Last month, French military forces freed the main population centres in northern Mali from jihadist control. Progress on the military front has created new political momentum as Malians plan to go to the ballot box this summer, ending 15 months of interim rule. But as the European Union deploys a training mission to build the Malian armed forces, the hardest work still lies ahead. A fragile transition phase approaches as the French get ready to hand over responsibilities to AFISMA, the African-led mission. Recent clashes in Gao and a car bomb in Kidal show that the peace has not yet been won. Political reconciliation is a long way away, regional spillover of the conflict is increasing and a jihadist threat remains. Superficial comparisons with the EU’s effort in Somalia are misleading; European member-states will need to play a more central role and commit for the long term to increase the prospects for stability in the Western Sahel. Four challenges in particular stand out.
The first is to continue to pursue the jihadists. This requires sustained counter-terrorist operations and considerable human and signals intelligence efforts. The military phase has now concentrated on the inhospitable Adrar des Ifoghas mountain range on the Mali-Algerian border. Chadian forces, US and British surveillance assets and US, British and Italian refuelling aircraft are supporting the French. The threat of ambushes, improvised explosives and shoulder-fired missiles, coupled with the unknown terrain, means that the operation may last several weeks or months. Concern for several European hostages - thought to be held captive in the Ifoghas – also commands caution.
The counter-terrorist operations impact the region at large. Close co-operation with Algerian security forces is necessary, to avoid their side of the mountains becoming a place of refuge. Jihadists have made their way to Algeria, Mauritania, Niger and perhaps further afield. Mauritania recently arrested nine people suspected of links to the jihadists. Spill-over to Algeria or Niger could jeopardise key mining areas. In response, the United States and France have strengthened their military presence in uranium-rich Niger. As the AFISMA mission continues to deploy, it is drawing in states from the region, placing their soldiers in harm’s way. An offshoot of the Nigerian Boko Haram terror group attacked Nigerian soldiers en route to Bamako, killing two. Kidnappings in Nigeria and Cameroon show that instability may spread at the expense of Western interests. A bomb-scare on February 4th at the airport of Ouagadougou in the Central African Republic involving a Malian Tuareg has put other states on edge as well. Further out, Al Qaeda’s Yemen-based sister organisation has similarly called for a jihad in the Sahel. Although regional security services are on high alert, they are also at risk of becoming overstretched. It is necessary to co-ordinate security efforts and share intelligence. European intelligence services, in particular in the UK, should assist in this process. On the military front, European states should sustain their commitment to the French operation with logistics and surveillance support.
The second challenge is to consolidate the gains made thus far. Mali is vast and in many places the government has a limited presence. The French operation focused on the main urban centres, and has left smaller villages and rural areas untouched. This creates the risk of a power vacuum that local militias or remaining jihadists can exploit. The African-led stabilisation mission is meant to fill the void, yet it is suffering from corruption, insufficient capabilities and lack of local knowledge. There are plenty of practical concerns. For instance, while Malians and many AFISMA troops are French-speaking, the operation’s Nigerian commander is not. The mission could turn out to be a case of the deaf helping the blind. Due to these and other concerns, the United Nations is gearing up to take command of the mission. This may also enable non-ECOWAS states, such as Algeria and Chad or EU countries, to join the operation under a single command. It would however slow the deployment for several weeks, leaving parts of Mali vulnerable. This means that Paris's March deadline to withdraw its forces may not be realistic, requiring France to stay longer.
Although the EU Training Mission starts soon, its mission is focused on rebuilding the Malian armed forces so that they can re-establish control over the country. Brussels is taking its cues from its experience in Somalia, where some 120 EU trainers have helped reform Somalia’s military. Confidently, the EU has called that training mission a ‘European success story’. The parallels with the plan for Mali are striking. As in Somalia, the objective is to support the ailing government by training its armed forces to restore territorial integrity and rout jihadist rebels. As in Somalia, the EU operates alongside a UN-mandated stabilisation operation composed of African forces. As in Somalia, the training mission is part of a regional comprehensive approach, consisting of a patchwork of several EU missions. In the Horn, a small-scale EU civilian mission is helping develop a coastal police force while European navies are fighting pirates in the Gulf of Aden. In the Sahel, the EUCAP-SAHEL civilian mission is focused on strengthening the rule of law and the justice system. It is now only active in Niger, but will expand to Mauritania as well. An EU mission to help secure Libya’s borders is also likely.
Yet this is where the parallels stop. In Somalia, the training takes place in neutral Uganda. In Mali, the training centre is just north of the capital Bamako. In Somalia, a previously non-existent state is slowly expanding its influence over the south of the country with the help of the African Union. In Mali, an embattled and corrupt state is struggling for survival. Two decades of civil war, years of political negotiations, external military intervention and a wholesale collapse of the state have created war fatigue in Somalia. While this means progress in Somalia will be slow and uncertain there are grounds for optimism. Mali’s lethal cocktail of emerging tribal tensions, a power vacuum, jihadist presence, a deteriorating food crisis, foreign intervention and supplies of small arms is much more recent. In Somalia the Transitional Federal Government has international legitimacy, while in Mali civil-military relations are a mess. The interim government is the product of a coup d’état, while in-fighting among different factions of the Malian armed forces raise doubts over who the EU will be training. In an environment where Somalia looks good in comparison, the job surely is difficult.
