– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

Pacta sunt servanda. For centuries international law has rested on the Latin principle that agreements must be kept.

Now Britain’s Conservative party, widely expected to win power in a general election next year, is vowing to go back on the country’s signature on European Union treaties. The Tories say voters were denied a promised referendum on the EU’s Lisbon reform treaty. Opponents of closer European integration — the Conservatives and the more radical UK Independence Party (UKIP) — won most of Britain’s seats in the European Parliament elections last month.

If implemented, the Tory policy would set a government under David Cameron on a collision course with its European partners that could harm Britain’s wider political and economic interests, which rely on EU cooperation and leverage.

The Conservatives have already taken a first step away from the centre-right mainstream by quitting the European People’s Party (EPP), the biggest group in the European legislature, and forming a caucus with nationalists and sceptics from Poland, the Czech Republic and other mostly east European countries.

Swedish Prime Minister Fredrik Reinfeldt, a fellow centre-right leader from a moderately Eurosceptic country, lamented that step and told The Guardian newspaper Cameron will need mainstream European partners to achieve his objectives, including on climate change. He is right.

The Tories have said that if they take office before all 27 EU states ratify the Lisbon treaty, they will call a referendum on withdrawing British ratification, which was completed by parliament last year. That would put the government in the unprecedented position of campaigning against a treaty which Britain had already signed and ratified.

It could take Britain back to the isolation of John Major’s last Conservative government. Major stopped cooperating with the EU in 1996 after British beef exports to the continent were banned over mad cow disease.

But there is a chance that disaster may be averted. Cameron must be secretly hoping that Irish voters approve the treaty in a second referendum in October and the Eurosceptic Polish and Czech presidents then sign it, averting an immediate crisis for a new Conservative administration.

If Lisbon is already in effect, the Tories say: “We would not let matters rest there.” This deliberately vague phrase gives Cameron some wiggle room. Conservative leaders have said they would demand a negotiation to return EU powers over social affairs, employment, fisheries and some aspects of justice and home affairs to national level.

That would cause a clash at Cameron’s first EU summit, since it is highly unlikely that any of Britain’s partners will agree to open talks on repatriating major competences from Brussels.

Cameron is deluding himself if he thinks Britain can expect Paris or Berlin to cooperate on financial regulation, policy towards Iran and the Middle East, carbon trading or free trade if it is at loggerheads with all its EU partners on the treaty. The United States has often made clear that Britain’s influence in Washington is directly proportionate to its influence in Europe. Britain’s neutral civil service has been conveying that message privately to the Conservatives.

The danger of a UK-EU confrontation comes at a time when London has a strong interest in shaping European regulation of financial markets to preserve the position of the City of London, which generated some 10 percent of Britain’s gross domestic product before the financial crisis. Britain does some 60 percent of its trade with the EU.

Cameron has modernised his party and shifted it towards the pragmatic centre on a swathe of policies from gay marriage to the environment and public services. But he has used Europe as one area on which he can throw red meat to the party faithful, and protect his right flank against inroads by UKIP. He promised to withdraw from the EPP when he ran for party leader in 2005.

Cameron is seeking to balance shadow Foreign Secretary William Hague, who lost a 2001 election on an anti-European platform, and pro-European cabinet veteran Kenneth Clarke, whom he brought back to the front bench for his economic competence.

Clarke said recently a Tory government would not reopen the Lisbon treaty if the Irish ratified it, and would seek instead a practical arrangement on repatriating employment rights. He was swiftly denounced by Eurosceptics in the party.

True, the governing Labour party has failed in 12 years in office to achieve Tony Blair’s objective of putting Britain at the heart of Europe, and reconciling the British with the EU.

Blair achieved some progress on EU defence cooperation and economic reform. But he never used his political capital to win public backing for taking Britain into the euro, despite his personal support for the objective. His successor, Gordon Brown, no fan of the euro, has warmed to the EU somewhat since the financial crisis struck.

Public opinion, as Blair acknowledged before he resigned, remains as Eurosceptic as ever. Grassroots Conservative members are even more hostile, as are some big Tory donors.

That constrains Cameron’s room for manoeuvre. But if he wants to maximise Britian’s international influence and avoid his first term being blighted by conflict with Europe, he should brush up his Latin and declare “pacta sunt servanda”.
(Editing by David Evans)

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

They’re at it again. No sooner has the financial system begun to stabilise than Big Finance is reverting to its old ways — aggressive hiring, remuneration on steroids, wriggling out of regulation or threatening to decamp to evade tougher supervision.

