Friday, November 26, 2010

The Euro: Why we are all in it together

The European bail-out package for the Irish economy this week seems to have failed in its ultimate objective of containing the threat to the Euro. The buzz-word in Brussels is “contagion” and some serious commentators believe that a full-blown currency crisis is now unavoidable as the markets, having done their worst to Greece and Ireland, now turn on Portugal, Belgium and even Spain. Such widespread contagion in the Eurozone could make the single currency unsustainable and the Euro, as we know it, would not survive another two years.

The unthinkable could still happen. The Euro could disintegrate under the relentless pressure of the markets – its weaknesses now so ruthlessly exposed. However, Germany will not allow it – and so long as Germany will shore up the single currency, the Euro will survive.

And yet, Germany has some responsibility for the latest contagion threat. Chancellor Angela Merkel insisted on a permanent crisis mechanism that included provisions for an “adequate participation of private creditors” - meaning future rescue packages might involve a write-down of existing debt – increasing the risk for private bond investors.

This only served to spook the markets, leading to increased borrowing costs for weaker Euro-zone markets. The German government faces increasing pressure to drop the idea and instead extend the European Financial Stability Facility (EFSF) beyond 2013. A permanent rescue and resolution mechanism would provide stability and good governance for the Eurozone.

The Achilles heel of the Euro has been the “no bail-out” clause of the Eurozone’s stability and growth pact – something that the German Finance Minister, Wolfgang Schäuble acknowledged in a speech in Berlin on 5th November. He said that Europeans could not see how far financial integration would go when the no bail-out clause was signed. UK Chancellor, George Osborne’s decision to a bilateral loan to Ireland demonstrated the extent of the exposure of UK banks to the Irish economy. So, the UK – a non-Eurozone country – is as financially integrated to Euro-zone economies as Eurozone countries are to each other. Euro or no Euro, financial integration is now so advanced that contagion is a threat to weak markets in or out-with the single currency area. As David Cameron is fond of saying in these difficult times, we are all in this together.

While it is true to say that Ireland has been constrained by the Euro and the European Central Bank in how it can adjust to worsening economic conditions, it was never the Euro that brought the country to its knees. The mistakes Ireland made were the same as those that ruined Iceland which like the UK is not a member of the Eurozone.

While the reasons for Ireland’s problems differ from Greece, another Eurozone member – the former was guilty of stoking a housing boom and the latter of profligacy and unsustainable indebtedness - they are both guilty of being irresponsible Eurozone members. Germany will want to ensure that Ireland and Greece change their ways. Greece is already winning praise for the way it is introducing new austerity measures. However, Ireland’s budget could go out of the window if – or rather once – a new Government is elected in January.

Reports of the Euro’s death are somewhat premature. The forecast for growth in the Eurozone is higher than it is for non-Euro countries like the UK. It is also worth keeping in mind, the reason for why weaker economies are struggling so much is because the Euro is so strong – and they can’t devalue to become more competitive internationally. Last week, I raised the prospect of a common corporate tax as a consequence of the EU bail-out of the Irish economy. For some, this was a little far fetched – but no more far fetched, I would argue than a complete disintegration of the single currency. The truth is the Euro needs closer economic governance if it is to survive in its current form. If Germany succeeds in putting in place a rescue mechanism, the Euro will survive; if there is closer co-ordination of national economies, the Euro will prosper. As they say; what doesn’t kill you, makes you stronger.

Friday, November 19, 2010

How the Irish Bail-out could mean an EU Business Tax

Ireland this week finally accepted the offer of an EU bail-out to halt a contagion spreading across the Euro-zone like wild-fire. Spain and Portugal are also vulnerable to a knock on the door from the man at the IMF and all the stops are being pulled to prevent them going the same way as Ireland and Greece. But the crisis does not begin and end with the PIGS (Portugal, Ireland, Greece and Spain). The banking crisis threatens to engulf the entire Eurozone to the point where it could wipe out the ten year old currency.

