From Brussels:

Last night’s summit of EU Leaders ended up early in the morning with a dramatic outcome (see conclusions here) with 26 out of 27 Member States agreeing to a proposed Treaty change, leaving the UK entirely isolated and the 26 proposing to move forward on an intergovernmental basis. While further details concerning the nature of the proposed Treaty change have yet to be finalized and not expected to be signed off until March 2012, the core elements being proposed include aspects of fiscal coordination and surveillance, as well as further harmonization of rules in other areas, such as financial regulation, labour market reforms, taxation, etc.

The grounds upon which the UK walked away from the negotiations were a refusal by Sarkozy and Merkel to include a protocol in the Treaty which would have enshrined the following core principles:

• No new powers to the ESAs.
• EBA remaining in London.
• Non discriminatory access to central bank liquidity, irrespective of location in the EU.
• Permitting Vickers report style top up capital charges for banks.
• User charges by ESAs to be on the basis of unanimity not QMV (to avoid backdoor FTT introduced to fund the ESAs).
• Commitment to maintain open access by passporting third country firms into Europe.

These developments clearly have profound implications for the future structure of European integration and the future political relations between UK and its European partners, and between those countries members of the Eurozone and those outside as well as potentially the future enlargement of the EU and future composition of the Eurozone.

Below are a number of key initial points to note – we will provide further analysis following this afternoon’s summit at 26 (minus the UK).

FIRST HEADLINE ANALYSIS:

• The most immediate and obvious question is calling in the UK’s future relations with the EU, symbolically demonstrated by the UK empty chair in the remainder of today’s negotiations.
  • This will translate into high political isolation in all legislative negotiations. It is noteworthy that UK could not persuade any country to align with it in its opposition.
  • European governments will draw their own conclusions from the fact that the UK appeared to prioritize more highly a narrower national financial services agenda over what is perceived as being vital to the future of the Euro and the EU.
  • Given the choice by Merkel and Sarkozy to opt for a more ambitious integration agenda, they raised a much higher risk of non-ratification by the remaining 26 countries, most notably Ireland and the Netherlands which will have to hold referenda.
    • Failure to ratify by one country need not prevent the other countries proceeding with the Treaty; failure to ratify will be perceived as a vote to leave the Euro, which creates a higher risk particularly in the case of Ireland.
    • The length of time involved and the uncertainties associated with ratification of such an ambitious new Treaty will in the short to medium term lead to significant new instability in the markets. The core strategy in the short term will therefore be heavily relying on the willingness for high ECB intervention.
    • The new two-tier structure which will result between those ratifying and those non-ratifying the intergovernmental Treaty will raise significant questions over the future institutional structureof the EU.
      • Given new Treaty will not be an EU Treaty, raises questions over how any EU law [ie law applicable to both those who are member of the group and those outside] will be subject to initiatives in codecision within the existing institutions and subject to the limitations on enhance cooperation which exists within the EU institutions. This raises the question whether a parallel set of decision making procedures will have to be integrated within the new intergovernmental Treaty.
      • Given the two-tier nature between the decision making structures and the political commitments, there is a high risk that those outside the core will experience the same EEA effect over time of having to apply laws without as much influence over them, given political majorities will be formed around the inner core.
      • Strengthens the role of intergovernmentalism and raises profound questions about the future role of the EU Parliament, given the intergovernmental Treaty will be based on international commitments and not formally involve the European Parliament.
      • Political outcomes resulting in discrimination between infrastructures and companies inside and outside the core/Eurozone.
      • The political will for the UK to pay the cost of not being part of the core will be a lot higher.
        • The outcome of the pending ECJ ruling around the access to liquidity of central bank will be crucial in determining how far this discrimination will be limited by the free movement of capital and people within the Single Market, which will continue to apply within the EU.
        • Based on that, the Euromarkets could be mandated to relocate within the Eurozone.
        • The decision severely compromises leadership roles for the UKin any areas of core economic importance in the EU,
          • In the short term it will undermine those in prominent positions such as Chairmanship of ECON Committee, Director General of Internal Market DG, Chair of ESMA, Vice-Presidency of the European Commission.
          • In the medium term it will prejudice their capacity to hold such posts.
          • Implications for future enlargement prospects: countries willing to join will need to agree on the core political vision.

