by Stephen Tindale
The European Commission published its proposals for the 2014-2020 EU budget at the end of June. The British media were incensed about proposals for new ‘EU taxes’, a planned nominal rise in EU budget spending at a time of austerity and alleged threats to the British rebate. However, rather than focusing on the British net balance, the Cameron government should make a strong and constructive case for thorough budget reform. The Commission’s proposals are a missed opportunity.
In a joint letter from last December, the British, German, French, Dutch and Finnish governments demanded that the next ‘Multiannual Financial Framework’ (MFF) for 2014-20 should keep total EU spending at 2013 levels in real terms. The European Parliament hit back in June 2011, demanding a budget increase of at least 5 per cent. The Commission’s proposal states, somewhat lamely, that it has “sought to strike the right balance between ambition and realism” and suggests to cap spending at 1 per cent of EU GDP as in the past while moving (or keeping) some spending items outside the official budget framework. If only the ‘on budget’ spending is counted, the Commission’s proposals are in line with the five member states’ demands, but if the ‘off budget’ money is included the Commission has sided with the Parliament. At 2 per cent of total EU public spending, the EU budget is “stuck between being so small as to be economically irrelevant and big enough to harbour shock horror stories”, in the words of one former British negotiator (quotes are from a recent CER seminar on “Reworking the EU budget”).
However, it is not so much the overall size of the budget that matters but whether EU money is spent on political priorities in a way that adds value. The Commission’s proposals more or less perpetuate the budget priorities of the 2007-13 MFF. While this will please most member-states, it will hardly help the EU to address new challenges such as innovation and research, fighting climate change, dealing with the euro crisis and migration or helping the democratic and economic transition in Eastern Europe and Northern Africa.
The two biggest spending blocks in the 2014-20 MFF will remain the same: structural (or cohesion) funds for regional developments and the common agricultural policy (CAP), with both receiving around 36 per cent of total EU budget spending (although cohesion funds would for the first time be slightly bigger than the CAP).
In theory, cohesion policy is a good example of what European co-operation should be all about: redistributing income and wealth from richer parts of Europe to poorer parts. However, the structural funds are still allocated in a way that even regions in the richest member-states get money. Economists (and some Commission officials) have long advocated to focus cohesion money on the poorer member-states, perhaps those with a GDP of less than 90 per cent of the EU average. Instead, the rich countries insist that their budget contributions get ‘recycled’ via Brussels back to their own less advantaged regions. Many politicians claim that such transfers are needed for political legitimacy and fairness. Surely there are better ways to ensure that richer countries benefit from the EU budget, such as spending on innovation.
The Commission proposals are similarly timid when it comes to the CAP. Not only does spending so much EU money on farmers make little sense as the share of Europeans working the land continues to decline. But the CAP even fails on its own account: too much money now goes to the biggest land-owners. With food prices near all-time high, this EU budget would have been the perfect opportunity for radical CAP reform. “Even the Americans are reducing farm support”, explains one British food producer, “if we do not reform the CAP now, then when?”. The Commission should have proposed phasing out the ‘single farm payment’ (income support that goes to all farmers) while maintaining rural development spending. There should also be a gradual shift towards more national co-financing.
With a much-reduced CAP and re-focused cohesion funds, the EU budget could increasingly go towards issues that the EU declares a priority.
Climate change is one such priority. According to the Commission, EU expenditure for climate programmes will rise to at least 20 per cent of the total – but it gives no details on how it plans to achieve this. Rather than making aspirational statements, the Commission should have made concrete proposals.
Another area that should get more money is external affairs. Only
€100 billion are earmarked in the Commission’s proposal. Although the biggest increase is foreseen for neighbourhood policies, the money will not be enough for the EU to implement its ambitious new neighbourhood policy that it started drawing up in the wake of the Arab spring. Similarly, the €8.7 billion foreseen for dealing with migration is inadequate for a European immigration policy that would help to save the Schengen area of free movement.
The EU should also spend more on its economic priorities. Allocated amounts for R&D and innovation are supposed to rise from €55 billion in the last MFF to €80 billion in 2014-20. This is welcome but still inadequate for a continent whose future prosperity will depend on staying at the technological frontier. For the first time, the EU budget will contain a sizeable pot of money for infrastructure investments: the €40 billion of the new ‘connecting Europe facility’ are supposed to attract a multiple in public (for example from the European Investment Bank) and private investments (perhaps from pension funds) to improve European transport, energy and communications infrastructure. However, about half of the €40 billion will go to transport infrastructure – an area where waste has been a big problem in the past. The money would be better spent on information and communication technology in the EU’s less developed countries and on constructing an EU-wide energy market and preparing for the addition of large amounts of renewables to the European power sector.
Alas, the chances that the 27 EU governments will agree on radical budget reform before 2014 are slim. European budget talks are always heated but today’s political environment is particularly toxic. First, most EU nations are in the process of pushing through painful budget cuts at home and want the Commission to do the same (to its credit, the Commission suggests to cut its staff by 5 per cent but since administration accounts for only 6 per cent of total EU spending, this will be largely symbolic). Second, the Lisbon treaty has given the European Parliament new powers over the budget process, which – if recent moves are anything to go by – it will use to push for higher spending. “The European Parliament is full of spokespeople for individual policy interests whose demands will add up to more than the available budget money”, predicts one British journalist.
Third, the euro crisis has left many people in the richer EU countries opposed to any kind transfers to poorer countries. The grants earmarked for cohesion in the EU budget are peanuts compared with the loan guarantees in the rescue packages put together for Greece, Ireland and Portugal. Yet in the minds of many Europeans, these blend into one. In particular Germany, traditionally the ‘paymaster’ of Europe, will be in no mood to throw in extra billions to lubricate a compromise on the EU budget. Finally, with presidential elections due in France next year, the chances that Paris will move on CAP reform are slim. In London, meanwhile, Prime Minister Cameron will be under heavy pressure from his eurosceptic party base to retain the British rebate and keep budget spending low. A bilateral deal whereby France keeps its farm payments while Britain retains its rebates would allow for a compromise but spell the death knell for EU budget reform.
The Commission has added further fuel to the political fire by making some bold proposals for new ‘own resources’, EU jargon for money that the Union collects directly for the EU budget, for example from customs duties or sugar levies. The Commission now wants member-states to discuss whether the EU could raise money from a new VAT levy and from a financial transaction tax. A German diplomat calls the proposals simply “not acceptable” while a British one dismisses them as an “amusing distraction”. A financial transaction tax would impact heavily on the UK – disproportionately so in the view of the UK government. Since any new own resources need unanimity among the 27 governments, the chances of the Commission’s proposal making it into the new MFF are close to zero.
The Commission’s proposals succeed in trying to please as many political masters as possible. The price that Brussels has paid for this is an unambitious, backward looking budget package. A European Union that must deal with a public finance crisis, an unstable neighbourhood, diminishing legitimacy and declining global competitiveness must do better. And David Cameron should provide the leadership. France has a presidential election in 2012, and Germany a federal election in 2013, so President Sarkozy and Chancellor Merkel are boxed in by the demands of electioneering. UK foreign secretary William Hague – no fan of Brussels – has said that the EU should do more to control climate change. So the British government should argue that significantly more should be spent on climate control, and significantly less on the CAP, and that if genuine budget reform is on the table, the UK rebate is up for re-negotiation.
Stephen Tindale is an associate fellow at the Centre for European Reform.
