ETS - the next sub-prime? Should we just tax carbon instead?

I never realised just how huge carbon trading has become. From nothing it has become a €84bn business in London. If the US Congress adopts a cap and trade scheme the value of the market could rise to €3,000.

The European Union's Emissions Trading Scheme (the largest cap and trade carbon market in the world) is arguably the cheapest way to encourage carbon emissions. But there are fears that there will be too much price volatility - coupled with political uncertainties . Wild volatility would not provide any useful price signal for investment in life long assets such as nuclear power stations. Trading will be vulnerable to shocks and destroy at a stroke a company's competitiveness. In short it carries risks - huge risks

Would tax be a better way to deliver carbon emission reduction targets?. It offers greater certainty and is easy to administer. Hopefully US Congress will learn from the weaknesses of the European system and hopefully, there will be some changes agreed to cap and trade at Copenhagen in December. Nevertheless, I can't help thinking good old fashioned taxation might have been preferable all along

shadowy power games expose EU's democratic deficit

I know it just the nature of things in a club of 27 different countries but the Swedish PM's heroic efforts to find a consensus candidate for the EU President job will result in the lowest common denominator. Worse than that it exposes the democratic gulf that exists in the new post-Lisbon.

I'm no federalist but I am becoming sympathetic to the idea of giving the President a democratic mandate. It might cause a division - possibly between left and right, north and south or east and west - but at least it would produce strong leadership.

Two leading women Commissioners, Nellie Kroes and Margot Wallstrom this week gave their support to former Latvian PM - Vaira Vika-Freiberga aka "The Iron Lady Mark II" for the EU President job which will be decided by European leaders behind closed doors on Thursday. Kroes and Wallstrom say that it is "utterly undemocratic" that more women do not hold senior EU positions. Oh but come on! Utterly unrepresentative, maybe but not one popular vote will have been cast for any of them. Nothing personal - I rate them both highly - but they need to be careful in future when describing whats democratic and whats not.

Have Socialists let Centre-Right choose a candidate just to spike Blair?

What has been most surprising about last nights dinner discussions in Brussels the role of the Presidency and Foreign representative jobs being created by the Lisbon Treaty is that the European Left have capitulated so quickly on the Presidency job.

Are we expected to believe that the socialist parties are more interested in holding the office of Foreign Representatives when the President job should be alot more powerful in terms of setting the political agenda for the EU. Of course, it's still not clear just how big the job will be - and that was something EU leaders did discuss only very loosely at dinner last night - but it will still be a powerful counterpoint to the position of the European Commission President - and if a member of the centre-right EPP has just been appointed to Commission President position then it is reasonable for the Socialists to go for the top Council job.

I can only assume that opposition among the socialist parties to Blair's candidacy is so great that they conceded this early to spike any potential Blair bandwagon. Blair was counting not so much on the support of Socialist PMs like Zaparto in any case. He did however need the firm support of Merckel and Sarkozy. The Franco-German axis is back - and unconstrained by any centre-right partners in the UK. Sarkozy was enthusiastic in his early support for Blair but has shown he is quite fickle lately -while Merckel has cannily kept counsel on who her favourite contender would be.

The British Press have now assumed that with Blair out of the running for President, then UK Foreign Secretary David Milliband is somehow favourte for the EU Foreign Affairs job. He would make a good candidate certainly - he is from a Centre-Left party and he gave a very-well recieved speech recently mapping out his vision of a post-Lisbon Europe - however, there are stronger candidates such as the French Socialist former Europe minister, Elizabeth Guigou. While Milliband could certainly match Ms Guigou's talents, No 10 would be very reluctant to let him go - his departure would force a by-election in his South Shields constituency. EU think tank veteran Stanley Crossick suggests that if the UK nominate Chris Patten for the post, we would be more likely to win it. Mr Patten - a former EU Commissioner - is hugely experienced in international affairs and would be a restraining influence on his more eurosceptic conservative colleagues. However he is from the centre-right and of course the Socialists will want one of their own for this post.

As for the Presidency job - I am going to be brave and make a prediction. If Tony Blair is too rich for their blood - then the Franco-German axis will go for a compromise candidate - and Herman van Rompoy - Belgian PM would be the classic compromise candidate.

Its not so surprising that this has come down to a tradition Left-Right fight but the fact that the Socialists have just simply sat back and let the Centre-Right pick the top job for one of their own warrants further explanation.