DETAILS OF THE COMMUNIQUE

FISCAL PACT

• Scope: Eurozone members + Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania. Sweden, Hungary and Czech Rep will consult their parliaments first, the UK will stay out.
• Implementation: New intergovernmental Treaty, outside of the EU framework – to be approved in March.
• Details:Based on the Merkel-Sarkozy proposals:
  • The Treaty will render the Stability and Growth Pact more robust (based on secondary legislation until now).
  • Automatic sanctions in case of non respect of the 3% deficit target – reverse qualified majority voting to reject these.
  • Harmonised “Golden rule” / budget balance rule to be enshrined in national constitutions (0,5% of nominal GDP).
  • Rule complemented by automatic correction mechanism if deviation (spending cuts and/or taxes increase) to be specified by each Member State.
  • European Court of Justice will control that the national implementation of the fiscal rules gives national constitutional courts the power to reject a budget on the ground of its unconstitutionality (related to this national golden rules).
  • Calendar for convergence to be established by the Commission.
  • “Economic partnership programme” to be submitted by Member States in EDP – implementation monitored by EC and Council.
  • Ex ante reporting of national debt issuance plans.
  • Debt adjustment path of 1/20 to be enshrined in new provisions.
  • Secondary law: Complemented by further reinforcement of the excessive deficit procedure – secondary legislation (cf Commission proposals of November: strengthened surveillance for programme/EDP countries) and Commission powers.
  • Further details: To be discussed today without the UK and Hungary presence.
  • Ratification: Agreement expected by March, ratification to start after the French elections.
  • Open questions:
    • How will this be articulated with the EU institutions? (given UK veto over using them)
    • How will it impact the Single Market?
    • What other areas will this Treaty cover?
    • Future of the EU / Eurozone +.
    • Eurobonds never mentioned, even at longer term horizon.

STRONGER POLICY COORDINATION

• Scope: Eurozone members, others?
• Implementation: Unclear – secondary legislation?
• Details:
  • Will make stronger use of enhanced cooperation on matters essential for the smooth functioning of the euro area, “without undermining the internal market”.
  • Procedure to make all major economic policy reforms planned by a Member State discussed and coordinated at Euro area level.
  • Euro Summits at least twice a year + other measures agreed in October (Eurozone President, stronger Eurogroup, etc).
  • Ratification: Unclear.
  • Open questions:
    • Extent to which enhanced cooperation will be used?
    • Articulation with Single Market?

STABILISATION TOOLS

• Scope: Eurozone members.
• Implementation: Reforms of existing intergovernmental treaties (ongoing).
• Details:
  • EFSF leveraging to be rapidly deployed.
  • ESM brought forward to July 2012 (as soon as 90% members have ratified).
    • PSI in ESM to be aligned to IMF practices.
    • Voting rules changed to include emergency procedure – mutual agreement replaced by qualified majority of 85% in case EC and ECB conclude urgent decision needed as euro area sustainability in danger (need be confirmed by Finnish parliament).
• Overall EFSF/ESM ceiling of 500 Bn € (to be reassessed in March 2012).
• EU to provide 200 Bn € to IMF (hopes other will increase provisions as well).
• Ratification: Ongoing (intergovernmental).
• Open questions:
  • Role of the ECB – no change so far.
  • Ceiling too low, especially if EFSF and ESM won’t run in parrallel?
  • Capacity to bring ESM forward (national ratifications).
  • Finnish parliament to confirm ESM change of majority rule.
  • ESM access to ECB money – ruled out by Germany.

Financial Times, 1:27pm Thursday November 24th, 2011
Germany is the real winner in a transfer union
–
By Sebastian Mallaby
–
Ireland and Spain suffered property and banking busts at least partly because monetary policy was too German, writes Sebastian Mallaby.

See the lively account below from my colleague in London (be sure to follows him on Twitter):

Simon Benson, Fleishman Hillard London

Back to the Future for Cameron’s Party?
By Simon Benson, FH London
A Tory Cabinet Minister resigning with the whiff of innuendo in the air and now the Parliamentary Conservative Party dividing in their dozens on the issue of Britain’s membership of the European Union. People younger than myself tell me there has been a 1990’s revival in the UK recently – I now see they are not wrong.

Of course, things are different today. At that time, John Major’s Government appeared to be on its last legs, held together by a rag tag alliance of the mad, bad and dangerous to know – and I have not even begun talking about their critical alliances with the Ulster Unionists.

Luckily, Cameron is not anywhere near that stage, and we should not draw too many parallels. First, Cameron’s coalition gives him a good majority and as Labour is not playing the politics game – for the moment –Cameron will easily survive. Second, the issue of Europe was the defining key issue for Major – for Cameron, it is the economy. If he plays it right, he can emphasise the critical role the EU plays in terms of trade with the UK.

