With US economic growth indicators still holding in well despite a hiccup or two, we think there should be little question by now in anybody’s mind that a significant contributor to the brutal volatility and collapse in financial markets over the past two weeks has been on the international side – namely increasing concern over sagging global growth, and with it ever dropping inflation. And then there is, of course, Ebola.
With even German growth now faltering badly, renewed alarm specifically over the Eurozone economy has again topped that list of global headwinds. That is exacerbated this time around by concerns over an increasingly limited room for maneuver by the European Central Bank, beyond the measures already announced, and a continued unwillingness or inability to deliver stimulus by fiscal authorities, stymied by Germany and the straight jacket of an overly restrictive adherence to the “fiscal compact” and Stability and Growth Pact.
*** At the European Union level, the European Commission is, however, in fact actively moving ahead with plans to put together a 300 billion Euro stimulus plan proposal, over three years, to provide some EU-wide investment spending to at least kick in some support to the monetary policy stimulus provided by the European Central Bank. And the 300 billion Euro figure that incoming EC President Jean-Claude Juncker has been proposing appears in fact to have been coordinated and come out of deliberations between Juncker and his staff, and ECB President Mario Draghi. ***
*** The current plan does not envisage the 300 billion to be all public, or “new money,” but a private-public partnership leveraging on the EU budget through the European Investment Bank. An alternative, more aggressive 700 billion Euro “European Investment Fund” proposed by Poland that would require significant and much more politically controversial national contributions is for now, as expected, on ice. But in an encouraging sign, from what we understand, it is also being actively studied by the ECOFIN (see SGH Report, 9/26/2014, “Europe: Searching for Fiscal Stimulus”). ***
*** There is still no certainty yet on the size of the public or private participation in Juncker’s plan at this point. But the Commission in conjunction with the EIB has already been drafting a list of projects to fund, which they expect to release in December, and there are increasing grounds for optimism in Brussels that the scheme will be approved and launched. The EU has gained some experience in the field conducting pilot investments with project bonds over the past two and a half years, and those seem to have worked reasonably well. ***
*** There also appears to be good progress in overcoming some of the major political controversies surrounding such a program relying on EIB funding for European stimulus. The plan is of course an EU, as opposed to Eurozone, plan, and as such needs approval from the Council, and thus from the conservative and thorny regime in London as well the austere leaders of Berlin. There is broad understanding even among the more conservative governments now, however, of the need for such investment programs and stimulus at a minimum, and much of the fight from here on is expected to revolve around prioritizing whose projects end up being funded, and not on the need for additional investment projects. ***
*** Perhaps even more intriguingly for the long run, in parallel, there have also been a good deal of back room discussions in Brussels on tightening up EU immigration policies, and that could present a major political sea change in healing rifts with the UK and in bringing Britain closer on board with Europe, including on economic policy, where Eurozone weakness is now hitting the UK as well. And in the process, the hope is that reform of internal EU immigration rules will help deflect the trend towards Brexit, as well as dampen the growing populist resentment in Britain that is aimed at Brussels as well as dampen the broader Euro-skepticism across the continent. ***
An Outreach to Britain
British Prime Minister David Cameron, a more politically astute politician than at times may appear, made some rather strong sounding statements yesterday vowing he will demand the EU slow immigration access to new entrants (that means the dreaded Romanians and Bulgarians) and review EU guidelines imposed for the provision of welfare payments to existing immigrants.
This is interpreted in Brussels as an attempt to get some form of public commitment from Juncker on immigration reform before the UK elections next year, given that the legislative path to actual reform of EU immigration laws could take much longer than that.
What Cameron conveniently failed to mention is that there are quiet discussions in Brussels already well underway on trying to enact precisely those reforms, which could – among other things – take the shape of a reform of the EU’s so-called “Citizenship Directive” (2004/38 EC).
Indeed, the tone in the relationship between Brussels and London has changed dramatically since the bitter and at time rather personal battles earlier this year over the appointment of the Commission’s President.
Some Tory leaders we speak to are quick to assure now that the British have the utmost respect for Juncker, who knows finance, is a seasoned politician, and has been in close contact with the ECB. Much of the bad blood in the British campaign against Juncker in the EC Presidential selection process is being attributed to a huge misunderstanding; it wasn’t about Juncker per se, it was the spitzenkandidat system that they did not like. Either way, time to move on.
And from the continent, all evidence, behind the scenes, points to EU countries being very supportive of efforts to encourage the UK to stay in the EU, and Juncker is ready to ride that capital and trade some concessions to deliver that result.
There are two key areas the Cameron government is pushing the EU for reform.
One is less red tape on services, such as France and Germany closing their energy markets to foreign investors while the UK liberalized its market a long time ago (the issue of “national champions”).
Second is imposing greater limits on the politically charged issue of immigration, and immigrants’ welfare rights.
The Shape of EU Immigration Reform
The complication on immigration is that EU rules prescribe that EU immigrants not be treated less advantageously than citizens of any EU country they migrate to.
The inequity in implementing that rule lies in the level of services guaranteed to a national in each host country that would have to be extended to immigrants – the higher that is, the higher it has to be for incoming EU citizens.
Germany, France and Belgium have a system whereby citizens pay into social security and then – after a number of years – have the right to benefits, whereas the UK has a universal system that pays into a common pool. That, under EU law, can’t be changed for foreigners because it would then have to be changed also for UK citizens.
There now appears to be a clear political will to find an EU-wide solution to this, which would require a tweak in the principle of “equal treatment” – or a different interpretation of it. Implementation of that change is still going to be a bumpy road.
One solution that has been offered could be a regulation that guarantees a minimum of protection for a certain number of years, until an EU immigrant has paid enough taxes to be entitled to the same treatment as the national.
But the likelihood of adopting that specific solution – at the moment – is pure speculation: what is concrete is that there will be a tweak to the immigration rules because there is currently strong Council support to do so.
The biggest hurdle to immigration reform may in fact not be on the Commission or national government levels, but be in opposition from the European Parliament. But there should be various ways to get around those objections, especially given that an overwhelming majority of Member States would categorically not ever want to allow a “Brexit” to happen.