Bruegel Report - Memo to the new Commissioners

They have not yet taken office - nor even been nominated, yet the new Commissioners have already face a list of demands from some of the European Union's leading thinkers. The Bruegel Report issues memos to the new Commission and makes interesting reading. I highlight some of the demands to the prospective Commissioners for Financial Services, Internal Market, Industry and Competition - the four portfolios, in my opinion most likely to go to a UK nomination (I have since ruled out Trade or Environment).

Memo to Financial Services Commissioner

Public institutions necessary to make a single EU financial system sustainable should be created. Many considered that such a system could look after itself with regulation and supervision being secondary issues. Effective supervision cannot be neglected and the EU must choose between an abandonment of a single EU financial system or the build up of institutions to suit financial integration.

• Be wary of excessive or poorly conceived regulation which could restrict Europe’s competitiveness and growth potential. Ill thought through reactions to the current financial crisis could hinder recovery.

• Act on both a short and long term agenda. In the short term, comprehensive recapitalisation and restructuring is needed as part of a system-wide approach to fix the banking crisis, either EU wide or across the main continental European countries (as British and Scandinavian countries can be considered autonomous).

• Depending on the severity of the crisis, significant public sector investments into financial institutions may be required. In this case innovative solutions will be needed to prevent massive distortions in the European economy.

• In the long term, for financial stability there must be effective supervision, protection and a capacity to manage future crises. Financial efficiency should also be improved to enhance Europe’s growth potential.

• Financial fairness should be pursued though protection of weaker players in the system which may include consumers, investors or potential competitors to established players.

• Continue, defend and promote financial integration with harmonisation of rules and regulations as well as effective enforcement mechanisms to ensure compliance and implementation.

• Publish ‘a clear vision for the financial system Europe needs’ reflecting the four dimensions previously described and to work to build a consensus for this vision among member states and the public. Over the next six months, a comprehensive Subsidiary review is to be carried out by the Commission’s services.

• You must determine which tasks to be taken from, and given back to member states and which new bodies may be required to carry them out. Partnership with the newly elected European Parliament should be a core tenet of the commissioner’s ambitions.

The Commissioner for Competitions Policy

• Competition policy has developed into a powerful instrument for enforcing a set of consistent rules across Europe.

• The impact and significance of EU competition can be divided into both internal and external dimensions. The former provides a consistent set of rules through a coherent implementation of competition law and spreads the competition culture across Europe. The latter is that Europe speaks with one voice on competition matters to countries such as the US and China.

• Europe has been at the forefront of competition policy and has been referred to as the world’s leading jurisdiction in antitrust matters, but there are major policy challenges ahead that need to be addressed:

• Enforce state aid rules and keep the rules of competition policy intact and firmly enforced in times of economic crisis, particularly in the area of state aid.

• Continue the policy of a ‘more economic approach’ and to focus on markets and consumer benefit in order to preserve competition, not competitors.

• Strengthen the role of efficiencies in merger control when approving or blocking mergers and clarify which dynamic efficiencies are acceptable.

• Strengthen the emphasis on supply side factors in defining relevant antitrust markets or downgrade market definition as an antitrust screening device.

• Protect consumers through effective competition, rather than by direct regulatory intervention and increase coordination

• Broaden and deepen global ties with competition regulators and emerging countries with a view to strengthening competition ties with the authorities of developed countries, especially the US.

The Commissioner for the Single Market

• The current economic crisis presents the biggest test ever to the cohesion of the EU’s single market. The biggest test faced by the Commissioner for the Single Market will be to uphold single market rules and to prevent backsliding by individual member states.

• Existing single-market rules must be strictly enforced and the existing instrument of the single market scoreboard strengthened.

• ‘Business as usual’ is not, on its own a strategy for the single market. The strategy must be comprehensive and clear at the outset to all stakeholders with long term plans explained in detail. The commissioner’s approach should be to refer to the global role of Europe and its single market as a force for good on the global scale.

• A truly integrated market for services in Europe must implemented in the form of the services directive, which although having already been adopted will need to be properly implemented. This directive is a key part of the EU’s economic policy, currently known as the Lisbon Strategy.

• A number of member states, possibly many, are unlikely to have all the rules in place by the end of this year, depriving businesses of a border-free services market. A clear strategy towards these member states should me adopted which helps those with genuine problems, while giving a strict timetable to those who fail to cooperate.

