by Philip Whyte
On February 25th, a Commission-appointed taskforce headed by Jacques de Larosière published its much-awaited report on financial supervision in the EU. By coincidence, a parallel (but less widely reported) event took place the same day on the other side of the Channel: Lord Turner, the chairman of the UK’s Financial Services Authority (FSA), gave evidence to a parliamentary committee. What light does Lord Turner’s evidence shed on the UK’s likely reception of the Larosière report?
London’s status as a financial centre has long played an important role in Britain’s complex relationship with the EU. Although the UK has been a strong supporter of the single market, it has been suspicious of any moves that might undermine London’s position as Europe’s pre-eminent financial centre. London’s status has partly rested on the UK’s ‘light touch’ regulatory regime. And many in the UK have long worried that the survival of that regime is threatened by the encroachment of EU rules – particularly as countries such as France and Germany, which aspire to ‘repatriate’ business to Paris and Frankfurt, have never had the City of London’s best interests at heart. This explains why the City, the most cosmopolitan economic cluster anywhere in the EU, is relatively Eurosceptic. And it partly explains successive British governments’ reticence to EU integration.
However, the financial crisis is transforming some longstanding British assumptions. It is not that the crisis has reduced domestic Euro-scepticism. Domestic opposition to joining the single currency remains as strong as ever. But the crisis has called into question the merits of ‘light touch’ regulation. Popular feeling against financiers is running high. A backlash is in full swing. Bankers have fallen even lower in the public’s esteem than politicians, journalists and estate agents. Given the epic scale of the profits which have been privatised and the losses which have been socialised, the opprobrium financiers are attracting is understandable. All the main political parties are going along with the public mood. But it would be wrong to dismiss the recent furore as politicians pandering to the mob. For the change in British assumptions seems to run deeper: it is intellectual, as well as political.
Take Lord Turner’s evidence to the Treasury select committee. What did he say? In essence, he said that the era of light touch regulation was over. He promised a ‘revolution’ in financial regulation that would include tougher capital rules for banks, and capital and liquidity rules for previously large, unregulated institutions such as hedge funds. Asked about the way in which the FSA had supervised a bank which had to be bailed out in 2008 with taxpayers’ money, he said that it “was a competent execution of a philosophy of regulation that was, in retrospect, mistaken”. Lord Turner is no populist, so his testimony represents one of the strongest repudiations of the philosophy of light touch regulation to date. It would be wrong to conclude that the British have converted to the French and German view of financial markets. But the intellectual distance across the Channel has narrowed.
What of the British view on pan-European regulatory structures? The government has opposed periodic calls for the establishment of a pan-European regulator. And there is no reason to believe that the financial crisis has made it anymore keen on the idea. It will continue to oppose any blueprint that smacks of supranationalism. The question is: does the Larosière report propose institutional structures that the UK could accept? It is not yet clear. The Larosière group is not recommending that a single regulator be established. It has recognised that this would be unrealistic, given the absence of political appetite in the UK and some other member-states. So it has proposed building two separate structures: one dealing with traditional micro-prudential supervision (the oversight of individual institutions) and another with macro-prudential issues (risks to the financial system as a whole).
Micro-prudential supervision would build on existing institutional arrangements by establishing a European System of Financial Supervisors. The day-to-day supervision of institutions would be left to national regulators, and international colleges of regulators would continue to oversee cross-border banks. But there would be greater central coordination. The so-called Level 3 committees, which currently try to coordinate national regulatory approaches across the EU, would be given more powers and turned into new authorities for the banking, insurance and securities industries. Macro-prudential supervision would be carried out by a European Systemic Risk Council. This new body would be chaired by the European Central Bank (ECB), but composed of national central banks and regulators. It would collate and analyse information relating to system risk and financial stability.
Could the British government sign up to the institutional architecture proposed by the Larosière report? Although the report does not recommend the establishment of a single, pan-European regulator the British government may still find it difficult to cede new powers to EU bodies. The governing Labour Party is domestically weakened and, with only a year before the next general election, is trailing the opposition Conservative Party by a huge margin in opinion polls. The political context is important because Labour will not want to expose itself to accusations from Eurosceptic Conservatives that it has “given powers away to Brusssels”. The Channel may have narrowed, therefore. But it is far from clear that it has done so sufficiently to allow the Larosière report to be implemented. This is a shame, because there may be no other way to reconcile political constraints with the needs of the moment.
Philip Whyte is a senior research fellow at the Centre for European Reform.