This is a crisis that is too good to waste. For Europhiles, the bail-outs present a unique opportunity for an unprecedented fiscal convergence and closer co-ordination of tax rates between Member States – the holy grail of the more ardent euro-federalists.

EU Commission officials joined the IMF and the European Central Bank in a fact-finding trip to Ireland this week to work out just how much Ireland needs to borrow to bail out its banks and perhaps even service the public debt which severe austerity measures have failed to correct. The final figure could be around €90bn.
The Irish Government is expected to announce further austerity measures of around €15bn next week and a 2011 austerity budget will be put to the Dail on 7th December. However, the cuts will not be enough to restore confidence. Germany is putting pressure on the Irish to raise its corporation tax, which at 12.5% is much lower than many other EU economies.

For Ireland it is too heavy a price to pay for a bail-out that they have only accepted with great reluctance.

Elmar Brok, a senior CDU Member of the European Parliament told a party congress in Karlsruhe; "Ireland has two options to consolidate its budget – cut expenses even further or increase taxes like the corporate tax rate,"

This is not the helpful budgetary advice it seems. Mr Brok’s concern is not really about how best the Irish Government can raise its income. He, like his political colleagues in Berlin, have long been concerned about the effect that the low rates of corporation tax in Ireland has had on the German economy. Germany has seen companies re-locate to Ireland thanks to highly competitive tax rates.

It is not just Germany that has seen an opportunity to attack Ireland’s corporation tax – but the UK too.

Britain is poised to help in the bail-outs – either bilaterally, or as part of a European mechanism. British banks reportedly have around $150 billion of exposure to Irish debt.

But the UK too has been a victim of the low rates of Irish corporation tax – and would welcome an increase being part of a European bail-out deal.
For its part, Ireland says the corporation tax rate is non-negotiable; not least because it offers the country its best chance to grow its way out of the crisis. The Irish European Minister Dick Roche bluntly told reporters that "it (corporation tax rates) is certainly not up for negotiation.”

This is hyperbole. It is, of course, up for negotiation. The austerity measures have stalled growth in the economy and the Irish need to look at where they can increase tax receipts. Moreover, the EU member states that have lost out to the advantage that Ireland had in attracting corporations to its shores, will insist on it.
Tax competition has been a sacred cow for EU member states. As member states have increasingly harmonised standards to ensure a level playing field in the single market, tax was the only area left where they could really compete with each-other. Outside of Value Added Tax, where minimum levels and exemptions are agreed at EU level, the European Union has very limited competences for tax policy.

This could all change. Although it may seem far-fetched to assume that the financial crisis could lead to a common corporation tax – particularly since it would require unanimity among all Member States, the terms of debate have changed since the bank bail outs. Low corporation taxes are increasingly seen as an unfair advantage -when each Member State’s economy is so intrinsically linked with each-other and fiscal transfers across the Eurozone are seen as a natural response to asymmetric shocks to the Euro. So rather than more protectionism and the disintegration of the Euro, could the banking bail-outs, in fact result in an EU tax policy that sets common rates for all business operating in the single market?

Friday, November 12, 2010

Row over Euro Bailout Scheme could lead to a Treaty Referendum

Could we get our referendum on the Lisbon Treaty after all? After nine bad-tempered years in the making – and the many contortions of the major political parties to avoid any chance of a referendum, there is again a real prospect of the Treaty being subjected to a popular vote.

And it is not the work of the British Conservatives that has re-opened the debate - but the Germans.

German Chancellor Angela Merkel is determined to make changes to the Lisbon Treaty to factor in a permanent mechanism that would bail out Eurozone countries in trouble - even if it means galvanising the anti-Lisbon lobby into one last push for a referendum.

It’s still not clear whether adding a permanent mechanism to the Treaty would require ratification from each of the 27 Member States. The Commission is hoping that it can be adopted by a “simplified” procedure (invoking Article 48 of the Lisbon Treaty). This procedure allows for the adoption of minor surgical changes.

It is not an option, either, to go ahead with a bailout mechanism without any treaty change at all. Germany has insisted that any bailout mechanism be enshrined into the Treaty - otherwise it would be contested by Germany’s Constitutional Court.