Monday, July 11, 2011
Monday, June 20, 2011
Financial regulation: Britain the perennial outlier?
by Philip Whyte
Back in 2007, when the Labour government had abolished the business cycle and the City of London was booming, British policy-makers liked to vaunt the merits of ‘light touch’ regulation. Given the scale of British hubris in the run-up to the worst financial crisis since the Great Depression, the country’s EU partners can be forgiven for feeling a certain amount of Schadenfreude. Less justifiable, however, is the sense of vindication that has often accompanied it. Many European politicians have liked to give the impression that the financial crisis would not have happened if ‘Anglo-Saxons’ had regulated and supervised financial markets as strictly as Europeans; and that the task following the crisis is for Europeans to make sure that recalcitrant Anglo-Saxons are finally made to do so.
There are at least two reasons why this narrative is misplaced. The first is that Europe was not an innocent spectator in the run-up to the financial crisis, but an active participant in its genesis. Many European banks were as highly leveraged as Anglo-American ones (and vastly more so than hedge funds). Their lending standards deteriorated every bit as dramatically. And many enthusiastically underwrote or invested in exotic asset-backed securities like collateralised debt obligations (CDOs). (European banks’ voracious appetite for high-yielding securities with AAA-ratings was one factor that drove the growth in the market for CDOs). It does not necessarily follow, then, that the crisis would have been averted if regulatory and supervisory regimes in the Anglo-American world had been ‘more European’.
The second reason is that it ignores just how far the climate in Britain has changed since the crisis. Britain has not had to be bullied into abandoning its ‘light touch’ regime; it has done so of its own will. Changes to its regulatory and supervisory regime have been so wide-ranging that the UK is now at the strict end of the EU spectrum. For example, senior policy-makers, from the governor of the Bank of England to the chairman of the Financial Services Authority, have argued that EU rules on bank capital should be stronger, not weaker, than the Basel III accords. And the government has recently said that it will follow the recommendations of the Vickers Commission and ring-fence retail banking operations from investment banking ones – a move no other EU country is contemplating.
What does it matter if European politicians believe that the post-crisis task is to whip Anglo-Saxons into shape? Isn’t the belief harmless? Indeed, if it helps to rectify the problems that the crisis exposed, doesn’t it do more good than harm? Not necessarily. To start with, it risks creating needless friction between Britain and its EU partners. As host to Europe’s largest financial centre, the UK is disproportionately affected by some of the measures that the EU adopts – the recent Alternative Investment Fund Managers (AIFM) directive being a case in point. As other measures wind their way through the EU’s legislative pipeline and the recently-established European Supervisory Authorities bed down, it is in no one’s interest for EU initiatives to be seen in Britain as gratuitous attacks on the City of London.
Just as seriously, the popular European pass-time of bashing Anglo-Saxons diverts attention away from problems elsewhere in the EU. Consider Germany. In 2009, the country’s chancellor, Angela Merkel, told members of her party that they would no longer be dictated to by the City of London. Since then, her government has shown a striking reluctance to come clean about the weakened state of Germany’s own banks. This is why Germany played an active part in watering down stress tests for EU banks in 2010, and why it fought a rear-guard action to try and dilute the new Basel accords on capital adequacy. Seen from outside, Germany has appeared strangely reluctant to accept one of the central lessons of the financial crisis: that banks should hold more and better quality capital.
However absurd British paeans to light touch regulation seem now, there was more in common between Britain and the rest of Europe in the run-up to the financial crisis than is often recognised. Politicians, however, rarely find it easy to own up to failings at home. There was a brief moment in 2008 when the British government tried to pin all the blame for the financial crisis on events in the US – a claim that was hard to sustain given the carbon-copy, debt-fuelled boom that the UK went through. Unlike Britain, Germany never experienced a domestic credit-fuelled boom. This may explain why German politicians have found it easier to claim (and perhaps even believe) that they were the victims of shortcomings abroad, and why they have been slow to confront the problems at German banks.
Europe’s landscape, in short, has changed since the financial crisis. Britain is increasingly nervous about the huge contingent liabilities to which the country’s large financial sector exposes domestic taxpayers. It does not want to become Reykjavik-on-Thames. It is calling for tougher rules than even longstanding critics of light touch regulation are prepared to contemplate. The future of the City of London, it follows, will be influenced as much by the new climate in London as by the old one in Brussels (more hedge funds have left London in response to changes in the British tax system than because of the adoption of the EU’s AIFM directive). Critics will argue that Britain is as unilateralist as ever – and hence remains a European outlier. But if it is, it is in a very different sense from in 2007.
Philip Whyte is a senior research fellow at the Centre for European Reform.
Back in 2007, when the Labour government had abolished the business cycle and the City of London was booming, British policy-makers liked to vaunt the merits of ‘light touch’ regulation. Given the scale of British hubris in the run-up to the worst financial crisis since the Great Depression, the country’s EU partners can be forgiven for feeling a certain amount of Schadenfreude. Less justifiable, however, is the sense of vindication that has often accompanied it. Many European politicians have liked to give the impression that the financial crisis would not have happened if ‘Anglo-Saxons’ had regulated and supervised financial markets as strictly as Europeans; and that the task following the crisis is for Europeans to make sure that recalcitrant Anglo-Saxons are finally made to do so.
There are at least two reasons why this narrative is misplaced. The first is that Europe was not an innocent spectator in the run-up to the financial crisis, but an active participant in its genesis. Many European banks were as highly leveraged as Anglo-American ones (and vastly more so than hedge funds). Their lending standards deteriorated every bit as dramatically. And many enthusiastically underwrote or invested in exotic asset-backed securities like collateralised debt obligations (CDOs). (European banks’ voracious appetite for high-yielding securities with AAA-ratings was one factor that drove the growth in the market for CDOs). It does not necessarily follow, then, that the crisis would have been averted if regulatory and supervisory regimes in the Anglo-American world had been ‘more European’.
The second reason is that it ignores just how far the climate in Britain has changed since the crisis. Britain has not had to be bullied into abandoning its ‘light touch’ regime; it has done so of its own will. Changes to its regulatory and supervisory regime have been so wide-ranging that the UK is now at the strict end of the EU spectrum. For example, senior policy-makers, from the governor of the Bank of England to the chairman of the Financial Services Authority, have argued that EU rules on bank capital should be stronger, not weaker, than the Basel III accords. And the government has recently said that it will follow the recommendations of the Vickers Commission and ring-fence retail banking operations from investment banking ones – a move no other EU country is contemplating.
What does it matter if European politicians believe that the post-crisis task is to whip Anglo-Saxons into shape? Isn’t the belief harmless? Indeed, if it helps to rectify the problems that the crisis exposed, doesn’t it do more good than harm? Not necessarily. To start with, it risks creating needless friction between Britain and its EU partners. As host to Europe’s largest financial centre, the UK is disproportionately affected by some of the measures that the EU adopts – the recent Alternative Investment Fund Managers (AIFM) directive being a case in point. As other measures wind their way through the EU’s legislative pipeline and the recently-established European Supervisory Authorities bed down, it is in no one’s interest for EU initiatives to be seen in Britain as gratuitous attacks on the City of London.
Just as seriously, the popular European pass-time of bashing Anglo-Saxons diverts attention away from problems elsewhere in the EU. Consider Germany. In 2009, the country’s chancellor, Angela Merkel, told members of her party that they would no longer be dictated to by the City of London. Since then, her government has shown a striking reluctance to come clean about the weakened state of Germany’s own banks. This is why Germany played an active part in watering down stress tests for EU banks in 2010, and why it fought a rear-guard action to try and dilute the new Basel accords on capital adequacy. Seen from outside, Germany has appeared strangely reluctant to accept one of the central lessons of the financial crisis: that banks should hold more and better quality capital.
