take these candidates into account when they make their decision this summer and there is speculation that national leaders will end up picking someone else entirely.

Conservative MEPs have been pulled out of the mainstream centre-right party in the European Parliament, and now sit with a much smaller group of reformist Eurosceptic conservative parties which have not fielded a common candidate. Labour and the Lib Dems are part of the mainstream social democratic and liberal European groups which have put forward, respectively, Martin Schulz and Guy Verhofstadt for Commission President. The fight to be the top candidate for President will be between Schulz and Jean-Claude Juncker, the mainstream centre-right candidate, a contest which current polling suggests could be close.

In Britain the national polls show UKIP and Labour jostling for first place with just a few points between them, with the Conservatives in third place and the Lib Dems a distant fourth and possibly even fifth, depending on the performance of the Greens. There’s a lack of proper regional polling, but in our area it’s likely that UKIP will lead, perhaps winning three or even four MEPs, followed by the Conservatives and Labour picking up a seat or two each, with the Lib Dems or Greens perhaps winning one too. At the last election in 2009, the Conservatives won three seats, UKIP took two and both the Lib Dems and Labour took one in East Anglia.

The big story of the election is likely to be UKIP’s strong performance, although it’s worth noting some polls indicate around half of those who say they’re voting UKIP on Thursday don’t plan to support them next year. This will be a test for Cameron and his approach to the EU, and for Miliband, coming less than a year from the 2015 general election amid narrowing national polls. Commentators will also be closely watching to see how many MEPs the Lib Dems can hold onto, as some polls show them teetering on the edge of a wipeout.

Inglorious Isolation

Greg Burke

“When will Labour learn that you cannot build Jerusalem in Brussels?”

The words of Margaret Thatcher echo louder than ever as that other ancient city of Athens crumbles and many warn that Europe will drag the City of London down with it too. As UKIP’s popularity and EU integration gain momentum, it is time to ask whether a British exit would bring independence or isolation; regain our sovereignty or lose our power; place national pride above prosperity.

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Getting Out

According to the Eurosceptic argument, the debt crisis has accelerated progress towards fiscal and political union. Fiscal union would require common banking supervision and greater regulation, stifling the City; it would also transform Westminster into a sort of regional parliament for Brussels. Europe would no longer consist of countries on one continent, but states of one nation.

Their plan is to secure an amicable divorce, given our relationship with Europe has mostly been a marriage of economic convenience, and uses Norway as its template. Norway is a member of the single market and exports 75% of its goods and services to the European Union. Norwegian oil, like British services, is highly valuable to EU countries. Therefore it is in Europe’s interest to maintain free trade with Britain.

But whatever negotiating power Norway can bring to bear comes too little too late, as all the early preparation of laws governing these sectors is concluded amongst EU countries alone. This essentially means that Norway is forced to follow EU laws without having any influence on their formation. There is also a time lag before these laws are implemented in Norway, giving EU firms a head start over their Norwegian competition. Furthermore, the British situation is different. Regulation for services is much more complex than for oil, Norway’s main export to the EU, potentially leading to an upsurge of legal arguments against UK standards. Thus by leaving Europe we cannot leave red tape behind, and the red tape will not be of our choosing.

The City is so dominant because it is seen as the financial centre of Europe. Many economists warn that the 160 European banks currently located in London would be put under pressure by their national governments to relocate. Banks of all nationalities are also likely to move their foreign exchange desks to mainland Europe, draining Her Majesty’s tax revenues. What about trade with the rest of the world? Eurosceptics argue that businesses which do not trade with the EU would no longer be pointlessly bound by EU rules. They also say that Norway has carte blanche to negotiate bilateral trade deals with the likes of China and Indonesia. However, there is no mutually exclusive choice between EU and world trade. In fact, a solid export base in Europe will bring in the revenue needed for many manufacturers to expand their horizons to more distant markets. More importantly, Britain’s negotiating position as an economy worth $2.5 trillion with 60 million consumers is little compared to the EU, which boasts an annual GDP of $16.5 trillion and 500 million consumers. As a case in point, the US-EU Free Trade Agreement is forecast to bring an additional £380 to each household in Britain, but President Obama has warned that Britain would have to renegotiate a bi-lateral deal if it were to leave. A Brexit would also exclude us from potential EU talks with Japan and India in the future, and this strength in numbers is also useful to get a better deal from multi-nationals, the EU roamer tariff for mobile phones being a recent example.

So if Britain were to pull up the drawbridge and use the Channel as a moat, it would be still be the subject of EU laws but no longer the sovereign, and poorer both in services and manufacturing.

Staying In

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If Britain does decide to stay, we must look at how it will define its place in a future of fiscal, banking and, perhaps in the long run, political union.

The case for fiscal union is this: because the Eurozone consists of very different economies with the same currency, if one country goes into recession the ECB will not be able to lower interest rates to spur spending and investment. However, a larger central budget could transfer money to suffering economies, smoothing out any downturn they may suffer. Governments pay into the budget in the good times and take out from the budget in the bad times. It is planned to break the vicious connection between banking debt and government debt, where governments like Spain currently have to borrow from banks to pay off their debts. This means that they are still in debt, just to different lenders. Some argue that fiscal union creates the issue of moral hazard, where the governments of weaker economies behave recklessly knowing that they will be bailed out by the stronger economies. However, this is where the Fiscal Compact comes in, committing national governments to live within their means and punishing them if they exceed a certain debt level without taking counter-measures. The Fiscal Compact, alongside the massive deterrent of the debt crisis, serves to reduce the risk of another recession.