The EU’s objective is to train the military so it can maintain and enforce territorial integrity. It will rearm Malian forces and prepare them for offensive operations. This puts pressure on the traditional image of Europe as a ‘civilian’ power. On paper, the EU trainers are excluded from combat, but they could be drawn in to give practical training and advice should an insurgency pick up steam. It may create fissures within Europe. The French have already criticised Germany for not responding more quickly with military support when the intervention started. Now Berlin’s ‘culture of military restraint’ must digest a combat training mission.
Since 2010 the EU has trained 3,000 Somali forces. Although the EU is sending twice as many trainers to Mali as to Somalia, some 240 in total, the fifteen month timeline for the operation is wholly inadequate. The EU should ensure that the Malian army is of good quality. Previously the United States attempted to build a Malian military capable of dealing with the insurgent threat. As became painfully clear, it did not pay enough attention to human rights and civil-military relations. While some US-trained forces played a leading role in the Tuareg insurgency, others starred in the coup d’état meant to counter it. The EU should conclude that investing in quality is the only option. This calls for a long-term effort. Crucially, given the mounting ethnic tensions, the
trained Malian forces must reflect the tribal composition of the country and
respect human rights.
This leads to the third challenge. Political reconciliation that addresses mounting ethnic and tribal tensions in Mali is essential. If unsuccessful, this can destabilise the western Sahel. Looting and reprisal killings are pitting tribal communities against each other. Lighter-skinned Malians – whether Arabs or Tuaregs – are no longer safe in southern Mali. Kill-lists are circulating and vigilantism is on the rise.
In the north, a worrying development is that the Tuareg Mouvement National pour la Liberation de l’Azawad (MNLA) and the Islamic Movement of Azawad (MIA) ‘liberated’ Kidal, the regional Tuareg capital. They have made clear that no Malian or West African forces are allowed to enter the city, creating a de facto division in the country. The French do not want to be seen as occupiers but AFISMA is not welcome either. Several Tuareg groups aspire to a significant degree of regional autonomy. Although the EU is committed to maintaining the territorial integrity of Mali, it has not excluded a possible measure of Tuareg self-rule.
While giving the Tuaregs special status in the Malian state might clear a path for political reconciliation, this may be unpalatable to the government in Bamako. It would also make Mali’s neighbours nervous. The Azawad, the term for the Tuareg homeland, stretches well beyond Mali’s borders into Algeria, Libya and Niger. In Mali, while Kidal is the main Tuareg capital, Timbuktu and Gao have mixed tribal populations. These cities could become flash points in the absence of political reconciliation. The Tuaregs themselves are also divided, with some backing Bamako and others vying for independence. Other tribes have so far kept relatively quiet, but if Tuareg demands are met at their expense, this may well change. The immediate priority for the soon to be appointed EU Special Representative for Mali is to cajole the different factions to the negotiating table.
Finally, the fourth challenge is to remain vigilant for terrorism against European interests. As the recent kidnappings make clear, European nationals in the region can increasingly become a target. The EU military presence is also a factor in the conflict dynamic. The longer that French and European forces stay in Mali, the greater the danger that Mali and its environs will become a magnet for foreign jihadists. A longer presence might also fuel local xenophobic and ‘anti-colonial’ sentiments. Unfortunately, a longer presence is precisely what the EU should prepare for. The French and other European member-states may have to outstay their welcome to stop the crisis in the Sahel from deteriorating.
Rem Korteweg is a senior research fellow at the Centre for European Reform.
Friday, February 22, 2013
Wednesday, February 20, 2013
Freeing the transatlantic economy – prospects, benefits and pitfalls
In mid-February, the EU and the US agreed to launch negotiations aimed at sealing a Transatlantic Trade and Investment Partnership (TTIP). Like Yogi Berra, cynics might be tempted to dismiss the project as déjà-vu all over again. After all, this is hardly the first such initiative the two sides have launched. In 1990, they signed a Transatlantic Declaration; in 1995, a New Transatlantic Agenda; in 1998, a Transatlantic Economic Partnership; and in 2007, they established a Transatlantic Economic Council (TEC), a body that was supposed to give political impetus to freeing up commercial relations across the Atlantic. Past attempts to lower the barriers that impede trade and investment across the Atlantic are a story of rising ambition, but frustratingly elusive results. So why bother?
Part of the answer is that the scale of the transatlantic economy makes the effort seem worthwhile. Despite the rise of China and other emerging economies, the transatlantic axis remains the largest bilateral commercial relationship in the world. Although the data indicates that the EU and the US now trade more goods with Asia than they do with each other, such figures are misleading. One reason is that they are distorted by the increasingly global nature of supply chains (so that finished goods like iPhones show up as Chinese exports, even though the value added to an iPhone in China is tiny). Another reason is that they ignore trade in services and foreign direct investment (FDI). Yet FDI has been growing faster than trade in goods for years; sales generated by foreign outlets outstrip those derived from cross-border trade; and services account for a rising share of transatlantic commerce.