A report from the think tank Bruegel published this week (9 November) says that any mechanism for financial stability will require a broad revision of the EU treaties.

It was at Deauville, before the October Council where Merkel persuaded the French President Nicolas Sarkozy to support her plans for establishing a permanent fund after Germany was exposed to a hefty 100 billion Euros contribution to the Greek bailout.

A permanent rescue mechanism would be activated in a possible future Greece-type scenario, where “the stability of the euro as a whole is under threat”.

Notwithstanding any prospects of Treaty referendums, the whole initiative is at risk from the markets which have so far reacted negatively.

Bond-holders are being asked to bear a greater risk and cost in case of a bailout in order to protect the taxpayer. This in turn would, as the President of the European Central Bank Jean-Claude Trichet fears, drive up borrowing costs for the most indebted countries. Ireland is at risk of going the way of Greece after news this week that its borrowing costs are being ramped up. Nevertheless, Merkel is adamant that the risk does not fall on the taxpayer.

Frau Merkel also wants to introduce tougher sanctions to deter more feckless members of the Eurozone from running large deficits in the first place. This would either be a loss of voting rights or of EU funding.

This did not go down well in Bulgaria the EU’s poorest country. Prime Minsiter Borissov said; "I would support [the proposals], but let's first discuss the mechanism. Imagine that you have a 3.5% or 4% deficit, and the sanctions include freezing of EU funding. The country would not solve its deficit problem: it would sink even deeper"

The new rules would the UK which has opted out of the EU, but the UK would nevertheless support Germany’s attempts to bring greater rigour to Eurozone deficit control.

The next Head of State summit will take place on December 16-17 where it is expected there will be some form of agreement on the whether the Treaty needs to be changed and whether it would need to be ratified again. The Commission on the other hand will deliver its own proposals on new EU budget rules amending the Eurozone’s original Stability and Growth Pact in December.

Berlin believes that all 27 member states, including the UK – and not just the Eurozone countries should be subjected to the new budget deficit regime to give the single market as a whole the stability it needs. Paris, on the other-hand is reluctant for the Eurozone countries to take decisions that would affect all 27 member states.

The bail-out debate has opened a whole pandora’s box of contentious issues and the EU will have to tread carefully if it is to avoid creating a split in the Eurozone between the deficit sinners and the deficit saints. And it is the cohesion of the whole of the European Union – and not just the Eurozone – that is at stake. If the bailout mechanism does trigger a treaty change and even a referendum, the Euro-sceptics will have their chance to strike.

Thursday, November 11, 2010

Barnier's Single Market Act - A Defining Moment for the EU?

Listening to Michel Barnier, the Commissioner for the Internal Market at the European Parliament yesterday, got me thinking. Are we about to witness the start of a new phase in the growth of the single market?

The ambition is big enough. The Commissioner spoke of the proposed Single Market Act as a motor for deeper and closer integration, sweeping away the structural barriers that have frustrated the development of the internal market over the ways. The new Act would re-launch the single market, he said. It would be our best hope for growth – adding 4% to the EU’s GDP annually. It would bring about a realization of a genuine single market in transport and energy, both important growth areas, if they weren’t being hamstrung by national protectionism.

I have no doubt he is right to conclude that market integration will help the economy grow – and help Europe become more competitive globally. But the Vision Thing will require a lot of vested interests being tackled and a lot of sacred cows being slaughtered. For instance, a key component of the Single Market Act is tax co-ordination – sensitive at the best of times. Some Member States, understandably, believe that tax differentials can give them a fair competitive edge against European trading partners – and that it doesn’t stop them from being good members of the internal market.

