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September 14, 2017

Bravo Mr Juncker

There are those who say that grand designs for the future of the EU don't matter, that they lack realism. The history of the EU suggests otherwise. The grand speeches of the past - from Schuman to Delors - never appeared realistic at the time, but looking back at them today they had agenda-setting powers. 

Jean-Claude Juncker's state of the union speech yesterday is of the same kind, a vector that will direct the discussions about the future of the EU in general, and the eurozone in particular. He may not get his way, certainly not on all points, but it would be very silly to dismiss his federalist vision on the grounds that it is not realistic, or that it requires treaty change and should therefore be struck off the agenda immediately. There were times when the single market was not realistic, and the euro was downright utopian.

The bits of his speech that interests us the most are the sections concerning the euro and the EU economy. He hardly mentioned Brexit, but the speech has important - and not so obvious - implications for the Brexit discussions as well, which we cover in a separate story below. 

Juncker emphasised a point we at Eurointelligence have been making for over ten years now - the euro is not the currency of the eurozone, but the currency of the EU. After Brexit, Denmark will be the only country left with a formal opt-out. Juncker recalled that all member states are legally under an obligation to join the euro. But, rather than force member states to join against their will, Juncker prefers a strategy of incentives - a euro accession instrument offering financial and technical assistance for countries transiting out of their domestic currencies into the euro.

This would presumably come in the form of a convergence instrument line item added to the EU budget to provide financial assistance to member states that have trouble meeting the convergence criteria. What he doesn't talk about is the conditionality attached to this assistance. While this is certain to have some strings attached, what it won't be is a replica of the ESM programmes, since it will be an EU budget line item and one can expect it to be managed by the Commission with a soft touch, like it does with cohesion funds. The Commission expects to introduce a proposal along these lines as early as December. 

Behind this, there lies a recognition that the division between eurozone and non-eurozone member states is becoming the fundamental fault-line in the EU. It is easy to see why an authoritarian country on the EU's eastern periphery, outside the eurozone, could at some point opt to exit the EU. It is much harder to see a country leaving the eurozone and the EU simultaneously.

Juncker is right in identifying the completion of the eurozone as the highest priority, because this is the area where the EU will succeed or fail. 

We also have sympathies for his approach to the eurozone governance reforms themselves, and the implicit criticism of the contours of the separate Franco-German discussion which is heading towards an inter-governmental governance regime for the eurozone. 

Juncker, by contrast, wants to embed the new governance structures within the framework of the EU itself. The European finance minister will be a Commissioner. The ESM will be transformed into a union instrument, which he also calls the European Monetary Fund but looks like a very different beast compared to what Germany envisages. It seems likely that the creation of the convergence instrument does not require treaty change, but that the transformation of the ESM does. Both go in the direction of strengthening the role of the Commission to the detriment of the intergovernmental approach that member states, led by Germany, have favoured especially since the financial crisis ten years ago.

Juncker's European minister of economy and finance is not really a fiscal authority. This sucking up to perceived realism is probably the most disappointing aspect of Juncker's speech. He emphasises the new position's role in fostering structural reforms, and providing financial assistance to member states in crisis. But the only reference to "fiscal" is to fiscal discipline. And, in the factsheet on the new minister, the role is made subordinate to the ECB's monetary policy objectives. So, many of the eurozone' innate macroeconomic problems remain unaddressed.

What is clever about Juncker's approach is the way he frames it. He is selling it on the grounds of efficiency, in the sense that the inter-governmental approach would duplicate structures. 

He is also selling it on the grounds of democratic legitimacy. The European finance minister has to be democratically accountable, and this is only possible for a commissioner, or a Commission vice-president, who answers to the European Parliament. He argues that parallel structures are inefficient. There should not be a eurozone budget, but an enlarged EU budget. There should not be a eurozone parliament, but enhanced powers for the European Parliament. 

These demands are important not because we expect France and Germany to change their mind but because they may shift the debate among some of the other member states. For the vast majority of member states, Juncker's vision of a eurozone that is deeply embedded in the EU is a much more attractive proposition than an inter-governmental approach, where Germany would dominate.

Emmanuel Macron, meanwhile, will present his proposals for a European renewal on September 26, two days after the German elections. Macron sees the fault lines mostly between the eurozone and other European countries, advocating for more executive power and democratic accountability for the eurozone. This would cement the parallel structures inside the EU, the ones Juncker wants to shake off. Where both men converge is on protection, and in his speech Juncker picked up several ideas from the French president. Macron’s slogan, "a protective Europe", is simple and aims to convince the sceptic French, those who voted against the EU constitution in 2005. Many in France are still hoping that Macron can give Europe a new political objective to which they can sign on. But these ambitions will have to be kindled with the German desire for restraint. And Germany is the more powerful partner in this relationship.