The transatlantic economy, then, is larger than a casual look at the data for ‘visible trade’ might suggest. Despite the rise of Asia, moreover, the axis has tightened, not loosened, in recent years. Trading across borders is important, but it is a less intimate relationship than establishing a physical presence to produce and sell goods and services in another country. And it is the second mode which dominates the transatlantic economy. US firms are the largest foreign investors in the EU, and vice versa. Taken together, the investment of American firms in the EU and of European firms in the US approaches $3 trillion. Despite the economic difficulties they have experienced since 2008, the EU and the US still meet most of the leading criteria that influence where businesses want to invest: they offer wealthy consumers, skilled workers, political stability and predictable business environments.
Yet for all its value, the transatlantic economy is still riddled with barriers to trade and investment. Tariffs, though low on average (at 4 per cent), have not been eliminated, and remain astronomical for certain goods – notably in the agricultural sector. Eliminating tariffs, however, would still not free up the transatlantic economy, because the principal barriers to trade and investment now lurk ‘behind the border’. Examples of non-tariff barriers that clog up transatlantic commerce include: regulations (such as the EU’s ban on imports of genetically-modified foods); burdensome customs procedures (particularly in the US since 9/11); different product standards; curbs on foreign ownership of companies (in, for example, the US maritime freight sector); subsidies (notably to aircraft manufacturers); public procurement markets that are still closed; and so on.
The size of the transatlantic economy means that even a partial reduction of some of these barriers could yield non-trivial economic gains, mainly through the ‘dynamic effects’ of increased competition on productivity. A recent study by the European Centre for International Political Economy (ECIPE) estimates that eliminating tariffs alone would yield GDP gains of 0.5 per cent for the EU and 1 per cent for the US. Such gains are not to be sniffed at. It is misleading, however, to think of the TTIP as providing a boost to growth and jobs at a time when economic activity (particularly in Europe) is so weak. Set aside the time-lag that will elapse before a deal – if one is reached – enters into force. Even if such a lag did not exist, trade deals are long-term, supply-side measures: they are not a solution to the short-term, demand-side weakness that afflicts much of Europe.
So what are the prospects for an agreement to lower trade and investment barriers? Seasoned observers caution that such barriers are notoriously difficult to get rid of. In many policy areas, trade-impeding barriers reflect conflicting regulatory approaches – for example, the EU’s ‘precautionary principle’ versus the US’s reliance on risk-based scientific evidence – that remain deep-seated. If such barriers had been easy to dismantle, they would have been a long time ago. The TTIP may therefore struggle to avoid the fate of previous such initiatives, which have tended to get bogged down in technical detail, resulting in a loss of political interest at the top; have become hostage to trivial-sounding but often rancorous disputes that cannot be resolved, like trade in chlorine-rinsed chicken; and have consequently delivered far less market opening than originally hoped for.
Set against this, optimists counter that the political stars appear to be better aligned than for a long time. The intellectual case for lowering barriers to transatlantic trade and investment is arguably more widely accepted than it has ever been by politicians and businesses on both sides of the pond. Cheerleaders are more numerous, refuseniks more muted. President Obama, who took little interest in transatlantic trade during his first term of office, mentioned it in his State of the Union address on February 12th. The rise of China has provided further impetus. The US and the EU recognise that there is more to the TTIP than just transatlantic relations. In addition to promoting a trade liberalisation agenda at a time when the Doha Round is moribund, a successful TTIP would influence behaviour, regulations and technical standards in third countries such as China.
How should the success of the TTIP be measured? The TTIP should not be judged relative to an idealised but unrealistic outcome. It is wholly unrealistic to expect the result to be a transatlantic free trade area (which would imply the complete elimination of tariffs), let alone an enlarged version of the EU’s single market (which would imply full freedom of movement for people, goods, services and capital across the Atlantic). A successful TTIP would make steps towards a free trade area (by reducing, but not eliminating, tariffs), and modest ones towards a single market (perhaps by delivering some mutual recognition of regulations, reaching some agreements on common technical standards, and by improving market access in services). But it would fall short of both. The test of the TTIP is not whether it eliminates all barriers, but whether it lowers some of them.
The prospects for a successful outcome would be greatly improved if the two sides could agree on some rules of engagement. First, they should not allow the best to be the enemy of the good: better to focus on credible objectives and deliver than to be unrealistically ambitious and fail to do so. Second, to provide a sense of purpose and momentum, the two sides should commit to early tariff cuts, before proceeding to the more difficult barriers ‘behind the border’. Third, they should identify the regulatory and other issues on which progress is least likely and agree to set them aside for the time being. Fourth, they should refrain from linking unrelated issues by making progress on one conditional on the other. If the EU and the US fail to observe such rules of engagement, the TTIP is more likely to produce finger pointing and recrimination than any substantive market opening.
Philip Whyte is a senior research fellow at the Centre for European Reform.
