The obscure mechanism by which Eurocrat salary increases are calculated (taking account of the civil service pay in 8 member states, but on a delayed timescale) meant that last year, the EU’s civil servants were entitled to a 3.7% pay rise. However, prompted by the austerity of the times (most national governments have been forced to freeze their civil service pay), the European Council decided at the end of last year to halve this above-inflation salary increase, and instead cap the pay rise at 1.8%. Despite the logic behind a minimal pay increase, the Council’s decision didn’t sit well with the EU Commission who referred the case to the ECJ. The Council’s decision has now been ruled illegal and as a result EU civil servants’ pay will be backdated, regardless of the heightening tension over next year’s EU budget discussions.

The EU Commission had proposed an increase of 6% for the 2011 EU budget (from the 2010 total); however, the UK and 12 other member states requested that the budget increase be limited to a maximum 2.9%. When the issue was debated in the EU Parliament last week, MEPs chose instead to support the Commission’s original proposal, and so negotiations broke down. EU spending next year will be based on the 2010 budget until agreement is reached.

Member states are reluctant to surrender more money to the EU when they are having to slash their national public spending, yet the EU refuses to accept that it too must limit its spending until the current economic situation stabilises. The EU’s ‘one rule for us and another for them’ attitude towards the size of its budget will only antagonise those who feel that the EU is out of touch with European citizens. The ECJ’s decision to allow the increased EU pay rise to go ahead will simply fuel this sense of isolation.

A new attempt to negotiate the 2011 EU budget is about to commence, with an ‘in-progress’ draft hinting that the Commission supports plans for EU self-funding through direct taxation, a concept that several member states, along with EU Council President Herman Van Rompuy, are uncomfortable with. The new budget draft is also likely to support MEPs’ calls to be granted greater powers in EU budget negotiations in the future, something that member states were reluctant to approve in the first round of negotiations.

This all comes a matter of weeks after EU auditors refused – for the sixteenth year in a row – to sign off the EU accounts. Many people feel that the EU’s spending should be straightened out before the EU demands further budget increases.

National leaders will meet with the EU Commission on 6^th December, hoping to finally conclude next year’s budget. The latest ECJ ruling is a provocative decision before these discussions resume, and is unlikely to make negotiations smoother.

David Lidington, Minister for Europe, introduced the Bill last week saying, ‘Many people in Britain feel disconnected with how the EU has developed, and the decisions that have been taken in their name’. The Europe Minister believes the new Bill can ‘rebuild trust and reconnect people with these EU decisions’.

The Bill will not attempt to regain powers that have already been shifted from the UK to the EU level; however, it will guarantee a referendum on future transfers of power. The intentions of the Bill are admirable, but it is naive to ignore its potential pitfalls, which could undermine that which David Lidington is attempting to achieve – reconnecting UK citizens with EU decisions.

At an event held by Open Europe on Tuesday, David Rennie, Political Editor at The Economist, suggested that a ‘referendum lock’ constitutes an endorsement of a two-speed Europe. Rennie suggested that a UK referendum bill would effectively be a ‘UK veto bill’ because it would be virtually impossible to win a referendum in favour of transfering sovereignty from the UK.

However, Mats Persson, director of the Open Europe think tank, highlighted a potential loophole in the wording of the Bill. The Bill will enable the Government to decide, in certain circumstances, that a particular power transfer is ‘insignificant’ and therefore not worthy of a referendum. The Foreign Office favours this wording in order to prevent referenda being held over trivial matters.  However, it would be preferable for the Europe Minister to clearly define what equals an ‘insignificant’ transfer now, in order to avoid future conflict and confusion. A clear definition would also alleviate concern about a ’snowballing’ effect – that increasing ‘insignificant’ competence transfers would together equal something really quite significant.

There has been a suggestion that the Bill could be improved if it were to include some form of initiative enabling citizens to prompt a referendum. Others have raised concerns that the UK’s Bill does too little too late – e.g. ‘on the table’ plans (such as a permanent bailout mechanism and a eurotax) could become a reality before the referendum lock is established.

