by Katinka Barysch
Russia’s economy has been hit hard by a triple whammy of capital outflows, collapsing oil prices and falling global demand. In the first three months of the year, output was down by 10 per cent compared with a year earlier. The retail boom that had fuelled growth in recent years has turned into a slump. The output of the manufacturing sector is contracting at a rate of over 20 per cent year on year. Construction is in deep recession. The current-account surplus has melted away.
However, the latest economic indicators suggest that the economic contraction is at least slowing. The oil price has recovered to over $70 a barrel. Surveys show that credit conditions are easing and managers are a bit less gloomy. Capital outflows have slowed. So has inflation, which has allowed the central bank to finally cut rates. International reserves, although down from 2008 peaks, still stand at $410 billion. The government is making plans for recapitalising some of the country’s banks.
Investors still remember the rapid, V-shaped recovery that followed Russia’s last financial crash in 1998. In the following nine years, the Russian economy grew by an average of 7 per cent a year. Will Russia be able to pull out of trouble this quickly again?
On the plus side, Russia’s government finances are in incomparably better shape than they were ten years ago. Back then, it was short-term public borrowing that triggered the crisis, ultimately forcing the government into default. Since then, the budget has shown a healthy surplus, allowing the government to stash away $140 billion in a reserve fund. So although revenue has collapsed (half of it comes from the oil and gas sector), the authorities have room for fiscal manoeuvre. Public spending will also have a bigger impact on the economy, simply because the Russian state is much bigger than it used to be (federal budget revenue was 13 per cent of GDP back in 1998, today it is over 20 per cent, according to Erik Berglőf from the European Bank of Reconstruction and Development).
Also, in 1998 the Russian economy had only just returned to growth, following years of severe post-transition recession. Now, after ten years of uninterrupted expansion, fewer Russians are living hand to mouth and many should be able to draw on savings to tide them over the most difficult period.
However, there are also reasons to expect the current crisis to be more severe and drawn-out. The 1998 crisis mainly affected emerging markets. This time, the recession is global, which means that no country will be able to export its way out of trouble. (Russia exports mainly raw materials, as well as some metals, timber and heavy industrial goods. But it is the collapse in demand for non-oil exports, such as steel products, that is causing the most trouble since these are often produced in isolated one-industry towns.)
Depressed global demand also means that the rally in oil prices is likely to be short-lived. After 1998, the oil price climbed steadily from around $10 a barrel to a peak of $140 last summer. Many forecasters expect oil prices to linger around $50-60 this year and next – not disastrously low but not enough to fuel a strong Russian recovery either. Moreover, Russia’s economy today is much more dependent on oil and gas sales than it was in 1998. Back then, oil and gas sales accounted for 44 per cent of export revenue, now the share is over two-thirds. Many manufacturing and services industries are directly or indirectly linked to the resource sector.
Perhaps the biggest difference lies in the role of banking and borrowing. Although both crises originated in the financial sector, in 1998 this sector was still so small that its collapse barely affected the wider economy. Then, credit to firms and households stood at 9 per cent of GDP; today it is over 40 per cent.
In recent years, much more of that borrowing came from abroad so the drying up of global liquidity in 2008 hit Russia hard. The World Bank estimates that in 1998-99, the reversal in foreign capital flows amounted to less than 2 per cent of Russian GDP. In 2008-09, it was close to 12 per cent of GDP.
Domestic banks cannot take up the slack because a rising share of bad loans will constrain their ability to start lending again. The health of the banking sector is difficult to assess. Official numbers show that the share of non-performing loans has climbed from 1 per cent at the start of the year to 4 per cent today. Given the sorry state of Russian industries, this is still an implausibly low number. Independent assessments put the share of bad loans at anywhere between 10 and 20 per cent.
As a result of these factors, the Russian economy is likely to take longer to come out if its slump than it did ten years ago. The World Bank predicts a contraction of almost 8 per cent this year, but some forecasters thinks even this is too optimistic and they question whether Russia will be able to make even timid recovery in 2010. Most economists agree that Russia stands little or no chance of returning to the 7-8 per cent growth rate that it enjoyed before the crisis struck
The big question is what the changed growth outlook will mean for Russia’s internal stability and the government’s willingness to implement economic reforms. In 1998 Russians expected very little from their leaders in Moscow. They were positively surprised when the Putin administration after 2000 started to implement some useful reforms, such as simplifying the tax system and cleaning up regulations.
Since then, Putin’s muscular rhetoric, combined with Alexei Kudrin’s sound macro-economic management, have raised expectations. The people that took to the streets in Russian cities in recent weeks and months did not so much protest against government policies as demand government help. The government could react either by getting serious about modernising and diversifying the economy. Or it could resort to economic nationalism and populist spending increases. So far, there is more evidence of the latter than the former. Prime Minister Putin has personally instructed companies to clear wage arrears and criticised shops for overcharging struggling families. On June 29th, he told the managers of Russia’s biggest banks that they should not go on summer holiday before they have significantly increased lending to the corporate sector (he even gave them a numerical target of $16 billion). With this kind of crises response, Russia’s growth prospects could end up being lower not only in the short term, but for many years to come.
Katinka Barysch is deputy director of the Centre for European Reform.
Friday, July 03, 2009
Thursday, June 25, 2009
Britain’s eurosceptics need to come clean
by Simon Tilford
Britain’s media and political class have a right to be sceptical about the EU, even hostile to it. But they also have an obligation to be honest about the economic implications of a retreat from full membership of the Union. Their failure to do so is dishonest and poses a serious risk to Britain’s prosperity. A newly ‘emancipated’ Britain would not remain part of the EU’s single market, at least not on the terms the eurosceptics claim. In fact, a retreat would achieve nothing but impotence. It would not reduce the regulatory and compliance costs facing UK business and it would end our ability to shape the EU’s single market.
Those calling for a renegotiation of the EU’s Lisbon treaty, or of the UK’s relationship with the EU more generally, ignore that this would inevitably lead to at best semi-detached membership of the EU, and more probably divorce. Eurosceptics appear to believe that a Britain outside the EU would remain part of the single market, but that it would be freed from the need to abide by EU regulation. In short, Britain could enjoy all the benefits of access to the single market but none of the costs.
This is incoherent. To remain a full member of the single market, British firms would have to abide by all its rules and regulations. A Britain that opted to withdraw from the EU would have no say over the drawing up of those rules and regulations. British interests would not be represented in Brussels and Britain would not be able to stymie regulatory drives that threaten UK prosperity. In short, British business would experience the worst of all worlds.
British manufacturers might not suffer too badly. Britain would have no say over EU product standards, which British firms would nevertheless have to comply with in order to sell their products in the EU. Nor would the costs of producing for the UK market fall – it would make no sense for British firms to make one set of products for the British market and another for the rest of Europe. But merchandise markets are at least already open. The real threat for the UK lies elsewhere.
Britain is by far the biggest exporter of commercial services in the EU. As such, it has a very strong interest in opening markets for those services. But a Britain that has no say over the future of the single market will not be able to use its influence to push for service sector liberalisation. It will not be able to challenge the self-serving idea put forward by other member-states that a single market in merchandise goods is one thing, but open markets in services are somehow beyond the pale. Nor will it be able to ensure that regulation of service industries is not inimical to the interests of British business. This would be a major own-goal.
One only has to look at the financial services industry to see the risks. If British-based providers of financial services wanted to do business in the single market, they would have to abide by whatever regulations the rest of the EU dreamt up. These would certainly be more restrictive in the absence of British involvement. At a time when other EU governments see an opportunity to cut London down to size, would it really make sense to be a bystander? How would Britain thwart the rather heavy-handed attack on the private equity and hedge fund industries operating in the EU if it had no seat at the table?
Britain needs to step up its involvement in the EU, not leave the playing field in a huff. It needs to strive to ensure that EU financial regulation is – as far as possible – proportionate and reconcilable with the UK approach. More generally, it needs to make common cause with other economically liberal member-states to ensure that the EU evolves in a direction that serves British interests.
Britain’s conversation about its relationship with the EU is devoid of the pragmatism and empiricism with which it is traditionally associated. Some British eurosceptics genuinely believe that the UK can have its cake and eat it. That it could reduce the cost of EU membership while retaining all the existing and potential benefits. Others know exactly what they are doing. Their ultimate objective is for Britain to withdraw from the EU. This is a perfectly defensible aim, but those for whom this is the objective need to explain how it would be in the UK’s strategic and commercial interests.
Simon Tilford is chief economist at the Centre for European Reform.
Britain’s media and political class have a right to be sceptical about the EU, even hostile to it. But they also have an obligation to be honest about the economic implications of a retreat from full membership of the Union. Their failure to do so is dishonest and poses a serious risk to Britain’s prosperity. A newly ‘emancipated’ Britain would not remain part of the EU’s single market, at least not on the terms the eurosceptics claim. In fact, a retreat would achieve nothing but impotence. It would not reduce the regulatory and compliance costs facing UK business and it would end our ability to shape the EU’s single market.
Those calling for a renegotiation of the EU’s Lisbon treaty, or of the UK’s relationship with the EU more generally, ignore that this would inevitably lead to at best semi-detached membership of the EU, and more probably divorce. Eurosceptics appear to believe that a Britain outside the EU would remain part of the single market, but that it would be freed from the need to abide by EU regulation. In short, Britain could enjoy all the benefits of access to the single market but none of the costs.
This is incoherent. To remain a full member of the single market, British firms would have to abide by all its rules and regulations. A Britain that opted to withdraw from the EU would have no say over the drawing up of those rules and regulations. British interests would not be represented in Brussels and Britain would not be able to stymie regulatory drives that threaten UK prosperity. In short, British business would experience the worst of all worlds.
British manufacturers might not suffer too badly. Britain would have no say over EU product standards, which British firms would nevertheless have to comply with in order to sell their products in the EU. Nor would the costs of producing for the UK market fall – it would make no sense for British firms to make one set of products for the British market and another for the rest of Europe. But merchandise markets are at least already open. The real threat for the UK lies elsewhere.
Britain is by far the biggest exporter of commercial services in the EU. As such, it has a very strong interest in opening markets for those services. But a Britain that has no say over the future of the single market will not be able to use its influence to push for service sector liberalisation. It will not be able to challenge the self-serving idea put forward by other member-states that a single market in merchandise goods is one thing, but open markets in services are somehow beyond the pale. Nor will it be able to ensure that regulation of service industries is not inimical to the interests of British business. This would be a major own-goal.
One only has to look at the financial services industry to see the risks. If British-based providers of financial services wanted to do business in the single market, they would have to abide by whatever regulations the rest of the EU dreamt up. These would certainly be more restrictive in the absence of British involvement. At a time when other EU governments see an opportunity to cut London down to size, would it really make sense to be a bystander? How would Britain thwart the rather heavy-handed attack on the private equity and hedge fund industries operating in the EU if it had no seat at the table?