The Single Market Act could prove to be one of the big landmark events in EU history. But looking at the evidence so far, I’m not so convinced. I’ve seen the Services Directive, which was launched by the Commission to a great fanfare, fizzle and become a shadow of the revolutionary turning point in the single market it was meant to be. Besides the Commission’s workplan for single market measures in 2011 looks particularly lacklustre – a bit more so-called Smart Regulation measures, some new initiatives on debt recovery, a common consolidated corporate tax base, an airports package and maybe something on VAT. Despite the big talk, the Commission is still quite hesitant.
There are nevertheless some big plans for a digital single market which the Belgian minister for Economy and Reform, Mr Vincent van Quickenborne emphasized at the same event in the European Parliament yesterday.

Michel Barnier’s speech on the Single Market Act is not quite up there with Paul Henri Spaak’s address to the European Parliament in June 1961 and the Single Market Act cannot match the defining moments of Jacques Delors’ “Completing the Single Market” White Paper 25 years ago. But perhaps it can be comparable to the 1997 Single Market Action Plan – a programme of objectives to give a boost to a flagging ideal. Of course, it all depends on political will and political leadership. Delors, Mitterand and Kohl – and yes even, Lord Cochfield and Mrs Thatcher, could offer the leadership required in 1985. Tony Blair and Gerhardt Schroeder led the way in 1997; who can give the single market the leadership it needs if it is to go to the next level?

Monday, November 8, 2010

French-British Defence Deal could provide a breakthrough for

“Sovereignty is not isolationism”; so said French President Sarkozy when he signed a historic agreement with UK Prime Minister on defence co-operation.
The deal between the UK and France aims for quite some far-reaching measures that will pool the defence capabilities of both countries for the next 50 years.

David Cameron was keen also to assure the media that the UK would not be restricted in making strategic defence decisions by pooling resources and capabilities with the French.

Does this new entente cordiale mark a step towards a deeper EU defence policy, or does it in fact create a pragmatic alternative that would in reality preclude any closer EU-level co-operation?

Britain and France are the two largest military spenders in the EU and therefore form the essential pillars of any EU defence ambitions. The two governments account for almost half of all military spending in the EU. However, both have a very different approach to EU defence policy. France, only recently a full member of NATO, have traditionally been enthusiastic about an EU role in defence; the UK have been careful to pick and choose areas for more EU co-operation, preferring to develop a leading role for itself in NATO.

When US Secretary of State, Hilary Clinton came to Brussels last month, she implied that impending cuts to the UK defence budget would only undermine the usefulness of the UK within NATO – and as a military ally of the US. The UK Government, nevertheless, pressed on with stringent cuts to its defence budget.

The Strategic Defence and Security Review (SDSR), which the UK Government issued on 19th October, foresees significant cuts in military capabilities with 8 percent cuts to the defence budget over the next four years
The budget cuts are the main reason for the UK’s decision to enter a pragmatic bilateral relationship with France.

The UK-France deal includes the creation of a joint expedition force, the shared use of aircraft carriers as well as cooperation for the maintenance and spare parts of strategic airlift capabilities. What has been deemed as ‘modest’ combined efforts on the safety and effectiveness of both countries’ nuclear weapons are also part of the deal.

An emergency deployment force will have 5000 service-men and women from each country, with land, sea and air components and with commanders rotating between UK and France.

Some of this makes good practical sense for both parties –. The UK won’t have its second carrier until 2020 but once it does, the French can use it as an alternative to the unreliable “Charles de Gaulle”.

The extent of nuclear cooperation established by the deal underscores the will to retain absolutely independent nuclear capabilities, maintaining mutual secrecy of the strength of the French ‘force de frappe’ vs. the British submarine ballistic missile force.

However, Strategic airlift continues to be a problem for Europe which it is only now dealing with the new Airbus A400M, already late in schedule, set to be delivered only in 2012