Friday, February 27, 2009
Tuesday, February 24, 2009
Why enlargement is in trouble
by Katinka Barysch
It is five years since the EU admitted eight Central and East European countries, followed by another two in 2007. To celebrate this anniversary, Commissioner Olli Rehn has just released a report that explains how these countries have benefited from integrating into the EU. But any jubilant mood was dimmed by the current economic crisis in Central and Eastern Europe; and by the bleak outlook for further accessions.
There are long-standing and well-known reasons why enlargement to Turkey and the Western Balkans is proceeding so slowly: the political instability and economic backwardness of most of the current applicants; the enlargement fatigue of many West Europeans; the specific questions that Austrian, French and other politicians ask about Turkey’s European destiny.
But there is another, more specific reason why enlargement is in trouble just now: various existing EU members are holding enlargement hostage to bilateral issues they have with some applicant or other. EU governments have always thrown their specific worries or pet projects into accession negotiations. But the boldness with which some now hold up the entire process to get what they want is almost unprecedented.
The most blatant example is Slovenia’s spat with Croatia over a stretch of Mediterranean border. Croatia was hoping to wrap up its accession negotiations this year so that it can join in 2010. But while 26 EU countries (and the European Commission) wanted to open ten new ‘chapters’ in the negotiations in 2008, Slovenia vetoed all but one. Since then, the political atmosphere between Ljubljana and Zagreb has become so poisonous that the EU has called in Nobel Prize winning diplomatic Martti Ahtisaari to find a way out.
Cyprus, meanwhile, is blocking several chapters in Turkey’s accession talks, probably in the hope of gaining leverage in the peace talks that are going on in the divided island. France is also holding up the talks, but for more profound reasons: since Nicolas Sarkozy prefers a ‘privileged partnership’, he argues that Turkey need not bother with those chapters of the acquis that are only relevant for full members.
Meanwhile, the Dutch government is vetoing an EU-Serbia ‘stabilisation agreement’ (an important step on the path towards candidate status) because it wants Belgrade to first deliver Ratko Mladic to the war-crimes tribunal in The Hague. Greece is holding Macedonia’s application hostage to its long-running dispute over the country’s proper name. Although Macedonia has had official candidate status since 2005, the Council has not yet asked the Commission for an ‘opinion’ on the country’s readiness. Without this report, the negotiations cannot start. Already, Brussels-watchers speculate which EU nation could impose a veto over a possible application from Iceland, perhaps over fishing rights.
One high-level Commission official warns that bilateral issues could “suffocate the enlargement agenda”. This would be a dangerous development in what is going to be a crucial year for accession. Albania, Bosnia and Serbia are planning to hand in their formal applications for membership this year, as Montenegro already did at the end of 2008. The EU needs to stand ready to respond in an encouraging and constructive way, not with the stony silence that has met recent advances from countries in the Western Balkans.
Turkey’s accession could also be heading for trouble this year. The EU is due to review the implementation of the ‘Ankara protocol’ under which Turkey is obliged to open up its ports and airports for ships and planes from Cyprus. Turkey is unlikely to comply unless there is progress in the peace talks between northern and southern Cyprus – a faint prospect after 40 years of divisions. Some EU governments will insist that Turkey’s accession process will be put on hold. Even if there were no such demands, there are now so many bilateral vetoes on different bits of the Turkish accession talks that the EU would simply run out of chapters to negotiate with Ankara.
Only a big political push can resolve these multiple deadlocks. But most EU members are not keen on moving enlargement along. West Europeans will be even more fearful of cheap competition from eastern newcomers now that their economies are in recession and unemployment is rising everywhere. EU governments will be cautious not to take any unpopular decisions on enlargement ahead of the elections to the European Parliament in June 2009 and the second Irish referendum on the Lisbon treaty in the autumn. By then, however, irreparable damage could already have been done to the credibility of the enlargement process, especially if the accession of Croatia – by far the best prepared of the current aspirants – was foiled or delayed because of a bilateral border spat.
EU governments need some vision here. They should conclude a ‘gentlemen’s agreement’ not to veto accessions because of bilateral grievances. They need to find a way of keeping Turkey’s accession process alive even if no breakthrough is achieved in Cyprus this year. And they should allow the Commission to get going with the opinions on the Western Balkans countries. The debate on whether these countries are ready to join the EU should be conducted on the basis of these reports, not ahead of them.
Katinka Barysch is deputy director of the Centre for European Reform.
It is five years since the EU admitted eight Central and East European countries, followed by another two in 2007. To celebrate this anniversary, Commissioner Olli Rehn has just released a report that explains how these countries have benefited from integrating into the EU. But any jubilant mood was dimmed by the current economic crisis in Central and Eastern Europe; and by the bleak outlook for further accessions.