Part of the answer is that the scale of the transatlantic economy makes the effort seem worthwhile. Despite the rise of China and other emerging economies, the transatlantic axis remains the largest bilateral commercial relationship in the world. Although the data indicates that the EU and the US now trade more goods with Asia than they do with each other, such figures are misleading. One reason is that they are distorted by the increasingly global nature of supply chains (so that finished goods like iPhones show up as Chinese exports, even though the value added to an iPhone in China is tiny). Another reason is that they ignore trade in services and foreign direct investment (FDI). Yet FDI has been growing faster than trade in goods for years; sales generated by foreign outlets outstrip those derived from cross-border trade; and services account for a rising share of transatlantic commerce.
The transatlantic economy, then, is larger than a casual look at the data for ‘visible trade’ might suggest. Despite the rise of Asia, moreover, the axis has tightened, not loosened, in recent years. Trading across borders is important, but it is a less intimate relationship than establishing a physical presence to produce and sell goods and services in another country. And it is the second mode which dominates the transatlantic economy. US firms are the largest foreign investors in the EU, and vice versa. Taken together, the investment of American firms in the EU and of European firms in the US approaches $3 trillion. Despite the economic difficulties they have experienced since 2008, the EU and the US still meet most of the leading criteria that influence where businesses want to invest: they offer wealthy consumers, skilled workers, political stability and predictable business environments.
Yet for all its value, the transatlantic economy is still riddled with barriers to trade and investment. Tariffs, though low on average (at 4 per cent), have not been eliminated, and remain astronomical for certain goods – notably in the agricultural sector. Eliminating tariffs, however, would still not free up the transatlantic economy, because the principal barriers to trade and investment now lurk ‘behind the border’. Examples of non-tariff barriers that clog up transatlantic commerce include: regulations (such as the EU’s ban on imports of genetically-modified foods); burdensome customs procedures (particularly in the US since 9/11); different product standards; curbs on foreign ownership of companies (in, for example, the US maritime freight sector); subsidies (notably to aircraft manufacturers); public procurement markets that are still closed; and so on.
The size of the transatlantic economy means that even a partial reduction of some of these barriers could yield non-trivial economic gains, mainly through the ‘dynamic effects’ of increased competition on productivity. A recent study by the European Centre for International Political Economy (ECIPE) estimates that eliminating tariffs alone would yield GDP gains of 0.5 per cent for the EU and 1 per cent for the US. Such gains are not to be sniffed at. It is misleading, however, to think of the TTIP as providing a boost to growth and jobs at a time when economic activity (particularly in Europe) is so weak. Set aside the time-lag that will elapse before a deal – if one is reached – enters into force. Even if such a lag did not exist, trade deals are long-term, supply-side measures: they are not a solution to the short-term, demand-side weakness that afflicts much of Europe.
So what are the prospects for an agreement to lower trade and investment barriers? Seasoned observers caution that such barriers are notoriously difficult to get rid of. In many policy areas, trade-impeding barriers reflect conflicting regulatory approaches – for example, the EU’s ‘precautionary principle’ versus the US’s reliance on risk-based scientific evidence – that remain deep-seated. If such barriers had been easy to dismantle, they would have been a long time ago. The TTIP may therefore struggle to avoid the fate of previous such initiatives, which have tended to get bogged down in technical detail, resulting in a loss of political interest at the top; have become hostage to trivial-sounding but often rancorous disputes that cannot be resolved, like trade in chlorine-rinsed chicken; and have consequently delivered far less market opening than originally hoped for.
Set against this, optimists counter that the political stars appear to be better aligned than for a long time. The intellectual case for lowering barriers to transatlantic trade and investment is arguably more widely accepted than it has ever been by politicians and businesses on both sides of the pond. Cheerleaders are more numerous, refuseniks more muted. President Obama, who took little interest in transatlantic trade during his first term of office, mentioned it in his State of the Union address on February 12th. The rise of China has provided further impetus. The US and the EU recognise that there is more to the TTIP than just transatlantic relations. In addition to promoting a trade liberalisation agenda at a time when the Doha Round is moribund, a successful TTIP would influence behaviour, regulations and technical standards in third countries such as China.
How should the success of the TTIP be measured? The TTIP should not be judged relative to an idealised but unrealistic outcome. It is wholly unrealistic to expect the result to be a transatlantic free trade area (which would imply the complete elimination of tariffs), let alone an enlarged version of the EU’s single market (which would imply full freedom of movement for people, goods, services and capital across the Atlantic). A successful TTIP would make steps towards a free trade area (by reducing, but not eliminating, tariffs), and modest ones towards a single market (perhaps by delivering some mutual recognition of regulations, reaching some agreements on common technical standards, and by improving market access in services). But it would fall short of both. The test of the TTIP is not whether it eliminates all barriers, but whether it lowers some of them.
The prospects for a successful outcome would be greatly improved if the two sides could agree on some rules of engagement. First, they should not allow the best to be the enemy of the good: better to focus on credible objectives and deliver than to be unrealistically ambitious and fail to do so. Second, to provide a sense of purpose and momentum, the two sides should commit to early tariff cuts, before proceeding to the more difficult barriers ‘behind the border’. Third, they should identify the regulatory and other issues on which progress is least likely and agree to set them aside for the time being. Fourth, they should refrain from linking unrelated issues by making progress on one conditional on the other. If the EU and the US fail to observe such rules of engagement, the TTIP is more likely to produce finger pointing and recrimination than any substantive market opening.
