Italy violated Germany’s immunity in allowing Nazi compensation claims - UN court

The United Nations International Court of Justice (ICJ) ruled today that Italy has violated its obligation to respect Germany’s immunity under international law by allowing civil claims seeking reparations for Nazi war crimes to be brought against it in Italian courts.

Another exposure which could sink Greek banks?

An interesting but niche issue has come to our attention recently in relation to the on-going troubles in Greece. The ‘Baltic Dry Index’ (a measure of global shipping demand/prices) has fallen for a month straight to record lows. When this index falls it suggests that there is trouble in the shipping industry, raising questions over the stability of shipping firms. As it turns out many of these firms have secured their financing from Greek and other European banks – meaning if they start defaulting on their loans these banks could take losses. This raise further questions over the bank recapitalisation plans and whether such contingencies have been thought of in the second Greek bailout (which sets aside €20bn for Greek banks).

As a recent NYT article noted:

“Basil Karatzas, the chief executive of Karatzas Marine Advisors, a ship brokerage and finance advisory firm in Manhattan, estimated that European banks hold about $500 billion in shipping loans on their books and face nearly $100 billion in losses to restructure them.”

Furthermore, not only does global demand seem to be faltering (although the index may not be the best judge of this), there is also a massive over supply of ships – due to orders put in during the boom period in 2008 which are only just being completed now (the equivalent of 22.7% of the cargo shipping fleet is due be produced this year alone). This suggest a combination of supply and demand issues which means this could become a lasting problem and will not just be tackled with a boost in growth in Asia.

Data on exposure to shipping loans is scarce, but in 2010 Greek banks had a portfolio of $16bn just on Greek owned shipping. Other European banks had about a $50bn exposure. Of this the 4 largest UK banks had $16bn and 10 German banks had $18bn.

The volatility of the index should be kept in mind but it’s an interesting fresh angle on the problems in Europe. If things keep going badly in the shipping sector, which it seems almost certain they will, some banks could face an increase in the level of non-performing loans on their books. Given that capital buffers already seem to be spread pretty thin this could cause problems. Of course this could take time to have an impact, if it does at all, but worth keeping an eye on.

UN refugee agency concerned over treatment of asylum-seekers in Ukraine

The United Nations refugee agency has voiced concern over the plight of asylum-seekers, including some minors, held in two detention centres in Ukraine, where more than 100 people are reportedly challenging their detention or have complained that they were denied the right to apply for asylum.

Calm down dear: Cameron’s EU veto isn’t dead yet

Over on the Telegraph blog, we argue:

MPs and MEPs – from different parties and for different reasons – have lined up over recent days to explain how David Cameron lost the plot over his EU veto, as it has become clear that the EU institutions are now involved, albeit on the margins, of the fiscal treaty that 25 out of 27 EU countries signed up to earlier in the week.

As we’ve noted before, the veto that Cameron pulled at the December EU summit was never the best of the possible outcomes. However, the veto hasn’t left Cameron empty-handed. In fact, contrary to popular belief, if played cleverly, the veto could remain a source of UK leverage in Europe for years to come. Here’s why.

In the treaty that was signed off, the role of the Commission and the ECJ is very limited. All the ECJ can do is impose a hypothetical fine on countries that fail to transpose spending caps into national law – but not prosecute states that break these spending limits. This makes virtually no practical difference to the UK.

However, as we have pointed out before, it still sets a worrying precedent, which the UK needs to be all over like a cheap suit. But the most effective way to disarm this potential threat is not to seek to blow up the dam by launching an all-in legal challenge.

Instead, Cameron should keep his cards close to his chest. The threat of legal action is Cameron’s greatest asset at the moment. Any legal challenge would be a messy, lengthy affair, involving a lot of uncertainty. The Germans in particular – ever conscious of their Constitutional Court – know that the current arrangement involving an ad hoc euro treaty is legally dubious. As long as the Germans feel uncomfortable, Cameron maintains his leverage.

Given that the role of the ECJ is so limited, by holding the option of a legal challenge in reserve, Cameron can tackle the use of the EU institutions head on if it ever genuinely threatened the UK’s interests: ie if the ECJ or the Commission started to dabble in single market issues under the auspices of a euro treaty.

In other words, Cameron can credibly tell Merkel: we want you to get on with the business of saving the euro (whether the current policies will actually work is a different matter), but stick to the rules, or it’s game over. Just as Merkel is seeking this treaty to assuage domestic political opinion, Cameron can point to his MPs. They will not allow him to stand by should he fail to launch a fully fledged legal challenge if the circumstances require it.

In contrast, playing all his cards now would be far riskier. Since the role of the ECJ is minimal, it’s not certain that a legal challenge would be successful at the moment (see here for our thoughts on this). If he lost a court case over an issue of little practical importance to the UK, he would lose his leverage and set an even more worrying precedent.

And remember, it’s still the explicit aim of the fiscal pact members to incorporate the treaty into EU law within five years – over which the UK retains its veto. This sets the UK up for another round of negotiations where it will be free to make demands of its own.