There are long-standing and well-known reasons why enlargement to Turkey and the Western Balkans is proceeding so slowly: the political instability and economic backwardness of most of the current applicants; the enlargement fatigue of many West Europeans; the specific questions that Austrian, French and other politicians ask about Turkey’s European destiny.
But there is another, more specific reason why enlargement is in trouble just now: various existing EU members are holding enlargement hostage to bilateral issues they have with some applicant or other. EU governments have always thrown their specific worries or pet projects into accession negotiations. But the boldness with which some now hold up the entire process to get what they want is almost unprecedented.
The most blatant example is Slovenia’s spat with Croatia over a stretch of Mediterranean border. Croatia was hoping to wrap up its accession negotiations this year so that it can join in 2010. But while 26 EU countries (and the European Commission) wanted to open ten new ‘chapters’ in the negotiations in 2008, Slovenia vetoed all but one. Since then, the political atmosphere between Ljubljana and Zagreb has become so poisonous that the EU has called in Nobel Prize winning diplomatic Martti Ahtisaari to find a way out.
Cyprus, meanwhile, is blocking several chapters in Turkey’s accession talks, probably in the hope of gaining leverage in the peace talks that are going on in the divided island. France is also holding up the talks, but for more profound reasons: since Nicolas Sarkozy prefers a ‘privileged partnership’, he argues that Turkey need not bother with those chapters of the acquis that are only relevant for full members.
Meanwhile, the Dutch government is vetoing an EU-Serbia ‘stabilisation agreement’ (an important step on the path towards candidate status) because it wants Belgrade to first deliver Ratko Mladic to the war-crimes tribunal in The Hague. Greece is holding Macedonia’s application hostage to its long-running dispute over the country’s proper name. Although Macedonia has had official candidate status since 2005, the Council has not yet asked the Commission for an ‘opinion’ on the country’s readiness. Without this report, the negotiations cannot start. Already, Brussels-watchers speculate which EU nation could impose a veto over a possible application from Iceland, perhaps over fishing rights.
One high-level Commission official warns that bilateral issues could “suffocate the enlargement agenda”. This would be a dangerous development in what is going to be a crucial year for accession. Albania, Bosnia and Serbia are planning to hand in their formal applications for membership this year, as Montenegro already did at the end of 2008. The EU needs to stand ready to respond in an encouraging and constructive way, not with the stony silence that has met recent advances from countries in the Western Balkans.
Turkey’s accession could also be heading for trouble this year. The EU is due to review the implementation of the ‘Ankara protocol’ under which Turkey is obliged to open up its ports and airports for ships and planes from Cyprus. Turkey is unlikely to comply unless there is progress in the peace talks between northern and southern Cyprus – a faint prospect after 40 years of divisions. Some EU governments will insist that Turkey’s accession process will be put on hold. Even if there were no such demands, there are now so many bilateral vetoes on different bits of the Turkish accession talks that the EU would simply run out of chapters to negotiate with Ankara.
Only a big political push can resolve these multiple deadlocks. But most EU members are not keen on moving enlargement along. West Europeans will be even more fearful of cheap competition from eastern newcomers now that their economies are in recession and unemployment is rising everywhere. EU governments will be cautious not to take any unpopular decisions on enlargement ahead of the elections to the European Parliament in June 2009 and the second Irish referendum on the Lisbon treaty in the autumn. By then, however, irreparable damage could already have been done to the credibility of the enlargement process, especially if the accession of Croatia – by far the best prepared of the current aspirants – was foiled or delayed because of a bilateral border spat.
EU governments need some vision here. They should conclude a ‘gentlemen’s agreement’ not to veto accessions because of bilateral grievances. They need to find a way of keeping Turkey’s accession process alive even if no breakthrough is achieved in Cyprus this year. And they should allow the Commission to get going with the opinions on the Western Balkans countries. The debate on whether these countries are ready to join the EU should be conducted on the basis of these reports, not ahead of them.
Katinka Barysch is deputy director of the Centre for European Reform.
Thursday, February 19, 2009
Germany: Between a rock and a hard place
by Simon Tilford
Twelve months ago it seemed inconceivable that any member of the EU could face a sovereign debt crisis. It would have been the stuff of fantasy to argue that Ireland or Austria could be among those at risk. Such an outcome is now well within the realms of possibility. If one country suffers a crisis, that will not be the end of it. It would almost certainly trigger a wave of crises, plunging the EU, and especially the eurozone, into turmoil. There is nothing inevitable about this. But a way out requires Germany to show more vision.