Britain has not signed up to the Fiscal Compact and is not a member of the Eurozone, but we may have to contribute more to the EU budget to fund fiscal union. This may well be in our national interest, shielding both the Eurozone countries from another dramatic downturn and the United Kingdom from the stifling side effects to our growth. But even if governments borrow within their means having signed up to the Fiscal Compact, the banks may still plunge the EU into recession. Hence the last step is to establish a banking union. So far, the G20 has already agreed on a leverage ratio of 6% for 8 SIFI banks and 5% for their bank holding companies. At the EU level, a cap on bonuses has been set at 100% of salary, but many banks have simply raised wages in response. The most important elements of banking union are outlined below:

1)      As of mid-2014, the ECB will work with national authorities to enforce a single set of rules on Eurozone banks whose assets exceed €30 billion.

2)      A single deposit insurance scheme to be introduced to prevent bank runs.

3)      A single bank resolution mechanism for winding down failed banks

The first of these prompted concerns that the Eurozone, acting as a unanimous block, would effectively impose legislation on those member states which have not chosen to join single banking supervision. However the Chancellor has negotiated a double majority voting system, where any banking law would need a majority in both the Eurozone and non-Eurozone blocks to pass. He also secured Britain against any future discrimination where the ECB might have set capital rules to put London at a competitive disadvantage. This measure gives Britain further scope to negotiate its relationship with Europe, as Germany has stipulated that it will only accept the new supervisor on the condition of treaty change.

For the second step, the Eurozone has not yet come close to pooling its resources. Germany is strongly opposed to the measure, believing its taxpayers will shoulder a great deal of the burden. The scheme might instead be funded by the Financial Transactions Tax, which would raise €57 billion a year according to EU Commission estimates (minus €10 billion without Britain). This places a tax of 0.1% on the exchange of shares and bonds and 0.01% across derivative contracts, affecting all transactions with Eurozone banks. The Eurozone countries have agreed to press ahead with this in spite of legal challenges.

The third step has met much opposition, most notably again from Germany, arguing that national authorities should decide which banks to liquidate and that the Commission would be torn between its duty to shut down banks and to enforce state aid. A painstaking economic solution must be worked out before political union can even get underway and it is unlikely that countries will change their defining approaches to the EU without significant concessions.

So with such substantial change, there is bound to be considerable disagreement, room for negotiation and necessity to compromise. Britain’s hand is strengthened by the threat of its exit, which would deprive the EU of 14.8% of its economy, €14.7 billion contribution to its annual budget, drain time and effort in protracted negotiations and undermine market confidence in the EU. So what should Britain seek from these negotiations?

We should first insert a pro-growth protocol into a new treaty which forges a real single market in services and cuts back on unnecessary regulation. The EU’s biggest long-term task is to improve competitiveness and this is an area where Britain can play a strong and active role. Secondly, we could work for a British veto over financial regulation, like the one France possesses for agriculture. Our share of the wholesale financial industry in Europe is 36% compared to France’s share of 20% in agriculture.

There will need to be concessions in return. Although the Government has ruled out a Financial Transaction Tax unless implemented globally, it might not be as harmful to the City as they think. The UK introduced a similar but much heavier task over 25 years ago: the Stamp Duty Reserve of 0.5% on the transaction of all shares listed on the London Stock Exchange, regardless of the traders’ nationality. This means that companies cannot escape the tax by leaving the UK. Moreover, the costs of mass re-location, not to mention the clarity of the European legal system, means that big companies will still issue bonds/shares and hedge their transactions in London. If the UK were to join the Eurozone’s FTT, the US would face no competitive disadvantage and could raise significant revenue by introducing the tax itself. The tax could be shared between the Treasury and Brussels, gaining significant bargaining power over Treaty Change without contributing more to the EU banking budget and increasing national revenue. Moreover, A Eurobarometer poll found that 65% of Britons interviewed were in favour of the tax. Politically, this could boost the pro-EU cause, showing that the EU is acting in the interests of the British public and ensuring that the financial sector would pay its share towards any future bailout.

Disraeli and Cameron: Splendour or Isolation?

Disraeli and Cameron: Splendour or Isolation?

So the Europe of the future provides opportunities and challenges. In the 19th century, the policy of ‘Splendid Isolation’ was characterised by a focus on British territories overseas, as free trade was the engine of the Empire in an era of increasing international competition. Whereas at that time isolation from Europe meant engagement with the world, today Europe is Britain’s major market. Today it is not Napoleon or European war ravaging the continent, but the debt crisis. Greater unification does alter our place in Europe, but it strengthens Europe’s place in the world. Perhaps Brussels is not the new Jerusalem, but if we seize the chance to change our relationship with the continent, Britain will build itself a better future.

Originally posted on Forward Forum