However absurd British paeans to light touch regulation seem now, there was more in common between Britain and the rest of Europe in the run-up to the financial crisis than is often recognised. Politicians, however, rarely find it easy to own up to failings at home. There was a brief moment in 2008 when the British government tried to pin all the blame for the financial crisis on events in the US – a claim that was hard to sustain given the carbon-copy, debt-fuelled boom that the UK went through. Unlike Britain, Germany never experienced a domestic credit-fuelled boom. This may explain why German politicians have found it easier to claim (and perhaps even believe) that they were the victims of shortcomings abroad, and why they have been slow to confront the problems at German banks.
Europe’s landscape, in short, has changed since the financial crisis. Britain is increasingly nervous about the huge contingent liabilities to which the country’s large financial sector exposes domestic taxpayers. It does not want to become Reykjavik-on-Thames. It is calling for tougher rules than even longstanding critics of light touch regulation are prepared to contemplate. The future of the City of London, it follows, will be influenced as much by the new climate in London as by the old one in Brussels (more hedge funds have left London in response to changes in the British tax system than because of the adoption of the EU’s AIFM directive). Critics will argue that Britain is as unilateralist as ever – and hence remains a European outlier. But if it is, it is in a very different sense from in 2007.
Philip Whyte is a senior research fellow at the Centre for European Reform.
Wednesday, June 01, 2011
EU ministers tackle defence austerity
by Tomas Valasek
How do you do more with less? The EU defence ministers agreed last week that the way to limit the impact of the economic crisis on their defence budgets lies in more co-operation. In a joint statement, they called for more military 'pooling and sharing': joint development and procurement of weapons, and partial integration of European militaries. EU member-states have trialled such ideas before but with limited success. Deep co-operation remains highly sensitive: governments are reluctant to build joint units because this may require them to share decisions on how and when to use them. The ministers' conclusions are correspondingly cautious: they call for a “structured” and “long-term” approach while offering few specific guidelines. It need not be this way: past pooling and sharing attempts offer plenty of lessons on what makes military collaboration successful.
In a recent CER report,['Surviving austerity: The case for a new approach to EU military collaboration', May 2011, http://www.cer.org.uk/pdf/rp_981.pdf]. I suggested ways for European countries to avoid past mistakes. Partial military integration works best when participating countries have similar strategic cultures, a high level of mutual trust, comparable attitudes to defence industry, and relatively low corruption in defence procurement. It also helps if countries are roughly similar in size, and serious about defence matters: that is, they are willing to use their armed forces and keen to maintain their ability to fight for future contingencies.
Several conclusions for EU defence ministers flow from these observations. Since many factors have to align for pooling and sharing to succeed, future defence integration will remain an exception rather than the rule. The conditions listed above only occur in some – and not necessarily geographically connected – parts of Europe. Hence, the idea that EU defence could begin around a single core group, the emergence of which would encourage others to join in a ‘snowballing’ effect, seems unrealistic. Future events may well prod European militaries to create a single, coherent military force. But no such outcome is foreseeable currently given widely varying levels of threat perception, political interest and military cultures across the Union.
The report also recommends that rather than pursuing ‘permanent structured co-operation’, the focus of EU countries and institutions should be on encouraging the formation of several “islands of co-operation” along regional lines, where members partly integrate their militaries. Some of these islands are already well established. The Benelux countries have had much success with pooling and sharing forces. The Nordic states are moving in this direction, as are France and the UK, which have recently concluded a bilateral treaty on defence co-operation. The recent EU defence ministers' communiqué makes a nod to the islands of co-operation idea by stating that multinational co-operation should also take place on a regional basis.
The EU's ability to nudge member-states towards such co-operation will be limited: the capitals will want a final say on with whom to partner, and to what end and depth. But this is not so say that there is nothing that the EU can do; in fact, European institutions have already been helpful. Their key role lies in spreading lessons learned in one region to the rest of Europe. The European Defence Agency, which EU countries set up to facilitate collaboration, has been collecting data on past and current examples of pooling and sharing; it should also catalogue why some have succeeded better than others. The EU military staff, which advises the EU high representative, has conducted a similar but forward-looking exercise: it collected information on what military skills or facilities the member-states are willing to pool and share. It should now use the data to highlight opportunities for collaboration.
The EU can also give member-states incentives to enter into permanent collaboration. Its best tool is the EU 'battlegroups': multinational, 1,500-strong units that are prepared, on a six-month basis, to deploy rapidly in and around Europe. While their primary raison d’être has been to give the EU the ability to quickly respond to crises, it was also hoped that the battlegroups would encourage governments to build permanent joint units. But on this last count, the experiment has disappointed: countries come together for six months, but then go their own separate ways. The EU should adopt recent Polish proposals that the battlegroups should always be composed of the same states, and that they should be on rotation on a predictable schedule, for example every three years. This would give the member-states reasons to maintain close long-term co-operation with partners in the battlegroup, and possibly to pool their units on a permanent basis, not just for the duration of the rotation.
Pooling and sharing will never compensate for inadequate defence budgets: when average spending in Europe, as percentage of GDP, drops by half – as it has over the past two decades – militaries will inevitably suffer. The EU member-states will almost certainly do 'less with less' rather than 'more with less'. However, properly applied, pooling and sharing can partly offset the impact of lower budgets. So while EU countries will still lose some of their military power to budget cuts, they will be better off with pooling and sharing than without.
Tomas Valsek is director of foreign policy and defence at the Centre for European Reform.
How do you do more with less? The EU defence ministers agreed last week that the way to limit the impact of the economic crisis on their defence budgets lies in more co-operation. In a joint statement, they called for more military 'pooling and sharing': joint development and procurement of weapons, and partial integration of European militaries. EU member-states have trialled such ideas before but with limited success. Deep co-operation remains highly sensitive: governments are reluctant to build joint units because this may require them to share decisions on how and when to use them. The ministers' conclusions are correspondingly cautious: they call for a “structured” and “long-term” approach while offering few specific guidelines. It need not be this way: past pooling and sharing attempts offer plenty of lessons on what makes military collaboration successful.
In a recent CER report,['Surviving austerity: The case for a new approach to EU military collaboration', May 2011, http://www.cer.org.uk/pdf/rp_981.pdf]. I suggested ways for European countries to avoid past mistakes. Partial military integration works best when participating countries have similar strategic cultures, a high level of mutual trust, comparable attitudes to defence industry, and relatively low corruption in defence procurement. It also helps if countries are roughly similar in size, and serious about defence matters: that is, they are willing to use their armed forces and keen to maintain their ability to fight for future contingencies.
Several conclusions for EU defence ministers flow from these observations. Since many factors have to align for pooling and sharing to succeed, future defence integration will remain an exception rather than the rule. The conditions listed above only occur in some – and not necessarily geographically connected – parts of Europe. Hence, the idea that EU defence could begin around a single core group, the emergence of which would encourage others to join in a ‘snowballing’ effect, seems unrealistic. Future events may well prod European militaries to create a single, coherent military force. But no such outcome is foreseeable currently given widely varying levels of threat perception, political interest and military cultures across the Union.
The report also recommends that rather than pursuing ‘permanent structured co-operation’, the focus of EU countries and institutions should be on encouraging the formation of several “islands of co-operation” along regional lines, where members partly integrate their militaries. Some of these islands are already well established. The Benelux countries have had much success with pooling and sharing forces. The Nordic states are moving in this direction, as are France and the UK, which have recently concluded a bilateral treaty on defence co-operation. The recent EU defence ministers' communiqué makes a nod to the islands of co-operation idea by stating that multinational co-operation should also take place on a regional basis.