Some eurozone member-states – Italy and Spain – are vulnerable because they have lost so much competitiveness and investors are sceptical they will be able to regain it. Others – Austria and Belgium – have disproportionately large banking sectors and/or banks with huge exposures to crisis hit regions such as Eastern Europe. For their part, Ireland and Greece have lost competitiveness and have very exposed banking sectors.
What is the way forward? One option might be for governments to start issuing eurozone sovereign bonds, rather than their own national bonds. This would help address the problem of poor liquidity that has bedevilled many of the smaller eurozone financial markets. And it would reduce borrowing costs substantially for most eurozone countries.
There are, however, a number of obstacles. German borrowing costs would rise, as it shared its credibility with the rest of the eurozone. Such a move would arguably let profligate countries off the hook. And, it might be difficult to ensure budgetary discipline in the fiscally weaker countries. Curbing the budgetary autonomy of individual governments would require a far greater degree of political integration in the eurozone.
These concerns highlight what many economists have always believed to be the inherent contradiction in economic and monetary union: the absence of a political union. However, the German government’s objection to the pooling of bond issuance – that it would cost Germany too much money – is a parochial one. The alternatives threaten to cost Germany (and Europe) much more.
The German finance minister, Peer Steinbrück, has indicated that there may be a case for support for hard-hit members of the eurozone. But he is mistaken if he thinks a fiscal crisis in one member-state would be a cleansing experience, with the chastened country receiving a highly conditional IMF-type bail-out, and the others learning the lesson of their errant ways. First, one sovereign crisis would almost certainly lead to others. The direct costs of the bail-out could be surmountable in the case of an Ireland or a Greece, but would pose a much bigger challenge in the case of larger member-states. Second there would be indirect costs to the German economy, which is enormously dependent on exports to the rest of the eurozone. The last thing the German economy needs is a further collapse in external demand.
Nor is this the worst case scenario. If Italy or Spain defaulted on their sovereign debt – perhaps as a result of the rest of the eurozone failing to agree a bail-out or attaching excessively onerous terms to one – the repercussions for the eurozone could be dramatic. For inflexible and sizeable economies, it is far from clear that default within the currency union is more plausible than a default and a move to leave it. A member-state could decide that having defaulted (and in the process cut itself off from most sources of capital, at least for a time) it may as well devalue, which would at least help to restore competitiveness and get the economy growing again. If one country were to leave, pressure on others to follow suit would be intense.
Germany cannot afford to be sanguine about such an outcome. German companies have spent years holding down costs. The result has been improved competitiveness versus the rest of the eurozone, but at the expense of chronically weak domestic demand. If the eurozone were to unravel, Germany would experience a huge real appreciation, reversing almost overnight the competitiveness gains it has painfully ground out.
A move to issue eurozone bonds would not mean Germany sacrificing its own interests for the good of Europe. A country as export-dependent as Germany and as politically reliant on the EU cannot afford to be blasé about economic crises in neighbouring countries. Germany is going to have to show solidarity one way or another, so it should do so in a way that imposes the fewest costs on itself and maximises its political capital.
Simon Tilford is chief economist at the Centre for European Reform.
Twelve months ago it seemed inconceivable that any member of the EU could face a sovereign debt crisis. It would have been the stuff of fantasy to argue that Ireland or Austria could be among those at risk. Such an outcome is now well within the realms of possibility. If one country suffers a crisis, that will not be the end of it. It would almost certainly trigger a wave of crises, plunging the EU, and especially the eurozone, into turmoil. There is nothing inevitable about this. But a way out requires Germany to show more vision.
Some eurozone member-states – Italy and Spain – are vulnerable because they have lost so much competitiveness and investors are sceptical they will be able to regain it. Others – Austria and Belgium – have disproportionately large banking sectors and/or banks with huge exposures to crisis hit regions such as Eastern Europe. For their part, Ireland and Greece have lost competitiveness and have very exposed banking sectors.
What is the way forward? One option might be for governments to start issuing eurozone sovereign bonds, rather than their own national bonds. This would help address the problem of poor liquidity that has bedevilled many of the smaller eurozone financial markets. And it would reduce borrowing costs substantially for most eurozone countries.
There are, however, a number of obstacles. German borrowing costs would rise, as it shared its credibility with the rest of the eurozone. Such a move would arguably let profligate countries off the hook. And, it might be difficult to ensure budgetary discipline in the fiscally weaker countries. Curbing the budgetary autonomy of individual governments would require a far greater degree of political integration in the eurozone.
These concerns highlight what many economists have always believed to be the inherent contradiction in economic and monetary union: the absence of a political union. However, the German government’s objection to the pooling of bond issuance – that it would cost Germany too much money – is a parochial one. The alternatives threaten to cost Germany (and Europe) much more.