Britain needs to step up its involvement in the EU, not leave the playing field in a huff. It needs to strive to ensure that EU financial regulation is – as far as possible – proportionate and reconcilable with the UK approach. More generally, it needs to make common cause with other economically liberal member-states to ensure that the EU evolves in a direction that serves British interests.
Britain’s conversation about its relationship with the EU is devoid of the pragmatism and empiricism with which it is traditionally associated. Some British eurosceptics genuinely believe that the UK can have its cake and eat it. That it could reduce the cost of EU membership while retaining all the existing and potential benefits. Others know exactly what they are doing. Their ultimate objective is for Britain to withdraw from the EU. This is a perfectly defensible aim, but those for whom this is the objective need to explain how it would be in the UK’s strategic and commercial interests.
Simon Tilford is chief economist at the Centre for European Reform.
Wednesday, June 17, 2009
Can Russia contribute to global governance?
by Charles Grant
Like the US, China and India, Russia has never been a big enthusiast for multilateral global governance. When the Russians believe that working through multilateral institutions will suit their interests, they will do so. But Russia’s history, size and traditions make it sceptical of multilateralism. Only with great reluctance did then President Vladimir Putin sign the Kyoto protocol on climate change – when he realised that Russia would benefit financially through the sale of unused carbon allowances.
Russia has never shown a lot of interest in multilateral institutions, other than the privileged clubs it is a member of, such as the G8 and the UN Security Council (UNSC). Presidents Yelstin and Putin have had similar views on global governance, both preferring to talk of multipolarity rather than multilateralism.
As a G8 member, Russia has not been in favour of broadening the membership to include countries like China. But now that the G20 has become an important group, in some ways replacing the G8, Russia willingly takes part. Russia evidently likes the UNSC, being one of five veto-wielding members. But it has shown less interest in the UN as a whole and stayed on the sidelines during the discussion of UN reform at the end of Kofi Annan’s tenure as UN secretary-general. When Russia does take part in global bodies, it often seems more interested in the status of membership than in active participation.
Russia is ambiguous on whether it wants to join the World Trade Organisation – its membership talks with the WTO have dragged on since 1993. Earlier this month Russian trade officials told EU negotiators that they hoped to join the WTO this year – but then Prime Minister Putin said that Russia would want to join only as part of a grouping with Belarus and Kazakhstan. That is likely to delay membership.
Russia is more comfortable with regional organisations than global bodies, perhaps because it can play a leading role in them. It likes the Collective Security Treaty Organisation, which links a number of former Soviet countries, and the Shanghai Co-operation Organisation, which brings together most of the Central Asian countries and is dominated by Russia and China. There has been talk in the Kremlin of a ‘gas OPEC’, hooking together Russia, Iran and other producers such as Turkmenistan.
Russia strongly dislikes NATO for several reasons: the US leads the alliance, Russia believes the West would not allow it to join, and NATO’s expansion symbolises Russia’s strategic retreat since the Cold War. In recent years Moscow has taken against the Organisation for Security and Co-operation in Europe, whose observers have criticised the conduct of elections in former Soviet states. That is one reason why President Dmitri Medvedev came up with the idea of ‘a new European security architecture’ last year. Medvedev has said this should bring together Russia, the US, European countries and European security organisations. But his government has not yet produced any specific proposals.
The economic crisis is spurring governments around the world to think seriously about reform of global governance. For example the membership of the Financial Stability Forum is being broadened to include the leading developing economies. The IMF and World Bank are preparing for another round of reform. The effort to combat climate change is likely to lead to new global institutions. Yet Russia has been reluctant to put forward its own proposals on global governance. Why?
Russian foreign policy is hyper-realist. Russian diplomats tend to believe that countries are most likely to achieve their objectives through being tough and unyielding rather than by compromising or working things out in international organisations. Their worldview focuses on power rather than rules. It is natural for large and strong countries to be realist; it tends to be smaller and weaker states that see multilateral institutions as a bulwark against bullying by the powerful. And perhaps Russia’s difficult history – it has never had defined frontiers and has usually got on badly with its neighbours – has encouraged the realism.
The fact that Russia is big makes it reluctant to cede much authority to multilateral bodies. For in international organisations small countries can wield disproportionate influence. One thing that Russian diplomats find infuriating about the EU is that small countries can veto its decisions – for a while Lithuania blocked the negotiation of an EU-Russia trade agreement. Tiny Georgia could, if it really insisted, stop Russia joining the WTO. Seeing itself as a great power, Russia has – ever since the Congress of Vienna, almost two hundred years ago – liked the idea of a concert of powers. Thus it enjoys its role in the ‘quartet’ that is supposed to handle the Middle East peace process: Russia sits alongside the US, the UN and the EU.
Russians should rethink their scepticism towards multilateral institutions. The Russian economy is globalising. Sberbank’s recent purchase of a major stake in General Motors Europe is just one indication of this trend. Gazprom is buying energy infrastructure in many EU member-states. Russia’s leading metals companies are building global networks. The long-term prosperity of the top Russian firms depends on their buying companies and raising money in the world’s major financial centres.
Russia is developing global economic interests and will need to defend them. This is best done through strong multilateral institutions. If Russia joined the WTO it would be harder for other countries to impose anti-dumping duties on Russian exports. As a leading exporter of energy, Russia has an interest in joining the International Energy Agency, and helping it to develop into a body that can smooth out volatility in oil and gas prices. Russia should also take more interest in the future of the IMF and the World Bank, and in the emerging institutional framework for regulating global financial markets.
The Europeans – who, unlike the Russians, Indians, Chinese and Americans are instinctively multilateralist – should encourage the Russians to view multilateral institutions as a tool for promoting their national interests. The WTO is the prime example of an organisation that would deliver tangible benefits to Russia, and the EU – as Russia’s biggest trading partner – should urge the Russians to made up their minds to join it.
Charles Grant is director of the Centre for European Reform.
Like the US, China and India, Russia has never been a big enthusiast for multilateral global governance. When the Russians believe that working through multilateral institutions will suit their interests, they will do so. But Russia’s history, size and traditions make it sceptical of multilateralism. Only with great reluctance did then President Vladimir Putin sign the Kyoto protocol on climate change – when he realised that Russia would benefit financially through the sale of unused carbon allowances.
Russia has never shown a lot of interest in multilateral institutions, other than the privileged clubs it is a member of, such as the G8 and the UN Security Council (UNSC). Presidents Yelstin and Putin have had similar views on global governance, both preferring to talk of multipolarity rather than multilateralism.
As a G8 member, Russia has not been in favour of broadening the membership to include countries like China. But now that the G20 has become an important group, in some ways replacing the G8, Russia willingly takes part. Russia evidently likes the UNSC, being one of five veto-wielding members. But it has shown less interest in the UN as a whole and stayed on the sidelines during the discussion of UN reform at the end of Kofi Annan’s tenure as UN secretary-general. When Russia does take part in global bodies, it often seems more interested in the status of membership than in active participation.
Russia is ambiguous on whether it wants to join the World Trade Organisation – its membership talks with the WTO have dragged on since 1993. Earlier this month Russian trade officials told EU negotiators that they hoped to join the WTO this year – but then Prime Minister Putin said that Russia would want to join only as part of a grouping with Belarus and Kazakhstan. That is likely to delay membership.
Russia is more comfortable with regional organisations than global bodies, perhaps because it can play a leading role in them. It likes the Collective Security Treaty Organisation, which links a number of former Soviet countries, and the Shanghai Co-operation Organisation, which brings together most of the Central Asian countries and is dominated by Russia and China. There has been talk in the Kremlin of a ‘gas OPEC’, hooking together Russia, Iran and other producers such as Turkmenistan.
Russia strongly dislikes NATO for several reasons: the US leads the alliance, Russia believes the West would not allow it to join, and NATO’s expansion symbolises Russia’s strategic retreat since the Cold War. In recent years Moscow has taken against the Organisation for Security and Co-operation in Europe, whose observers have criticised the conduct of elections in former Soviet states. That is one reason why President Dmitri Medvedev came up with the idea of ‘a new European security architecture’ last year. Medvedev has said this should bring together Russia, the US, European countries and European security organisations. But his government has not yet produced any specific proposals.
The economic crisis is spurring governments around the world to think seriously about reform of global governance. For example the membership of the Financial Stability Forum is being broadened to include the leading developing economies. The IMF and World Bank are preparing for another round of reform. The effort to combat climate change is likely to lead to new global institutions. Yet Russia has been reluctant to put forward its own proposals on global governance. Why?
Russian foreign policy is hyper-realist. Russian diplomats tend to believe that countries are most likely to achieve their objectives through being tough and unyielding rather than by compromising or working things out in international organisations. Their worldview focuses on power rather than rules. It is natural for large and strong countries to be realist; it tends to be smaller and weaker states that see multilateral institutions as a bulwark against bullying by the powerful. And perhaps Russia’s difficult history – it has never had defined frontiers and has usually got on badly with its neighbours – has encouraged the realism.
The fact that Russia is big makes it reluctant to cede much authority to multilateral bodies. For in international organisations small countries can wield disproportionate influence. One thing that Russian diplomats find infuriating about the EU is that small countries can veto its decisions – for a while Lithuania blocked the negotiation of an EU-Russia trade agreement. Tiny Georgia could, if it really insisted, stop Russia joining the WTO. Seeing itself as a great power, Russia has – ever since the Congress of Vienna, almost two hundred years ago – liked the idea of a concert of powers. Thus it enjoys its role in the ‘quartet’ that is supposed to handle the Middle East peace process: Russia sits alongside the US, the UN and the EU.
Russians should rethink their scepticism towards multilateral institutions. The Russian economy is globalising. Sberbank’s recent purchase of a major stake in General Motors Europe is just one indication of this trend. Gazprom is buying energy infrastructure in many EU member-states. Russia’s leading metals companies are building global networks. The long-term prosperity of the top Russian firms depends on their buying companies and raising money in the world’s major financial centres.
Russia is developing global economic interests and will need to defend them. This is best done through strong multilateral institutions. If Russia joined the WTO it would be harder for other countries to impose anti-dumping duties on Russian exports. As a leading exporter of energy, Russia has an interest in joining the International Energy Agency, and helping it to develop into a body that can smooth out volatility in oil and gas prices. Russia should also take more interest in the future of the IMF and the World Bank, and in the emerging institutional framework for regulating global financial markets.
The Europeans – who, unlike the Russians, Indians, Chinese and Americans are instinctively multilateralist – should encourage the Russians to view multilateral institutions as a tool for promoting their national interests. The WTO is the prime example of an organisation that would deliver tangible benefits to Russia, and the EU – as Russia’s biggest trading partner – should urge the Russians to made up their minds to join it.
Charles Grant is director of the Centre for European Reform.
Wednesday, June 10, 2009
EU politics after the elections
by Hugo Brady
EU policies were not the issue that guided most voters in last week’s elections to the European Parliament. The economic crisis and job safety were uppermost in people’s minds. It is therefore surprising that in the EU’s six largest member-states, socialist parties – whether in government or opposition – either did poorly or were routed. It was the centre-right, liberal and green parties that triumphed, gaining the majority of the assembly’s 736 seats. The far-right picked up a few extra seats as did single-issue, eurosceptic parties.
