Europe sweetens the pill for Spain

Spanish bonds will get cheaper, but the EU wants control of the banks in return

At an extremely late hour in the day, the European summit appears to have agreed to modest, but important, changes in the structure of European bailouts.

The most important alteration for many is the fact that the funds provided to Spain by the European Stability Mechanism (annouced on the 9th and formally requested on the 25th) are to be provided without seniority. Previously, loans from the ESM are given subject to a proviso – enforced through convention rather than legality – that they are to be repaid before any other loans.

This is problematic for countries in trouble, since it makes it a lot harder for them to receive other funds. If you are a private investor, the last country you want to lend to is one which, if it goes bust, has to pay off a €100bn+ loan to the European Central Bank before you see a penny. As a result, when Spain first announced it was planning to seek a bailout, the first thing to happen was a spike, of around 5 per cent, in its bond yields (the cost of borrowing).

It now appears that seniority is to be "renounced" for the ESM's loan to Spain. It may still have implicit seniority – in any bankruptcy, the debtor has some choice of the order in which they pay off creditors of equal status, and Spain is unlikely to want to piss off the EU too much – but private lenders will be able to feel slightly more comfortable in giving money to the country. The question for the ESM now (and there are always further questions) is whether this is a one-off exemption, or new policy. And if it is new policy, can it be applied retroactively? Spain is, after all, not the only country with a bailout from the EU.

The summit also agreed to allow funds from the bailout to be injected directly into Spain's banks. The statement from the summit affirms that "it is imperative to break the vicious circle between banks and sovereigns," and that the ESM should be allowed to recapitalise banks. Previously, the money would have gone directly into a Spanish government vehicle, which would have paid out to the banks; the ESM is now capable of skipping that step, which should save everyone some time and money.

More important than what the EU has allowed, though, are the concessions it has demanded. Instead of there being 17 different banking supervisors throughout the eurozone, there will now be just one, a major step towards the creation of a pan-European banking union. The big change is that Eurozone authorities –  for which, read "Germany" – will now be able to force struggling banks throughout the Eurozone to recapitalise, rather than waiting for the individual sovereigns to decide. 

Angela Merkel is happy. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty Images
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The future of policing is still at risk even after George Osborne's U-Turn

The police have avoided the worst, but crime is changing and they cannot stand still. 

We will have to wait for the unofficial briefings and the ministerial memoirs to understand what role the tragic events in Paris had on the Chancellor’s decision to sustain the police budget in cash terms and increase it overall by the end of the parliament.  Higher projected tax revenues gave the Chancellor a surprising degree of fiscal flexibility, but the atrocities in Paris certainly pushed questions of policing and security to the top of the political agenda. For a police service expecting anything from a 20 to a 30 per cent cut in funding, fears reinforced by the apparent hard line the Chancellor took over the weekend, this reprieve is an almighty relief.  

So, what was announced?  The overall police budget will be protected in real terms (£900 million more in cash terms) up to 2019/20 with the following important caveats.  First, central government grant to forces will be reduced in cash terms by 2019/20, but forces will be able to bid into a new transformation fund designed to finance moves such as greater collaboration between forces.  In other words there is a cash frozen budget (given important assumptions about council tax) eaten away by inflation and therefore requiring further efficiencies and service redesign.

Second, the flat cash budget for forces assumes increases in the police element of the council tax. Here, there is an interesting new flexibility for Police and Crime Commissioners.  One interpretation is that instead of precept increases being capped at 2%, they will be capped at £12 million, although we need further detail to be certain.  This may mean that forces which currently raise relatively small cash amounts from their precept will be able to raise considerably more if Police and Crime Commissioners have the courage to put up taxes.  

With those caveats, however, this is clearly a much better deal for policing than most commentators (myself included) predicted.  There will be less pressure to reduce officer numbers. Neighbourhood policing, previously under real threat, is likely to remain an important component of the policing model in England and Wales.  This is good news.

However, the police service should not use this financial reprieve as an excuse to duck important reforms.  The reforms that the police have already planned should continue, with any savings reinvested in an improved and more effective service.

It would be a retrograde step for candidates in the 2016 PCC elections to start pledging (as I am certain many will) to ‘protect officer numbers’.  We still need to rebalance the police workforce.   We need more staff with the kind of digital skills required to tackle cybercrime.  We need more crime analysts to help deploy police resources more effectively.  Blanket commitments to maintain officer numbers will get in the way of important reforms.

The argument for inter-force collaboration and, indeed, force mergers does not go away. The new top sliced transformation fund is designed in part to facilitate collaboration, but the fact remains that a 43 force structure no longer makes sense in operational or financial terms.

The police still have to adapt to a changing world. Falling levels of traditional crime and the explosion in online crime, particularly fraud and hacking, means we need an entirely different kind of police service.  Many of the pressures the police experience from non-crime demand will not go away. Big cuts to local government funding and the wider criminal justice system mean we need to reorganise the public service frontline to deal with problems such as high reoffending rates, child safeguarding and rising levels of mental illness.

Before yesterday I thought policing faced an existential moment and I stand by that. While the service has now secured significant financial breathing space, it still needs to adapt to an increasingly complex world. 

Rick Muir is director of the Police Foundation