The German finance minister, Peer Steinbrück, has indicated that there may be a case for support for hard-hit members of the eurozone. But he is mistaken if he thinks a fiscal crisis in one member-state would be a cleansing experience, with the chastened country receiving a highly conditional IMF-type bail-out, and the others learning the lesson of their errant ways. First, one sovereign crisis would almost certainly lead to others. The direct costs of the bail-out could be surmountable in the case of an Ireland or a Greece, but would pose a much bigger challenge in the case of larger member-states. Second there would be indirect costs to the German economy, which is enormously dependent on exports to the rest of the eurozone. The last thing the German economy needs is a further collapse in external demand.
Nor is this the worst case scenario. If Italy or Spain defaulted on their sovereign debt – perhaps as a result of the rest of the eurozone failing to agree a bail-out or attaching excessively onerous terms to one – the repercussions for the eurozone could be dramatic. For inflexible and sizeable economies, it is far from clear that default within the currency union is more plausible than a default and a move to leave it. A member-state could decide that having defaulted (and in the process cut itself off from most sources of capital, at least for a time) it may as well devalue, which would at least help to restore competitiveness and get the economy growing again. If one country were to leave, pressure on others to follow suit would be intense.
Germany cannot afford to be sanguine about such an outcome. German companies have spent years holding down costs. The result has been improved competitiveness versus the rest of the eurozone, but at the expense of chronically weak domestic demand. If the eurozone were to unravel, Germany would experience a huge real appreciation, reversing almost overnight the competitiveness gains it has painfully ground out.
A move to issue eurozone bonds would not mean Germany sacrificing its own interests for the good of Europe. A country as export-dependent as Germany and as politically reliant on the EU cannot afford to be blasé about economic crises in neighbouring countries. Germany is going to have to show solidarity one way or another, so it should do so in a way that imposes the fewest costs on itself and maximises its political capital.
Simon Tilford is chief economist at the Centre for European Reform.
Friday, February 13, 2009
A thaw between Russia and the West?
by Charles Grant
After several years of chilly relations between Moscow and western capitals, a little warmth is detectable. At both the Davos Word Economic Forum in January, and the Munich Security Conference in February, the Russians’ exchanges with Americans and Europeans were fairly polite. Of course, this change in the political weather may prove to be short-lived. Indeed, some commentators argue that even if the style is softer, the substance of Russian foreign policy is as hard as ever (see Quentin Peel in the Financial Times, and a forthcoming CER policy brief by my colleague Bobo Lo). Thus in recent weeks Russia has announced plans for a new naval base in Abkhazia (which is legally part of Georgia) and encouraged Kyrgyzstan to close the American airbase at Manas.
But in international politics, style matters. Russia’s leaders know that their economy is being harder hit by the economic crisis than most others in Europe. One adviser to the Russian government recently said that a GDP shrinkage of 10 per cent could not be ruled out this year. Russia’s leaders know that the modernisation of their country will require western capital and technology. So perhaps it is not surprising that they have become less inclined to display the swaggering arrogance that was so visible at certain moments last year, and again during the gas crisis in January.
Even on substance, the Russians appear to be making an effort to be nice on a few issues. Russia’s threat to put short-range missiles in Kaliningrad – in response to American plans to install missile defence systems in the Czech Republic and Poland – has been withdrawn. And Russia is offering to help the US to get civilian supplies to its forces in Afghanistan. As Sergei Ivanov, Russia’s deputy prime minister, said in Munich: “Russia is ready to improve relations on a range of issues, including talks on reductions of nuclear arms.”
Ivanov was responding to the olive branch that Vice President Joe Biden brought to Munich. “On NATO-Russia relations, it is time to press the reset button,” said Biden. “Let’s co-operate on fighting the Taliban, securing nuclear facilities, and cutting numbers of nuclear weapons…of course we’ll disagree on some issues but we should work together where our interests coincide.”
Some of this new US approach to Russia merely reflects the realism that now dominates some – though not all – policy-making circles in Washington. Russia can help on several important issues, so it should be engaged, flattered and treated like the super-power that it wishes to be seen as. Iran is particularly important in shaping US policy on Russia. President Obama sees the challenge of Iran’s nuclear programme as one of his very top priorities. His administration thinks that Russia may be able to lean on Iran. Therefore it is willing to ‘give’ Russia some of the things it wants, like a review or postponement of plans for missile defence and NATO enlargement.
The Europeans are now willing to help the US on Iran. They share the American view that the best way of preventing Iran from pursuing its nuclear programme is to offer a combination of bigger incentives and stronger penalties. The bigger incentive is American engagement: Obama has indicated that he is ready to talk. The stronger penalties are more stringent economic sanctions against Iran. Germany was reluctant to consider these but Chancellor Angela Merkel indicated in Munich that she was ready for new sanctions.