The EU's ability to nudge member-states towards such co-operation will be limited: the capitals will want a final say on with whom to partner, and to what end and depth. But this is not so say that there is nothing that the EU can do; in fact, European institutions have already been helpful. Their key role lies in spreading lessons learned in one region to the rest of Europe. The European Defence Agency, which EU countries set up to facilitate collaboration, has been collecting data on past and current examples of pooling and sharing; it should also catalogue why some have succeeded better than others. The EU military staff, which advises the EU high representative, has conducted a similar but forward-looking exercise: it collected information on what military skills or facilities the member-states are willing to pool and share. It should now use the data to highlight opportunities for collaboration.
The EU can also give member-states incentives to enter into permanent collaboration. Its best tool is the EU 'battlegroups': multinational, 1,500-strong units that are prepared, on a six-month basis, to deploy rapidly in and around Europe. While their primary raison d’être has been to give the EU the ability to quickly respond to crises, it was also hoped that the battlegroups would encourage governments to build permanent joint units. But on this last count, the experiment has disappointed: countries come together for six months, but then go their own separate ways. The EU should adopt recent Polish proposals that the battlegroups should always be composed of the same states, and that they should be on rotation on a predictable schedule, for example every three years. This would give the member-states reasons to maintain close long-term co-operation with partners in the battlegroup, and possibly to pool their units on a permanent basis, not just for the duration of the rotation.
Pooling and sharing will never compensate for inadequate defence budgets: when average spending in Europe, as percentage of GDP, drops by half – as it has over the past two decades – militaries will inevitably suffer. The EU member-states will almost certainly do 'less with less' rather than 'more with less'. However, properly applied, pooling and sharing can partly offset the impact of lower budgets. So while EU countries will still lose some of their military power to budget cuts, they will be better off with pooling and sharing than without.
Tomas Valsek is director of foreign policy and defence at the Centre for European Reform.
Monday, May 16, 2011
Press freedom – the new accession criterion?
by Katinka Barysch
Countries that want to join the EU need to show that their democracies work well. However, press freedom – a key ingredient of any pluralist democracy – is under threat in most of the countries that are now queuing for accession. Independent newspapers and broadcasters are being squeezed out of the market. Critical journalists are being sacked, beaten or locked up. Without curious and courageous journalists, crime and cronyism flourish, public debate is stunted and politicians feel unaccountable. The EU could do more to protect media freedom in the Western Balkans and Turkey.
The erosion of press freedom has been most striking in Turkey recently. A shocking 50-60 journalists are now in jail (depending on who does the counting), mostly accused of plotting to overthrow the government or split the country. Some 10,000 lawsuits are pending against writers and broadcasters. Many journalists suspect that their phones are tapped and their e-mails read. Fear and suspicion pervade the media. In the press freedom ranking of Reporters without Borders, a Paris-based NGO, Turkey has dropped to 138th place, behind Iraq and only just ahead of Russia.
The situation in the Western Balkan countries is similarly worrying. Scores of journalists have been beaten up or intimidated. A couple have lost their lives, with their killers usually going unpunished. Some of Serbia's and Croatia's best-known journalists now live with constant police protection. Many of their colleagues prefer self-censorship to a life in fear or unemployment.
The problems that the region's newspapers, radio stations and TV broadcasters grapple with are complex. Direct state censorship is arguably the least of their problems. Pressure is indirect and comes from various sides. Money is a huge constraint, especially in the small, fragmented Balkan media markets. The economic crisis that started in 2008 has led to painful losses of advertising revenue. Media companies have sacked staff and dumbed down their coverage. Investigative journalism is becoming a luxury.
Some media bosses would not want their journalists to snoop around too much anyway. Conflicts of interests are rife: although ownership structures are often obscure, it is clear that many newspapers and TV stations form part of bigger business empires. Owners fear that they will lose lucrative public contracts or other favours from politicians if their journalists write about government corruption or crime. Others are using their media outlets blatantly to promote their own interests. Albania, with fewer inhabitants than Berlin, has 25 daily newspapers. Most of them are controlled by local mini-tycoons wrestling for influence. In such an environment, journalists are little more than PR writers.
West Europeans can usually rely on well-funded public service broadcasters for information. But trying to build a local version of the BBC is not the solution for South East Europe. In most Balkan countries, public TV stations function more like "ministries for propaganda", says Remzi Lani of the Albanian Media Institute. Their coverage is neither independent nor balanced. In the Western Balkans, a legacy of ethnic hatred and fervent nationalism makes for a toxic media landscape. In Turkey, the press mirrors the political schism between the mildly Islamist AK government and its Kemalist opponents.
"Governments need to stop seeing the media as their private property", warns Dunja Mijatovic, the OSCE’s Media Freedom Representative. Some observers hope that internet bloggers and other forms of 'citizen journalism' could fill the gap between self-serving commercial media and politicised public ones. However, most web publications do not generate income to pay for investigative journalism. And governments are clamping down on the internet as well. The Turkish government has blocked an estimated 12,000 websites to date. It is now planning to make 'filters' compulsory to prevent Turks from viewing websites that contain pornography. Access to sites containing one or more of 138 'prohibited' words (including puzzling items such as skirt, homemade and Haydar) would be blocked automatically.
The European Commission, in charge of monitoring accession countries' compliance with civil liberties and democratic standards, is getting seriously worried. It has repeatedly flagged up the deteriorating media environment in its annual assessments of accession preparations. Yet the situation keeps getting worse. To help it figure out what to do, the Commission gathered over 450 journalists and activists from the Western Balkans and Turkey in Brussels on May 6th. Many of them were seething with frustration: "The Europeans are hypocrites. They say they worry about journalism in our countries. But they still support our governments", said one editor.
The EU has been shy to put pressure on accession country governments. First, the EU's own record on media freedom is not flawless, with Hungary's new restrictive media law and Silvio Berlusconi's grip on Italy’s television the most frequently cited examples. Second, the EU has only a limited role in the media sector. There is, for example, a directive telling member-states not to discriminate against media outlets from other EU countries. But on the whole, the acquis in this area is thin and rules are made by national governments or by self-regulatory bodies.
To its credit, the Commission is becoming more outspoken, in particular in response to the most recent arrests of journalists in Turkey. Enlargement Commissioner Stefan Fule is also thinking about singling out press freedom as a more explicit benchmark for accession. At the moment, it is just one of the many items assessed under the criterion of a 'functioning democracy' (the other accession criteria concern market economics and the implementation of EU law).
The Commission could also do more to monitor the broader environment in which journalists in Turkey and the Western Balkans operate. While the accession countries usually have nice-sounding laws on media freedom, these are often not implemented properly. Other laws, covering defamation, anti-terrorism, taxation or public procurement, have been used to prosecute journalists and bankrupt or disadvantage their employers. The Commission has a remit to push accession countries to reform their judiciaries and improve the wider business environment for media outlets. It should use it forcefully.
In addition, the Commission should ask accession countries to make media ownership more transparent and clamp down on conflicts of interest. It should work out benchmarks against which the region's fledgling self-regulatory bodies can be measured. It could join other donors in funding training for investigative journalists or support for independent news websites.
Most importantly, the EU and its member-states have to become more vocal about their concerns. Past attempts to put pressure on the governments of Turkey and some Balkan countries through silent diplomacy have not worked. "Our politicians are liars", says Saso Ordanoski, an editor from Macedonia. "They will promise anything unless they are exposed to public scrutiny."