At the end of the day, there’s no escaping that Britain, and most other euro outs, need a different set of arrangements under EU law than euro members – on an increasing number of issues. If the EU, for all practical circumstances, becomes equivalent to the eurozone, then the UK is out, and life won’t be easy for the Swedes of the world either. For all the posturing, all EU countries will want to avoid this.

In any case, the fiscal pact is big on talk but small on action – non-euro members are invited to one eurozone summit a year if the fiscal pact is being discussed at that summit. In itself the fiscal pact won’t change the world. Sorry everyone – there’s not that much to see here.

Better then for Cameron to save his ammunition – there are many, many EU negotiations to come.

Sarkozy: a Tobin Tax is an “absurdity”

In a debate with Francois Hollande and François Bayrou, a youthful Nicolas Sarkozy calls the Tobin Tax an “absurdity”. You heard that right. Sarkozy - who recently announced his plan to introduce a Financial Transaction Tax(FTT) by the 1st of August “with or without the others” - warns in a 1999 TV debate of the dangers of excessive financial regulation.

In particular, he argues:

“If we tax, none of the other countries will do so,” adding that “penalising wealth creation in our country will only serve to benefit wealth creation elsewhere, unemployment for us and jobs for the others”.

He’s clearly changed his mind.

UN Yugoslav tribunal accepts plea agreement in contempt trial

The United Nations war crimes tribunal for the Balkan conflicts of the 1990s today accepted the plea agreement filed in the contempt of court trial of Jelena Rašic, who was accused of procuring false statements from witnesses in exchange for money.

Mediterranean the deadliest sea for refugees and migrants, says UN agency

The Mediterranean Sea has become the deadliest stretch of water in the world for migrants and refugees, the United Nations High Commissioner for Refugees (UNHCR) reported today.

Merkel takes the fight directly to Hollande

The politics of the eurozone crisis took several new twists and turns over the weekend, including the news that Angela Merkel intends to step in and “actively” support Nicolas Sarkozy’s Presidential re-election campaign (although he is yet to formally announce his candidature) against the Socialist candidate Francois Hollande. It is understood this involvement could take the form of joint campaign appearances.

Moreover, Hermann Gröhe, a senior member of Merkel’s CDU party did not mince his words when he commented on the election, claiming that:

“[Sarkozy] is the right man in the Elysée now and in the future…We need a strong France with a strong president in charge…The Socialists are stuck in their dreams of the past. All they are doing is bringing out dusty concepts and wealth distribution fantasies from their moth-ridden policy cupboard.”

In recent months, Hollande’s candidacy has become the focal point of opposition to Merkel’s crisis management strategy and the ethos that underpins it - symbolised by the treaty on closer fiscal integration and discipline. Hollande has promised to focus less on austerity and more on promoting jobs and growth, both in France and the eurozone; he has pledged, if elected, to re-negotiate the treaty so that it focuses less on ’stability’ and more on ’solidarity’. Although Sarkozy signed up to the treaty at yesterday’s summit, the French parliament will not have an opportunity to ratify it before the presidential elections.

The stakes are therefore high for Merkel who has a lot political capital – both domestically and internationally - riding on the successful transposition of the treaty into domestic law throughout the eurozone (even if it is debatable as to whether it will address the root causes of the crisis). Given that polls consistently give Hollande a clear lead, Merkel has decided that in order to protect the treaty in its current state, she will have to intervene. While it may be unpopular with her own MPs who consider it to have been watered down too much, she knows this is nothing compared to how it would be affected by a likely Hollande victory.

The big question is whether Merkel’s endorsement will be to Sarkozy’s benefit or detriment; it certainly jars with his recent media strategy of playing the humble do-gooder trying to make the best out of a bad situation. It is likewise no secret that due to Merkel’s (perceived) lack of willingness to compromise on issues such as eurobonds or the ECB, both she and Germany as a whole have become the pantomime villains of the crisis. There is also potentially the risk of a backlash against Sarkozy if the French public feels that Merkel has crossed the line and is actively trying to meddle in their domestic political arrangements.

Ultimately however, both Merkel and Sarkozy will hope that as suggested in the FT’s editorial this weekend, the French public will vote with their hearts in the first round, and with their heads in the second. While they cannot win in the popularity stakes, they will count on the fact that the public will at least recognise that they have taken tough but necessary action to tackle the eurozone crisis, and that for all his rhetoric, Hollande lacks a credible plan for making the French economy competitive. There are some grounds for optimism - a poll earlier this month found that 82% of respondents had a positive view of Germany, in particular regarding its leadership and work ethic. Finally, it is worth remembering Merkel is not renowned as an astute political operator for nothing; evidently she has decided Sarkozy’s re-election is not a lost cause.

Merkel’s intervention should add further spice to what is shaping up to be a fascinating election campaign - as ever we will keep you updated on the ins and outs…

Germany still doesn’t understand Greece

Despite being locked together in economic turmoil for almost two years, the reports which emerged over this weekend further suggest that Germany still does not understand the depth of some of the problems facing Greece (and that they cannot be tackled by a one dimensional policy).