Tougher sanctions are unlikely to achieve much unless Russia and China support them. Currently they do not, but American and European diplomats believe that if Russia moved, China could well follow. “We need Russia’s help on Iran, so that sanctions are effective,” said President Nicolas Sarkozy in Munich. “We don’t have much time, the recent Iranian satellite launch [which showed Iran’s mastery of some ballistic missile technologies] is very bad news. Russia must show whether it really wants peace [in the world], and whether it is prepared to behave like a great power.”
There are two big unknowns about Russia’s relationship with Iran. First, could Russia really influence the country, if it wanted to? Would the Iranians listen to Russia’s advice, or respond to pressure from its leaders? Second, if the answer to the first question is yes, does Russia really want Iran to abandon its nuclear programme? In public, of course, Russia’s leaders say they do not want Iran to develop nuclear weapons. And that may well be the case. But one may suppose that some Russians think that the Iranian nuclear programme suits them very well. It creates huge problems for the US, Russia’s principal strategic competitor, by amplifying tensions between America’s allies and radical regimes across the broader Middle East. The activities of pro-Iranian groups in Iraq, Lebanon and Palestine help to weaken American (and European) soft power in the region. And so long as senior western policy-makers regard Iran’s nuclear programme as a major geopolitical headache, they will see Russia as a potential source of assistance, and thus treat it with respect. And that suits Russia very nicely.
Russia will probably tell the US that it will try to help with Iran. But if the answer to either of those two questions turns out to be no, President Obama will be disappointed. Of course, there are many important strands to the US-Russia relationship other than Iran. But a falling out over the Iranian nuclear programme would put a chill back into the entire relationship.
Charles Grant is director of the Centre for European Reform.
After several years of chilly relations between Moscow and western capitals, a little warmth is detectable. At both the Davos Word Economic Forum in January, and the Munich Security Conference in February, the Russians’ exchanges with Americans and Europeans were fairly polite. Of course, this change in the political weather may prove to be short-lived. Indeed, some commentators argue that even if the style is softer, the substance of Russian foreign policy is as hard as ever (see Quentin Peel in the Financial Times, and a forthcoming CER policy brief by my colleague Bobo Lo). Thus in recent weeks Russia has announced plans for a new naval base in Abkhazia (which is legally part of Georgia) and encouraged Kyrgyzstan to close the American airbase at Manas.
But in international politics, style matters. Russia’s leaders know that their economy is being harder hit by the economic crisis than most others in Europe. One adviser to the Russian government recently said that a GDP shrinkage of 10 per cent could not be ruled out this year. Russia’s leaders know that the modernisation of their country will require western capital and technology. So perhaps it is not surprising that they have become less inclined to display the swaggering arrogance that was so visible at certain moments last year, and again during the gas crisis in January.
Even on substance, the Russians appear to be making an effort to be nice on a few issues. Russia’s threat to put short-range missiles in Kaliningrad – in response to American plans to install missile defence systems in the Czech Republic and Poland – has been withdrawn. And Russia is offering to help the US to get civilian supplies to its forces in Afghanistan. As Sergei Ivanov, Russia’s deputy prime minister, said in Munich: “Russia is ready to improve relations on a range of issues, including talks on reductions of nuclear arms.”
Ivanov was responding to the olive branch that Vice President Joe Biden brought to Munich. “On NATO-Russia relations, it is time to press the reset button,” said Biden. “Let’s co-operate on fighting the Taliban, securing nuclear facilities, and cutting numbers of nuclear weapons…of course we’ll disagree on some issues but we should work together where our interests coincide.”
Some of this new US approach to Russia merely reflects the realism that now dominates some – though not all – policy-making circles in Washington. Russia can help on several important issues, so it should be engaged, flattered and treated like the super-power that it wishes to be seen as. Iran is particularly important in shaping US policy on Russia. President Obama sees the challenge of Iran’s nuclear programme as one of his very top priorities. His administration thinks that Russia may be able to lean on Iran. Therefore it is willing to ‘give’ Russia some of the things it wants, like a review or postponement of plans for missile defence and NATO enlargement.
The Europeans are now willing to help the US on Iran. They share the American view that the best way of preventing Iran from pursuing its nuclear programme is to offer a combination of bigger incentives and stronger penalties. The bigger incentive is American engagement: Obama has indicated that he is ready to talk. The stronger penalties are more stringent economic sanctions against Iran. Germany was reluctant to consider these but Chancellor Angela Merkel indicated in Munich that she was ready for new sanctions.
