Monday, September 27, 2010

Immigration: why Brussels will be blamed

By Hugo Brady

Liberal Sweden elects an explicitly anti-immigrant party to parliament for the first time. France's president and the European Commission lacerate each other in public over deportations of Roma. A former German central banker publishes a bestseller warning that immigration is diluting the nation's human stock. And even Britain moves forward with plans to cap economic immigration. The last three weeks have been a startling illustration of how immigration has come to dominate European politics.

At first, the EU seemed only a marginal player in this drama. The European Commission cannot dictate how many immigrants member countries let in, how many refugees they accept or how host societies should integrate newcomers. EU powers over the issuing of work visas are limited. But, as the row between President Sarkozy and Viviane Reding, the EU's justice commissioner, demonstrates, the Union has become a central player in immigration policy, even when governments point to public safety to defend their actions. This is mainly because the Commission is legally obliged to protect the mobility rights of citizens under a 'free movement' directive agreed by governments in 2004. (The law aims to make sure that EU nationals can move to each others' countries without the need for work or residency permits, a commitment originally laid down in the EU's founding treaties.)

This responsibility is unlikely to make the EU any more popular with the public, however. It means EU law limits the powers of national governments to tighten immigration policy in response to popular demand during tough economic times. Britain, for example, will set a cap on the numbers of new immigrants coming to the UK starting next year. But the cap seems largely cosmetic, given that citizens from EU countries will continue to be able to seek work there under free movement rules. Voters tend to value control and security over the freedoms they either do not use or take for granted. And there are a number of reasons to think that – in the febrile political atmosphere created by the 2009 recession - they may begin to regard the EU as part of the problem rather than the solution to immigration challenges.

For starters, EU officials should remember that what they often doctrinally dismiss as merely 'free movement' is immigration in anyone else's language, including Europe's politicians. Tensions over immigrants were evident in Western Europe long before the onset of global recession. And they are bound to continue because the east-west European migration that followed the EU's 2004-2007 enlargement has yet to run its course. Germany and Austria will lift transitional restrictions on the free movement of workers from eight Central and East European countries next year. All EU countries must do the same for Bulgaria and Romania by 2014.

Second, the Commission has plans to toughen up the application of EU rules on asylum seekers over the next two years. It will propose higher standards for the treatment and accommodation of refugees and access to the job market for those who wait a long time for their claims to be heard. But like few other issues, the cost of maintaining asylum seekers touches a very raw nerve, especially in countries that are faced with budgetary austerity. The Sweden Democrats owe their electoral success in part to widespread public concerns over the country's recent generosity to thousands of Iraqi refugees. However high-minded the intention, the cost implications of the Commission's proposals may further erode public support for the EU especially as governments are likely to portray such measures as being imposed by Brussels.

Third – as Commissioner Reding has already made clear in the case of France – she wants EU rules on free movement to be more strictly enforced in every member-state, and is prepared to take miscreant countries to court, if necessary. Reding's zeal to apply the law is laudable: EU rules must be uniformly implemented across the 27 member-states to be effective. However she also risks opening a Pandora's box of national discontent at the wrong time. Several EU countries grumble that the free movement directive is too broad in scope, especially after a 2008 court ruling expanded free movement rights even to non-EU nationals in certain circumstances. Faced with a further ultimatum by Reding, governments might be tempted to support a proposal from Italy to water down the directive and allow governments greater leeway to refuse residency based on economic circumstances or security concerns.

If the Commission refused to table such a draft, it might hand a political platform to far right and eurosceptic forces throughout the EU. On the other hand, the EU's institutions have little choice but to stand firm in the face of pressure to compromise on free movement rights or to ignore their non-implementation. They believe - probably rightly - that if such freedoms were rescinded or weakened now, EU governments would not return to the status quo at a future date. Welcome to Europe's battle over immigration and free movement. Appalled Swedish liberals, a floundering French president and an indignant European commissioner are just the opening salvos.

Hugo Brady is a senior research fellow at the Centre for European Reform.

Thursday, September 23, 2010

Observations from Russia

By Charles Grant

On a recent trip to Russia, I found that the momentum for reform, very evident last year, has dissipated. The more encouraging news is that Russia’s leaders are trying to be civil to Americans and Europeans. In early September I was in Russia with the Valdai Club, a group of think-tankers, academics and journalists that meets Russian leaders and intellectuals once a year. A year ago, the economic crisis was biting and President Dmitri Medvedev’s schemes for ‘modernisation’ were being taken seriously. There was much talk of shifting the economy away from dependency on natural resources – and also of encouraging manufacturing and service industries, boosting innovation and R&D, and fighting corruption. Some Europeans, and the German government especially, became excited about the prospect of helping Russia to modernise.