We are of course referring to the leaked German proposal calling for Greece to cede budget sovereignty to the EU. Naturally, this is an impossible claim and was roundly rejected by Greece and the Commission, while German officials have spent the weekend trying to douse the flames behind the scenes.

It is not clear whether or not this was ever a serious proposal on the part of the German government, although stern talk from the German Finance Minister Wolfgang Schaeuble and the Economy Minister Philipp Roesler suggested that the sentiment behind the proposal was real enough. We will not dwell on the obvious and well documented political and democratic questions which this raises – it is clearly a step too far which could and would not ever be accepted by the EU in the current framework. There has been talk of a Eurozone finance ministry at some point in the future, but this stands apart from asking a single country to undemocratically cede control of taxation and spending to the EU- meaning the proposal was destined to sink as soon as it hit the water.

This substantial issue aside, the sentiment behind the proposal reveals a continuing misunderstanding of the Greek problem from the German government. Despite all the talk of “growth and jobs” in recent days, it is clear the emphasis is on austerity above all else. It also raises serious questions about Germany’s belief that Greek debt could ever be sustainable under Greek control – which should be a concern for German citizens since they are about to finance the largest share of another €130bn bailout.

Fundamentally though, as a recent OECD report noted, the problems within Greece run a lot deeper than just the ability to agree on the ‘right’ policies. For all its shortcomings, the Greece has instituted a multitude of deficit and debt reduction plans over the past year. However, the real issue comes with the implementation of these reforms, as the OECD comments:

“Ministries take decisions but these are often not reflected in concrete results. A succession of reforms launched in recent years (including reforms of the administration) did not bring the expected results, due to poor implementation.”

So, the problems do not necessarily lie with the politicians or the top level civil servants (or at least they do not stop there) meaning that shifting top level control to the EU would make very little practical difference.

These problems cannot be tackled overnight or by simply imposing more austerity. Germany has continually refused or failed to understand the nature of the problems facing Greece despite much of the public posturing. With the outcome of the Greek restructuring negotiations still far from clear, a change in tact is needed - although it could well already be too late.

Fifth time lucky?

Thanks to La Stampa Brussels correspondent Marco Zatterin’s blog, we’ve just got hold of the fifth (maybe last) draft of the new ‘fiscal treaty’ on budgetary discipline, due to be discussed at today’s meeting of EU leaders in Brussels.

As we are at the ‘finishing touches’ stage, changes from the previous version are getting more subtle and harder to spot. However, there are still a few interesting changes, including:

• In Article 3(1b), the so-called ‘balanced budget rule’ seems to have been further watered down. The wording “with the annual structural deficit not exceeding 0.5% of the GDP at market prices” has been replaced by “with a lower limit of a structural deficit of 0.5% of the GDP at market prices.” We wonder how the markets will react: There’s quite a substantial difference between imposing a maximum cap and a blander lower limit. We interpret this as meaning that the lowest the limit will be set for any country will be 0.5% (where as previously it could have been even stricter). Since the article still refers the the Stability and Growth pact we can infer that the new balanced budget targets will probably fall somewhere between 0.5% of GDP and 3% GDP (the deficit limit in the treaties);

• Non-euro countries will no longer need to implement at least part of the budgetary rules set out for eurozone countries in order to qualify for a place by the table at future summits of eurozone leaders. However, invites will still be allowed only for meetings which specifically focus on the implementation of the ‘fiscal treaty’. In light of the recent agreement with the opposition Social Democrats, this is probably enough to have the Swedish government sign up. Poland’s stance remains more uncertain, as the Polish government is clearly seeking greater participation;

• In a bid to win Denmark’s support, the latest draft stipulates that fines imposed by the ECJ will be paid into the eurozone’s permanent bailout fund, the ESM, only if they are imposed on eurozone countries. Otherwise, the money will be channeled into the EU’s general budget;

• Regarding the fines, there’s an aspect of the ‘fiscal treaty’ that is worth flagging up. Under the agreement, the ECJ will impose fines of 0.1% of GDP on countries that failed to comply with its previous ruling (on whether the countries have correctly incorporated the balanced budget rules into their national laws). This is a power that the ECJ seems to have under Article 260 of the Lisbon Treaty. The power to impose fines in such circumstances is therefore not a new power (and the ECJ still does not have the power to punish countries for missing their deficit targets). However, questions still remain over the eligibility of the ECJ to rule on whether the balanced budget rules have been correctly incorporated in the first place;

• Countries who want to join the agreement at a later stage will not have to wait for other Contracting Parties to “approve the application by common agreement.” Under the latest draft, accession will become effective as soon as a country deposits the necessary instruments of accession - i.e. when it decides to ratify the ‘fiscal treaty’.

Most changes aimed at convincing the remaining holdouts to sign up while keeping the tone of the treaty the same, but the ‘lower limit’ change does suggest a further watering down of the rules.