How to explain the centre-left’s eclipse? To suggest a single, pan-European explanation would be a little dubious. Election campaigns were, almost without exception, based on local and national issues. Nevertheless, European electorates appear to trust conservative or liberal parties to get them out of the current crisis in better shape than the left. In countries like Italy or France, where socialist parties are not in power, the centre-left was too complacent that the crisis would mean an automatic increase in their share of the vote. Also, sterner language by centre-right parties on immigration issues over the last year probably served to shore up their votes in some countries.
For the next five years, the European Parliament will be dominated, but not controlled, by the European People’s Party (EPP, the group of centre-right parties), which won 264 seats. New MEPs are already haggling over which committee chairmanships each political group will get and who will be the parliament’s next president. More importantly, the EPP is attempting to cobble together the majority (369 votes) needed to approve current European Commission president, José Manuel Barroso, for a second term. EU governments are likely to approve Barroso’s reappointment at a summit in Brussels next week. If the EPP’s leader, Hans-Gert Pöttering, can get the Liberals, the anti-federalist European Conservatives and some independents on board, Barroso, a liberal-leaning conservative, will be re-appointed. That will mean that future EU policies – in critical areas like the environment, financial regulation, migration and energy policy – should continue to be governed by the same centre-right consensus that has prevailed since 2004. However, France’s president, Nicolas Sarkozy, might support Barroso’s reappointment only on the understanding that a major economic portfolio such as trade, internal market or competition will go to a French nominee in the next Commission.
The election results have affected Europe’s political landscape in other ways, too. First, the parliament’s credibility is under threat from an ever-decreasing electoral turnout. At just over 43 per cent, average turnout was higher than expected (some polls predicted participation as low as 35 per cent). But the trend towards voter apathy that has been apparent since direct elections to the assembly began 30 years ago continues. This trend is in stark contrast to the European Parliament’s rising powers and relevance. Almost ten years ago, Oxford academic Larry Siedentop argued that an indirectly elected ‘European senate’ of national parliamentarians would be a better way to give voters a proper say over European integration, an idea revisited in The Economist this week. If turnout in the next two elections falls below 40 per cent, Siedentop’s idea should be dusted off.
Second, Libertas, the group that led the campaign against the Lisbon treaty in last year’s Irish referendum, fielded over 500 candidates in various EU countries. But it failed to make an impact in any, despite spending some €30 million. Declan Ganley, Libertas’ leader, failed to win a seat in Ireland. His retirement from politics makes a Yes vote in Ireland’s second treaty referendum, expected in early October, more likely. He was a key factor in swaying undecided, mildly pro-European voters whose support is critical if the treaty is to pass. However, the amount of media attention heaped on Ganley partially obscured the utter failure of pro-European parties to give voters strong arguments as to why the treaty matters. If this failure is repeated, other member-states can expect a second No, whatever Ireland’s economic circumstances or perceived reliance on the EU.
Third, the elections highlighted that popular anti-EU feeling in Britain is at an all-time high. Well over 50 per cent of the British vote went to eurosceptics of various hues. The Conservative party and UKIP, both staunch opponents of the Lisbon treaty and of further EU integration, gained seats, while the ruling Labour party received an historically low share of the vote. That suggests a future British government will face fresh calls for a referendum on Britain’s place in Europe, whether linked to the Lisbon treaty or not. Conservative leader David Cameron, if and when he becomes prime minister, will be haunted by Britain’s 20-year EU debate as much as his predecessors were. In the end, the Tories might be relaxed about fundamentally re-defining Britain’s relationship with France and Germany. But Britain’s ally, the US, wants it to remain a fully engaged EU member-state. The Obama administration will be dismayed if Britain chooses to relinquish or renegotiate its status.
Lastly, victories for the far-right, including the Dutch Freedom Party, British National Party, Hungarian Jobbik and Greater Romania Party, have caused anguish among Europe’s political mainstream. Although far-right parties gained no more than eight extra seats, they look likely to have enough seats to form a separate group in the next European Parliament. Under new rules, groups can be formed by a minimum of 25 MEPs from seven different countries. Being a member of such a group gives parties access to significant funds and the right to chair or steer committees. Whether such a far-right grouping would have a lot of political influence remains to be seen, however. In the 2004-2009 parliament, the far-right ‘Identity, Tradition, Sovereignty’ group quickly dissolved due to irreconcilable differences between the parties. The Parliament’s new cohort of extreme nationalists and anti-immigration parties may soon realise what those in the political mainstream have long known: working with foreigners can be tough.
Hugo Brady is a research fellow at the Centre for European Reform.
EU policies were not the issue that guided most voters in last week’s elections to the European Parliament. The economic crisis and job safety were uppermost in people’s minds. It is therefore surprising that in the EU’s six largest member-states, socialist parties – whether in government or opposition – either did poorly or were routed. It was the centre-right, liberal and green parties that triumphed, gaining the majority of the assembly’s 736 seats. The far-right picked up a few extra seats as did single-issue, eurosceptic parties.
How to explain the centre-left’s eclipse? To suggest a single, pan-European explanation would be a little dubious. Election campaigns were, almost without exception, based on local and national issues. Nevertheless, European electorates appear to trust conservative or liberal parties to get them out of the current crisis in better shape than the left. In countries like Italy or France, where socialist parties are not in power, the centre-left was too complacent that the crisis would mean an automatic increase in their share of the vote. Also, sterner language by centre-right parties on immigration issues over the last year probably served to shore up their votes in some countries.
For the next five years, the European Parliament will be dominated, but not controlled, by the European People’s Party (EPP, the group of centre-right parties), which won 264 seats. New MEPs are already haggling over which committee chairmanships each political group will get and who will be the parliament’s next president. More importantly, the EPP is attempting to cobble together the majority (369 votes) needed to approve current European Commission president, José Manuel Barroso, for a second term. EU governments are likely to approve Barroso’s reappointment at a summit in Brussels next week. If the EPP’s leader, Hans-Gert Pöttering, can get the Liberals, the anti-federalist European Conservatives and some independents on board, Barroso, a liberal-leaning conservative, will be re-appointed. That will mean that future EU policies – in critical areas like the environment, financial regulation, migration and energy policy – should continue to be governed by the same centre-right consensus that has prevailed since 2004. However, France’s president, Nicolas Sarkozy, might support Barroso’s reappointment only on the understanding that a major economic portfolio such as trade, internal market or competition will go to a French nominee in the next Commission.
The election results have affected Europe’s political landscape in other ways, too. First, the parliament’s credibility is under threat from an ever-decreasing electoral turnout. At just over 43 per cent, average turnout was higher than expected (some polls predicted participation as low as 35 per cent). But the trend towards voter apathy that has been apparent since direct elections to the assembly began 30 years ago continues. This trend is in stark contrast to the European Parliament’s rising powers and relevance. Almost ten years ago, Oxford academic Larry Siedentop argued that an indirectly elected ‘European senate’ of national parliamentarians would be a better way to give voters a proper say over European integration, an idea revisited in The Economist this week. If turnout in the next two elections falls below 40 per cent, Siedentop’s idea should be dusted off.
Second, Libertas, the group that led the campaign against the Lisbon treaty in last year’s Irish referendum, fielded over 500 candidates in various EU countries. But it failed to make an impact in any, despite spending some €30 million. Declan Ganley, Libertas’ leader, failed to win a seat in Ireland. His retirement from politics makes a Yes vote in Ireland’s second treaty referendum, expected in early October, more likely. He was a key factor in swaying undecided, mildly pro-European voters whose support is critical if the treaty is to pass. However, the amount of media attention heaped on Ganley partially obscured the utter failure of pro-European parties to give voters strong arguments as to why the treaty matters. If this failure is repeated, other member-states can expect a second No, whatever Ireland’s economic circumstances or perceived reliance on the EU.
Third, the elections highlighted that popular anti-EU feeling in Britain is at an all-time high. Well over 50 per cent of the British vote went to eurosceptics of various hues. The Conservative party and UKIP, both staunch opponents of the Lisbon treaty and of further EU integration, gained seats, while the ruling Labour party received an historically low share of the vote. That suggests a future British government will face fresh calls for a referendum on Britain’s place in Europe, whether linked to the Lisbon treaty or not. Conservative leader David Cameron, if and when he becomes prime minister, will be haunted by Britain’s 20-year EU debate as much as his predecessors were. In the end, the Tories might be relaxed about fundamentally re-defining Britain’s relationship with France and Germany. But Britain’s ally, the US, wants it to remain a fully engaged EU member-state. The Obama administration will be dismayed if Britain chooses to relinquish or renegotiate its status.
Lastly, victories for the far-right, including the Dutch Freedom Party, British National Party, Hungarian Jobbik and Greater Romania Party, have caused anguish among Europe’s political mainstream. Although far-right parties gained no more than eight extra seats, they look likely to have enough seats to form a separate group in the next European Parliament. Under new rules, groups can be formed by a minimum of 25 MEPs from seven different countries. Being a member of such a group gives parties access to significant funds and the right to chair or steer committees. Whether such a far-right grouping would have a lot of political influence remains to be seen, however. In the 2004-2009 parliament, the far-right ‘Identity, Tradition, Sovereignty’ group quickly dissolved due to irreconcilable differences between the parties. The Parliament’s new cohort of extreme nationalists and anti-immigration parties may soon realise what those in the political mainstream have long known: working with foreigners can be tough.
Hugo Brady is a research fellow at the Centre for European Reform.
Friday, June 05, 2009
What the economic crisis will mean for European defence
by Tomas Valasek
There are mounting indications that defence budgets across Europe, not very high in the first place, could fall further because of the economic crisis. This will have a three-fold impact on European militaries and missions. Some governments will be tempted to cut operations – but if done haphazardly, this risks leaving parts of the world exposed to insecurity. Multinational weapons programmes may suffer a disproportionate share of the budget cuts. And while all defence ministries will have to rationalise (and most already have) governments will need to decide whether it is worth keeping the rumps of their national militaries. Many should form joint units with neighbours instead.
There are two strong reasons to believe that defence budgets will fall dramatically. First, all European governments will see their public debts rise over the next few years. Some – like that of Latvia – are beginning to have serious trouble raising funds. Even the more sturdy economies, like the UK, have been warned by rating agencies to bring their debt under control or risk losing their gold-plated credit rating. Most European governments will have to increase taxes and cut spending in order to rebalance the books. Second, those cuts will hit defence harder than other parts of the budget. This is because many forms of government spending – like the cost of paying interest on public debt – cannot be reduced by decree. Some non-mandatory expenditures like healthcare tend to be politically explosive: no government wants to be seen to be taking risks with people’s health. So defence budgets are an obvious target for ax-wielding finance ministers. George Osborne, the UK shadow chancellor of the exchequer, warned recently that he would cut defence spending if the Conservatives won the election (which they are widely expected to do this year or next).