The reaction in Germany to Juncker's plans was mixed. Werner Mussler made a good point in FAZ when he said that Merkel had previously rejected any such ideas on the grounds that they required treaty change. She can no longer dismiss this point so easily, and should confront Juncker's arguments directly - and this before the elections.

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September 14, 2017

... what he said about the labour market

The part of Juncker's speech on labour regulations is a case where every word matters. We were particularly struck by the bit of Juncker's speech where he calls for a European Labour Authority:

"It seems absurd to have a Banking Authority to police banking standards, but no common Labour Authority for ensuring fairness in our single market. We will create one"

Apart from the fact that the Europea Banking Authority set banking standards but does not police them - policing is the job of the SSM - is Juncker really suggesting that the EU should be in the business of labour inspections? That would be a huge undertaking, far exceeding in scale the creation of the Single Supervisory Mechanism for banking. But Juncker's proposal is much less ambitious than that. It does not aim to harmonise labour conditions across member states, but to ensure the uniform application of regulations on cross-border labour. Even if only about 3% of Europeans work in a member state where they are not a national, that still amounts to 16m people, and nearly 2m commute across borders. So the Commission is proposing an agency that will coordinate between member states' labour authorities to ensure uniform application of regulations for cross-border labour only. So the scope is limited, and it will not create a new body of inspectors but be more like Europol or the EBA.  

In Juncker's speech "union of equals" refers to equality between Eastern and Western citizens, but when he says

"in a Union of equals, there can be no second class workers. Workers should earn the same pay for the same work in the same place."

He's not saying that wages should be equalised between, say, Romania and France for the same work. He's talking about the same work in the same place, which is a reference to posted workers who are temporarily in another member state while subject to the employment conditions - and wages - of their home state where they are employed.

To a large extent the controversy over posted workers, pitting Eastern and Western member states which Macron has made one of the central planks of his EU reform platform, has to do with the perception that is enables social dumping. The combination of firms' freedom to provide cross-border services without establishing a subsidiary in the target member state, and the concept of the posted worker, can be used for a race to the bottom on labour protections. The Commission intends that all labour regulations of the target member state should apply to posted workers after a minimum amount of time. Currently, this only applies to construction work, perhaps because there issues of worker safety are felt more acutely. The principle of equal pay for equal work, central to the Commission's proposal on posted workers, will continue to ease the administrative burden on operating in multiple member states, but ensuring that the device is not used simply to dump wages.

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September 14, 2017

... and what his speech means for Brexit

It was funny to see Nigel Farage in the first row of the European Parliament, representing his group of renegades. But in a comment in the Daily Telegraph he managed to make two important points. First, that it was one of the boldest speeches from a European leader since Jacques Delors. And second, that it will cement the UK's determination to leave the EU. We agree with both. He goes on to say that, if it ever came to a second referendum, the pro-EU side could not win it after what Juncker has said. This is probably true as well.

We were always struck by the blunt denial of the EU's federalist ambitions by UK pro-Europeans, and got the impression that Britain was a member of a rather different EU than the rest of us. That was factually true in the sense that the UK had numerous opt-outs. The important point about Juncker's speech is that it will open up a necessary treaty change debate. This may not be concluded quickly, but it is clear that anybody in the UK who argues a pro-EU case will need to confront this debate. It is possible, but not very inspiring, that the pro-EU case will reduce itself to a threat to veto future EU integration. But, then again, if you are a eurosceptic at heart, why not choose the real thing?

This is the more important aspect of Juncker's speech, not yesterday's much quoted ad-libbed reference that the UK will come to regret Brexit. 

What is far more important is how little Brexit now matters in the European debate. Guntram Wolff makes a good observation in the Guardian:

"It's official. Brexit is boring – at least on the continent."

This is not entirely surprising. After a period of denial, even the European press is now resigned to the fact that Brexit will happen. The EU has formulated its negotiating position, from which it will not depart by much. Beyond the rough contours as outlined by Theresa May in her Brexit notification, the UK has yet to decide what form of co-operation it seeks with the EU, what it intends to offer, and whether or not to seek a transitional period. 

Wolff is right when he says that the UK faces a clear choice to be either fully in the EU or a third country, like the US or Russia. 

We also noted an intervention in the House of Lords by John Kerr, the  former British diplomat who co-authored Article 50. He made three points. The first is that the UK's position papers are not proper negotiating documents, beyond the first one on citizens' rights. His second point is that the UK's strategy is not achieving its goals because it is confusing and contradictory. The third one is that the UK needs to make an offer of money to unlock the talks. He calls the EU's demands grossly inflated, and also disagrees with the EU's sequencing of the talks. But without a proposal on money the gridlock will not be undone.

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