The Coalition Government has already agreed that there will be no transfer of power from the UK to the EU during this Parliament’s lifetime (until 2015), therefore this Bill is ultimately being developed to constrain future Governments. As a result, we will have to wait and see whether it is successful. In the meantime,  David Lidington hopes that the Bill will represent an important step towards restoring the confidence of UK citizens who have become increasingly frustrated with the constant creeping of EU sovereignty.  After the farce of the Lisbon Treaty ratification, UK citizens will no doubt be relieved to hear that, finally, their opinions may be taken into account. In a similar vein, in response to the fact that many Eurosceptics remain convinced that the ‘referendum lock’ will be a complete failure, David Rennie commented ‘it is the fate of the paranoid not to realise when they’re winning’.

The Common Agricultural Policy (CAP) and Cohesion Fund payments are, as usual, the main culprits for the majority of the concerns highlighted. These are two areas where EU citizens regularly express dissatisfaction over EU spending. The CAP, which falls under the Agricultural and Natural Resources branch of the budget, has seen its error rate rise to 5%, and for the Cohesion Funds this figure is 11%.

It is rather ironic then that the Court of Auditors report has been released on the same day as the EU’s highest court ruled against transparency in CAP payments, deciding that publishing the details of farm subsidy recipients ‘infringes their privacy rights’. If ever there was a time to insist on improved transparency in order to avoid the misappropriation of funds and payments to undeserving recipients, it should be the day the Court of Auditors are, once again, unable to sign off the EU accounts.

The court case regarding farm subsidies was brought by two German farmers who objected to their names, addresses and allocated funds being published in the public domain, a sentiment that is shared by many farmers across the EU. Despite the large slice of the budget earmarked for CAP payments (more than a third of all EU spending) and the controversies that have made the headlines (the Royal families, for example, that claim high amounts of EU funding) the court found in the claimants’ favour, and their details can no longer be published.

The CAP is one of the more contentious areas of the EU budget. CAP funding is plagued with tales of fraud and figure fixing, non-existent olive groves and, even worse, corrupt ministers and officials siphoning off the funds. Of course the honest claimants far out-weigh these examples; however, funding discrepancies still occur with frightening frequency. The policy’s standing is further damaged when you visit websites like Farmsubsidy.org (which publishes details of who receives what in payments) and see Danish Crown, Nestlé, and Tate & Lyle in the top 10 recipients of CAP payments. Whilst under the current policy rules they are perfectly entitled to claim, these organisations are not the poor and struggling farmers we like to envisage the fund helping.

Only 20% of UK citizens trust the EU institutions. Removing access to details about the CAP and putting the public back into the dark about who is getting how much of the funds, is a step in the wrong direction. It makes the EU look like it has something to hide. Continually failing to get the accounts signed off, whilst asking for greater amounts of EU citizens’ money (via budget increases); will only alienate the EU further. If the EU cares about restoring the public’s faith in its accounts and spending, then transparency and accuracy should be the objective of every EU fund allocation, and this includes spending under the CAP.

In the second quarter of this year, the number of immigrants entering the EU increased six-fold, compared with figures for the first quarter. 90% of immigrants entered the EU via Greece, crossing the Turkish-Greek border.  For the vast majority of immigrants (excluding those looking for seasonal work in Greece), Greece is simply the gateway to other destinations in the EU. However, the Dublin II Regulation (2008) established that all asylum cases must be processed in the ‘country of entry’, which gives Greece the colossal responsibility of processing nearly every immigrant entering the EU. As a consequence of this, Greece has a backlog of 52,000 asylum cases waiting to be examined, and the number is growing every day.

The UN Special Rapporteur for Torture, Manfred Nowak, found there was a ‘national crisis within the Greek detention system’. He condemned the ‘appalling’ conditions, noting the overcrowded detention centres, inadequate sanitation facilities and the frequent inability to separate detainees appropriately, be-it by gender or age. The guards he interviewed acknowledged the centres are ill-equipped for such numbers, and recognised their own lack of training to deal with so many immigrants, but it seems they have no other option. In a time of economic crisis and large scale social misery from severe austerity measures, Greece is keeping its head above water, but only just.