The looming military budget cuts will have many salutary effects. Defence establishments, with their resistance to civilian oversight and emphasis on continuity, tend to get bloated in times of relative plenty. It often takes a crisis to force meaningful reforms. France – which suffered a defence budget meltdown in 2007, even before the economic crisis unfolded in full – at last shut many of its African bases, a legacy of its colonial years. Slovakia recently cut the number of military commands from eight to three – a long overdue step that will reduce unnecessary overheads. Other European militaries, too, will come out of the crisis with more sensible structures and budgets.
But the economic crisis presents several serious risks to European defences. The easiest portion of the defence budget to cut is the part that pays for operations. Withdrawing soldiers from faraway places plays well at home (it removes young men and women from harm’s way) and is politically easier than restructuring the militaries (no one is laid off). But European governments should resist the urge to pull back their soldiers indiscriminately; this could cause conflicts to re-flare and leave vulnerable people at risk. Instead, they should stop sending overlapping missions to the same trouble spots. Because international institutions compete to fly their flag in missions abroad, it is not unusual for western governments to have multiple operations in the same place. For example, three different forces are currently fighting piracy off the coast of Somalia. That is a wasteful use of taxpayer money. The EU, NATO, and the US should roll their Somalia operations into one or two.
The budgetary crisis will force many defence ministries to cancel planned weapon buys. Their instinct will be to cut multinational programmes and protect those purchases that generate jobs at home. That could be a mistake. While much of the needed equipment can be made nationally, the truly complex systems are so expensive that defence ministries can only afford them if they share the development costs with other countries. As defence budgets shrink, such multinational approaches will only become more important. Granted, many of the collaborative programmes to date have been a disaster. The seven-nation plan to develop a new generation of military transport aircraft, the A400M, is the most glaring example. The airplane cannot fly because the engines, made by a four-nation European consortium, lack the proper certification; the plane is also said to be too heavy.
But the answer lies not in abandoning collaborative programmes. Instead, European governments need to rethink their approach to collaboration. The trouble with the A400M is not that the plane’s manufacture, EADS, lacks technical expertise (it builds one of the finest civilian aircraft in existence, the Airbus) but that participating governments have been more concerned with securing production jobs than with obtaining a good product. In return for investing in the aircraft, they have demanded that a commensurate number of production jobs to go to their country. As a result, bits of the aircraft are being built in different countries, and not necessarily in the ones most qualified to do the job. In case of the A400M, EADS executives say they wanted a US company to build the engine, but were told by participating governments to keep the jobs in Europe. European governments should accept that it makes more sense to order the needed parts from the plant with the most relevant technical expertise, no matter where it is located. The governments also need to be more ready to buy off-the-shelf components, rather than try to generate jobs by manufacturing parts from scratch.
Cuts in personnel and equipment risk turning some European militaries into ‘showcase’ forces: incapable of deploying abroad and thus irrelevant to most EU and NATO operations. It makes little sense, for example, for most European militaries to maintain supersonic air forces without access to air-to-air refueling; or to have infantry without the support units needed to feed and re-supply the soldiers in faraway places. As an excellent new study commissioned by the Nordic governments concluded, “the size of certain units may fall below a critical limit… and small and medium-sized countries [could] lose their ability to maintain a credible defence. The result could be a Europe where only countries like France, Russia, the UK and Germany have their own modern defence forces.”
There are two ways to avoid such outcome while cutting budgets. Some of the key equipment that makes modern warfare possible – like planes providing air-to-ground surveillance or military transport – needs to be jointly owned. NATO owns a common fleet of aircraft that co-ordinate air traffic, and the alliance plans to buy transport airplanes for its members to use. This allows militaries of the smaller and poorer European states that cannot afford such specialist equipment to take part in complex operations in distant places.
But joint ownership of critical resources alone may not save enough money. The time has come for European governments to consider abandoning parts of their national forces and infrastructure, and to form joint units with neighbours. It is becoming increasingly hard to justify why the 25 European members of NATO should maintain 25 separate air forces with own commands and bases, when between them they could only find a handful of much-needed helicopters for Afghanistan (most did not have any, and those who did, did not want to send them). Modern militaries do virtually all their fighting abroad, and in coalition with others. If they lack the money to equip and deploy their soldiers overseas, they need to consider radical cost-saving measures. More governments should do as Belgium, Holland and Luxembourg do (they merged parts of their air forces) or emulate the Nordic countries (which are thinking of forming joint amphibious forces).
Such ‘pooling’ is not a new idea; it has been talked about on and off for nearly a decade, but to little effect. Most European governments have found it too difficult to part with the cherished symbol of national sovereignty that is a proper army or an air force. They have held on to them as symbols even though the practical value of some military services in Europe is negligible. The US has stopped asking Europe for more forces for Afghanistan, partly because politicians do not want to send forces into harm’s way but also because few have any useful forces to deploy. The economic crisis may at last force more countries to pool their militaries. This would enable them to take part in NATO and EU operations whilst saving money. If so, the crisis will have turned out to be a blessing in disguise.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
There are mounting indications that defence budgets across Europe, not very high in the first place, could fall further because of the economic crisis. This will have a three-fold impact on European militaries and missions. Some governments will be tempted to cut operations – but if done haphazardly, this risks leaving parts of the world exposed to insecurity. Multinational weapons programmes may suffer a disproportionate share of the budget cuts. And while all defence ministries will have to rationalise (and most already have) governments will need to decide whether it is worth keeping the rumps of their national militaries. Many should form joint units with neighbours instead.
There are two strong reasons to believe that defence budgets will fall dramatically. First, all European governments will see their public debts rise over the next few years. Some – like that of Latvia – are beginning to have serious trouble raising funds. Even the more sturdy economies, like the UK, have been warned by rating agencies to bring their debt under control or risk losing their gold-plated credit rating. Most European governments will have to increase taxes and cut spending in order to rebalance the books. Second, those cuts will hit defence harder than other parts of the budget. This is because many forms of government spending – like the cost of paying interest on public debt – cannot be reduced by decree. Some non-mandatory expenditures like healthcare tend to be politically explosive: no government wants to be seen to be taking risks with people’s health. So defence budgets are an obvious target for ax-wielding finance ministers. George Osborne, the UK shadow chancellor of the exchequer, warned recently that he would cut defence spending if the Conservatives won the election (which they are widely expected to do this year or next).
The looming military budget cuts will have many salutary effects. Defence establishments, with their resistance to civilian oversight and emphasis on continuity, tend to get bloated in times of relative plenty. It often takes a crisis to force meaningful reforms. France – which suffered a defence budget meltdown in 2007, even before the economic crisis unfolded in full – at last shut many of its African bases, a legacy of its colonial years. Slovakia recently cut the number of military commands from eight to three – a long overdue step that will reduce unnecessary overheads. Other European militaries, too, will come out of the crisis with more sensible structures and budgets.
But the economic crisis presents several serious risks to European defences. The easiest portion of the defence budget to cut is the part that pays for operations. Withdrawing soldiers from faraway places plays well at home (it removes young men and women from harm’s way) and is politically easier than restructuring the militaries (no one is laid off). But European governments should resist the urge to pull back their soldiers indiscriminately; this could cause conflicts to re-flare and leave vulnerable people at risk. Instead, they should stop sending overlapping missions to the same trouble spots. Because international institutions compete to fly their flag in missions abroad, it is not unusual for western governments to have multiple operations in the same place. For example, three different forces are currently fighting piracy off the coast of Somalia. That is a wasteful use of taxpayer money. The EU, NATO, and the US should roll their Somalia operations into one or two.
The budgetary crisis will force many defence ministries to cancel planned weapon buys. Their instinct will be to cut multinational programmes and protect those purchases that generate jobs at home. That could be a mistake. While much of the needed equipment can be made nationally, the truly complex systems are so expensive that defence ministries can only afford them if they share the development costs with other countries. As defence budgets shrink, such multinational approaches will only become more important. Granted, many of the collaborative programmes to date have been a disaster. The seven-nation plan to develop a new generation of military transport aircraft, the A400M, is the most glaring example. The airplane cannot fly because the engines, made by a four-nation European consortium, lack the proper certification; the plane is also said to be too heavy.
But the answer lies not in abandoning collaborative programmes. Instead, European governments need to rethink their approach to collaboration. The trouble with the A400M is not that the plane’s manufacture, EADS, lacks technical expertise (it builds one of the finest civilian aircraft in existence, the Airbus) but that participating governments have been more concerned with securing production jobs than with obtaining a good product. In return for investing in the aircraft, they have demanded that a commensurate number of production jobs to go to their country. As a result, bits of the aircraft are being built in different countries, and not necessarily in the ones most qualified to do the job. In case of the A400M, EADS executives say they wanted a US company to build the engine, but were told by participating governments to keep the jobs in Europe. European governments should accept that it makes more sense to order the needed parts from the plant with the most relevant technical expertise, no matter where it is located. The governments also need to be more ready to buy off-the-shelf components, rather than try to generate jobs by manufacturing parts from scratch.
Cuts in personnel and equipment risk turning some European militaries into ‘showcase’ forces: incapable of deploying abroad and thus irrelevant to most EU and NATO operations. It makes little sense, for example, for most European militaries to maintain supersonic air forces without access to air-to-air refueling; or to have infantry without the support units needed to feed and re-supply the soldiers in faraway places. As an excellent new study commissioned by the Nordic governments concluded, “the size of certain units may fall below a critical limit… and small and medium-sized countries [could] lose their ability to maintain a credible defence. The result could be a Europe where only countries like France, Russia, the UK and Germany have their own modern defence forces.”
There are two ways to avoid such outcome while cutting budgets. Some of the key equipment that makes modern warfare possible – like planes providing air-to-ground surveillance or military transport – needs to be jointly owned. NATO owns a common fleet of aircraft that co-ordinate air traffic, and the alliance plans to buy transport airplanes for its members to use. This allows militaries of the smaller and poorer European states that cannot afford such specialist equipment to take part in complex operations in distant places.
But joint ownership of critical resources alone may not save enough money. The time has come for European governments to consider abandoning parts of their national forces and infrastructure, and to form joint units with neighbours. It is becoming increasingly hard to justify why the 25 European members of NATO should maintain 25 separate air forces with own commands and bases, when between them they could only find a handful of much-needed helicopters for Afghanistan (most did not have any, and those who did, did not want to send them). Modern militaries do virtually all their fighting abroad, and in coalition with others. If they lack the money to equip and deploy their soldiers overseas, they need to consider radical cost-saving measures. More governments should do as Belgium, Holland and Luxembourg do (they merged parts of their air forces) or emulate the Nordic countries (which are thinking of forming joint amphibious forces).