A recent centre for European reform paper says that “London must invest the same political energy it has devoted to France towards exploring additional savings with other European countries.
Certainly the SDSR, has opened the possibility of closer defence co-operation with Germany, Italy, the Netherlands and Spain.
The SDSR says that the EU has a role to play in “promoting security and prosperity”.
That the SDSR does not see bilateral co-operation on defence operations and capabilities as an alternative to a fully-formed EU defence policy is striking – not least because its principal author is Defence Secretary, Liam Fox, an ardent Euro-sceptic who was, in opposition, keen to seethe UK withdraw from the European Defence Agency and openly opposed a stronger foreign policy that would result from the Lisbon Treaty.
That does not mean the UK Government has not been critical where it believes European military operations have failed. The EU mission in support of security sector reform in Guinea-Bissau and the military training mission for Somali security forces has raised eyebrows in the Foreign Office. But the UK wants to keep the EU’s military deployment in Bosnia-Herzegovina
Notwithstanding some highly effective EU military programmes, EU defence policy has been stagnant, on the whole, since the Iraq war. The success of the France-UK deal could provide the EU with an impetus to further develop EU co-operation on defence and security. The so-called Common Security and Defence Policy still falls short of any workable EU-wide decision-making capacity.

However, that is to assume the France-UK deal will work in practice. In 1998, both countries signed the St Malo defence accord which was within the NATO framework. Just five years later, it was forgotten as France became the UK’s biggest critic for going to war with Iraq.

Maternity leave rights will test UK’s patience with Europe

“Choose your battles carefully” would be Machiavelli’s advice to David Cameron. The British Prime Minister was in Brussels this week with a mission to freeze the EU budget for 2011. It is a battle he is set to lose.
The showdown over the budget was Mr Cameron’s first real foray as Prime Minister into hard-nosed European negotiations. His attack on the proposed budget increase at his week’s European Summit rallied the more Eurosceptic wing in his party. However, after failing to repatriate powers to the UK, as he had promised to do before the election, and now failing to prevent a rise to the EU budget, he will need to find another battle to win if he is to confirm his Euro-realist credentials.
He doesn’t need to wait long. After lying low on employment and social legislation, the European Commission has chosen a time of increasing unemployment across Europe to propose to extend maternity leave. The Council has already pushed back any major extension of paid leave for new mothers but the UK Government, more than most, will want to resist any new maternity leave rights. So far, David Cameron has kept quiet since his coalition partners will not want to take such a hard line. However, he will soon have to take a view and come out fighting if he is to please his own party which believes that the EU has no role to play at all in employment and social affairs.
Last week the European Parliament adopted the Estrela Report on the “improvement of the health and safety at work of workers who are pregnant or have recently given birth”.
MEPs want to increase paid maternal leave to 20 paid weeks and make a two-week paid paternal leave mandatory across the EU.
"Maternity cannot be regarded as a burden on social security systems, it is an investment in our future," argued the author of the Parliament’s Report, Portuguese Socialist MEP Edite Estrela.
The Estrela report proposes minimum maternity leave should be extended from 14 to 20 weeks, six weeks of which would be taken immediately after childbirth. The rules would apply to self-employed workers. Workers on maternity leave must be paid their full salary, which must be 100% of their last monthly salary or their average monthly salary. The report also says that member states must give fathers the right to fully paid paternity leave of at least two weeks within the period of maternity leave. Female workers cannot be fired from the beginning of a pregnancy to at least six months following the end of the maternity leave.
Sometimes an issue exposes cultural divisions as much as political ones. This is one such issue. The vote by and large followed national lines with a high cohesion ratio of 72,54% among MEP votes from the same state. Of the UK MEPs that voted, 54 voted against and only 3 in favour. The liberal group ALDE was divided right in the middle on the issue. UK Liberals were opposed to the report.
Liz Lynne a UK Lib Dem MEP on the social and employment committee said that at a time of economic recovery, it would not be acceptable to impose such a heavy burden on businesses. And in any case, it would only give employers further reason not to employ young women.
The report did not take into consideration who would be picking up the bill. Responsibilities for paying for maternity leave vary across Europe. France will oppose the Parliament’s position since it will be the Government that would be responsible for an additional €1.3 billion.
What is remarkable is that the report received most support from the southern states. The so-called PIGS plus Ireland, all without exception voted overwhelmingly for the legislative proposal. Bankrupt Greece voted 14 for the proposition and 0 against. Italy had 57 votes for and one vote against the proposition. Spain had 37 for and 1 against, Ireland voted 11 for and 0 against.
The European Small Business Association estimates the cost for these proposals from the Parliament would be in the region of €121bn between now and 2030. The proposed 2.9% increase in the EU budget would cost the UK a further €500m in contributions. The maternity rights proposals present a much bigger challenge to David Cameron. Certainly much more tax-payers money is at stake. Is he ready to go to battle, again?