These are is not the rantings of some crypto-Marxist City-basher, but the considered view of one of Europe’s most thoughtful financial regulators.

In testimony to the House of Commons on Tuesday, FSA chief Lord Adair Turner voiced concern that the industry was failing to learn the lessons from the “biggest financial crisis in the history of market capitalism”. Regulatory exhaustion and the first green shoots of recovery could prompt “some drawing back from the degree of radicalism that we require”, he said, raising the prospect of another such crisis in 10 or 15 years’ time.

Turner cited investment banks’ aggressive hiring of traders among his concerns. Others would add the return of bumper bonuses, the casting off of restraints on top executives’ pay, and threats by banks and hedge funds to desert the City if the EU or the UK enact onerous new rules.

There are plenty of examples. Last week, 10 of the biggest U.S. banks repaid $68 billion in U.S. taxpayers’ bailout funds in a race to extract themselves from government restrictions on pay for senior executives.

Citi, prevented from repaying its $25 billion in TARP funds, is reported to be planning to raise employees’ base salaries by as much as 50 percent this year to offset smaller bonuses.

In Brussels, there is talk that Internal Market Commissioner Charlie McCreevy, the pope of “light touch regulation”, is busy watering down his officials’ proposals to regulate the vast and opaque trade in over-the-counter derivatives.

Where banks and financial market players feel they are not getting their way, some are threatening to vote with their feet.

Hedge fund managers warned the UK Treasury at a recent meeting that some funds could desert London for Switzerland to avoid EU regulation. And even the big banks are dropping veiled hints that they could move elsewhere.

A senior continental European regulator says he sees growing signs that the financial services industry is playing for time in the belief that it will be back to “business as usual” soon provided it can see off the drive for rapid and sweeping regulation.

Regulators are not necessarily helping themselves. Debates over the degree of future intervention, and turf battles between different regulatory bodies, are sapping momentum in the United States, Britain and the EU.

There is legitimate concern that hasty, ill-drafted reforms will merely create a new set of problems in the future. But regulators have a limited opportunity to impose meaningful changes. They must not allow themselves to be blown off course.

Latvia needs more support from the European Union if it is to preserve its currency peg to the euro and avert a chain reaction of devaluations and bankruptcies around the Baltic and beyond.

The Latvian government and central bank are taking extreme measures to maintain a currency board linking the lat with the single European currency, hoping to steer the former Soviet republic into the safe haven of the euro zone in 2012.

But the price in wage and pension cuts for ordinary Latvians has risen to normally intolerable levels, and the prospect of entering the promised land of monetary stability looks ever more remote as the EU sticks to its strict rules on euro entry.

Furthermore, Latvia’s prospects of economic recovery after a staggering 20 percent forecast contraction of output this year look poor with an overvalued currency. The boom years of consumer spending based on cheap euro credit are well and truly over.

To secure the disbursement of 1.2 billion euros in emergency International Monetary Fund and EU loans, parliament in Riga is expected to approve a revised budget on Tuesday cutting pensions by 10 percent and public sector wages by a further 20 percent on top of the 20 percent reduction already implemented.

Devaluing the lat, as emerging market economists recommend, would trigger a wave of bankruptcies because 80 percent of private borrowing is in euros. Euro zone entry would recede since the country would have to restart from scratch in the EU’s Exchange Rate Mechanism (ERM) with higher inflation and a bigger budget deficit. A new currency peg might prove hard to defend, while a floating lat would likely overshoot on the downside.

More seriously for the EU, a Latvian devaluation would cause big losses at Swedish banks, heavily exposed to the Baltic states, and put immediate pressure on the currency pegs of neighbours Estonia and Lithuania, and perhaps of Bulgaria. It could also make the main central European economies such as Poland and the Czech Republic more wary of entering the ERM.

There is some suspicion that Germany, the EU’s central economy, may want to slow down euro zone enlargement to preserve stability for existing members and perpetuate its orthodox influence over European Central Bank decision-making. But the EU has a strategic interest in holding the line in Latvia against currency turmoil.

To achieve this, it needs to give Riga both more generous financial assistance and a clearer perspective for euro zone membership. Yet so far the European Commission and the ECB have seemed semi-detached, at the risk of sending Latvians the message that Europe doesn’t care too much.