Such ‘pooling’ is not a new idea; it has been talked about on and off for nearly a decade, but to little effect. Most European governments have found it too difficult to part with the cherished symbol of national sovereignty that is a proper army or an air force. They have held on to them as symbols even though the practical value of some military services in Europe is negligible. The US has stopped asking Europe for more forces for Afghanistan, partly because politicians do not want to send forces into harm’s way but also because few have any useful forces to deploy. The economic crisis may at last force more countries to pool their militaries. This would enable them to take part in NATO and EU operations whilst saving money. If so, the crisis will have turned out to be a blessing in disguise.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
Friday, May 29, 2009
Why the European elections matter
by Hugo Brady
Between June 4th and June 7th, Europeans will cast their votes to elect a new European Parliament (EP). Recent opinion polls indicate that they will do so without much enthusiasm. Indeed, there is every chance that the average turnout will be the lowest ever – it has fallen at every election since the first time that Europeans directly elected their MEPs in 1979, and sank to 45.6 per cent in 2004. But despite the prevailing apathy, this election matters. During its next five-year term, the EP will influence what the EU decides in areas as diverse as financial services, trade, climate change, energy security and immigration.
Why do European elections so often struggle to capture the public imagination? Evidently, voters think the stakes are lower than in national elections – or at any rate less clear. Unlike legislative elections in a member-state, European elections do not, strictly speaking, lead to the formation of a new government. Moreover, the EP can often seem distant because few voters know what it actually does. And even if they do, the areas where the EP exercises most influence seem technical and dull. Voters tend to be less interested in arguments such as home versus host regulation of service companies, or the pros and cons of ‘unbundling’ vertically-integrated energy companies, than in the subjects which dominate domestic elections – tax and spending, health and education policy, foreign and defence policy and so on. And on those issues the EP has no say.
MEPs are remote from most voters. The party list system used in most countries means that few electors know the names of their MEPs. European constituencies are huge, making it difficult for any voter to meet an MEP; in national politics members of parliament can more easily hold ‘surgeries’ to meet constituents. Furthermore, the process-heavy, non-adversarial way in which the Parliament operates attracts little media, and voter, attention. Political groups in the EP stand out less clearly than in most national assemblies. Although they are organised on a conventional left-right spectrum, they are composed of MEPs from very different national traditions, which makes them less monolithic. And there is not a great difference between the policies proposed by the three biggest groups, the centre-right European People’s Party (EPP), the centre-left Party of European Socialists (PES) and the Alliance of Liberals and Democrats for Europe (ALDE). Finally, the parliament lacks political theatre. Many of its proceedings revolve around consensus-building and horse-trading in specialist committees.
Eurosceptics sometimes argue that these flaws weaken the legitimacy of the EP as a representative institution. That argument is unfair for two reasons. The first is that the EP’s job is not to replace national assemblies but to complement them, by providing an additional layer of democratic representation in EU policy. The second is that the EP has become a serious actor. During its 2004-2009 term, it influenced EU policy in areas as diverse as climate change, energy, the cross-border provision of services, telecoms regulation and the authorisation of chemicals. This trend is set to continue, especially if – depending on Ireland’s autumn referendum – the Lisbon treaty enters into force. The EP would then have the power of ‘co-decision’ – an equal say to the Council of Ministers – over virtually all legislation, instead of around 70 per cent as is now the case. In particular, the Lisbon treaty would give the EP much more legislative power on justice and home affairs.
The future political balance of the EP will be largely determined by the outcome of voting in the big six member-states: Britain, France, Germany, Italy, Poland and Spain. The EPP seems likely to remain the largest political group in the Parliament, albeit with a reduced majority, despite the fact that Britain’s Conservatives are due to leave it. The Party of European Socialists (PES), for its part, should increase its representation, but only a little. When other groupings are taken into account – including the new group that the British Conservatives plan to lead – the centre-right is likely to dominate the EP.
If current opinion polls are to be believed, the mainstream centre-left will fail to draw much advantage from the current ‘crisis of capitalism’. In the largest member-states, centre-left parties are either unpopular incumbents (as in Britain, Germany and Spain), or in opposition and disarray (as in France, Italy and Poland). The great unknown is how well populist fringe groups of the left and right – those who are really opposed to the current political and economic system – will perform. It would still be a major surprise if fringe parties won much more than 50 seats in the 736-seat EP.
The balance of the parties matters for the leadership of the European Commission. In June the European Council is due to nominate the Commission’s next president. EU leaders are likely to offer José Manuel Barroso, who is affiliated with the EPP, a second five-year term. But if the PES becomes the largest group in the EP, they will try and insist on one of their own. The newly elected Parliament is due to approve the European Council’s nominee for Commission president in July. Assuming that the centre-right dominates the Parliament, Barroso will be voted in.
In the autumn the EP will hold hearings on the individual commissioners proposed by governments. These hearings matter. Five years ago, the EP did not like the look of Silvio Berlusconi’s nominee, Rocco Buttiglione, on account of his views on gays and women – and it forced Berlusconi to withdraw him. In January the Parliament will vote to invest the entire team of commissioners. If it is implemented, the Lisbon treaty will make more explicit the need for the appointment of the Commission president to ‘take into account’ the results of the European elections. In the long run, whatever happens to that treaty, the Commission is likely to become more directly accountable to the Parliament. But whether that makes Europeans any more willing to vote for MEPs is another matter.
Hugo Brady is a research fellow at the Centre for European Reform.
Between June 4th and June 7th, Europeans will cast their votes to elect a new European Parliament (EP). Recent opinion polls indicate that they will do so without much enthusiasm. Indeed, there is every chance that the average turnout will be the lowest ever – it has fallen at every election since the first time that Europeans directly elected their MEPs in 1979, and sank to 45.6 per cent in 2004. But despite the prevailing apathy, this election matters. During its next five-year term, the EP will influence what the EU decides in areas as diverse as financial services, trade, climate change, energy security and immigration.
Why do European elections so often struggle to capture the public imagination? Evidently, voters think the stakes are lower than in national elections – or at any rate less clear. Unlike legislative elections in a member-state, European elections do not, strictly speaking, lead to the formation of a new government. Moreover, the EP can often seem distant because few voters know what it actually does. And even if they do, the areas where the EP exercises most influence seem technical and dull. Voters tend to be less interested in arguments such as home versus host regulation of service companies, or the pros and cons of ‘unbundling’ vertically-integrated energy companies, than in the subjects which dominate domestic elections – tax and spending, health and education policy, foreign and defence policy and so on. And on those issues the EP has no say.
MEPs are remote from most voters. The party list system used in most countries means that few electors know the names of their MEPs. European constituencies are huge, making it difficult for any voter to meet an MEP; in national politics members of parliament can more easily hold ‘surgeries’ to meet constituents. Furthermore, the process-heavy, non-adversarial way in which the Parliament operates attracts little media, and voter, attention. Political groups in the EP stand out less clearly than in most national assemblies. Although they are organised on a conventional left-right spectrum, they are composed of MEPs from very different national traditions, which makes them less monolithic. And there is not a great difference between the policies proposed by the three biggest groups, the centre-right European People’s Party (EPP), the centre-left Party of European Socialists (PES) and the Alliance of Liberals and Democrats for Europe (ALDE). Finally, the parliament lacks political theatre. Many of its proceedings revolve around consensus-building and horse-trading in specialist committees.
Eurosceptics sometimes argue that these flaws weaken the legitimacy of the EP as a representative institution. That argument is unfair for two reasons. The first is that the EP’s job is not to replace national assemblies but to complement them, by providing an additional layer of democratic representation in EU policy. The second is that the EP has become a serious actor. During its 2004-2009 term, it influenced EU policy in areas as diverse as climate change, energy, the cross-border provision of services, telecoms regulation and the authorisation of chemicals. This trend is set to continue, especially if – depending on Ireland’s autumn referendum – the Lisbon treaty enters into force. The EP would then have the power of ‘co-decision’ – an equal say to the Council of Ministers – over virtually all legislation, instead of around 70 per cent as is now the case. In particular, the Lisbon treaty would give the EP much more legislative power on justice and home affairs.
The future political balance of the EP will be largely determined by the outcome of voting in the big six member-states: Britain, France, Germany, Italy, Poland and Spain. The EPP seems likely to remain the largest political group in the Parliament, albeit with a reduced majority, despite the fact that Britain’s Conservatives are due to leave it. The Party of European Socialists (PES), for its part, should increase its representation, but only a little. When other groupings are taken into account – including the new group that the British Conservatives plan to lead – the centre-right is likely to dominate the EP.
If current opinion polls are to be believed, the mainstream centre-left will fail to draw much advantage from the current ‘crisis of capitalism’. In the largest member-states, centre-left parties are either unpopular incumbents (as in Britain, Germany and Spain), or in opposition and disarray (as in France, Italy and Poland). The great unknown is how well populist fringe groups of the left and right – those who are really opposed to the current political and economic system – will perform. It would still be a major surprise if fringe parties won much more than 50 seats in the 736-seat EP.
The balance of the parties matters for the leadership of the European Commission. In June the European Council is due to nominate the Commission’s next president. EU leaders are likely to offer José Manuel Barroso, who is affiliated with the EPP, a second five-year term. But if the PES becomes the largest group in the EP, they will try and insist on one of their own. The newly elected Parliament is due to approve the European Council’s nominee for Commission president in July. Assuming that the centre-right dominates the Parliament, Barroso will be voted in.
In the autumn the EP will hold hearings on the individual commissioners proposed by governments. These hearings matter. Five years ago, the EP did not like the look of Silvio Berlusconi’s nominee, Rocco Buttiglione, on account of his views on gays and women – and it forced Berlusconi to withdraw him. In January the Parliament will vote to invest the entire team of commissioners. If it is implemented, the Lisbon treaty will make more explicit the need for the appointment of the Commission president to ‘take into account’ the results of the European elections. In the long run, whatever happens to that treaty, the Commission is likely to become more directly accountable to the Parliament. But whether that makes Europeans any more willing to vote for MEPs is another matter.
Hugo Brady is a research fellow at the Centre for European Reform.
Thursday, May 21, 2009
Making a success of the EAS
by Charles Grant
If the Irish people vote yes to the Lisbon treaty at the second attempt, and the Czechs, Germans and Poles also ratify, the EU will set up an ‘external action service’ or EAS. This new institution promises to make the Union’s common foreign and security policy more effective. But of course an EAS will not mean that the EU suddenly develops a single foreign policy on every issue. The EU’s inability to develop a coherent approach to Russia, for example, would probably not be very different if an EAS was in place. Different member-states believe that they have different interests in Russia and so disagree on how to handle it.
That said, some of the EU’s incoherence in foreign policy can be put down to its often dysfunctional institutions, notably the rotating presidency; the split between both the High Representative (currently Javier Solana) and the external relations commissioner (currently Benita Ferrero-Waldner), and their respective bureaucracies; and the fact that the current institutions do not provide EU foreign ministers with high quality analysis on a number of important subjects.
The EAS should solve some of those problems. It will be a single bureaucracy made up of the merged foreign desks of the Commission and the Council of Ministers secretariat, as well as secondees from member-states. It will be led by the new High Representative or HR, fusing the Solana and Ferrero-Waldner jobs. That individual plus the EAS will take on the tasks currently performed by the rotating presidency, in terms of external representation and foreign policy.