• The EU’s success as a global standard-setter relies primarily on the single market remaining intact and under the current pressure and needs a coordinated approach across its institutions, Commission department. It also needs a common ‘face’ to defend and to promote the single market to external governments and businesses.

• It is proposed that you:
- Coordinate European stakeholders’ efforts to define a global regulatory standard-setting approach for the EU.
- Use the EU’s external standard-setting power as an additional argument to convince EU governments to cooperate.
- Expand the regulatory dialogue with other countries and international institutions.

The Commissioner for Enterprise and Industry Policy

• Avoid the ‘zombification’ of Europe’s economy. Governments may be tempted to encourage or force banks to provide credit to businesses which are not viable in the current form to prevent them from restructuring if that means making significant redundancies. Such action would turn them into ‘zombie banks’ which are insolvent but protected by national authorities and would have similar effects on other businesses.

• You should defend the vision of a European Union leads in frontier innovation, breeds world-class new companies and maintains the prosperity of its citizens. The emphasis should be on creating the right framework conditions for success.

• Ensure that the policy responses to the crisis do not weaken European economic integration. There is a distinct risk that government action will lead to the fragmentation of Europe’s single market which is among the EU’s most valuable but also most fragile assets.

• You should make the restructuring of industries severely damaged by the crisis the main focus of your term. This is a temporary but crucial task as existing policy tools such as competition policy and single market policy may not suffice to meet the challenges given the magnitude of the economic shock.

• You may wish to take a similar approach to Etienne Davignon, you predecessor in the late 1970s and early 1980s when national governments’ support of troubled sectors threatened the common market. The ‘Davignon Plan’, implemented in the 1980s involved accepting governments’ state aid in exchange for coordinated restructuring plans that drastically reduced production capacity.

• A similar approach could now be used in the automotive sector which suffers from structural overcapacity as a result of changing market conditions and has been badly hit by the crisis. Davignon’s approach of joint action by the member states, spearheaded by the Commission could be usefully replicated today.

• Industry specific EU task forces should be formed that would help you to coordinate national governments’ moves and to suggest relevant EU decisions. Such task forces would report to you and if well designed and managed, could play a powerful role providing a shared understanding of industry dynamics and could be a catalyst of joint actions where a fragmentation of policy initiatives is leading to demonstrably inefficient outcomes.

Euro-Parliament Grand Coalition would freeze out Tories

While Westminster is still to be roused from its long summer slumber, the European Parliament is back at work. New (and returning) MEPs hit the ground running after the Euro elections in June. Already, new political groups have been formed, senior posts agreed, new Rapporteurs appointed to carry on legislation left over from the previous parliament – and last weeks’ last minute approval of President Barosso for third term at the Commission. However, the real work is yet to start.

So what can we expect from the new Parliament? A study by LSE Professor Simon Hix attempts to give a flavour of what the political dynamics will look like. Written for the Swedish Institute for European Policy Studies, “Return of the Grand Coalition” says that because of the success of the smaller parties, neither the centre-right or the centre-left could have the strength to dominate the new Parliament.

He says that the proportional increase in the seat shares of the smaller political groups has come "at the expense of the three main groups – the European People’s Party (EPP), the Socialists and Democrats (S&D) and the centrist Alliance of Liberals and Democrats (ALDE). The EPP have gone down "from 36.7% to 36.0%, the Socialists from 27.6% to 25.0%, and ALDE from 12.7% to 11.4%" of total seats.
Although the Centre Right have fared better than the Centre Left, it is the groups to the right of the EPP that have done much better this time round – at the expense of the Big 3. The European Conservatives and Reformists (including UK Conservatives) have 7.5% of the proportional make-up of the House.

Because the UK Conservatives have defected from the EPP to the new ECR, the German CDU/CSU delegation will dominate but the Italian, French and Polish MEPs will be more influential in the new group than in the old group.The Germans will also dominate the S&D and (along with the British) the ALDE Groups.

I remember when UK’s Labour delegation was larger than the German SPD delegation – in fact it was the largest single group in the Parliament – some 62 MEPs out of 84 UK MEPs (its now down to 11). Yet even with 62 MEPs, the German delegation managed to get its way every time – because of internal faction-fighting in the EPLP (For a day-to-day account of the EPLP’s “glory” days, read the new book by former Labour MEP, Anita Pollack).

Professor Hix says that what is striking about the political groups in the last parliament was the high level of cohesion – higher than that for Democrats or Republicans in the US – quite remarkable when you think of all the nationalities – and various national pressures involved.