What will be most interesting for me – as a former special adviser in the Chief Whip’s office – will be the scale of the rebellion – especially among the new intake. When I worked in the Whips’ Office, any rebellion predicted to be around the 60 mark sent panic waves through Government. The best operation we were involved in got a top line prospect of 75 rebellions down to about 28 on the day – using all sorts of tactics that I won’t publish here.

If the Government succeeds in reducing the numbers by a healthy third or more, then Cameron and his team will have seen a job well done. Less than that and Cameron will know that Europe – and its fatal ability to be a conduit for other frustrations – has come back to haunt his Party.

The Key Points

• The Motion has been tabled by Tory MP David Nuttall, suggesting a public referendum on either leaving the EU entirely or renegotiating the UK’s position within it.
• It is not binding on the Government – even if it succeeded, it would not pass as statute.
• David Cameron’s Government will easily survive this vote as the Opposition will not collude with the Eurosceptics.
• The Tory rebellion is likely to be up to 65. Any more than 41 rebels would mean the largest Conservative revolt on Europe in Government. The Whips will be spending today finalising a campaign which would have started days ago, turning on the pressure.
• The ‘three line’ Whip on this – the strictest in parliament – surprised many in the Tory Party, who thought that as the motion was not binding, the Government would allow a free vote.
• All eyes will be on the scale of the rebellion and what this will signify for Mr Cameron and his authority on both his policy on Europe and his grip on the parliamentary party.

Key Points from the Debate so far, at 1700

• Labour leader, Ed Miliband MP: ‘He (the PM) went in shouting at Germans, but came out being
• lambasted by the French…the Tory party on Europe suffering another nervous breakdown.’
• David Nuttall MP, proponent: ‘the vast majority of the British people want a referendum’.
• Prime Minister David Cameron MP: ‘National interest is within the EU, benefiting from single market.. 50% UK trade is with Europe – would not want to imperil that.’

What Happens Next

• The vote is at 10pm tonight. Insight Special will email the results and tweet them at www.twitter.com/fleishmanLonpa

My chief takeaway at this meeting was a realization that our dysfunctional federal government is driving the private sector to be more active in solving problems beyond companies’ private economic interests.  This topic was truly driven home by incoming Chair of the Executive Committee, Diane Lilly, Executive Vice President, Government Relations at Wells Fargo in her inaugural address, which outlined the challenges she has faced in dealing with this “paradigm sift.”

Until fairly recently, private businesses had one overriding responsibility, achieving good return on investment for their stockholders.  Large companies had a fiduciary responsibility to maintain a single-minded focus on that one goal.  To some degree, dedicating resources to activities that did not contribute to profit was considered irresponsible and even, in some instances illegal.  At a minimum, it was considered contrary to their fiduciary responsibility.  Customers and employees were important, but primarily as assets that would produce the profit that would enrich investors.

All that has changed.  Now, every company must be seen as “green,” and they need to have a plan for operating in the most environmentally friendly way.  This is true even while debate rages in Washington over whether global warming even exists.  Similarly, companies all must engage in Corporate Social Responsibility (CSR) in which they must conduct activities that address social or environment problems outside their specific business interests.  In the old days, this would have been considered reckless “do-gooderism,” having nothing to do with a company’s core mission.

In this new world order, the debate goes beyond whether there should corporate social responsibility.  Some question whether there should even be a discrete “function” in a company called CSR.  Rather than segregate these kinds of activities, some argue that they should be built into the fabric of a company.  We have thus come to a point where companies must recognize that their stakeholders extend beyond stockholders, beyond employees, even beyond customers.  Now, stakeholders include society at large.  In some ways, this is a good thing, particularly at a time when our government seems fundamentally unable to address larger societal goals.  The public clearly holds large companies accountable for their impact on the larger community beyond their private interests.

Companies respond to this public demand in various ways.  For some, it is a communications problem.  They treat the challenge in the category of “perception is reality.”  If the public “perceives” them as acting in the public interest, they have achieved their goals.  Checked this box, as it were.

But another new obligation that is imposed on companies, largely through the spotlight social media puts on them, is “authenticity.”  So, the companies that deal with these issues as perception problems are doomed to failure.  To paraphrase the old joke, “If you can fake sincerity, you’ve got it made!”  The fact is you can’t fake it anymore.