If the member-states get the design of the EAS right – and give it the budget it needs – it should improve EU foreign policy in four ways.
1) The EAS should help the EU to join up its foreign policies. The EU has the potential to play a powerful international role because it has such a broad range of instruments at its disposal, such as aid, trade, soldiers, policemen, humanitarian aid, rules on asylum and visas, and so on. Neither NATO nor the UN can draw on such wide-ranging capacities. But in practice the EU rarely joins up its external policies. Within the Commission there is seldom much co-operation between the various directorates-general, let alone between those directorates and the Council of Ministers. By merging parts of the Commission and the Council into a single institution, the EAS should help to join up EU foreign policy. But it will still be a challenge to ensure that other parts of those bodies – such as the trade, enlargement, justice and energy directorates of the Commission – work in harmony with the EAS.
2) The EAS should be able to provide more high quality and common analysis to EU ministers. If the 27 governments view a problem in a similar way, they are more likely to be able to hammer out a common approach to it. The current institutions sometimes succeed in encouraging common thinking. For example the EU has taken a single line on Iran’s nuclear programme in recent years, partly because of the quality of the analysis provided by the Situation Centre (which gathers intelligence from the member-states) in the Council of Ministers. The EAS will have more resources and expertise than the current array of Brussels institutions. National diplomats seconded to it should help to feed in the best analysis from national capitals.
3) The integration of the Commission’s 120-odd overseas representations into the EAS should increase the EU’s clout. At the moment they focus (naturally) on the Commission’s priorities and are of little help to Solana and his team in Brussels, or to EU foreign ministers. In order to improve their performance and enhance their expertise in areas like political reporting and hard security, senior figures from national governments should be given prominent roles in some missions. These offices will need to have positions to represent in their part of the world, which will probably encourage the EAS to develop common policies. They will play a role in co-ordinating (though not managing) the work of member-state embassies. They will represent the smaller member-states that have no embassy in the country concerned. Even large member-states such as Britain or Germany do not have embassies everywhere and may find EU missions useful. In the longer run, small and large member-states may start to rely on missions as a way of saving money: if and when a government trusts the quality of the EAS’s work, it may decide to close embassies in countries that it considers relatively unimportant.
4) The EAS will eliminate the problem that a weak presidency can undermine EU foreign policy. The Czech presidency has, by general consent, been one of the worst in memory, and not only because the government collapsed half way through. When the EU is represented by the High Representative and the EAS it will, one may hope, be spared the embarrassments it has faced in the first half of 2009.
It is inevitable that the creation of the EAS will be a bureaucratic nightmare. Each of the existing bureaucracies, as well as the member-states, will fight to protect its specific interests. The EAS will need to be shaped by men and women of vision who can look beyond those interests. Whether or not the EAS is a success will depend, in part, on how well it meets four challenges.
1) Will the EAS attract very good people to work for it? National governments must send their best and brightest. It is not self evident that they will: the UK, for example, has not always sent its top diplomats to work in the Council of Ministers secretariat. The High Representative must be the kind of politician who inspires and whom bright young people will want to work for. And he or she will need to get on well with the president of the European Council (a new post) and the Commission president. The effectiveness of both the Commission and the Council of Ministers is marred by national flags being imposed on particular jobs. The High Representative must have the freedom to appoint the best people to the key jobs (of course, every member-state must have people in the EAS). He or she will also need deputies. Solana works about 100 hours a week, but the new HR will have extra responsibilities in the Commission and in chairing the meetings of EU foreign ministers. The HR will need at least five senior deputies: for traditional diplomacy, managing military missions, generating civilian capabilities, working with the various Commission directorates, and ensuring that justice and home affairs (JHA) is integrated into external policies. Other deputies may be needed to focus on specific regions.
2) Will the EAS succeed in stitching together policy on JHA with the EU’s foreign policies? A lot of the things the EU does that matter to the rest of the world are in areas like visas, asylum, illegal immigration, organised crime, counter-terrorism, police and judicial co-operation and border controls. At the moment the EU seldom joins up policies in these areas with other external policies. For example, when the JHA directorate general negotiates an agreement on the repatriation of illegal immigrants with a third country, it can offer to discuss visa rules, but not trade, aid or non-proliferation, which are handled by other parts of the EU. The EAS needs to find a way of integrating the EU’s work on JHA with other external policies.
3) When several parts of the EU are operating in the same problem country, will the EAS manage to co-ordinate their work? When there are several EU missions in the same country they tend not to work together. For example, when the EU peacekeeping mission arrived in Bosnia it found that the EU police mission, the Commission office and the EU special representative’s office had different objectives and did not want to work with it. There was little co-ordination from Brussels. There have been similar problems in Congo and Afghanistan. In order to ensure that the various EU agencies work together in such important places, the EAS should deploy a special representative to each of them. He or she should have the authority to co-ordinate the work of the various missions on the ground.
4) Will the 27 member-states identify with the EAS and trust it to promote their interests? Most small countries will see the value of a body that can represent them in places where they lack embassies. But there is a real danger that the foreign ministries of Britain, France or Germany could see the EAS as a rival source of power and as a competitor for money and the best people. They would then work round or against the EAS. The High Representative should therefore ensure that the big countries are given the chance to send good people to fill some of the top posts in the EAS. If the HR can establish an efficient bureaucracy that produces high-quality analysis, national foreign ministries will, hopefully, learn to respect it.
Charles Grant is director of the Centre for European Reform.
If the Irish people vote yes to the Lisbon treaty at the second attempt, and the Czechs, Germans and Poles also ratify, the EU will set up an ‘external action service’ or EAS. This new institution promises to make the Union’s common foreign and security policy more effective. But of course an EAS will not mean that the EU suddenly develops a single foreign policy on every issue. The EU’s inability to develop a coherent approach to Russia, for example, would probably not be very different if an EAS was in place. Different member-states believe that they have different interests in Russia and so disagree on how to handle it.
That said, some of the EU’s incoherence in foreign policy can be put down to its often dysfunctional institutions, notably the rotating presidency; the split between both the High Representative (currently Javier Solana) and the external relations commissioner (currently Benita Ferrero-Waldner), and their respective bureaucracies; and the fact that the current institutions do not provide EU foreign ministers with high quality analysis on a number of important subjects.
The EAS should solve some of those problems. It will be a single bureaucracy made up of the merged foreign desks of the Commission and the Council of Ministers secretariat, as well as secondees from member-states. It will be led by the new High Representative or HR, fusing the Solana and Ferrero-Waldner jobs. That individual plus the EAS will take on the tasks currently performed by the rotating presidency, in terms of external representation and foreign policy.
If the member-states get the design of the EAS right – and give it the budget it needs – it should improve EU foreign policy in four ways.
1) The EAS should help the EU to join up its foreign policies. The EU has the potential to play a powerful international role because it has such a broad range of instruments at its disposal, such as aid, trade, soldiers, policemen, humanitarian aid, rules on asylum and visas, and so on. Neither NATO nor the UN can draw on such wide-ranging capacities. But in practice the EU rarely joins up its external policies. Within the Commission there is seldom much co-operation between the various directorates-general, let alone between those directorates and the Council of Ministers. By merging parts of the Commission and the Council into a single institution, the EAS should help to join up EU foreign policy. But it will still be a challenge to ensure that other parts of those bodies – such as the trade, enlargement, justice and energy directorates of the Commission – work in harmony with the EAS.
2) The EAS should be able to provide more high quality and common analysis to EU ministers. If the 27 governments view a problem in a similar way, they are more likely to be able to hammer out a common approach to it. The current institutions sometimes succeed in encouraging common thinking. For example the EU has taken a single line on Iran’s nuclear programme in recent years, partly because of the quality of the analysis provided by the Situation Centre (which gathers intelligence from the member-states) in the Council of Ministers. The EAS will have more resources and expertise than the current array of Brussels institutions. National diplomats seconded to it should help to feed in the best analysis from national capitals.
3) The integration of the Commission’s 120-odd overseas representations into the EAS should increase the EU’s clout. At the moment they focus (naturally) on the Commission’s priorities and are of little help to Solana and his team in Brussels, or to EU foreign ministers. In order to improve their performance and enhance their expertise in areas like political reporting and hard security, senior figures from national governments should be given prominent roles in some missions. These offices will need to have positions to represent in their part of the world, which will probably encourage the EAS to develop common policies. They will play a role in co-ordinating (though not managing) the work of member-state embassies. They will represent the smaller member-states that have no embassy in the country concerned. Even large member-states such as Britain or Germany do not have embassies everywhere and may find EU missions useful. In the longer run, small and large member-states may start to rely on missions as a way of saving money: if and when a government trusts the quality of the EAS’s work, it may decide to close embassies in countries that it considers relatively unimportant.
4) The EAS will eliminate the problem that a weak presidency can undermine EU foreign policy. The Czech presidency has, by general consent, been one of the worst in memory, and not only because the government collapsed half way through. When the EU is represented by the High Representative and the EAS it will, one may hope, be spared the embarrassments it has faced in the first half of 2009.
It is inevitable that the creation of the EAS will be a bureaucratic nightmare. Each of the existing bureaucracies, as well as the member-states, will fight to protect its specific interests. The EAS will need to be shaped by men and women of vision who can look beyond those interests. Whether or not the EAS is a success will depend, in part, on how well it meets four challenges.
1) Will the EAS attract very good people to work for it? National governments must send their best and brightest. It is not self evident that they will: the UK, for example, has not always sent its top diplomats to work in the Council of Ministers secretariat. The High Representative must be the kind of politician who inspires and whom bright young people will want to work for. And he or she will need to get on well with the president of the European Council (a new post) and the Commission president. The effectiveness of both the Commission and the Council of Ministers is marred by national flags being imposed on particular jobs. The High Representative must have the freedom to appoint the best people to the key jobs (of course, every member-state must have people in the EAS). He or she will also need deputies. Solana works about 100 hours a week, but the new HR will have extra responsibilities in the Commission and in chairing the meetings of EU foreign ministers. The HR will need at least five senior deputies: for traditional diplomacy, managing military missions, generating civilian capabilities, working with the various Commission directorates, and ensuring that justice and home affairs (JHA) is integrated into external policies. Other deputies may be needed to focus on specific regions.
2) Will the EAS succeed in stitching together policy on JHA with the EU’s foreign policies? A lot of the things the EU does that matter to the rest of the world are in areas like visas, asylum, illegal immigration, organised crime, counter-terrorism, police and judicial co-operation and border controls. At the moment the EU seldom joins up policies in these areas with other external policies. For example, when the JHA directorate general negotiates an agreement on the repatriation of illegal immigrants with a third country, it can offer to discuss visa rules, but not trade, aid or non-proliferation, which are handled by other parts of the EU. The EAS needs to find a way of integrating the EU’s work on JHA with other external policies.