On this visit Prime Minister Vladimir Putin was less combative than he had been in previous Valdai meetings. He went through the motions of saying that modernisation mattered, but did not engage on the subject. He talked of the need to avoid sudden changes of direction. Stability is his watchword. A number of factors may explain his relaxed mood. Last year the economy shrunk by about 8 per cent, but this year the oil price is above $70 a barrel and there is solid growth. Ukraine is not going to join NATO and is more or less in the Russian camp (this matters hugely to Russian leaders). Relations with the US are quite good, and there has also been an – entirely unreported – ‘reset’ with China.

One senior Russian official who met the Valdai Club was alarmingly frank. “During the crisis, business was mobilised to change its ways; provincial authorities tried harder to think of improving the business environment. But the economy has suffered from oil going to $70 so rapidly,” he said. “We’d have had more progress on modernisation with a slower rise in the oil price. Now we have complacency.” He said corruption had got worse. He had hoped that last year’s budget cuts would help to squeeze corruption out of the system. But this year the budget had grown again and the “shadow sector” had bounced back, siphoning money out of the economy. “The mind-set [for corruption] has now returned to its pre-crisis level.”

None of the Russian intellectuals on this year’s Valdai trip thought that modernisation would go anywhere. They believe that ‘top down’ efforts to modernise – such as giving Rosnano, a state entity, the money to build a nano-technology industry, or creating a ‘silicon valley’ near Moscow at Skolkovo – will not have much impact without broader political change.

One reason for this pessimism is that the position of Medvedev – who has always been more enthusiastic about modernisation than Putin – seems to have weakened. Conservatives never liked him, but some of them now sneer about him with open contempt. Meanwhile Russian liberals, who used to praise Medvedev, have become disdainful. This is because for all his eloquent talk about modernisation, the rule of law and democracy, he has changed so little. Medvedev has sacked some provincial governors, introduced a little judicial reform, made a start on military reform, and responded to Barack Obama’s initiative by agreeing to a ‘reset’ with the US. And that’s about it. The general assumption in Moscow is that Putin will run for president in 2012. Two terms of six years would then mean Putin staying in charge till 2024.

Some of Putin’s most powerful lieutenants show no enthusiasm for Medvedev’s plans for modernisation. Vladimir Yakunin, who runs Russia’s railways and is close to Putin, argued in a letter to The Economist earlier this month that state capitalism “simply works better” than western models. Russia’s past attempts to “reject all history and tradition, combined with the blind imitation of foreign experience, [had] impeded the country’s political and economic development for 20 years”.

For all the gloom about economic modernisation, Russian foreign policy may offer a slightly happier story. Although the oil price has picked up, the swaggering arrogance of a couple of years ago has not reappeared. Last year’s economic crisis brought Russia’s leaders down to earth with a bump. They saw that the growing disparity between the Russian and Chinese economies will be a serious problem in the long term, and that Russia needs to strengthen its position – economically and politically – by looking west. Hence the reset with the US, modest co-operation with the West on Iran and Afghanistan, the deliberate rapprochement with Poland and the settlement of the maritime border dispute with Norway.

Putin confirmed that the reset between Russia and the US still holds by saying that he found Obama “a deep and profound person whose view of the world coincides with ours”. There has also been an improvement in Moscow’s relations with Beijing. Though unreported in the press, “this is more important than the reset with the US”, according to a senior official in the Russian security establishment.

China and its increasingly assertive leaders have been a source of worry to Russia in recent years. But this year there has been a rapprochement. “We now have a relationship that is strategic, pragmatic and based on equal status,” said the official. Each side has agreed not to play off the other one against the US. And the two governments have reached agreement on some difficult issues, such as building a pipeline to take Siberian oil to China, handling the Iranian nuclear problem and co-operating on civil nuclear power. One minister who met the Valdai Club stressed the importance of integrating the Russian Far East and Siberia into the dynamic Asian economies. He saw China not only as a growing market for Russian raw materials but also as a source of investment in areas such as ships, aerospace and high-tech equipment.

Despite the new modus vivendi with China, deep down Russian leaders still fret about the growth of Chinese power. A new Valdai Club report by a group of Russian thinkers calls for a ‘Union of Europe’, including Russia, the EU, Turkey and Ukraine. The report argues that Russia (with its natural resources) and the EU (with its technology) need to get together in order to prevent a ‘G2 world’ run by the US and China. The report therefore proposes a union that would have supranational institutions and its own treaty, covering not only economics and energy but also foreign and security policy. The implication of the report is that if Russia stays on its own it will become a subsidiary of China. The Union of Europe would also help to further the long-held Russian ambition of drawing European states away from the US.

One minister took a similar line when he met the Valdai Club, saying that in the long term he favoured a single market running from the Atlantic to Vladivostok. The Customs Union that Russia has set up with Belarus and Kazakhstan was a first step to a common economic space and then full integration with the EU. But his westward orientation was rather hesitant. “Don’t try to teach us to be civilised or call us black sheep or we will react badly,” he said. “If you push us away we will want to walk away. For all our problems, we are Europe’s salvation, it needs our new blood. But if you don’t want us we will turn to the more dynamic east.”