Philip Whyte is a senior research fellow at the Centre for European Reform.
Wednesday, February 13, 2013
Why British prosperity is hobbled by a rigged land market
The British have the least living space per head, the most expensive office rents and the most congested infrastructure of any EU-15 country. Thanks to a rapidly growing population – the result of a healthy birth-rate and immigration – these trends are worsening steadily. At the same time, the British economy is languishing in a prolonged slump brought on by a collapse of demand. The answer is obvious: Britain needs to build more. Unfortunately, the obstacles to development are formidable. Britain’s supply-side problems are of a different character to those holding back other struggling European economies, but arguably no less serious.
Britain is generally considered a flexible, economically liberal economy, in which insiders have few opportunities to rig the system for their own benefit. To the extent that supply-side problems are considered a significant obstacle to economic growth, attention generally centres on the country’s patchy skills base. A high drop-out rate from secondary school and weak vocational training are no doubt real constraints on the UK economy, but there is an equally, if not more, serious one. Housing, commercial property and infrastructure are central to a country’s economic and social well-being. The UK’s essentially rigged market for land and its restrictive planning system are as big an obstacle to economic growth as restrictive labour markets and protected professions are in Southern Europe.
The number of new homes built each year in Britain has lagged far behind demand from a growing population for 30 years. Despite faster population growth, house construction is currently running at half the level of the 1960s. At the same time the average size of homes built in Britain is now the smallest in the EU. The result of these two trends has been a steady fall in the amount of living space per head. Property prices relative to average household incomes have come down a bit since 2007, but remain very high. Moreover, the problem is not just restricted to the residential sector: Britain has the highest office rents in the EU. Firms in cities such as Manchester pay more than in Frankfurt or Milan. And transport infrastructure is very expensive to build in Britain, which is one reason why there is too little of it.
Britain is small and densely-populated, but does not suffer from particularly acute land scarcity. Around 13 per cent of the UK is built on, a lower proportion than in countries with a similar population density such as Germany, Belgium or the Netherlands. Britain’s problem is that the supply of new housing and commercial space is uniquely unresponsive to increases in property prices. Alone among the countries that experienced a house price boom in the run up to the financial crisis, Britain had no construction boom. The number of houses being built picked up only slightly, despite UK house prices rising by more than in any other developed countries except Ireland.
This situation has far-reaching economic and social consequences for the UK. Massive house price inflation has aggravated the UK’s already high levels of inequality by shifting wealth from the young (and property-less) to the old (and propertied). The poor availability of affordable housing undermines labour mobility – people are unable to move to where jobs are available because they cannot afford accommodation. Those on welfare are discouraged from working (as they then lose access to subsidised housing). Congested, expensive infrastructure combined with pricey commercial property pushes up the cost of business, depresses investment and holds back economic growth.
The two reasons for Britain’s land-use woes – a complex planning system and insufficient land for development – are inter-related. A major constraint on the supply of land is the existence of a protected ‘greenbelt’: land around cities on which development is very tightly controlled. There are also strict controls over building on other so-called green-field sites. The market for land is essentially rigged in favour of landowners, who pay no tax on their land holdings and hence pay no penalty for sitting on it, waiting for the artificially-created scarcity to push prices up further. With no revenue from land taxes, local authorities are unable to capture any increase in the value of land that takes place when planning permission is granted. As a result, they have little incentive to open up land for development.
The UK should, of course, redevelop so-called ‘brownfield’ sites – vacant or derelict buildings and land. But this will only ever comprise part of the solution to its land use crisis. By its very nature, brownfield land is concentrated in parts of the country where people do not want to live. And it is often very expensive to redevelop, not least because the government has stipulated that 60 per cent of new homes must be built on brownfield sites. There is no alternative to building on the green-belt, much of which is neither beautiful nor green. The greenbelt was originally established to combat urban sprawl, but is now an obstacle to sensible development. For example, allowing London to expand by between two and three miles in each direction would easily solve the city’s land-use problems. Increasing that proportion of the UK’s surface area under development by between 1 and 2 percentage points would address the country’s land constraints and would not involve concreting over England’s ‘green and pleasant land’. Urban sprawl could easily be prevented by good quality town planning.
The sanctity of the greenbelt, and green-field land more generally, has much to do with vested interests perpetuating a system which rewards speculation. Many Britons have profited from land scarcity (and the tax-free property price gains it has led to), and are determined to defend those gains. They may complain about their children being unable to buy a house, but at the same time will staunchly oppose new development. For their part, landowners are a powerful and politically well-connected lobby; many of the biggest sit in the House of Lords (the country’s upper house). They have a big stake in inflated land prices and are well-placed to resist the taxation of land.