The Commission has left the loan negotiations to the IMF. The ECB has lent Sweden 3 billion euros to guard against its banks’ Baltic exposure. ECB President Jean-Claude Trichet disclosed in an aside on June 4 that the ECB had a repurchase agreement with the Latvian central bank, but he did not say if or when it had been used and whether the European institution accepted assets in lats as collateral.

The EU is a community of law. Treaty rules for joining the single currency cannot simply be torn up in a crisis to admit countries in distress. But once the Latvian parliament adopts the drastic budget cuts, the EU should use this week’s summit to send a political signal to markets that it will do what it takes to keep the Baltic states on track for the euro zone.

To underpin this commitment to avert contagion, the ECB should flesh out its intention to support Latvia with liquidity, accepting assets denominated in lats as collateral. The Commission should propose to member states using more of the EU’s emergency balance of payments facility to support Latvia.

Both moves might set risky precedents if other, bigger economies get into trouble. But if the EU wants to prevent a currency meltdown with wider consequences, that is the political price.
(Editing by David Evans)

-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

A wind of change is blowing through Iran, where hardline President Mahmoud Ahmadinejad faces an increasingly tough battle for re-election on Friday.

Whether or not Ahmadinejad fends off reformist Mirhossein Moussavi and two other candidates after a turbulent campaign, Iran is likely to be more open to talks with the United States on a possible "grand bargain" to end 30 years of hostility. Tehran will not give up its nuclear program, whoever wins. But it may be persuaded to stop short of testing or making a bomb.

There is a sense of deja vu about this election.

In 1997, a soft-spoken reformist, Mohammad Khatami, swept to a surprise landslide victory over the establishment candidate, Ali Akbar Nateq-Nouri, on a tide of young people and women clamoring for greater freedom. But after his supporters won control of parliament, the conservative clerical establishment used unelected institutions in Iran's complex power system to neutralize Khatami and block his liberal agenda.

There is, however, a crucial difference this time.

The United States, which had a policy of "dual containment" of Iran and Iraq at the time, never seized the opportunity of Khatami's victory to open a dialogue. Now, U.S. President Barack Obama is waiting with an outstretched hand and has made crucial gestures by accepting the Islamic Republic by its name, offering talks without pre-conditions and admitting Washington's role in ousting nationalist Prime Minister Mohammad Mossadeq in 1953.

Obama's respectful overtures in his Cairo speech calling for a new start with the Muslim world have played into the Iranian campaign.

Moussavi, a graying architect who was prime minister during the Iran-Iraq war in the 1980s, shortly after the 1979 Islamic Revolution, has become the unlikely standard bearer of a mass movement for change. Tehran is teeming nightly with green-clad young men and women demonstrating joyously against the fundamentalist Ahmadinejad. It will be hard to get the genie back into the bottle even if the incumbent wins.

The president is only number two in the hierarchy after Iran's supreme leader, Ayatollah Ali Khamenei, who has the final say on all foreign policy and national security decisions, especially on the nuclear program, and controls the elite Revolutionary Guards.

The president is constrained by other powerful bodies such as the conservative judiciary, the Guardian Council, which can veto legislation and bar election candidates on Islamic grounds, and the Expediency Council, which arbitrates differences among the institutions and is headed by influential ex-President Akbar Hashemi Rafsanjani.

Policymaking involves endless bargaining among multiple stakeholders, but the supreme leader is the ultimate arbiter. For example, he is believed to have vetoed a proposal by Iran's nuclear negotiator in 2006 to accept a temporary freeze on expanding uranium enrichment in order to launch negotiations with major powers represented by the EU's Javier Solana.

While both main candidates say the nuclear program is irreversible, Ahmadinejad has ruled out further negotiations while Moussavi has advocated fresh talks.

Khamenei has endorsed Ahmadinejad's re-election bid, but he is sensitive to public opinion and must be deeply worried by rifts that have opened in the establishment during the campaign.

The fissures were dramatized when Rafsanjani accused Ahmadinejad of lying and demanded that the leader call the president to order for airing corruption allegations against Rafsanjani during a televised debate. The ex-president warned Khamenei there could be an explosive situation after the election if he did not "extinguish the fire".

This does not mean that Iran is on the brink of another revolution. The Islamic system is deeply rooted and the security forces have shown in the past they act swiftly and ruthlessly to crush any challenge.