Tougher sanctions are unlikely to achieve much unless Russia and China support them. Currently they do not, but American and European diplomats believe that if Russia moved, China could well follow. “We need Russia’s help on Iran, so that sanctions are effective,” said President Nicolas Sarkozy in Munich. “We don’t have much time, the recent Iranian satellite launch [which showed Iran’s mastery of some ballistic missile technologies] is very bad news. Russia must show whether it really wants peace [in the world], and whether it is prepared to behave like a great power.”
There are two big unknowns about Russia’s relationship with Iran. First, could Russia really influence the country, if it wanted to? Would the Iranians listen to Russia’s advice, or respond to pressure from its leaders? Second, if the answer to the first question is yes, does Russia really want Iran to abandon its nuclear programme? In public, of course, Russia’s leaders say they do not want Iran to develop nuclear weapons. And that may well be the case. But one may suppose that some Russians think that the Iranian nuclear programme suits them very well. It creates huge problems for the US, Russia’s principal strategic competitor, by amplifying tensions between America’s allies and radical regimes across the broader Middle East. The activities of pro-Iranian groups in Iraq, Lebanon and Palestine help to weaken American (and European) soft power in the region. And so long as senior western policy-makers regard Iran’s nuclear programme as a major geopolitical headache, they will see Russia as a potential source of assistance, and thus treat it with respect. And that suits Russia very nicely.
Russia will probably tell the US that it will try to help with Iran. But if the answer to either of those two questions turns out to be no, President Obama will be disappointed. Of course, there are many important strands to the US-Russia relationship other than Iran. But a falling out over the Iranian nuclear programme would put a chill back into the entire relationship.
Charles Grant is director of the Centre for European Reform.
Tuesday, February 10, 2009
Britain’s Schengen dilemma
by Hugo Brady
Britain supports more EU co-operation against terrorism, crime and illegal immigration and has done so for over a decade. This is because effective justice co-operation has clearly been in the national interest (as with the speedy capture and extradition of one of the 2005 London bombers from Italy to Britain). And because it fits in with British notions of preventative or ‘intelligence-led’ policing’. As one senior police officer at the London metropolitan police put it: “Our security starts not just at our own borders, but at the Greek islands or the Finnish frontier.”
Accordingly, Britain has invested heavily in the EU’s police office, Europol, and now directs much of its international efforts against crime and terrorism through the organisation. The EU’s database of asylum-applicants’ fingerprints helps the UK send back hundreds of would-be asylum seekers each year if they already have an outstanding application in another member-state. Mike Kennedy, a British crown prosecutor, served as the first president of the EU’s fledgling prosecution unit, Eurojust, from 2002 to 2007. And it was Britain which originally introduced the idea that the EU needed to work more with migrants’ home countries, international organisations and NGOs to tackle the root causes of illegal immigration more holistically.
This track record is doubly impressive when you consider that the UK -- and Ireland, with which it shares a land border -- remain outside of the Schengen area, the EU’s zone of passport-free travel. The two countries also have the right to opt-out of EU asylum and immigration legislation they dislike, a right which will be extended to cover all justice and security co-operation if the Lisbon treaty enters into force.
But Britain’s luck may be on the wane. The political and legal problems associated with its half-in, half-out status are growing. Although the country retains its own border controls, its police officers are allowed to follow criminal suspects into the Schengen area if they are on a surveillance mission. It has also been agreed that the UK’s national police computer can connect to the Schengen-area police database. But the Schengen countries object to either Britain or Ireland having access to valuable data on who is refused entry to the Schengen area, or to having a vote on the board of the EU’s border agency since they do not share the pain of maintaining a common EU border. When Britain tried to challenge this in 2008, the European court of justice (ECJ) ruled in favour of the Schengen countries.
The EU is currently developing a range of new databases related to either border control or law enforcement (examples include a biometric version of the Schengen database, a single visa database and a new version of the asylum database). Already, Britain has had to take a new court case to the ECJ to fight its exclusion from the single visa database, which UK police officers want to be able to access. Also, Britain would probably be excluded from future efforts by Schengen members to pool the costs of acquiring and using hugely expensive biometric technology needed for modern passports and visas.
Admittedly, British officials are unlikely to get their political masters to re-consider joining Schengen anytime soon. Indeed Britain is pushing ahead with its own so-called ‘e-borders’ project. This new border system will link all of the UK’s land, air and sea borders electronically and will be able to receive personal travel data from private operators. (Ireland has had to follow suit with a similar scheme.)