Katinka Barysch is deputy director of the Centre for European Reform.
Countries that want to join the EU need to show that their democracies work well. However, press freedom – a key ingredient of any pluralist democracy – is under threat in most of the countries that are now queuing for accession. Independent newspapers and broadcasters are being squeezed out of the market. Critical journalists are being sacked, beaten or locked up. Without curious and courageous journalists, crime and cronyism flourish, public debate is stunted and politicians feel unaccountable. The EU could do more to protect media freedom in the Western Balkans and Turkey.
The erosion of press freedom has been most striking in Turkey recently. A shocking 50-60 journalists are now in jail (depending on who does the counting), mostly accused of plotting to overthrow the government or split the country. Some 10,000 lawsuits are pending against writers and broadcasters. Many journalists suspect that their phones are tapped and their e-mails read. Fear and suspicion pervade the media. In the press freedom ranking of Reporters without Borders, a Paris-based NGO, Turkey has dropped to 138th place, behind Iraq and only just ahead of Russia.
The situation in the Western Balkan countries is similarly worrying. Scores of journalists have been beaten up or intimidated. A couple have lost their lives, with their killers usually going unpunished. Some of Serbia's and Croatia's best-known journalists now live with constant police protection. Many of their colleagues prefer self-censorship to a life in fear or unemployment.
The problems that the region's newspapers, radio stations and TV broadcasters grapple with are complex. Direct state censorship is arguably the least of their problems. Pressure is indirect and comes from various sides. Money is a huge constraint, especially in the small, fragmented Balkan media markets. The economic crisis that started in 2008 has led to painful losses of advertising revenue. Media companies have sacked staff and dumbed down their coverage. Investigative journalism is becoming a luxury.
Some media bosses would not want their journalists to snoop around too much anyway. Conflicts of interests are rife: although ownership structures are often obscure, it is clear that many newspapers and TV stations form part of bigger business empires. Owners fear that they will lose lucrative public contracts or other favours from politicians if their journalists write about government corruption or crime. Others are using their media outlets blatantly to promote their own interests. Albania, with fewer inhabitants than Berlin, has 25 daily newspapers. Most of them are controlled by local mini-tycoons wrestling for influence. In such an environment, journalists are little more than PR writers.
West Europeans can usually rely on well-funded public service broadcasters for information. But trying to build a local version of the BBC is not the solution for South East Europe. In most Balkan countries, public TV stations function more like "ministries for propaganda", says Remzi Lani of the Albanian Media Institute. Their coverage is neither independent nor balanced. In the Western Balkans, a legacy of ethnic hatred and fervent nationalism makes for a toxic media landscape. In Turkey, the press mirrors the political schism between the mildly Islamist AK government and its Kemalist opponents.
"Governments need to stop seeing the media as their private property", warns Dunja Mijatovic, the OSCE’s Media Freedom Representative. Some observers hope that internet bloggers and other forms of 'citizen journalism' could fill the gap between self-serving commercial media and politicised public ones. However, most web publications do not generate income to pay for investigative journalism. And governments are clamping down on the internet as well. The Turkish government has blocked an estimated 12,000 websites to date. It is now planning to make 'filters' compulsory to prevent Turks from viewing websites that contain pornography. Access to sites containing one or more of 138 'prohibited' words (including puzzling items such as skirt, homemade and Haydar) would be blocked automatically.
The European Commission, in charge of monitoring accession countries' compliance with civil liberties and democratic standards, is getting seriously worried. It has repeatedly flagged up the deteriorating media environment in its annual assessments of accession preparations. Yet the situation keeps getting worse. To help it figure out what to do, the Commission gathered over 450 journalists and activists from the Western Balkans and Turkey in Brussels on May 6th. Many of them were seething with frustration: "The Europeans are hypocrites. They say they worry about journalism in our countries. But they still support our governments", said one editor.
The EU has been shy to put pressure on accession country governments. First, the EU's own record on media freedom is not flawless, with Hungary's new restrictive media law and Silvio Berlusconi's grip on Italy’s television the most frequently cited examples. Second, the EU has only a limited role in the media sector. There is, for example, a directive telling member-states not to discriminate against media outlets from other EU countries. But on the whole, the acquis in this area is thin and rules are made by national governments or by self-regulatory bodies.
To its credit, the Commission is becoming more outspoken, in particular in response to the most recent arrests of journalists in Turkey. Enlargement Commissioner Stefan Fule is also thinking about singling out press freedom as a more explicit benchmark for accession. At the moment, it is just one of the many items assessed under the criterion of a 'functioning democracy' (the other accession criteria concern market economics and the implementation of EU law).
The Commission could also do more to monitor the broader environment in which journalists in Turkey and the Western Balkans operate. While the accession countries usually have nice-sounding laws on media freedom, these are often not implemented properly. Other laws, covering defamation, anti-terrorism, taxation or public procurement, have been used to prosecute journalists and bankrupt or disadvantage their employers. The Commission has a remit to push accession countries to reform their judiciaries and improve the wider business environment for media outlets. It should use it forcefully.
In addition, the Commission should ask accession countries to make media ownership more transparent and clamp down on conflicts of interest. It should work out benchmarks against which the region's fledgling self-regulatory bodies can be measured. It could join other donors in funding training for investigative journalists or support for independent news websites.
Most importantly, the EU and its member-states have to become more vocal about their concerns. Past attempts to put pressure on the governments of Turkey and some Balkan countries through silent diplomacy have not worked. "Our politicians are liars", says Saso Ordanoski, an editor from Macedonia. "They will promise anything unless they are exposed to public scrutiny."
Katinka Barysch is deputy director of the Centre for European Reform.
Monday, May 09, 2011
Debt restructuring will not end the euro crisis
by Simon Tilford
Even as the ink is still drying on Portugal’s EU/IMF ‘bail-out’ agreement, it is becoming clear that Greece’s 2010 bail-out has failed to improve the sustainability of its public finances. There are even rumours (strenuously denied) that the German government has drawn up plans for a Greek withdrawal from the currency union. Far from improving access to the financial markets, the support packages for Greece and Ireland (which succumbed to a bail-out of its own in December 2010) have left these countries facing record borrowing costs. The reasons for this are by now well-rehearsed. The markets do not believe that the struggling euro countries are going to grow rapidly enough to service their debts. By increasing their debts further, the bail-outs have made investors even more sceptical. The outlook for Portugal is similar, notwithstanding the slightly less draconian terms of its agreement.
All three countries will eventually have to restructure their debts. Initially, the EU will no doubt try and get away with ‘soft’ restructurings, involving a combination of longer maturities and lower interest rates. But this will not work and by 2013 there will be no viable alternative to ‘hard’ restructurings (default) comprising debt write-downs of 50 per cent or more. Unfortunately, in the case of Greece and Portugal at least, even this will not guarantee continued membership of the euro.
Debt restructuring of this scale will be messy and fraught with risks. The eurozone will have to inject capital into the banks of peripheral countries, which have huge holdings of their respective governments’ debts. Banks based elsewhere in the eurozone that have large exposures to peripheral country debt will have to raise capital from private investors or from their governments. However, by the time the EU gets around to a ‘hard’ debt restructuring in 2013, public bodies (EU governments, the ECB and the IMF) will have assumed at least half of the private sector’s exposure to the public debt of the defaulting countries. In order to prevent debt restructuring from causing a flight from government debt markets across the rest of the eurozone, the ECB will have to stand ready to provide liquidity and, if necessary, purchase government bonds. The ECB itself will have to book huge losses on the money it lent to banks in the defaulting countries. But assuming all this can be achieved without a systemic financial crisis, what then? Will such a debt restructuring/default solve the crisis?