The pressure the Greek detention system is under has, however, been common knowledge in the EU for some time. Greece has frequently pleaded for more assistance and burden-sharing.  The publication of the UN’s latest public findings has forced the EU to act and launch its first deployment of RABIT-s (established since 2007), to try and stem the flow of immigrants entering the EU through Greece. Announcing the deployment, Cecilia Malmstroem, EU Commissioner for Internal Affairs, said: ‘Greece will now be able to benefit concretely from European solidarity in the management of external borders.’

The RABIT-s are drawn from ‘national reserves’, and will patrol the Turkish–Greek border assisting Greek border controls. EUObserver, the EU news website, commented that: ‘The Rabit-s have authorisation to access Greek databases and “when necessary, use force”. They are authorised to carry their service weapons and national uniform, but will wear a blue armband with the EU and Frontex logo’. However, the teams are only a temporary measure so what happens after they leave?

The number of migrants looking to enter the EU via Greece is, as one Greek minister pointed out ‘a European problem that demands a European solution’. In his report, Manfred Nowak suggests that: ‘The European Union should fundamentally rethink its asylum and migration policy, and replace the Dublin II Regulation by a fairer system of burden sharing.’

Immigration is rarely a popular topic, especially not in times of economic difficulty. But perhaps the EU should accept that EU integration has changed migration trends, and that current policy focusing on ‘country of entry’ places immense pressure on both border-states and the people detained.

The Greek debt crisis, which nearly brought the Eurozone to its knees earlier this year, highlighted the massive failings of the Stability and Growth Pact (which is meant to protect against member states’ finances getting out of control and undermining the stability of the Eurozone). The Stability and Growth Pact (SGP) rules have proved difficult to enforce.  For example, the Pact requires a majority vote before any punitive measures can be taken against states who break the rules (i.e. ensuring their budget deficit doesn’t fall below -3% of GDP and ensuring national debt doesn’t exceed 60% of GDP). In the past, Eurozone member governments have proved to be overly-comfortable with flouting the Pact’s rules, and have shown little concern regarding possible repercussions. For Greece, this culminated in the public finances spinning out of control, which ultimately caused serious damage to the stability and reputation of the Eurozone.

In a bilateral meeting on Monday, France and Germany examined how the SGP could be reformed to prevent other crises in the future. The two countries proposed that states that break SGP rules should face automatic penalties, with a majority of states needed to stop such measures being instigated (a reversal of the current system). It is noteworthy that France only agreed to champion such stringent measures after it persuaded Germany to give states sixth-month leeway to get their finances back on track before such penalties are enacted.

In addition to toughening up the ‘corrective’ elements of the SGP, further proposed measures include strengthening  the SGP’s ‘preventative’ arm, so that there is less chance of a member state’s  public debt reaching an excessive  level in the first place. In particular, the Franco-German declaration states: ‘the Council should be empowered to decide (acting by QMV) to impose progressive sanctions in the form of interest-bearing deposits on any member state whose fiscal consolidation path deviates particularly significantly from the adjustment path foreseen in the Stability and Growth Pact’.

The Franco-German dialogue controversially concluded that a permanent Eurozone bailout fund should be established before 2013 (the current ‘safety-net’ mechanism – the €440 billion European Financial Stability Facility – developed in the wake of Greece’s bailout, expires in June 2013). Both Germany and France readily accept that such a move would require treaty changes.

There can be no doubt that the current Stability and Growth Pact measures have failed to ensure economic stability, therefore stronger regulations need to be implemented to protect the EU from future crises.  However, amending the Lisbon Treaty will not be a popular move. The UK’s Prime Minister, David Cameron, has already promised that any future treaty changes must be subject to referenda in the UK.

It took eight years of difficult negotiations and bickering before the Lisbon Treaty was ratified. Therefore,  any future attempt to amend the EU Treaties is likely to tread a treacherous path. If (or when) treaty amendments do make it to the negotiating table, there is no guarantee that reforms would be limited to matters of financial regulation – it could become a free-for-all for states seeking to request amendments. To guarantee the survival of the Eurozone, the SGP needs to be reformed. However, attempting treaty amendments so soon after the controversy caused by the ratification of the Lisbon Treaty could prove to be a fatal move for member state relations, which are already strained in the current, fraught economic climate.