However, there are a number of smaller steps Britain could attempt to improve its negotiating position in future. First, Britain should push for its nominee to the next European Commission to be given the justice and security portfolio. Although it is a political long shot for a non-Schengen national, one key advantage is that Britain already has a prime candidate for the job: Baroness Cathy Ashton. Although Ashton is the current EU trade commissioner, she has been in Brussels less than a year and has excellent experience with EU policies in this area through her time as a UK justice minister. The move could be seen as symbolic of the desire of all parties for much closer co-operation between Britain and the Schengen area.
Second, the UK should unilaterally offer to share its own border information with the Schengen countries. This will help blunt hostility to future British attempts to work more closely with the Schengen area. Lastly, Britain should continue to give intelligence and money to the EU’s border agency and aim for its ‘e-borders’ technology to be as interoperable as possible with a similar system currently being discussed for the Schengen area. Such a move would make any formal change in relations between Britain and the Schengen area more plausible in the future.
Hugo Brady is a research fellow at the Centre for European Reform.
Britain supports more EU co-operation against terrorism, crime and illegal immigration and has done so for over a decade. This is because effective justice co-operation has clearly been in the national interest (as with the speedy capture and extradition of one of the 2005 London bombers from Italy to Britain). And because it fits in with British notions of preventative or ‘intelligence-led’ policing’. As one senior police officer at the London metropolitan police put it: “Our security starts not just at our own borders, but at the Greek islands or the Finnish frontier.”
Accordingly, Britain has invested heavily in the EU’s police office, Europol, and now directs much of its international efforts against crime and terrorism through the organisation. The EU’s database of asylum-applicants’ fingerprints helps the UK send back hundreds of would-be asylum seekers each year if they already have an outstanding application in another member-state. Mike Kennedy, a British crown prosecutor, served as the first president of the EU’s fledgling prosecution unit, Eurojust, from 2002 to 2007. And it was Britain which originally introduced the idea that the EU needed to work more with migrants’ home countries, international organisations and NGOs to tackle the root causes of illegal immigration more holistically.
This track record is doubly impressive when you consider that the UK -- and Ireland, with which it shares a land border -- remain outside of the Schengen area, the EU’s zone of passport-free travel. The two countries also have the right to opt-out of EU asylum and immigration legislation they dislike, a right which will be extended to cover all justice and security co-operation if the Lisbon treaty enters into force.
But Britain’s luck may be on the wane. The political and legal problems associated with its half-in, half-out status are growing. Although the country retains its own border controls, its police officers are allowed to follow criminal suspects into the Schengen area if they are on a surveillance mission. It has also been agreed that the UK’s national police computer can connect to the Schengen-area police database. But the Schengen countries object to either Britain or Ireland having access to valuable data on who is refused entry to the Schengen area, or to having a vote on the board of the EU’s border agency since they do not share the pain of maintaining a common EU border. When Britain tried to challenge this in 2008, the European court of justice (ECJ) ruled in favour of the Schengen countries.
The EU is currently developing a range of new databases related to either border control or law enforcement (examples include a biometric version of the Schengen database, a single visa database and a new version of the asylum database). Already, Britain has had to take a new court case to the ECJ to fight its exclusion from the single visa database, which UK police officers want to be able to access. Also, Britain would probably be excluded from future efforts by Schengen members to pool the costs of acquiring and using hugely expensive biometric technology needed for modern passports and visas.
Admittedly, British officials are unlikely to get their political masters to re-consider joining Schengen anytime soon. Indeed Britain is pushing ahead with its own so-called ‘e-borders’ project. This new border system will link all of the UK’s land, air and sea borders electronically and will be able to receive personal travel data from private operators. (Ireland has had to follow suit with a similar scheme.)
However, there are a number of smaller steps Britain could attempt to improve its negotiating position in future. First, Britain should push for its nominee to the next European Commission to be given the justice and security portfolio. Although it is a political long shot for a non-Schengen national, one key advantage is that Britain already has a prime candidate for the job: Baroness Cathy Ashton. Although Ashton is the current EU trade commissioner, she has been in Brussels less than a year and has excellent experience with EU policies in this area through her time as a UK justice minister. The move could be seen as symbolic of the desire of all parties for much closer co-operation between Britain and the Schengen area.
Second, the UK should unilaterally offer to share its own border information with the Schengen countries. This will help blunt hostility to future British attempts to work more closely with the Schengen area. Lastly, Britain should continue to give intelligence and money to the EU’s border agency and aim for its ‘e-borders’ technology to be as interoperable as possible with a similar system currently being discussed for the Schengen area. Such a move would make any formal change in relations between Britain and the Schengen area more plausible in the future.
Hugo Brady is a research fellow at the Centre for European Reform.
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