Cutting the debt burdens of the peripheral states will only go so far to resolving their problems. After all, interest payments on their outstanding public debt account for a relatively small (albeit quickly rising) proportion of their budget deficits. Reducing the cost of servicing the outstanding stock of public debt by 50-60 per cent would obviously improve the long-term sustainability of these countries' fiscal positions. But unless the defaulting countries can engineer a return to economic growth, they will continue to struggle to tap the capital markets on anything but prohibitively expensive terms. Of the three peripheral economies, only Ireland stands a good chance of convincing investors of its solvency.
Assuming Ireland’s public debt is written down by around 50 per cent in 2013 (when its debt-to-GDP ratio will have climbed to around 120 per cent of GDP) its debt ratio would be a manageable looking 60 per cent. However, in all likelihood it will also still have a huge budget deficit, which will require on-going budget austerity. In Ireland’s case investors will probably calculate that the Irish economy will be strong enough to weather continued austerity. Ireland is now running a current-account surplus – so it is not dependent on foreign borrowing to finance the deficit and the foreign balance is not a drag on its economy. There will be no return to Celtic Tiger rates of expansion, but the country’s export sector is competitive. Exports should perform relatively strongly, holding out the promise of decent economic growth. As a result, Ireland could regain access to financial markets relatively quickly following a ‘hard’ debt restructuring.
What about Greece and Portugal? In both cases the picture is bleaker. Assuming that the ratio of Greek debt rises to over 160 per cent of GDP before the EU finally pushes ahead with a ‘hard’ restructuring involving a write-down of as much as 60 per cent, the country would have a debt to GDP ratio of 65 per cent. However, investors will be sceptical of the Greek economy’s ability to absorb the cuts needed to bring down the still very large budget deficit. The Greek government will be largely dependent on foreign borrowing to finance the budget deficit: Greece’s current-account deficit has narrowed, but remains very large. Unlike Ireland, Greece will find it very hard to generate the stimulus from exports needed to offset the impact of continued austerity. Exports only account for around 25 per cent of Greek GDP – compared with well over 100 per cent in the Irish case – and Greece does little trade with countries outside the slow-growing EU. Investors will surely bet that they will not get bailed out by taxpayers a second time, and continue to deny Greece market access.
What about Portugal? Portugal has a lower stock of public debt than Greece – at around 95 per cent of GDP – but it has a very sizeable budget deficit, hugely indebted private sector and current account deficit of a comparable size to Greece’s. The combined debt of Portugal’s public and private sectors (excluding debts between banks) is now around 300 per cent of GDP. A chunk of this private sector debt will end up on the government’s books. Under its agreement with the EU and IMF, Portugal has to underwrite €35bn of its banks’ liabilities – equivalent to around 20 per cent of its GDP. But with the Portuguese economy set to contract steeply over the next two years (the EU forecasts falls in GDP of 2 per cent in both 2011 and 2012) the eventual transfer of debt from the private to the public sector is likely to be substantially higher than $35 billion.
If, as seems likely, the ratio of Portugal’s public debt to GDP rises to close to 120 per cent by 2013, a 50 per cent write-down would reduce the debt to around 60 per cent of GDP. But with the fiscal deficit large and export-led growth elusive, investors will remain wary of lending to the Portuguese government. Portugal’s economy is more open than Greece’s, but nowhere near as open as Ireland’s, and does similarly little trade with non-EU markets. Moreover, the country’s principal export market – Spain – faces years of economic stagnation as it grapples with problems not dissimilar to those of Portugal. Portuguese businesses have also experienced a huge loss of trade competitiveness within the eurozone. Added to this, the euro is likely to remain very strong against the dollar as the US Federal Reserve maintains a loose monetary policy and the ECB raises interest rates.
What will then happen? Further bail-outs of Greece and Portugal in the form of loans from the rest of the eurozone are unlikely. Everyone will by then recognise that piling more debt on top of already unsustainable levels makes little sense. This will leave two alternatives: fiscal transfers (the dreaded ‘fiscal union’) or a withdrawal of the affected countries from the currency union. Faced with the possibility of countries leaving the currency union, it is impossible to discount the possibility of a shift to some kind of transfer union. But the politics look formidably difficult. Could there be a negotiated withdrawal from the currency union? It would require action on a number of fronts, including emergency support for the affected countries’ banks and the imposition of temporary capital controls. The quitting countries’ debts would have to be redenominated into their newly introduced (and massively devalued) currencies. The rules stating that any country leaving the currency union would have to quit the EU would also have to be fudged. It is impossible to attach a likelihood to all this happening. But given the obstacles to fiscal transfers between eurozone economies it would be unwise to bet too much money against it.
Simon Tilford is chief economist at the Centre for European Reform.
Even as the ink is still drying on Portugal’s EU/IMF ‘bail-out’ agreement, it is becoming clear that Greece’s 2010 bail-out has failed to improve the sustainability of its public finances. There are even rumours (strenuously denied) that the German government has drawn up plans for a Greek withdrawal from the currency union. Far from improving access to the financial markets, the support packages for Greece and Ireland (which succumbed to a bail-out of its own in December 2010) have left these countries facing record borrowing costs. The reasons for this are by now well-rehearsed. The markets do not believe that the struggling euro countries are going to grow rapidly enough to service their debts. By increasing their debts further, the bail-outs have made investors even more sceptical. The outlook for Portugal is similar, notwithstanding the slightly less draconian terms of its agreement.
All three countries will eventually have to restructure their debts. Initially, the EU will no doubt try and get away with ‘soft’ restructurings, involving a combination of longer maturities and lower interest rates. But this will not work and by 2013 there will be no viable alternative to ‘hard’ restructurings (default) comprising debt write-downs of 50 per cent or more. Unfortunately, in the case of Greece and Portugal at least, even this will not guarantee continued membership of the euro.
Debt restructuring of this scale will be messy and fraught with risks. The eurozone will have to inject capital into the banks of peripheral countries, which have huge holdings of their respective governments’ debts. Banks based elsewhere in the eurozone that have large exposures to peripheral country debt will have to raise capital from private investors or from their governments. However, by the time the EU gets around to a ‘hard’ debt restructuring in 2013, public bodies (EU governments, the ECB and the IMF) will have assumed at least half of the private sector’s exposure to the public debt of the defaulting countries. In order to prevent debt restructuring from causing a flight from government debt markets across the rest of the eurozone, the ECB will have to stand ready to provide liquidity and, if necessary, purchase government bonds. The ECB itself will have to book huge losses on the money it lent to banks in the defaulting countries. But assuming all this can be achieved without a systemic financial crisis, what then? Will such a debt restructuring/default solve the crisis?
Cutting the debt burdens of the peripheral states will only go so far to resolving their problems. After all, interest payments on their outstanding public debt account for a relatively small (albeit quickly rising) proportion of their budget deficits. Reducing the cost of servicing the outstanding stock of public debt by 50-60 per cent would obviously improve the long-term sustainability of these countries' fiscal positions. But unless the defaulting countries can engineer a return to economic growth, they will continue to struggle to tap the capital markets on anything but prohibitively expensive terms. Of the three peripheral economies, only Ireland stands a good chance of convincing investors of its solvency.