Khamenei's chief aim is to ensure the Islamic system's survival. Public pressure for change and heightened factional tension should convince him, despite his deep suspicion of the United States, that it is worth exploring a deal with Obama.

Many experts believe that by completing the nuclear fuel cycle under international supervision, but without testing or building a weapon, Iran can deter its enemies and entrench its regional influence without incurring an Israeli or American strike. To spurn Obama's offer and press ahead with an unsupervised nuclear program would invite such intervention and could put the regime's survival at risk.

So whoever wins the vote, it could be "game on" in Tehran.

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

“All political careers end in failure,” the late British Conservative Enoch Powell famously said. And perhaps all political cycles end in scandal.

The outcry in Britain over politicians’ expenses that has claimed ministerial scalps and threatens the survival in office of Prime Minister Gordon Brown reflects more than just anger over taxpayer-funded duck houses.

Parliamentarians have become scapegoats for a deeper malaise combining the twilight of the Labour Party’s long reign, the worst economic slump since the Great Depression and the shaming of the City of London’s financial titans.

This is not to belittle abuses of the public purse by individual lawmakers. But they do not fully explain the nervous breakdown that has gripped Britain in the last month.

Seen from abroad, many Britons seem to feel their country has been politically, financially and morally devalued. It is easier to vent frustration at MPs having their moats or tennis courts cleaned at public expense than to accept that Britain has been on a binge for a decade and faces a long, costly hangover.

Bits are falling off Gordon Brown’s fag-end government in the same way that befell John Major’s hapless last Conservative cabinet in the 1990s and James Callaghan’s washed-up minority Labour administration in the 1970s.

Parties that stay long enough in power get lazy, sleazy and accident-prone. Remember the political funding scandals that tainted the sunset years of Francois Mitterrand and Jacques Chirac in France, and of Helmut Kohl in Germany. Or the “back to basics” sex scandals and bonfire of mad cows that did for Major.

What makes the current mood in Britain particularly toxic is the cocktail of political brown-out and economic distress.

In the last 18 months, house prices have tumbled in a country where home-ownership is central to wealth. The pound has lost a quarter of its value against the euro, as Britons discover when they go abroad. Banks have been nationalised or propped up by the state. Unemployment has surged. Government debt has gone through the roof and taxes are rising.

Britons who own homes, shares and/or private pension savings are worth less and face an enormous bill for the clean-up. Many home-buyers who joined the party late have “negative equity” — they owe more in mortgage than their house is now worth. Consumers are groaning under unsustainable debts.

There is also a dawning awareness that after 25 years of deregulation and fast fortunes, Britain is going to have to do something other than financial capitalism to earn an honest living in the coming years.

Financial Times economic commentator Martin Wolf put it starkly when he wrote that the UK had “a strong comparative advantage in the world’s most irresponsible industry” and needed to diversify away from finance. The bill for rescuing banks will be comparable to the fiscal costs of a big war, he said.

Such introspection does not come easily to a proud old nation fond of lecturing foreigners, especially continental Europeans, on how to run their economies.

The French, Germans and Italians can be forgiven a smirk of “schadenfreude” (pleasure at others’ misfortune) after years of being hectored — not least by Gordon Brown — about economic reform, deregulating financial services and labour markets, privatising pensions and modernising the welfare state. But they should not feel too smug, since most are facing an even deeper recession than Britain this year.

Now that politicians have replaced bankers as public hate figures, it is safer for British party leaders to outbid each other with proposals for reforming parliament than to tell the public the ugly truth. Whoever wins the next election, most Britons will earn less, pay more tax, retire later on a smaller pension and enjoy less public spending on schools, hospitals and transport.

The bankers will cost Britons far more than the politicians. It will make the cost of removing dry rot and changing chandeliers in MPs’ second homes look like small change.
(editing by David Evans)

– Paul Taylor is a Reuters columnist. The opinions expressed are his own. –

Unlike the 1930s, there are no hunger marches or tent cities of the homeless and jobless in Europe’s biggest economic slump since the Great Depression.

Welfare states built after World War Two, and labour market regulation in many West European countries, have cushioned workers and their families so far from the full force of the collapse of banks, the credit squeeze and a deep recession.

“People who were criticising the European welfare state just a few months ago are now praising it as a shock absorber in the crisis,” said Jacques Delors, who championed pan-European social legislation as European Commission president from 1985 to 1994.