Companies will continue to advocate for public policies that are in their own financial interests, i.e. weaker environmental mandates, limited worker protections, etc.  At the same time, companies have to recognize that the public holds them to higher standards in how they conduct their business.  There is clearly a tension.  But, at a time when public esteem for government is at an all time low, it may offer some hope that public pressure on the business community will force the greater society to address these very large problems  in spite of government inaction.

Key quote:

“Not compared to any other industrial nation on earth. Economists for the OECD, the club of the world’s leading economies, studied regulations in their 30 members and in 10 other nations.

“The findings would shock purveyors of the GOP’s conventional wisdom — the U.S. economy is less regulated than that of any country studied save the U.K., with which we are essentially tied. American business is less regulated than businesses in Germany, Norway, Japan, Korea, Israel, Brazil and Chile, to mention just a few. ”

Read the whole piece:

http://thehill.com/opinion/columnists/mark-mellman/167731-a-balanced-regulatory-approach

I think capitalist democracy depends on an educated populace that, in general, recognizes the tradeoffs inherent in sound economic policy.  It also helps of the population has some kind of social conscience that will prevent gross inequity from taking hold.  I fear that large numbers of Americans, maybe even a majority of the voting population, lacks either of these qualities.  Combine that with a dysfunctional Congress (read: U.S. Senate) and the future looks bleak.

But there may be another way and China is, I think, testing the proposition.  Maybe if you concentrate solely on generating economic growth and ignore the luxuries of democratic governance or government provided social programs, you can create a functioning society.  Maybe the best way to maintain social peace is a free market economy, with a tightly controlled political system.

In today’s Financial Times, there is a story about economic growth in Tibet.  The Chinese government is focusing heavily on making sure the economy is robust in this tumultuous region, while maintaining strict control over political activity there. 

Nearly two years after Tibetan regions of China were engulfed in riots and protests, Beijing is doubling its bet that rapid economic development will win the political loyalty of its Tibetan population.

This will be an interesting experiment.  Let’s check back in two years and see if the Tibetan resistance to Chinese political control subsides as the population begins to enjoy the fruits of a strong economy. 

Maybe James Carville was more right than he knew when he said, “It’s the economy, stupid.”

You would expect that this catastrophic failure of free market capitalism would provide fodder for the left critique of conservative economic policies.  Instead, voters all over the world seem to be moving further to the left?  How could that be?

In today’s Financial Times, John Lloyd takes a crack at an explanation.  He believes that parties on the left are, in fact, gaining support.  But it is the center left that is being punished.  He suggests that, because the center left supports free market capitalism, but only seeks a more humane version, it is implicated in the economic collapse.  Moreover, he posits that the center left parties are victims of their own success.  Much of their non-economic agenda has been adopted by the right, so there’s nothing to fight about.  As he puts it:

The great causes – race, women’s and homosexual equality, community involvement, the spread of democratic practice – which had been significantly dominated by the left, are now largely uncontroversial on the western European right, except on its fringes and in parts of Italy’s governing coalition.

Clearly, the political consequences of the economic crisis will play out over months, if not years.  But, just as the collapse itself was unexpected, so too are the political reverberations.

Here’s how BusinessWeek describes the situation:

“Lula has reason to be proud. The former union activist, who never finished elementary school, has been a surprisingly careful steward of Brazil’s economy. In a country long plagued by hyperinflation, devaluations, and defaults, Lula last year won investment-grade status for Brazil’s sovereign debt. And he did it while expanding social programs that have dramatically reduced poverty rates and spurred expansion of the middle class.”

http://www.businessweek.com/magazine/content/09_33/b4143042830503.htm?campaign_id=mag_Aug6&link_position=link44

It would seem that Ireland is taking advantage of its current ownership of property to embarked on some central planning reminiscent of the early Marxists.  The Irish Independent reports that the Irish government, is planning to use its zoning and other powers to bring about social benefits in the disposition of its newly acquired property holdings that has come about through its backing of bad real estate loans.  The agency formed to back these loans is the National Asset Management Agency (NAMA).

The government seems to recognize the risk involved.  To wit:

Finance Minister Brian Lenihan said that while NAMA had a commercial mandate and its function was to maximise return to the taxpayer, he was “not ruling out the possibility that useful social opportunities may emerge”. But he quickly added that he was not out to “rig the system”.

It will be interesting to see whether this approach leads to positive social changed, combined with a good return on investment, the proverbial “win-win.”  Or whether it goes the way of previous attempts of a “planned economy.”

However it turns out, it is more evidence of the 21st century trend of deeper involvement by governments into the private economy.

Stay tuned.