Assuming Ireland’s public debt is written down by around 50 per cent in 2013 (when its debt-to-GDP ratio will have climbed to around 120 per cent of GDP) its debt ratio would be a manageable looking 60 per cent. However, in all likelihood it will also still have a huge budget deficit, which will require on-going budget austerity. In Ireland’s case investors will probably calculate that the Irish economy will be strong enough to weather continued austerity. Ireland is now running a current-account surplus – so it is not dependent on foreign borrowing to finance the deficit and the foreign balance is not a drag on its economy. There will be no return to Celtic Tiger rates of expansion, but the country’s export sector is competitive. Exports should perform relatively strongly, holding out the promise of decent economic growth. As a result, Ireland could regain access to financial markets relatively quickly following a ‘hard’ debt restructuring.
What about Greece and Portugal? In both cases the picture is bleaker. Assuming that the ratio of Greek debt rises to over 160 per cent of GDP before the EU finally pushes ahead with a ‘hard’ restructuring involving a write-down of as much as 60 per cent, the country would have a debt to GDP ratio of 65 per cent. However, investors will be sceptical of the Greek economy’s ability to absorb the cuts needed to bring down the still very large budget deficit. The Greek government will be largely dependent on foreign borrowing to finance the budget deficit: Greece’s current-account deficit has narrowed, but remains very large. Unlike Ireland, Greece will find it very hard to generate the stimulus from exports needed to offset the impact of continued austerity. Exports only account for around 25 per cent of Greek GDP – compared with well over 100 per cent in the Irish case – and Greece does little trade with countries outside the slow-growing EU. Investors will surely bet that they will not get bailed out by taxpayers a second time, and continue to deny Greece market access.
What about Portugal? Portugal has a lower stock of public debt than Greece – at around 95 per cent of GDP – but it has a very sizeable budget deficit, hugely indebted private sector and current account deficit of a comparable size to Greece’s. The combined debt of Portugal’s public and private sectors (excluding debts between banks) is now around 300 per cent of GDP. A chunk of this private sector debt will end up on the government’s books. Under its agreement with the EU and IMF, Portugal has to underwrite €35bn of its banks’ liabilities – equivalent to around 20 per cent of its GDP. But with the Portuguese economy set to contract steeply over the next two years (the EU forecasts falls in GDP of 2 per cent in both 2011 and 2012) the eventual transfer of debt from the private to the public sector is likely to be substantially higher than $35 billion.
If, as seems likely, the ratio of Portugal’s public debt to GDP rises to close to 120 per cent by 2013, a 50 per cent write-down would reduce the debt to around 60 per cent of GDP. But with the fiscal deficit large and export-led growth elusive, investors will remain wary of lending to the Portuguese government. Portugal’s economy is more open than Greece’s, but nowhere near as open as Ireland’s, and does similarly little trade with non-EU markets. Moreover, the country’s principal export market – Spain – faces years of economic stagnation as it grapples with problems not dissimilar to those of Portugal. Portuguese businesses have also experienced a huge loss of trade competitiveness within the eurozone. Added to this, the euro is likely to remain very strong against the dollar as the US Federal Reserve maintains a loose monetary policy and the ECB raises interest rates.
What will then happen? Further bail-outs of Greece and Portugal in the form of loans from the rest of the eurozone are unlikely. Everyone will by then recognise that piling more debt on top of already unsustainable levels makes little sense. This will leave two alternatives: fiscal transfers (the dreaded ‘fiscal union’) or a withdrawal of the affected countries from the currency union. Faced with the possibility of countries leaving the currency union, it is impossible to discount the possibility of a shift to some kind of transfer union. But the politics look formidably difficult. Could there be a negotiated withdrawal from the currency union? It would require action on a number of fronts, including emergency support for the affected countries’ banks and the imposition of temporary capital controls. The quitting countries’ debts would have to be redenominated into their newly introduced (and massively devalued) currencies. The rules stating that any country leaving the currency union would have to quit the EU would also have to be fudged. It is impossible to attach a likelihood to all this happening. But given the obstacles to fiscal transfers between eurozone economies it would be unwise to bet too much money against it.
Simon Tilford is chief economist at the Centre for European Reform.
Thursday, April 21, 2011
Can the Arab spring bring peace to the Middle East?
by Clara Marina O'Donnell
Many western diplomats and observers argue that the popular uprisings in North Africa and the Middle East reinforce the need for Israelis and Palestinians to return to peace talks. In May, US President Barack Obama and Israeli Prime Minister Benjamin Netanyahu are expected to lay out their views about how the process should be re-started. However, calls for an immediate resumption of negotiations are unrealistic. The political turmoil across the Arab world is making conditions on the ground – already dire – even less conducive to a lasting settlement. Instead, Europeans and Americans should exploit the hiatus created by current regional instability to encourage Palestinians to end their divisions and hold long-overdue elections before October. The EU and the US should also prod Israel to offer the prospect of serious peace talks to whoever wins those elections.
Western diplomats calling for progress in the peace process in response to the upheaval in the Arab world make two arguments. First they point out that Israel could end up with neighbours which are even more hostile to it. There is significant uncertainty about the makeup of the next leadership in Egypt – a key ally of Israel in recent decades. In addition, it cannot be ruled out that regimes in neighbouring countries, such as Syria and Jordan, will fall. In each of these countries, there are groups that are more hostile to Israel than the regimes which have governed in recent years. To limit the scope for conflict, some diplomats argue, Israel should solve its dispute with the Palestinians as soon as possible.
The second argument advanced by western diplomats is that if Israeli and Palestinian leaders do not make progress towards a final negotiated agreement soon, Palestinians in the West Bank might feel emboldened by the popular movements in other Arab countries – and start protesting against Israel or the local Palestinian authorities. In recent years, there have been relatively few protests within the West Bank, governed by moderate President Mahmoud Abbas, either against the Palestinian authorities or Israel. This is in stark contrast to Gaza, which since 2007 has been run by a more radical Palestinian faction, Hamas, and where many militant groups have been protesting violently against Israel, not least through rocket attacks. Some Gazans have already been inspired by the Arab spring, and held marches against Hamas' rule and calling for new elections.
While these arguments are valid, the upheaval across North Africa and the Middle East precludes a diplomatic breakthrough over the next few months. Even before the wave of popular uprisings, the realities on the ground in Israel and the Palestinian Territories stalled the successive diplomatic efforts of the Obama administration (and previously those of the Bush administration): since 2007, the US has been attempting to negotiate a peace deal between the Israeli government and President Abbas. At the same time, Washington, as well as the EU and Israel, have isolated the rulers of Gaza. But Abbas's credibility as a negotiator has been seriously undermined because he has not spoken on behalf of all the Palestinians. To make matters worse, recent Israeli governments have included political parties strongly opposed to negotiating certain key aspects of the peace process – including the withdrawal of illegal settlements in the West Bank or sharing Jerusalem.
The uprisings in Egypt and elsewhere in the region have thrown up two new obstacles: several Arab governments are shaky or in transition, which means they cannot commit to normalising their relations with Israel - a key component of a peace deal for any Israeli government. Second, Hamas is holding out hopes that regional power shifts – in particular the political rise of the Muslim Brotherhood in Egypt - will strengthen their position vis-à-vis President Abbas and his Fatah party. As a result, Hamas is now even less inclined to support peace efforts led by Abbas.
If the US initiates another push for immediate peace talks between Netanyahu and Abbas under current circumstances, they are most likely to flounder. Another diplomatic failure would fuel further disillusionment amongst the Palestinian population. It also risks strengthening calls from the political leadership in the West Bank to secure unilaterally the recognition of the state of Palestine at the UN – which would further complicate eventual peace talks and risk cementing divisions between Gaza and the West Bank.