In particular, state-subsidised short-time working has kept hundreds of thousands of Germans, French, Dutch and Belgians in jobs after their employers’ order books dried up.

This system enables firms to retain experienced staff while reducing their wage bills for a limited period as the government contributes towards pay. As a result, consumer spending is holding up better than expected in those countries.

Unless extended, those schemes will mostly run out next year, when unemployment is forecast to soar to 26 million in the European Union, some 10.9 percent of the workforce, from a 44-month high of 20 million or 8.3 percent in March 2009.

European governments hope the impact of economic stimulus programmes and the return of at least timid growth will click in at that stage, saving many households from poverty and averting a potential double-dip recession due to depressed demand.

BARRIER OR BOON?

Economic liberalisers have long argued that continental western Europe’s rigid labour laws are a barrier to growth and a source of inefficiency. Now that U.S. unemployment has overtaken the EU level for the first time since the early 1980s, they contend that flexible labour markets will enable America to recover faster than Europe.

But the crisis is prompting a rethink. The countries that have done best to soften the blow are those with a tradition of social partnership among employers, trade unions and government, such as the Netherlands, Germany and the Nordic states.

Political support for further liberalisation has evaporated as EU governments try to shield voters from the storm.

In fact, economist Giuseppe Bertola of Turin University says flexibility-oriented reforms enacted over the last decade, which boosted the employment rate, contributed to unemployment rising more rapidly in Europe in this crisis than in past downturns.

Young people, migrants, temporary agency workers and staff on fixed-term contracts have been worst hit by redundancies. In Spain, where the collapse of a housing boom triggered mass layoffs of unprotected workers, the unemployment rate reached a staggering 17.4 percent in March — the highest in the EU.

In many European countries, workers who do hold on to their jobs face pay cuts, later retirement, a smaller pension, or all of the above. Mostly this is not on the scale of the sacrifices accepted by unionised U.S. auto workers to try to save their jobs at Detroit’s big three car makers.

“A lot of workers are under pressure, apart from reduced working time, to take wage freezes or wage cuts of one sort or another,” said John Monks, general secretary of the European Trade Union Confederation (ETUC), an umbrella group for organised labour in the 27-nation EU.

“It’s take it or leave it for many workers for the moment. That’s the mentality,” he said in an interview.

Nor is it confined to the private sector. Governments in the worst affected countries are forcing public employees to accept sharply lower pay or higher pension contributions.

Ireland, stricken by a housing crash and a banking meltdown, has imposed a 7 percent pension levy on public employees.

Latvia, gripped by a balance of payments crisis, cut public workers’ pay by 10 percent last year and has to slash another 20 percent this year as a condition for an International Monetary Fund loan. Hungary, also under IMF orders, has cut pensions and social benefits and axed public sector 13th month wage payments.

Despite Delors’ efforts, employment and social policy is set at national and not EU level, largely due to opposition from Britain, which introduced easier hire-and-fire rules and tougher strike laws in the 1980s.

As a result, protection for workers is uneven. Data collated by the ETUC shows workers have been hit hardest hit in eastern Europe, where job protection was dismantled after the fall of communism and the social safety net is thinner than in the West.

But after two decades of deregulation and rising inequality in Europe, maybe the pendulum is starting to swing back.

(editing by David Evans)

-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

India's voters have just given stalled world trade talks their biggest potential boost since the financial crisis spurred fears of rising protectionism.

By handing the governing Congress party a decisive victory, unshackled from the Communist party, Indians have created a chance to break a deadlock in negotiations on global commerce that foundered last year on a U.S.-Indian spat over farm trade.

Trade Minister Kamal Nath, whose dogged defence of India's small farmers helped sink the talks, told Reuters on Sunday: "We believe that it is even more important to conclude the Doha round as one of the measures to extricate the global economic from going into a tailspin, and India is willing to play a leadership role in this."

The unexpectedly clear Indian vote coincides with signs that U.S. President Barack Obama's administration, after striking a protectionist tone to appease blue-collar voters, is warming to completing a World Trade Organisation accord. In recent speeches Obama has rightly identified trade as key to pulling the world out of recession.

U.S. Trade Representative Ron Kirk made positive noises on a visit to Geneva last week. He revealed nothing new but said Washington was committed to seeing the trade round launched in Doha in 2001 succeed and he did not want talks to start from scratch or throw away work already done.