The case of Equitable Life is long-running. It began in 1999, when the Equitable Life Assurance Society ran into financial difficulty and announced it was going to cut bonuses it paid to for-profit guaranteed annuity rate (GAR) policy holders. The decision was initially held up in court, but then later overturned by the Court of Appeals and the House of Lords. Equitable Life has since staggered on, winding down its operations by selling off assets and refusing to take on any more customers. The result, however, is that some policy holders have still suffered losses on their policies and have been demanding compensation in a sustained campaign.  The Government is deemed to be partially liable for the losses because the legal decisions in the case found that failings by the regulators and government departments played a part in the company’s demise.

The Equitable Life case has thrown up a great deal of heated debate on both sides.  Some have argued that the policy holders deserve compensation and that the proposed £1.5 billion is not enough. In contrast, others have replied that it is not for the tax payer to compensate people who lost money due to poor investment by a company that they freely chose to take out a policy with. The debate centres around the fact that many of the policy holders took out for-profit annuity policies that paid out bonuses based on the performance of the firm’s investments. Policy holders paid a premium so that Equitable Life could place such premiums in an investment fund that would generate high returns, benefitting policy holders and Equitable Life. This type of policy had been described as a conservative investment for people who want a taste of the stock market.  In the case of Equitable Life, the difficulty lies in determining the degree to which the loss incurred on the policies was  a result of governmental and regulatory failures, or due to the inherent risk in the policy.

Aside from this difficult and perhaps indeterminable question, the case has important implications for financial services in general. In particular, it highlights the fact that customers need to be aware of the financial implications of their decisions when purchasing financial products. Customers cannot expect the Government to bail them out if decisions they knowingly took result in losses that were always possible. This is an issue which is not limited to the insurance and assurance industries. In banking, customers demand a good interest rate on their savings, however an interest rate can only be generated for savers if banks are using deposits for productive investment. Banks theoretically use short-term deposits to fund long-term lending, and in doing so distribute credit in a manner that produces benefits for savers and borrowers alike. However, such activity is not without risk; defaults on loans, or mass withdrawals by savers can produce crises in the system.  Such crises are far more prevalent than is perhaps appreciated, and evidence suggests that they affect developed and developing nations alike with the same frequency and severity. Such crises, and in particular the recent global financial crisis, have created calls by some for ‘narrow banking’.  Such ‘narrow’ banks would simply take in deposits and hold them for savers, investing them in ‘safe’ assets such as government bonds. In return, savers would be guaranteed the safety of their deposits but would forego a high interest rate, savers may also have to pay the bank a holding fee for effectively storing their money. In  essence, narrow banking would be attractive to savers who want security but a low rate of interest, other savers who wanted a higher rate could deposit money in banks who would engage in maturity transformation (turning short-term deposits into long-term lending) in order to generate increased returns for customers but with a greater level of risk.

As is probably apparent, this trade-off between security and profitability would occur in other financial services. Life assurance policies could be marketed to different customers depending on their appetite for risk. What is necessary, however, is that customers are aware that the trade-off between security and profitability exists and that they make decisions on financial products based on this knowledge. Currently, some customers seem to expect both high returns and security, and Equitable Life perhaps marketed some of their policies by promising both. This is unacceptable and financial services providers need to be held to account for accurate marketing of their products. The other side of the coin, however, is that customers need to be aware that such a trade-off is inevitable. Once this is firmly recognised, the implications for financial services may be dramatic: deposit insurance for banks could be deemed illegitimate if it allows banks to promise security and a high rate of return on savings; the era of expected interest rate returns on deposits could come to an end; more customers may choose to invest part of their money safely and part of their money on risky ventures such as through peer-to-peer lending systems.

Such developments would be dramatic, and it is far more likely that the current system will continue. However, the nagging implications of the security-profitability trade-off will remain. Perhaps it will take a few more banking or financial crises before customers realise that in financial services there is no such thing as a risk-free, high yield investment.