A land tax would involve property owners paying a percentage of the value of their land in tax each year. If the value of their property rose, so would the amount of tax paid on it. This would achieve a number of things. First, local authorities would have a financial incentive to change land from agricultural to residential (and commercial) use as they would profit from the increased value of the land this would cause. Second, it would make it more expensive to speculate on future rises in land values, and some of those gains would be captured by the government. Third, construction companies would not be able to sit on large amounts of land (so-called land banks), and drip feed the market, maintaining prices at artificially high levels. Instead, land would have to be developed or sold, which together with the increased availability resulting from the freeing up of greenbelt land, would bring down the price of developing land and with it the cost of housing, commercial property and infrastructure. Lower land costs would also increase competition by reducing barriers to entry to the construction sector: for example, at present housing building is dominated by a small number of big players.
Supply-side measures are rarely a quick solution to a demand-side crisis. That is certainly the challenge facing other struggling European economies. Spain and France suffer from inflexible labour markets, Germany from over-regulated product and services markets, Italy from both. Academic research shows that addressing such problems improves economic performance in the longer term, but it provides no immediate boost to demand. However, the UK is almost certainly an exception. Addressing Britain’s biggest supply-side problem (its rigged market for land) could provide a more immediate economic stimulus by releasing massive pent-up demand, as well as lift growth potential.
Britain should turn its weaknesses into strengths. Other struggling European countries have a surfeit of housing and infrastructure and poor demographics. For example, boosting construction in Spain would do no good – Spain has far too many unsold houses and it is now suffering from net emigration (more people are leaving the country than arriving). In Italy and Germany, populations are stagnant, although there is more scope to boost spending on infrastructure than in Spain. France’s population is growing, but as a result of persistently strong public investment, it already has very good physical infrastructure. And thanks to a rational planning system and plenty of land, it does not suffer from a housing shortage. Unlike Britain, these countries have few low-hanging fruit.
Far-reaching reform of the greenbelt and the introduction of land taxes could open the way for a boom in housing and commercial development. Local authorities and the national government could agree to set aside a proportion of the funds raised through land taxes to fund investment in infrastructure. Moreover, land taxes would make the tax system fairer by taxing unearned income. And by redistributing money from the wealthy (who save a high proportion of their income) to construction sector workers (who save little of it), it would provide a further boost to economic activity. The current Conservative-Liberal government has pushed through modest reforms of the planning system, but has shied away from opening up the greenbelt and has no intention of introducing a land tax.
An economy in which speculation is rewarded and wealth is increasingly concentrated in the hands of those with property risks stagnation. It faces an uphill battle to hold on to its young or attract skilled immigrants. Britain needs to strike a better balance between the interests of existing property-owners and the rest of the country. This includes acknowledging that the value of land is determined by the activities of society as a whole and not the landowner, and hence needs to be taxed accordingly.
Simon Tilford is chief economist at the Centre for European Reform.
Britain is generally considered a flexible, economically liberal economy, in which insiders have few opportunities to rig the system for their own benefit. To the extent that supply-side problems are considered a significant obstacle to economic growth, attention generally centres on the country’s patchy skills base. A high drop-out rate from secondary school and weak vocational training are no doubt real constraints on the UK economy, but there is an equally, if not more, serious one. Housing, commercial property and infrastructure are central to a country’s economic and social well-being. The UK’s essentially rigged market for land and its restrictive planning system are as big an obstacle to economic growth as restrictive labour markets and protected professions are in Southern Europe.
The number of new homes built each year in Britain has lagged far behind demand from a growing population for 30 years. Despite faster population growth, house construction is currently running at half the level of the 1960s. At the same time the average size of homes built in Britain is now the smallest in the EU. The result of these two trends has been a steady fall in the amount of living space per head. Property prices relative to average household incomes have come down a bit since 2007, but remain very high. Moreover, the problem is not just restricted to the residential sector: Britain has the highest office rents in the EU. Firms in cities such as Manchester pay more than in Frankfurt or Milan. And transport infrastructure is very expensive to build in Britain, which is one reason why there is too little of it.
Britain is small and densely-populated, but does not suffer from particularly acute land scarcity. Around 13 per cent of the UK is built on, a lower proportion than in countries with a similar population density such as Germany, Belgium or the Netherlands. Britain’s problem is that the supply of new housing and commercial space is uniquely unresponsive to increases in property prices. Alone among the countries that experienced a house price boom in the run up to the financial crisis, Britain had no construction boom. The number of houses being built picked up only slightly, despite UK house prices rising by more than in any other developed countries except Ireland.
This situation has far-reaching economic and social consequences for the UK. Massive house price inflation has aggravated the UK’s already high levels of inequality by shifting wealth from the young (and property-less) to the old (and propertied). The poor availability of affordable housing undermines labour mobility – people are unable to move to where jobs are available because they cannot afford accommodation. Those on welfare are discouraged from working (as they then lose access to subsidised housing). Congested, expensive infrastructure combined with pricey commercial property pushes up the cost of business, depresses investment and holds back economic growth.
The two reasons for Britain’s land-use woes – a complex planning system and insufficient land for development – are inter-related. A major constraint on the supply of land is the existence of a protected ‘greenbelt’: land around cities on which development is very tightly controlled. There are also strict controls over building on other so-called green-field sites. The market for land is essentially rigged in favour of landowners, who pay no tax on their land holdings and hence pay no penalty for sitting on it, waiting for the artificially-created scarcity to push prices up further. With no revenue from land taxes, local authorities are unable to capture any increase in the value of land that takes place when planning permission is granted. As a result, they have little incentive to open up land for development.