He restated U.S. demands that major emerging economies -- China, India, Brazil and South Africa -- must open their markets more to American exports to achieve a deal. Without tangible benefits for business, it would be hard for Obama to push a WTO agreement through a trade-sceptical Democratic Senate.

The prospect of holding a decisive WTO ministerial before the summer break still seems remote. Before it is worth convening ministers, the United States, India and probably China must thrash out the complex dispute over ways to shield developing nations from a surge in agricultural imports.

This and the equally sensitive issue of cotton, where U.S. subsidies are a big obstacle, were the last two points to be resolved when last year's WTO talks collapsed. Eighteen other areas had been provisionally settled.

With hindsight, it is extraordinary that the pro-trade Bush administration clinched an agreement on nuclear cooperation with India last year without linking it to a Doha accord. Obama has not set a date for concluding a U.S. trade policy review, but Washington should not squander the opportunity for an early understanding with a more market-friendly Indian government.

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

Opinion polls predict a record low turnout in next month’s EU-wide European Parliament elections. The Strasbourg-based assembly was once regarded as a toothless talking shop, but that has long ceased to be true. Indeed there are many reasons for Europeans to cast a vote.

In doing so they can shape European policies on the financial and economic crisis and the environment, and help determine who runs the executive European Commission.

By abstaining, however, they may let in extremists and make it less likely that the world’s only directly elected legislature will exercise effectively its role of democratic control over EU officialdom and legislation.

That could widen a democratic deficit that is one of the concerns about the direction of the European Union.

European elections are often seen as a cost-free chance to cast a protest vote against national governments or boost single issue parties that fare poorly in national polls. But more is at stake.
Here are 10 other reasons to vote on June 4 or 7 (depending on where you live) for the world’s only directly elected transnational parliament:

1) The crisis. For the first time since direct elections to the European Parliament began in 1979, a single issue dominates all 27 member states: the financial and economic crisis. EU lawmakers share legislative power with member governments on crucial issues such as financial and business regulation.

Unlike national legislatures, the European Parliament is not divided along government and opposition lines, and it cannot initiate laws on its own. But it can amend or block proposals, which gives it the ability to influence the outcome of European legislation. The next parliament is sure to tackle proposals relating to the crisis. The left-right balance of the chamber will influence, for instance, how far the EU regulates hedge funds, private equity, derivatives or even executive pay.

2) Barroso’s future. Low-profile Portuguese conservative Jose Manuel Barroso looks set for a second term as president of the executive European Commission, which proposes all EU legislation and ensures that those laws are enforced. He is backed by the conservative European People’s Party, the largest bloc in the outgoing parliament, and some socialist governments.

Some believe Barroso has been too pliant to big member state governments, turning a blind eye to anti-competitive measures and state bail-outs to secure support for his re-election. Many see him as a weak leader of a weakened Commission.

However, Barroso’s reappointment does not solely depend on the will of EU leaders. He must be approved by parliament, which holds hearings with individual nominees for policy portfolios and must vote to endorse the full Commission. A centre-left majority could block Barroso. Parliament has never rejected a Commission president before, but the threat of censure forced Jacques Santer’s Commission to resign in 1999, and Barroso had to modify his line-up before winning approval in 2004. If the socialist group emerged as the biggest bloc, it could demand that a centre-left candidate be chosen instead.

3) Radicals. There is a danger that the parliament will become a dumping ground for single issue groups and fringe politicians. Radical leftists and rightists, such France’s New Anticapitalist Party, the anti-immigrant British National Party or Belgium’s far-right Vlaams Belang, are hoping to achieve a breakthrough, helped by mainstream voters’ apathy. A low turnout would also benefit highly mobilised Eurosceptics.

4) The outgoing parliament played a key role in shaping environmental legislation to tackle the threat of climate change and promote clean energy. The make-up of the next parliament will help determine how far and how fast Europe moves towards a low-carbon economy.

5) Enlargement. Conservative French President Nicolas Sarkozy and German Chancellor Angela Merkel have highlighted their joint opposition to Turkey’s EU membership bid. The EU legislature has no direct say in the negotiations but its reports on candidate countries influence the Commission and the applicants, and it has to assent to accession treaties.

6) The Lisbon Treaty. Irish voters will seal the fate of a major EU reform treaty in a second referendum likely in October after they rejected it last year. The text aims to give the enlarged bloc stronger leadership, a more effective foreign policy and a fairer decision-making system. A big vote for treaty opponents Libertas and Sinn Fein in the European Parliament election would dim the prospects of the reforms entering into force as planned in January, or at all.