Cathy Ashton gets her EU Foreign Service – with a little help from William Hague

The EU institutions have, despite some last-minute political wrangling, reached a settlement on a new European diplomacy service. The Lisbon Treaty allowed for an External Action Service with the objective of matching Europe’s economic status in the world with a similar diplomatic clout.

However Cathy Ashton, the EU’s High Representative for Foreign Affairs, had to contend with competing demands from MEPs, national governments and the European Commission, all with different views on what the scale and scope of the new foreign service operations should look like.

In Strasbourg this week MEPs voted to adopt the European External Action Service Staff Regulation, the Financial Regulation and the EEAS 2010 budget. The EAS will now be operational on schedule - from 1st December.

EU foreign ministers in July already paved the way for the EAS to be operational from 1st December. Member State governments – including the UK Conservatives, who had been critical of the EAS plans before they came to office – were keen for the EAS to be a success.

However, rows broke out soon after over the budget and over appointments. Nevertheless, Cathy Ashton has defied her critics – and she has had many – by casting aside controversy over the budget and over national and georaphical quotas for the EAS staffing regulations. The vote this week means, the High Representative can now get on with the business of appointing around 80 senior diplomats. She will then, over the next two years, recruit officials from the Council General Secretariat and from national diplomatic services. Eventually, the EAS is expected to be staffed by around 6,000 officials.
The EAS is possibly the most significant of the innovations brought about by the Lisbon Treaty. And it was the unqualified support of the British Foreign Secretary, William Hague that helped make it happen

In a major speech on foreign policy on 1st July, William Hague set out his vision for a United Kingdom that is “highly active and activist in our approach to the European Union and the exercise of its collective weight in the world”. This was not the Euro-passive Conservative Government we had been led to expect

This represented a major shift in Hague’s view of the world. In opposition, he was particularly hostile to the EU external relations policy as conceived by Lisbon. As shadow foreign secretary, he was bitterly opposed to the appointment of Tony Blair as EU Council President, fearing that, as an international statesman, Mr Blair would give the EU too much legitimacy on the world stage.

And now, Mr Hague is making the case for a stronger British presence within the EU institutions. He says that the number of British “A” officials has fallen by 205 since 2007, he says; “As a new Government we are determined to put this right”.

Although there is no guarantee that nationality provides any support for any particular national policy, it is important for the UK that British diplomacy is ingrained in the new External Action Service.

William Hague understands the real-politik of a common European foreign and defence policy and the EAS is a practical way of demonstrating Europe’s power to the world – at a time when the UK, France and Germany are losing their individual impact on world events and when their bilateral relations with countries like India and China are becoming less relevant to world affairs.

Spending cuts at the UK Foreign Office and Ministry of Defence, announced this week, was in part made possible because of the new powers and responsibilities of the External Action Service.

So the EU’s High Representative for foreign affairs – and former Labour peer, Cathy Ashton can thank William Hague for the success this week in securing a smooth transition to a powerful new global institution. Mr Hague has paved the way for a powerful international diplomatic service which will finally give the EU a single voice in the world. But Cathy Ashton must receive her fair share of praise for the success in setting up the EAS. She has confounded her critics – who have from the day she was appointed dismissed her as a light-weight - by keeping a cool head and single-handedly creating the momentum she needed to drive through her plans

MEPs square up to National Governments over the EU Budget

The British public is bracing itself next week for deep spending cuts when the Chancellor of the Exchequer, George Osborne unveils plans for unprecedented reductions to departmental budgets in the Comprehensive Spending Review on Wednesday.