The UK should, of course, redevelop so-called ‘brownfield’ sites – vacant or derelict buildings and land. But this will only ever comprise part of the solution to its land use crisis. By its very nature, brownfield land is concentrated in parts of the country where people do not want to live. And it is often very expensive to redevelop, not least because the government has stipulated that 60 per cent of new homes must be built on brownfield sites. There is no alternative to building on the green-belt, much of which is neither beautiful nor green. The greenbelt was originally established to combat urban sprawl, but is now an obstacle to sensible development. For example, allowing London to expand by between two and three miles in each direction would easily solve the city’s land-use problems. Increasing that proportion of the UK’s surface area under development by between 1 and 2 percentage points would address the country’s land constraints and would not involve concreting over England’s ‘green and pleasant land’. Urban sprawl could easily be prevented by good quality town planning.
The sanctity of the greenbelt, and green-field land more generally, has much to do with vested interests perpetuating a system which rewards speculation. Many Britons have profited from land scarcity (and the tax-free property price gains it has led to), and are determined to defend those gains. They may complain about their children being unable to buy a house, but at the same time will staunchly oppose new development. For their part, landowners are a powerful and politically well-connected lobby; many of the biggest sit in the House of Lords (the country’s upper house). They have a big stake in inflated land prices and are well-placed to resist the taxation of land.
A land tax would involve property owners paying a percentage of the value of their land in tax each year. If the value of their property rose, so would the amount of tax paid on it. This would achieve a number of things. First, local authorities would have a financial incentive to change land from agricultural to residential (and commercial) use as they would profit from the increased value of the land this would cause. Second, it would make it more expensive to speculate on future rises in land values, and some of those gains would be captured by the government. Third, construction companies would not be able to sit on large amounts of land (so-called land banks), and drip feed the market, maintaining prices at artificially high levels. Instead, land would have to be developed or sold, which together with the increased availability resulting from the freeing up of greenbelt land, would bring down the price of developing land and with it the cost of housing, commercial property and infrastructure. Lower land costs would also increase competition by reducing barriers to entry to the construction sector: for example, at present housing building is dominated by a small number of big players.
Supply-side measures are rarely a quick solution to a demand-side crisis. That is certainly the challenge facing other struggling European economies. Spain and France suffer from inflexible labour markets, Germany from over-regulated product and services markets, Italy from both. Academic research shows that addressing such problems improves economic performance in the longer term, but it provides no immediate boost to demand. However, the UK is almost certainly an exception. Addressing Britain’s biggest supply-side problem (its rigged market for land) could provide a more immediate economic stimulus by releasing massive pent-up demand, as well as lift growth potential.
Britain should turn its weaknesses into strengths. Other struggling European countries have a surfeit of housing and infrastructure and poor demographics. For example, boosting construction in Spain would do no good – Spain has far too many unsold houses and it is now suffering from net emigration (more people are leaving the country than arriving). In Italy and Germany, populations are stagnant, although there is more scope to boost spending on infrastructure than in Spain. France’s population is growing, but as a result of persistently strong public investment, it already has very good physical infrastructure. And thanks to a rational planning system and plenty of land, it does not suffer from a housing shortage. Unlike Britain, these countries have few low-hanging fruit.
Far-reaching reform of the greenbelt and the introduction of land taxes could open the way for a boom in housing and commercial development. Local authorities and the national government could agree to set aside a proportion of the funds raised through land taxes to fund investment in infrastructure. Moreover, land taxes would make the tax system fairer by taxing unearned income. And by redistributing money from the wealthy (who save a high proportion of their income) to construction sector workers (who save little of it), it would provide a further boost to economic activity. The current Conservative-Liberal government has pushed through modest reforms of the planning system, but has shied away from opening up the greenbelt and has no intention of introducing a land tax.
An economy in which speculation is rewarded and wealth is increasingly concentrated in the hands of those with property risks stagnation. It faces an uphill battle to hold on to its young or attract skilled immigrants. Britain needs to strike a better balance between the interests of existing property-owners and the rest of the country. This includes acknowledging that the value of land is determined by the activities of society as a whole and not the landowner, and hence needs to be taxed accordingly.
Simon Tilford is chief economist at the Centre for European Reform.
Friday, February 01, 2013
Time to bite the bullet on European defence
Europe’s military spending is in free fall. As highlighted during a seminar organised by the CER in December as part of the FR-UK Defence Forum, the EU countries combined have reduced defence spending from €200 to €170 billion since the start of the economic crisis in 2008. In response, governments have signed up to a variety of new bilateral and multilateral initiatives. These are designed to limit the impact of budget cuts on their armed forces. But so far, the savings incurred pale in comparison. At the December discussions, participants estimated them at €200 to €300 million. Many sensitivities relating to national security make it hard for governments to implement collaborative defence efforts. But at a time when Europe’s neighbourhood is replete with instability and the United States is scaling back its own armed forces, Europeans need to do more to stem the damage to their militaries.