7) Power. The Lisbon Treaty would extend the assembly’s power of co-decision with member states to almost all areas of EU legislation. Already, experts reckon more than half of national legislation is the transposition of laws decided at European level. Voters who ignore the European elections in the belief that the real power lies with their national parliaments are wrong.

Legitimacy. Critics often accuse EU institutions of being undemocratic, unelected or lacking legitimacy. The European Parliament is the main institution that exercises a degree of democratic control and scrutiny over the executive.

9) Idealism. The European Union is an unique experiment in transnational co-operation between former foes and remains a beacon for many countries beyond the union’s borders. For those who see a more united, integrated Europe as a better future, a big turnout is a must. For those who fear a European superstate, there are plenty of parties vying to curb Brussels’ powers.

10) Sleaze. The European Parliament has made strides in cleaning up abuses of travel and attendance allowances, unequal pay for members and nepotism that earned it a reputation as a gravy train, even if more remains to be done. As Britain’s parliamentary expenses scandal shows, sleaze is by no means an exclusive preserve of Strasbourg. If sleaze was an argument for staying home, many of Europe’s national chambers would be empty.

(editing by David Evans)

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

A revisionist theory on the causes of the global financial crisis blames surplus countries like China, Japan and Germany as much as highly-leveraged, deregulated finance in the United States and Britain.

Making Germany a scapegoat may be tempting, especially in Britain, where memories of sterling’s humiliating exit from the European Exchange Rate Mechanism in 1992 still rankle, but it is unfair and dishonest.

The revisionists contend that the meltdown was due not just to the Americans and British who borrowed, traded and lived beyond their means but also to the Chinese, Japanese and Germans who sold them the goods and lent them the money.

It follows that responsibility for digging the global economy out of its current hole lies disproportionately with the surplus countries, which must spend their reserves or go deeper into debt to boost demand and give the world a fiscal stimulus.

Seen from Berlin, this interpretation of global imbalances looks like a brazen attempt to punish German fiscal and economic virtue and divert attention from the irresponsibility of “Anglo-Saxon” financial capitalism.

Finance Minister Peer Steinbrueck has a 10-second summary of the origins of the crisis.

“My short formula is that a policy of cheap money in the USA afer Sept. 11 (2001), plus a paradigm of deregulation, plus the race for yields combined with illusions about risk, led to excesses and hubris which today have seriously shaken the world financial architecture,” he told visiting journalists last week.

Germany was slower than the United States, Britain or France to recognise how hard the crisis would hit its economy. It faces a deeper recession than any major economy except Japan, with a contraction of 6 percent of gross domestic product this year.

After early hesitation, it has enacted two stimulus packages which the government says are worth 81 billion euros ($107.6 billion) over two years. Combined with automatic extra welfare spending and lower tax revenues, it says the measures amount to about 4 percent of GDP. Ministers note that half of the German premium for scrapping old cars has been spent on imports, benefiting European neighbours and Asian exporters.

Steinbrueck acknowledged that dependency on exports, which account for 40 percent of GDP, made Germany more vulnerable to the collapse of global demand. The world export champion had a trade surplus of 178.2 billion euros in 2008.

Yet government leaders are convinced Germany will be able to export its way out of crisis as key markets recover, provided it keeps labour costs and public deficits under control. They see no alternative to the export-driven manufacturing economy. If that means cutting wages and working longer to stay competitive, so be it.

Two-thirds of Berlin’s exports go to other EU countries, mostly to the other 15 members of the euro zone. Since the EU is a customs union, its trade balance should arguably be considered as a bloc. Seen in this light, it had a modest deficit in 2008.

While critics of China’s export-led growth accuse Beijing of keeping the yuan artificially low, no one can accuse Germany of manipulating its currency. On the contrary, the euro has been strong on world markets, and the Germans entered the single currency in 1999 at a rate that was initially hard on them.

Germany imposed sacrifices on its taxpayers to balance its budget in the years before the financial turmoil began. Martin Weale, director of Britain’s National Institute of Economic and Social Research, argues German saving is no more than is needed to make reasonable provision for its ageing population, while Britain and the United States “decided not to make adequate provision for their collective old age”.