Despite the rhetoric about integrating with Europe, few Russians are interested in the nitty-gritty of the EU-Russia relationship; the current talks on a new partnership and co-operation agreement have stalled and nobody in Russia seems bothered. There are two obvious problems with the schemes being floated for union between Russia and the EU. One is that most Europeans will not want a closer union with Russia so long as its political system remains authoritarian. The other is that many people in the EU still look to the US for their security, and would not want to join a union that would inevitably weaken transatlantic bonds.

On current trends neither Russia’s economy nor its political system is likely to undergo serious reform anytime soon. That means that China will continue to pull ahead of Russia economically, while the EU will spurn grandiose schemes for ‘union’.

Charles Grant is director of the Centre for European Reform

Thursday, September 02, 2010

Has Germany become Europe's locomotive?

By Philip Whyte

The German economy has been growing exceptionally strongly of late. In the second quarter of 2010, it expanded faster than any other economy in the G7 and faster than at any time since the country’s reunification in 1990. Industrial output is surging. The rate of unemployment has been declining for over a year and is now well below the eurozone average (let alone levels in the US). Consumer spending and business investment are picking up – and households and firms are generally less burdened with debt than their counterparts in highly leveraged economies like the UK and the US. Germany, in short, seems to have emerged strongly from the Great Recession. Indeed, some observers think it has entered a self-sustained recovery – and that it is starting to act as Europe’s ‘growth locomotive’.

If this were true, it would be welcome. Over the past decade, Germany has not been a great source of demand for the world or the European economy: in real terms, domestic demand is only about 3 per cent higher now than it was back in 2000. For most of the noughties, Germany was structurally reliant on exports for its economic growth: without debt-fuelled spending elsewhere in the world economy, it would barely have grown at all. So any sign of a sustained recovery in German domestic demand would be good news for the country itself and the rest of the world. Not only would it reduce Germany’s reliance on unsustainable (and hence destabilising) foreign profligacy. It would also allow the eurozone and the world economy to rebalance at a higher level of output and employment than otherwise.

Sadly, it may be premature to conclude that Germany has embarked on a durable, self-sustained recovery that will help to lift growth elsewhere. Much has been made of the scale of Germany’s rebound in the second quarter of 2010. But it needs to be placed in context. Germany resembles a bungee jumper in the spring-back phase. It is rebounding faster than neighbouring France. But this is partly because it fell much further on the way down. The size of Germany’s manufacturing sector has resulted in greater output volatility. Germany was hit disproportionately hard in 2008-09 when manufacturers scrambled to run down stocks, but it has since benefited as the stock cycle has reversed. Even after its recent rebound, however, German output is still lower relative to pre-crisis levels than in France.

Besides, the pattern of the recent upturn casts doubt on the view that Germany is acting as a ‘locomotive’ for other countries. The pick-up in domestic demand in the second quarter of 2010 came after three consecutive quarters in which household consumption fell. As for business investment, it is still a long way below pre-crisis levels. If Germany really had become a locomotive for the rest of the EU, net trade would be exerting a drag on its own economic growth. Yet the reverse is the case: net trade has boosted German GDP growth in three of the past five quarters. True, exports to Asia are making a greater contribution to growth. But Germany’s recovery is doing little to rebalance activity in the EU. Indeed, Germany’s trade surplus with the rest of the EU has risen compared with the first half of 2009.

There is a final reason to be sceptical about the prospect of Europe’s largest economy becoming a locomotive for the rest of the EU: it is not clear that German policy-makers want it to become one. As far as they are concerned, the global financial crisis has discredited profligacy and vindicated German prudence. The lesson of the crisis, they believe, is that countries must learn to live within their means. For them, the direction of change is clear: it is for the erstwhile dissolute to shape up, not for Germany to become more spend-thrift. Any suggestion that Germany needs to adjust tends to be met with bemusement, irritation and contempt. Germany has no lessons to take (least of all from irresponsible Anglo-Saxons). And any attempt to hobble German ‘competitiveness’ will be fiercely resisted.

The hopes currently being vested in Germany may consequently be misplaced. The strength of the country’s recovery is partly an optical illusion created by the depth of the downturn which preceded it. Much of the recovery is being driven by net trade. Domestic demand is still fragile and could weaken as the government’s fiscal stimulus is withdrawn and the stock cycle becomes less favourable. And German policy-makers have yet to be persuaded that it is in their country’s interest to reduce its reliance on export-led growth. In short, Germany is not yet acting as a ‘growth locomotive’ for the rest of Europe. And other EU countries, particularly in the highly indebted geographical periphery, may have to get used to the idea that the region’s largest economy may not be about to become one any time soon.

Philip Whyte is a senior research fellow at the Centre for European Reform