Notwithstanding their budget cuts, taken together EU states are still the second largest defence spenders in the world. And not all European countries are reducing the level of funding to their armed forces. According to a 2011 study for the European Parliament, Finland and Denmark have maintained military spending steady in recent years. Poland and Sweden have increased it.
But even prior to the economic crisis, most European countries spent less than 2 per cent of their GDP on defence – even though NATO members are in theory committed to devote at least that much to their militaries. And, according to the European Parliament study, most middle-sized European countries have cut their defence spending by 10 to 15 per cent since 2009. Some of the smaller EU states, including Latvia and Lithuania, have cut by more than 20 per cent. Britain is reducing its military budget by 7.5 per cent over four years. And according to Andrew Dorman from Chatham House, the actual reduction is nearly 25 per cent because the ministry of defence has many unfunded liabilities and has to unexpectedly pay for the replacement of the UK’s nuclear deterrent. France is expected to scale back its military once it announces its new defence priorities this year. As a result, US officials warn that Europeans will soon be incapable of deploying a mission like the one they sent to Libya in 2011.
European governments have acknowledged that closer co-operation between their armed forces could offset – at least partly – the impact of such large spending cuts. They have introduced some welcome measures. For example, last year, 14 countries agreed to buy surveillance drones for a joint NATO-run squadron. Eighteen states now take part in an EU network to facilitate maritime surveillance through information exchanges. Last April, Belgium and the Netherlands decided to co-operate in helicopter maintenance. In September, Bulgaria and Romania agreed terms to make it easier to police each other’s airspace. Britain and France are training together to develop a new joint expeditionary force. And the UK and other Europeans are providing logistical support to France’s deployment in Mali.
But governments remain wary of pooling military capabilities. They still fear that their partners may block their access to shared equipment if they disapprove of a particular operation. States also disagree on the best way to develop new military technologies. For example, the UK wants to acquire defence equipment with France bilaterally. But since President François Hollande has been in office, France has become increasingly keen to allow other European countries to take part in Franco-British procurement projects. Many countries are averse to committing to ambitious initiatives because they know that these can be costly in the short term – last year Britain notably abandoned its plans to adapt its aircraft carrier so that French planes could land on it, after realising how expensive the adjustments would be. Several EU states are loath to integrate their defence companies with those of other countries, as Germany illustrated when it refused to support the merger between BAE and EADS. Finally, governments do not want their defence firms to lose out on contracts. Many in France worry that several of the cost-saving projects proposed by NATO, including missile defence and the joint purchases of surveillance drones, favour US defence companies.
Europeans need to overcome some of these continued aversions to co-operation. Even though governments would prefer to avoid using military force, they might not have a choice. Several conflicts risk undermining stability in Europe’s southern periphery over the next few years – not least the partial take-over of Mali by Islamist militants, where French forces have already felt compelled to intervene, the civil war in Syria and a possible standoff with Iran. And Washington, struggling with its own budgetary constraints, wants its allies across the world to take more responsibility for their regional security.
President Hollande’s government can allay some of the French concerns about the lack of European industrial participation within NATO cost-saving initiatives. To do so, Paris could suggest projects to the alliance which involve equipment made in Europe. As a participant from the CER seminar has proposed, Berlin, London, Paris or Rome could sell some of their old fighter jets to countries in Central Europe which want to strengthen their arsenals cheaply.
As suggested by another participant at the December discussions, Europeans should buy cutting edge military capabilities only when it is necessary. Over the last few decades, the cost of defence equipment has grown exponentially. Even when their economies are stronger, European governments will increasingly struggle to arm their militaries. In some cases, national security will require governments to continue acquiring the most technologically sophisticated capabilities. But for less sensitive tasks, governments should explore cheaper equipment options and a greater use of civilian suppliers, for example in communications.
Finally, European governments must ensure that they do not duplicate their efforts to build the next generation of drones. European governments have long argued that it has been very inefficient for Europe to have three manned fighter jets programmes (Rafale, Eurofighter and Gripen). The duplication has prevented the various programs from benefiting from economies of scale, it has curtailed interoperability amongst European armed forces, and it has led Europeans to compete against each other in export markets.
Over the next few years, Europeans will decide how to develop unmanned combat aircraft and other sophisticated drones. It is still unclear how governments will proceed. France and Britain have announced plans to develop next generation drones bilaterally. EADS and Finmeccanica, Italy’s largest defence company, have floated intentions to do the same. And France has agreed to work on unmanned aircraft with Germany, too.
Under current spending trends, there is insufficient demand in Europe to support several competitive next generation large unmanned aircraft programmes. So Europeans must avoid several unco-ordinated efforts taking place simultaneously. EU countries could barely afford duplicating expensive aerospace programmes prior to the economic crisis. They definitely cannot afford it now.
Clara Marina O’Donnell is a senior research fellow at the Centre for European Reform and a nonresident fellow at the Brookings Institution.
The FR-UK Defence Forum is an initiative between Chatham House, CER, FRS, IFRI and RUSI. It explores the opportunities and challenges for Franco-British defence co-operation.
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