The OECD forecasts that the impact of the crisis will push the German deficit to 4.5 percent of GDP this year and 6.8 percent in 2010. So Berlin is understandably loath to sign bigger cheques to underwrite countries that were less prudent in the boom years, whether in the Europe or beyond.
Nevertheless, Germany has broken a taboo by making clear, without going into details, that it will help, if necessary and with conditions, to bail out any EU country that faced default.

So don’t blame the Germans for making machines, cars and chemicals that other people want to buy. And don’t bash them for living within their means and not having a property bubble.

Perhaps the lesson of the financial crisis is that we all need to become a bit more German.

(Editing by David Evans)

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

Germany is becalmed by a political and economic phoney war five months before this year’s most important European general election. But a lack of real economic debate now risks prolonging the political stalemate and delaying much needed reforms.

The export-dependent economy is shrinking faster than any other major economy except fellow exporter Japan. Output is expected to contract by an eye-watering 6 percent this year. German banks turn out to have bought as many toxic assets as their British or American counterparts, proportionate to their balance sheets.

Yet the grand coalition government has just reaffirmed, with broad political backing, that there will be no new stimulus package. And there is little public debate about whether the government has the right economic strategy.

When the Social Democratic challenger for the country’s figurehead presidency, Gesine Schwan, warned last week of the risk of social unrest, her comments were widely dismissed.

Schwan said the mood could turn explosive later this year when hundreds of thousands of people surviving on short-time work thanks to Germany’s social safety net become unemployed.

But opinion polls suggest most of the 82 million Germans are resigned to seeing their income fall this year due to the global economic crisis, and two-thirds do not believe that government stimulus packages adopted so far will be effective.

Unlike France, which faces a milder recession, there are no mass protests or wildcat kidnappings of bosses in fury at layoffs or factory closures. German trade unions sit in boardrooms and share responsibility for the fate of industry. Labour representatives have accepted pay cuts or longer working hours to save jobs and firms.

“More than half the population expect they will have to scale back their standard of living, especially in the east and among the poor,” says Manfred Guellner, head of the Forsa polling institute. “There is no dramatic impact on the political mood. The crisis is seen as the fault of distant, unclear forces and the government is not blamed.”

Conservative Chancellor Angela Merkel is still sharing power quite harmoniously with her Social Democratic rival in the Sept. 27 election, Foreign Minister Frank-Walter Steinmeier, and with Social Democratic Finance Minister Peer Steinbrueck.

Politicians from both governing parties trade attacks on weekends but work together pragmatically during the week. They are putting finishing touches to a scheme to create “bad banks” to get toxic assets off German banks’ balance sheets and allow them to be unwound over several years. And they are jointly looking for a buyer for trouble car maker Opel, the German unit of stricken U.S. giant General Motors, to avert mass job losses with knock-on effects in the supply chain.

The centre-right Christian Democrats (CDU) and centre-left Social Democrats (SPD) appear to feel voters would not reward adversarial politics in the midst of such an economic crisis, or at least not until the final weeks of campaigning.

To the outside world, this may look like complacency in the face of the worst crisis since the creation of the Federal Republic in 1949 but to most Germans it looks like common sense.

The CDU hopes to govern next time in coalition with the pro-market liberal Free Democrats (FDP), and the SPD would prefer an alliance with the environmentalist Greens. The former seems more plausible than the latter. But both major parties are aware the electoral arithmetic may force them kicking and screaming back into each others’ arms.

That would be a dreadful outcome, condemning Germany to another four years of stifling consensus and little reform. The grand coalition enacted a flawed health reform, restored public finances to balance before the crisis struck but dodged other structural problems in education, ageing and the tax system.

The opposition FDP has gained most from the economic crisis so far in voting intentions. The smallest mainstream party, which has sometimes struggled to jump the 5 percent hurdle for seats in parliament, now has around 14 percent support. That score reflects disenchanted middle class and business voters who have deserted the CDU because Merkel is seen as too conciliatory to the SPD and loath to cut taxes.

By contrast, the Left Party, a mix of former east German communists and disenchanted former Social Democrats, has lost ground in the polls. Support has fallen below 10 percent because it is not perceived as having credible policies on the crisis.

The campaign for June 7 European Parliament elections, a dry run for September, is barely visible. Surveys show most voters are not even aware the EU poll is taking place, and turnout could be below the record low of 43 percent in 2004.

The battle of Berlin will only begin in earnest once Germans return from their summer break in August. Despite all denials, more economic stimulus measures should not be ruled out at that stage.
(editing by David Evans)