3) When several parts of the EU are operating in the same problem country, will the EAS manage to co-ordinate their work? When there are several EU missions in the same country they tend not to work together. For example, when the EU peacekeeping mission arrived in Bosnia it found that the EU police mission, the Commission office and the EU special representative’s office had different objectives and did not want to work with it. There was little co-ordination from Brussels. There have been similar problems in Congo and Afghanistan. In order to ensure that the various EU agencies work together in such important places, the EAS should deploy a special representative to each of them. He or she should have the authority to co-ordinate the work of the various missions on the ground.
4) Will the 27 member-states identify with the EAS and trust it to promote their interests? Most small countries will see the value of a body that can represent them in places where they lack embassies. But there is a real danger that the foreign ministries of Britain, France or Germany could see the EAS as a rival source of power and as a competitor for money and the best people. They would then work round or against the EAS. The High Representative should therefore ensure that the big countries are given the chance to send good people to fill some of the top posts in the EAS. If the HR can establish an efficient bureaucracy that produces high-quality analysis, national foreign ministries will, hopefully, learn to respect it.
Charles Grant is director of the Centre for European Reform.
Tuesday, May 05, 2009
Are the British the new French?
by Simon Tilford
The British tend to deride France as a hopelessly statist, anti-entrepreneurial country full of bolshie workers intent on extracting disproportionate rewards for their labour and a state too weak to resist them. This characterisation is not wholly inaccurate. But the implicit (and sometimes explicit) assumption is that the UK is everything that France is not. This is not the case.
In some respects, Britain now looks worse than France. For all its faults, France produces good public services and decent social outcomes, such as relatively low levels of poverty and high overall skills levels. Britain, by contrast, now combines a very big state, patchy public services, generally poor social outcomes and increasing barriers to wealth creation. This is a poisonous mixture. The situation can be rescued, but not without breaking some eggs.
The figures are arresting. Britain has gone from having one of the smallest states in the EU to one of the largest. In 2000, public spending accounted for 37% of GDP in the UK, just three percentage points above the US and a full 15 percentage points below France. By 2010 the OECD estimates that state spending will account for 49% of GDP in Britain, against 53% in France (52% in famously high-spending Sweden). Britain has already overtaken Germany and the Netherlands (44% and 46% respectively).
This unprecedented expansion of the British state would be less of problem if the UK now had Scandinavian (or even French) levels of public services or first-rate physical infrastructure. But improvements in British public services over the last ten years have been nowhere near big enough to justify the increase in expenditure. Most of the money has gone on increased employment and wages, rather than improvements in services. Perhaps unsurprisingly, given the stranglehold that the unions have on the public sector, productivity has stagnated.
It is also notable that Britain’s welfare-state is not comparable to that of Germany or the Netherlands, let alone France or Sweden. Unlike in these countries, many of the ordinary Britons currently losing their jobs will receive only derisory sums in unemployment benefits because these are means-tested. And only a forensic scientist could spot significant improvements in the country’s physical infrastructure. Britain’s roads remain as congested as ever and its railways expensive and unreliable.
Of course, the tax burden in the UK is still lower than in France. In 2008, taxes accounted for 49% of GDP in France compared to just 42% in Britain. But the gap between tax and expenditure in Britain is completely unsustainable, given the parlous state of the country’s public finances. How it is closed will to a large extent determine Britain’s economic prospects. If the gap is bridged by cutting expenditure, the UK stands a chance of returning to a relatively strong growth path. But if it is closed primarily through increased taxes, Britain will have a bleak future. The tax burden will be among the highest in the OECD, but public services (and the country’s social outcomes) will be nowhere near good enough to justify the tax take. In short, Britain will have Scandinavian levels of taxation and American levels of public services and social welfare.
The Labour party is poorly placed to sort out this mess because of its close links to the public sector unions. Under Labour the public sector has become a privileged class that is impervious to change and reform. By way of illustration, public sector wages are currently rising by close to 4% a year at a time of economic crisis. And this despite the fact that public workers are on average better paid than their private sector counterparts and enjoy generous pension entitlements. What about the country’s physical infrastructure? On the government’s forecasts, public investment will halve over the next 4 years. In fact, the only significant cuts the government intends to make are to investment.
The Tories stand a better chance of taking on entrenched public sector vested interests, but it will be a battle. Moreover, they will need to avoid the mistakes of the 1980s when they reduced spending by cutting services and investment rather than by increasing public sector efficiency. If they do this again, UK taxes will remain very high relative to what those taxes deliver in terms of services.
Britain still has strengths, of course. It is straightforward to set up a business in the UK and the labour market remains flexible. But overall Britain looks increasingly like one of the sick men of Europe, and certainly as sick as France. The French state is an efficient provider of services and quasi-state institutions construct and manage first-rate physical infrastructure. France, unlike Britain, has bitten the bullet on public pensions, increasing the retirement age to 65. The French have no qualms about allowing private companies to provide healthcare. Even the Tories do not appear to have the stomach for dismantling the NHS’s near monopoly on the provision of public healthcare.
The British need to get over the idea that they took all the difficult decisions in the 1980s and that Britain is an example for others to follow. It has a huge state, yet has poor social outcomes. Much of its growth in recent years has been down to a turbo-charged financial services industry and an unsustainable expansion of the public sector. Both trends have now run their course and the public sector has become a dead weight on the economy. Britain needs to concentrate on improving the climate for wealth creation. This will require much better public sector productivity and high levels of investment in human capital and physical infrastructure.
Simon Tilford is chief economist at the Centre for European Reform.
The British tend to deride France as a hopelessly statist, anti-entrepreneurial country full of bolshie workers intent on extracting disproportionate rewards for their labour and a state too weak to resist them. This characterisation is not wholly inaccurate. But the implicit (and sometimes explicit) assumption is that the UK is everything that France is not. This is not the case.
In some respects, Britain now looks worse than France. For all its faults, France produces good public services and decent social outcomes, such as relatively low levels of poverty and high overall skills levels. Britain, by contrast, now combines a very big state, patchy public services, generally poor social outcomes and increasing barriers to wealth creation. This is a poisonous mixture. The situation can be rescued, but not without breaking some eggs.
The figures are arresting. Britain has gone from having one of the smallest states in the EU to one of the largest. In 2000, public spending accounted for 37% of GDP in the UK, just three percentage points above the US and a full 15 percentage points below France. By 2010 the OECD estimates that state spending will account for 49% of GDP in Britain, against 53% in France (52% in famously high-spending Sweden). Britain has already overtaken Germany and the Netherlands (44% and 46% respectively).
This unprecedented expansion of the British state would be less of problem if the UK now had Scandinavian (or even French) levels of public services or first-rate physical infrastructure. But improvements in British public services over the last ten years have been nowhere near big enough to justify the increase in expenditure. Most of the money has gone on increased employment and wages, rather than improvements in services. Perhaps unsurprisingly, given the stranglehold that the unions have on the public sector, productivity has stagnated.
It is also notable that Britain’s welfare-state is not comparable to that of Germany or the Netherlands, let alone France or Sweden. Unlike in these countries, many of the ordinary Britons currently losing their jobs will receive only derisory sums in unemployment benefits because these are means-tested. And only a forensic scientist could spot significant improvements in the country’s physical infrastructure. Britain’s roads remain as congested as ever and its railways expensive and unreliable.
Of course, the tax burden in the UK is still lower than in France. In 2008, taxes accounted for 49% of GDP in France compared to just 42% in Britain. But the gap between tax and expenditure in Britain is completely unsustainable, given the parlous state of the country’s public finances. How it is closed will to a large extent determine Britain’s economic prospects. If the gap is bridged by cutting expenditure, the UK stands a chance of returning to a relatively strong growth path. But if it is closed primarily through increased taxes, Britain will have a bleak future. The tax burden will be among the highest in the OECD, but public services (and the country’s social outcomes) will be nowhere near good enough to justify the tax take. In short, Britain will have Scandinavian levels of taxation and American levels of public services and social welfare.
The Labour party is poorly placed to sort out this mess because of its close links to the public sector unions. Under Labour the public sector has become a privileged class that is impervious to change and reform. By way of illustration, public sector wages are currently rising by close to 4% a year at a time of economic crisis. And this despite the fact that public workers are on average better paid than their private sector counterparts and enjoy generous pension entitlements. What about the country’s physical infrastructure? On the government’s forecasts, public investment will halve over the next 4 years. In fact, the only significant cuts the government intends to make are to investment.
The Tories stand a better chance of taking on entrenched public sector vested interests, but it will be a battle. Moreover, they will need to avoid the mistakes of the 1980s when they reduced spending by cutting services and investment rather than by increasing public sector efficiency. If they do this again, UK taxes will remain very high relative to what those taxes deliver in terms of services.
Britain still has strengths, of course. It is straightforward to set up a business in the UK and the labour market remains flexible. But overall Britain looks increasingly like one of the sick men of Europe, and certainly as sick as France. The French state is an efficient provider of services and quasi-state institutions construct and manage first-rate physical infrastructure. France, unlike Britain, has bitten the bullet on public pensions, increasing the retirement age to 65. The French have no qualms about allowing private companies to provide healthcare. Even the Tories do not appear to have the stomach for dismantling the NHS’s near monopoly on the provision of public healthcare.
The British need to get over the idea that they took all the difficult decisions in the 1980s and that Britain is an example for others to follow. It has a huge state, yet has poor social outcomes. Much of its growth in recent years has been down to a turbo-charged financial services industry and an unsustainable expansion of the public sector. Both trends have now run their course and the public sector has become a dead weight on the economy. Britain needs to concentrate on improving the climate for wealth creation. This will require much better public sector productivity and high levels of investment in human capital and physical infrastructure.
Simon Tilford is chief economist at the Centre for European Reform.
Thursday, April 23, 2009
Towards a new system of financial regulation
by Philip Whyte
The financial crisis is often portrayed as the product of weak regulation in the Anglosphere. But it is more accurate to think of it as the result of flawed thinking (and policy) across the global financial system as a whole. One reason is that countries outside the Anglosphere have also experienced unsustainable credit and housing market booms. Another is that differences in regulatory systems are smaller than is often supposed. The lesson of the crisis is not, as Nicolas Sarkozy and Jean-Claude Juncker seem to think, that Anglo-Saxons must move in a European direction. It is that all countries must converge on a new regulatory model.
It is not hard to see why the attention of European politicians should have zeroed in on regulatory flaws in the US – it is, after all, where the financial crisis broke out. There are unquestionably important lessons to be learned from the US experience – particularly in relation to the ‘shadow banking system’ and securitisation (the process of originating loans, then packaging them up as securities and selling them on to the market). But the financial crisis has done more than simply expose flaws in the US’s regulatory model. It has also called into question the very principles on which institutions the world over have been supervised.
The first flaw that the crisis has exposed is the ‘pro-cyclicality’ of financial regulation. Regulation did nothing to mitigate the expansion of leverage, credit and house prices. Capital adequacy rules did not become more constraining during the upswing, while accountancy rules exacerbated the downswing by forcing firms to sell assets at distressed prices. So the regulatory framework did not provide enough of a check on banks at the top of the credit cycle – but compounded their problems when the cycle turned. Lesson: the regulatory framework must be redesigned so that it mitigates, rather than exacerbates, the credit cycle.