Ireland and the Baltic states are already experiencing the pain that comes with their national austerity measures. Other European countries like Sweden, France and Germany are also scaling back public sector spending. Even the new left wing government in Greece is slashing the public sector – although it hardly has a choice in the matter after a humiliating European bail-out.

It is understandable then that EU member state governments were appalled at the European Commission’s proposal to increase the EU budget by nearly 6%. At a time, when difficult decisions on job cuts and wage freezes in the public sector are being made by national governments, the EU asks for more money.

It is, of course, the centre-right governments across Europe that are introducing the austerity measures they believe will stabilise their economies and help bring about a sustainable recovery. Some are more enthusiastic than others. Nevertheless, the European centre-right consensus is real cuts need to be made and need to made immediately.

It is strange then that the Centre-Right majority in the European Parliament has taken an entirely different view when it comes to the European Union budget. The European People’s Party believe that there should be more public spending – not less – for the
EU to invest in growth and jobs for the future.

Sidonia Jedzejewska – a Polish MEP in the Centre Right EPP Group, is drafting the European Parliament’s report on the 2011 budget. He believes that the EU should be able to properly fund cross-border education and training programmes if it is to add value.

When the European Council agreed to a lower budget increase than the 5.9% proposed by the Commission, the European Parliament, led by the EPP, responded by re-instating the 5.9% increase. This matters because after the Lisbon Treaty, the European Parliament now has a say in the Budget. Previously it would just be asked to approve the over-all amount. Now it can negotiate on individual budgets for transport and fisheries and so on. MEPs have already threatened to block funding for ITER, the international nuclear fusion reactor project.

On October 5, after a bruising debate, the Budget Committee of the EU Parliament voted to reject the Council’s proposal to limit the increase to 2.91%. The Council said that a 5.9% increase on 2010 – giving an overall EU budget of €130.14billion – was “politically unrealistic”.

The UK government goes further. It sees the proposal increase as – at the very least – insensitive.

Earlier this week, British Prime Minister David Cameron told a joint press conference in London with Danish counterpart Lars Lokke Rasmussen that the figures should be progressively "reduced rather than increased." The UK's net transfer to EU institutions is set to rise from £6.4 billion this year to £8.3 billion in 2011-12.

On 30th September, Vince Cable, the UK’s business minister spoke to MEPs in the European Parliament: He said; “At a time when national governments, including mine, are having to make very painful cuts in public spending, no one can understand why the European budget is not being subjected to the same discipline.” Clearly, this has fallen on deaf ears.

The most audacious part of the Commission’s budget plans is the four percent increase for administration costs. The Commission has even gone to the European Court of Justice to save planned pay increases for EC officials after Council threatened to impose a freeze.

The European Parliament – along with the Commission – believe that there is a need to increase EU funds to compensate for the short-falls that will come about in national public spending. MEPs are particularly concerned that infrastructure and regional development projects would suffer. However they go much further than ring-fencing investment projects – they have also rejected a Council proposal for a €820.71m cut to the hugely bloated agriculture and fisheries sectors.

While tax payers have been asked to indirectly or directly shoulder the costs of getting through the financial crisis, can the EU conceivably demand for more?

National governments are forced to take measures to cut national defence spending, reduce child benefits, postpone school building schemes, lay off thousands of workers. Is this the right time for MEPs to make the case for more money for cross-border student exchange schemes, bee-keeping research or the Palestinian Authority? MEPs are worried that if the EU does less, it would become less relevant. If the EU does less, but does it well, they should have nothing to fear. The EU budget should not be used as a substitute for another European stimulus package. It should be there to support growth, jobs and prosperity, for the long-term success of the single market.

The fight over the EU budget is set to rumble on. The European Parliament will vote on the Committee’s recommendation during the plenary session in Strasbourg next week.

Although the Parliament will continue to push the limits of its mandate and test the patience of the Council in doing so, ultimately it does not have the power to impose its will on the national governments. Perhaps, instead MEPs should reconcile itself to the political imperative across Europe. Rather than re-start a debate over stimulus versus austerity, it should accept the new reality, while securing as best it can its constituent interests.