Already we are seeing the Franco-German axis making a come-back. This is mostly because the largest group - the EPP has no UK members and the UK's interests - particularly in financial services-where the French and Germans from both left and right want to see more regulation while the UK (again from left and right) want to see - on the whole - a light touch approach. My guess is that we will see the EPP and ALDE and S&D work together more than before - and smaller parties frozen out. It will in some respects resemble the Grand Coalition that has kept Angela Merckel in power for the last four years.

EU leaders say exit strategy from fiscal stimuli must wait until recovery is sustainable

"The bonus bubble burst tonight" - so said Frederick Reinfeldt - the Swedish Premier after announcing the conclusions to a special EU summit yesterday. Reinfeldt said it was time for the talking to stop and time to take action on banker's bonuses.

Sounds pretty definitive - we can expect EU measures to unilaterally crack down on excessive rewards for risk-taking in the financial services. Reinfeldt, who chaired the Summit, said the public will not stand for profits to remain in private hands while losses come at taxpayers expense. Apart from holding the EU Preseidency, there is good reason to sit up and take notice of the Swedes when they start talking about learning lessons from the banking crisis. Their bail-out of busted banks in the 1990's and subsequently returning a profit for the taxpayer was the model for Gordon Brown when he led the international response to the global banking collapse. So it's a little disappointing that despite the hyperbole from Reinfeldt, his idea of remuneration caps do not feature in the informal common position - only a suggestion that it could be picked up at G20 as a multilateral solution.

Sarkozy, of course was keen on the bonus caps. Berlesconi less so - he says that acting on irresponsible speculation was much more important.

Apart from the economy, mitigation costs of climate change was he other big issue - the Commission wants to raise €100bn by 2020 for mitigation costs. Member States yesterday agreed to a commitment of €7bn upfront annual payments.

The main message, however from the Summit that the exit strategy from the fiscal stimuli should not be applied until the recovery is secured.

Summit Conclusions: http://alturl.com/i68u

Barroso finally gets second term mandate

Jose Manuel Barroso has been given the support from the European Parliament to start a second mandate as President of the European Commission.



Mr Barroso secured 382 votes in support of his nomination (more than the 269 threshold he would have need in the muhc tougher conditions that would have been set by the Lisbon Treaty). There were 219 votes against and the remainder abstained.



The vote was held in a secret ballot but in reality, Mr Barroso was already assured of three large political groups. Last week, he had met the leaders of the EPP Group (centre-right and the largest group in the Parliament), ALDE (including the UK liberal democrats) and the ECR (including UK Conservatives) who had pledged support for him at the vote earlier today. The ALDE Group leader, Guy Verhofstadt (former Belgian Premier and a contender for Commission President last time round when he had lost out to Barroso) had withheld support until he was able to secure some important concessions for his Group. One of the concessions made to Verhofstadt was to create a special Commissioner post for justice and civil liberties – as well as pledge a new economic recovery plan and a single financial market regulator.



In a three hour debate yesterday, Mr Barroso spelt out his concessions to ALDE on top of his earlier manifesto pledges. They included root and branch EU funding reform in order to source further funding from Member State governments for the Commission and a common approach to migration. Its not clear what the UK conservative-dominated ECR Group - which is also supporting Barroso - think of these concessions.



Mr Barroso stopped short of offering anything substantial to the Socialist Group parties – such as their demands for a new Posting of Workers Directive – although he did say he would look into how best to bring about a new framework for public services

The response from leading figures in the Socialists and Democrats (S&D) has been very negative – Leader of the S&D Group, Martin Schutz says that Barroso’s Presidency would be the weakest in the EU’s history. He has clearly forgotten all about Jacques Santer.

Earlier this month, Mr Barroso issued a 41 page document “Political Guidelines for the next Commission” which set out his priorities for the next term. However, they did not differ from what he had set out in a two page letter to Government leaders in July.

In his document, Barroso proposes that the Lisbon Strategy for growth and jobs, the renewed social agenda, the Stability and Growth Pact, competition and state aid policy, the Sustainable Development Strategy, the climate change and energy strategy, the European Research Area, and the Hague and now the Stockholm programmes on justice and home affairs, all be "channelled" to deliver by 2020 “the kind of social market economy that he says Europeans are calling for”.

Barroso now has to start the difficult task of building a team of Commissioners around him – based on Member State nominations but subject to European Parliament approval.