A second problem brought to light by the crisis is that regulators were not paying enough attention to liquidity. For the past twenty years or so, international discussions between regulators have concentrated overwhelmingly on solvency – that is, how much capital financial institutions should hold to cushion themselves against losses on their banking and trading books. But many of the institutions that were brought low by the crisis (such as Northern Rock and Lehman Brothers) ran into trouble because their sources of funding dried up. In effect, regulators had spent the past twenty years preparing for a right hook, but ended up being floored by an upper cut. Liquidity will loom larger in regulation than it has done to date.
A final flaw that the crisis exposed is the belief that the stability of a financial system follows inexorably from the soundness of its individual constituents. What this belief ignored was that institutions were more interconnected (and hence vulnerable) than was previously realised; and that actions by individual institutions to maintain their own stability could, when copied by all their peers, push the system itself to collapse. In short, regulatory regimes paid too much attention to the supervision of individual institutions (micro-prudential regulation) and not enough to the system as a whole (macro-prudential regulation). Macro-prudential supervision will be one of the key innovations to emerge from the crisis.
A major overhaul of financial regulation is in prospect, both in the Anglosphere and Europe. It will not involve the supposedly unregulated Anglo-Saxon systems converging on existing European models, but Anglo-Saxon and European models converging on an entirely new model, with novel rules and institutional structures. Will the new system regulate future crises out of existence? Almost certainly not. Financial systems will always be prone to periodic crises because of the nature of their function – borrowing short and lending long – and because they rely on fickle human traits such as confidence and trust. But if the new system can limit the scale of future crises, it will have done its job.
Philip Whyte is a senior research fellow at the Centre for European Reform.
The financial crisis is often portrayed as the product of weak regulation in the Anglosphere. But it is more accurate to think of it as the result of flawed thinking (and policy) across the global financial system as a whole. One reason is that countries outside the Anglosphere have also experienced unsustainable credit and housing market booms. Another is that differences in regulatory systems are smaller than is often supposed. The lesson of the crisis is not, as Nicolas Sarkozy and Jean-Claude Juncker seem to think, that Anglo-Saxons must move in a European direction. It is that all countries must converge on a new regulatory model.
It is not hard to see why the attention of European politicians should have zeroed in on regulatory flaws in the US – it is, after all, where the financial crisis broke out. There are unquestionably important lessons to be learned from the US experience – particularly in relation to the ‘shadow banking system’ and securitisation (the process of originating loans, then packaging them up as securities and selling them on to the market). But the financial crisis has done more than simply expose flaws in the US’s regulatory model. It has also called into question the very principles on which institutions the world over have been supervised.
The first flaw that the crisis has exposed is the ‘pro-cyclicality’ of financial regulation. Regulation did nothing to mitigate the expansion of leverage, credit and house prices. Capital adequacy rules did not become more constraining during the upswing, while accountancy rules exacerbated the downswing by forcing firms to sell assets at distressed prices. So the regulatory framework did not provide enough of a check on banks at the top of the credit cycle – but compounded their problems when the cycle turned. Lesson: the regulatory framework must be redesigned so that it mitigates, rather than exacerbates, the credit cycle.
A second problem brought to light by the crisis is that regulators were not paying enough attention to liquidity. For the past twenty years or so, international discussions between regulators have concentrated overwhelmingly on solvency – that is, how much capital financial institutions should hold to cushion themselves against losses on their banking and trading books. But many of the institutions that were brought low by the crisis (such as Northern Rock and Lehman Brothers) ran into trouble because their sources of funding dried up. In effect, regulators had spent the past twenty years preparing for a right hook, but ended up being floored by an upper cut. Liquidity will loom larger in regulation than it has done to date.
A final flaw that the crisis exposed is the belief that the stability of a financial system follows inexorably from the soundness of its individual constituents. What this belief ignored was that institutions were more interconnected (and hence vulnerable) than was previously realised; and that actions by individual institutions to maintain their own stability could, when copied by all their peers, push the system itself to collapse. In short, regulatory regimes paid too much attention to the supervision of individual institutions (micro-prudential regulation) and not enough to the system as a whole (macro-prudential regulation). Macro-prudential supervision will be one of the key innovations to emerge from the crisis.
A major overhaul of financial regulation is in prospect, both in the Anglosphere and Europe. It will not involve the supposedly unregulated Anglo-Saxon systems converging on existing European models, but Anglo-Saxon and European models converging on an entirely new model, with novel rules and institutional structures. Will the new system regulate future crises out of existence? Almost certainly not. Financial systems will always be prone to periodic crises because of the nature of their function – borrowing short and lending long – and because they rely on fickle human traits such as confidence and trust. But if the new system can limit the scale of future crises, it will have done its job.
Philip Whyte is a senior research fellow at the Centre for European Reform.
Wednesday, April 08, 2009
Towards a better EU migration policy
by Hugo Brady
Over the last decade, EU countries have experienced a rapid rise in both legal and illegal migration, mostly from Turkey, Morocco, Albania, Algeria and Serbia. Each spring and summer, Mediterranean member-states struggle to cope as migrants perish attempting to reach Europe from North Africa in unseaworthy and over-crowded boats. The deaths of 300 people, who drowned while trying to reach Italy from Libya, marked a particularly grim beginning to this year’s ‘smuggling season’.
Unsurprisingly, then, migration has supplanted terrorism and crime as the top priority for European interior ministers. Ministers think that collective EU action is essential if migration is to be managed better. That includes making European border management more effective and technologically advanced; integrating migration issues – visas, border controls, the resettlement of refugees and the return of illegal immigrants – into EU foreign policy; and helping Europe to fill the 50 million skilled vacancies that Europe’s retiring baby boomers will leave behind by 2060.
European policies to tackle these challenges are in their infancy, such as the Union's rather weak scheme to attract more skilled workers with an EU working visa or 'blue card'. One reason for this is that ministers have to work around major knowledge gaps about the specific foreign labour needs of the single market and about the movement of migrants into and around the EU, a free movement area. Governments have little idea where migrants go next after entering the UK from Pakistan, Spain from Ecuador or Poland from Brazil. For example, how many move to other EU countries; how many go back home; and how many are granted residency? Similarly, policy-makers are not yet certain about how good the EU’s border controls are. How many visas to the EU’s passport-free area result in illegal overstays or how many travellers are allowed in, refused at the border or returned home? Officials say they need to properly understand such movements before they can agree serious migration policies.
In many cases, such data is available but the patterns have not yet been analysed to draw concrete conclusions. The European Commission, which might be expected to have such information readily to hand, is over-burdened. Its directorate-general dealing with migration issues also has a plethora of other responsibilities, ranging from commercial law to terrorism. To overcome this lack of analytical capability, Commission officials often emphasise technological solutions such as biometric databases for visas and law enforcement. But these have tended to be subject to long development delays and will not, in any case, cut out the need to synthesise vast amounts of information.
One idea to help address such knowledge gaps would be to create national ‘immigration profiles’. The idea – already floated by the Commission – would be to maintain a precise and detailed picture of migration and border management in each member-state at any given moment. The Commission would also be able to ascertain the foreign labour needs of each member-state, by identifying skill shortages by sector and occupation, though member-states would still control the issuance of work visas. Similar profiles of non-EU countries could help identify the skills composition of different migrant communities and to provide analysis to EU policy-makers negotiating with migrants’ home governments on visa facilitation, border controls and the return of illegal immigrants. The member-states think that the EU speaking with one voice in such negotiations would be a significant improvement on national efforts.
The compilation of national immigration profiles is not a panacea for solving all of Europe's migration challenges. But if implemented effectively, the profiles could help to ensure that future migration policies are properly evidence-based and, therefore, more effective. However, if the Commission wants the job of providing such analysis, it will need to create a separate department for migration or to boost the resources of its current directorate-general for justice, liberty and security.
Hugo Brady is a research fellow at the Centre for European Reform.
Over the last decade, EU countries have experienced a rapid rise in both legal and illegal migration, mostly from Turkey, Morocco, Albania, Algeria and Serbia. Each spring and summer, Mediterranean member-states struggle to cope as migrants perish attempting to reach Europe from North Africa in unseaworthy and over-crowded boats. The deaths of 300 people, who drowned while trying to reach Italy from Libya, marked a particularly grim beginning to this year’s ‘smuggling season’.
Unsurprisingly, then, migration has supplanted terrorism and crime as the top priority for European interior ministers. Ministers think that collective EU action is essential if migration is to be managed better. That includes making European border management more effective and technologically advanced; integrating migration issues – visas, border controls, the resettlement of refugees and the return of illegal immigrants – into EU foreign policy; and helping Europe to fill the 50 million skilled vacancies that Europe’s retiring baby boomers will leave behind by 2060.
European policies to tackle these challenges are in their infancy, such as the Union's rather weak scheme to attract more skilled workers with an EU working visa or 'blue card'. One reason for this is that ministers have to work around major knowledge gaps about the specific foreign labour needs of the single market and about the movement of migrants into and around the EU, a free movement area. Governments have little idea where migrants go next after entering the UK from Pakistan, Spain from Ecuador or Poland from Brazil. For example, how many move to other EU countries; how many go back home; and how many are granted residency? Similarly, policy-makers are not yet certain about how good the EU’s border controls are. How many visas to the EU’s passport-free area result in illegal overstays or how many travellers are allowed in, refused at the border or returned home? Officials say they need to properly understand such movements before they can agree serious migration policies.
In many cases, such data is available but the patterns have not yet been analysed to draw concrete conclusions. The European Commission, which might be expected to have such information readily to hand, is over-burdened. Its directorate-general dealing with migration issues also has a plethora of other responsibilities, ranging from commercial law to terrorism. To overcome this lack of analytical capability, Commission officials often emphasise technological solutions such as biometric databases for visas and law enforcement. But these have tended to be subject to long development delays and will not, in any case, cut out the need to synthesise vast amounts of information.
One idea to help address such knowledge gaps would be to create national ‘immigration profiles’. The idea – already floated by the Commission – would be to maintain a precise and detailed picture of migration and border management in each member-state at any given moment. The Commission would also be able to ascertain the foreign labour needs of each member-state, by identifying skill shortages by sector and occupation, though member-states would still control the issuance of work visas. Similar profiles of non-EU countries could help identify the skills composition of different migrant communities and to provide analysis to EU policy-makers negotiating with migrants’ home governments on visa facilitation, border controls and the return of illegal immigrants. The member-states think that the EU speaking with one voice in such negotiations would be a significant improvement on national efforts.
The compilation of national immigration profiles is not a panacea for solving all of Europe's migration challenges. But if implemented effectively, the profiles could help to ensure that future migration policies are properly evidence-based and, therefore, more effective. However, if the Commission wants the job of providing such analysis, it will need to create a separate department for migration or to boost the resources of its current directorate-general for justice, liberty and security.
Hugo Brady is a research fellow at the Centre for European Reform.
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