Instead, over the next few months, the US, the EU and Israel should try to eliminate one of the key obstacles to peace – the lack of a united Palestinian government. Both Fatah and Hamas have repeatedly called for Palestinian reunification over the years, but their mutual antipathy has blighted several reconciliation efforts. However, Abbas has also been held back because Israel has stressed that if the Palestinian President were to form a government of national unity with Hamas, Israel would rule out peace talks. And the US and the EU have threatened to cut off their generous funding to the Palestinian Authority – although the EU has slightly relaxed its position in recent years.
The next deadline for the long-overdue Palestinian presidential and parliamentary elections is October 2011. The US and the EU should encourage Israel to make an offer to the Palestinians: if Palestinians hold elections in both the West Bank and Gaza before October, Israel will be open to peace talks with the resulting united Palestinian government, even if it contains members of Hamas – so long as they no longer resort to violence. In the meantime, Israel could demonstrate its good faith by improving conditions on the ground, notably by halting settlement building and removing further roadblocks in the West Bank.
There is a risk that reuniting the Palestinian factions would weaken President Abbas and Prime Minister Salam Fayyad – two figures who have shown a strong commitment to a peaceful resolution of the conflict and who have succeeded in improving the economy of the West Bank. But it is a risk worth taking, particularly because, according to polling by the Palestinian Center for Policy and Survey Research in March 2011, Abbas would win the presidential election and Fatah would receive 40 per cent of the vote in parliamentary elections (while Hamas would only secure 26 per cent). Even if Hamas were to fare better in the elections, having members of Hamas in a government of national unity would be better than leaving the group in continued isolation: over the nearly four years since Hamas has been in sole control of Gaza, Israeli border closures and military strikes (in response to the sustained rocket attacks) have led to poverty and alienation amongst the population of Gaza. And Hamas and other militant groups have built a significant military arsenal in preparation for another conflict with Israel – in large part with the help of Iran.
The Arab spring makes the continued boycott of Hamas even more problematic. The upheaval in Egypt is giving more room for manoeuvre to militant groups and outside actors - including Iran - within its Sinai region which borders Israel. Moreover, future governments in Egypt, Tunisia and possibly other countries in the region, may well contain Islamist groups. Having to deal with such groups is likely to make it harder for the EU and the US to continue sidelining Hamas.
If Israel, the US and the EU help to reunite the Palestinians over the next few months, they will limit the influence of nefarious groups in and around Gaza. They will incorporate Hamas into the political process at a time when the group has less popular support than moderate Palestinian factions. And importantly, Israelis and Palestinians will be putting themselves in a much stronger position to secure a lasting peace when the turmoil in their neighbourhood starts to settle.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform
Many western diplomats and observers argue that the popular uprisings in North Africa and the Middle East reinforce the need for Israelis and Palestinians to return to peace talks. In May, US President Barack Obama and Israeli Prime Minister Benjamin Netanyahu are expected to lay out their views about how the process should be re-started. However, calls for an immediate resumption of negotiations are unrealistic. The political turmoil across the Arab world is making conditions on the ground – already dire – even less conducive to a lasting settlement. Instead, Europeans and Americans should exploit the hiatus created by current regional instability to encourage Palestinians to end their divisions and hold long-overdue elections before October. The EU and the US should also prod Israel to offer the prospect of serious peace talks to whoever wins those elections.
Western diplomats calling for progress in the peace process in response to the upheaval in the Arab world make two arguments. First they point out that Israel could end up with neighbours which are even more hostile to it. There is significant uncertainty about the makeup of the next leadership in Egypt – a key ally of Israel in recent decades. In addition, it cannot be ruled out that regimes in neighbouring countries, such as Syria and Jordan, will fall. In each of these countries, there are groups that are more hostile to Israel than the regimes which have governed in recent years. To limit the scope for conflict, some diplomats argue, Israel should solve its dispute with the Palestinians as soon as possible.
The second argument advanced by western diplomats is that if Israeli and Palestinian leaders do not make progress towards a final negotiated agreement soon, Palestinians in the West Bank might feel emboldened by the popular movements in other Arab countries – and start protesting against Israel or the local Palestinian authorities. In recent years, there have been relatively few protests within the West Bank, governed by moderate President Mahmoud Abbas, either against the Palestinian authorities or Israel. This is in stark contrast to Gaza, which since 2007 has been run by a more radical Palestinian faction, Hamas, and where many militant groups have been protesting violently against Israel, not least through rocket attacks. Some Gazans have already been inspired by the Arab spring, and held marches against Hamas' rule and calling for new elections.
While these arguments are valid, the upheaval across North Africa and the Middle East precludes a diplomatic breakthrough over the next few months. Even before the wave of popular uprisings, the realities on the ground in Israel and the Palestinian Territories stalled the successive diplomatic efforts of the Obama administration (and previously those of the Bush administration): since 2007, the US has been attempting to negotiate a peace deal between the Israeli government and President Abbas. At the same time, Washington, as well as the EU and Israel, have isolated the rulers of Gaza. But Abbas's credibility as a negotiator has been seriously undermined because he has not spoken on behalf of all the Palestinians. To make matters worse, recent Israeli governments have included political parties strongly opposed to negotiating certain key aspects of the peace process – including the withdrawal of illegal settlements in the West Bank or sharing Jerusalem.
The uprisings in Egypt and elsewhere in the region have thrown up two new obstacles: several Arab governments are shaky or in transition, which means they cannot commit to normalising their relations with Israel - a key component of a peace deal for any Israeli government. Second, Hamas is holding out hopes that regional power shifts – in particular the political rise of the Muslim Brotherhood in Egypt - will strengthen their position vis-à-vis President Abbas and his Fatah party. As a result, Hamas is now even less inclined to support peace efforts led by Abbas.
If the US initiates another push for immediate peace talks between Netanyahu and Abbas under current circumstances, they are most likely to flounder. Another diplomatic failure would fuel further disillusionment amongst the Palestinian population. It also risks strengthening calls from the political leadership in the West Bank to secure unilaterally the recognition of the state of Palestine at the UN – which would further complicate eventual peace talks and risk cementing divisions between Gaza and the West Bank.
Instead, over the next few months, the US, the EU and Israel should try to eliminate one of the key obstacles to peace – the lack of a united Palestinian government. Both Fatah and Hamas have repeatedly called for Palestinian reunification over the years, but their mutual antipathy has blighted several reconciliation efforts. However, Abbas has also been held back because Israel has stressed that if the Palestinian President were to form a government of national unity with Hamas, Israel would rule out peace talks. And the US and the EU have threatened to cut off their generous funding to the Palestinian Authority – although the EU has slightly relaxed its position in recent years.
The next deadline for the long-overdue Palestinian presidential and parliamentary elections is October 2011. The US and the EU should encourage Israel to make an offer to the Palestinians: if Palestinians hold elections in both the West Bank and Gaza before October, Israel will be open to peace talks with the resulting united Palestinian government, even if it contains members of Hamas – so long as they no longer resort to violence. In the meantime, Israel could demonstrate its good faith by improving conditions on the ground, notably by halting settlement building and removing further roadblocks in the West Bank.
There is a risk that reuniting the Palestinian factions would weaken President Abbas and Prime Minister Salam Fayyad – two figures who have shown a strong commitment to a peaceful resolution of the conflict and who have succeeded in improving the economy of the West Bank. But it is a risk worth taking, particularly because, according to polling by the Palestinian Center for Policy and Survey Research in March 2011, Abbas would win the presidential election and Fatah would receive 40 per cent of the vote in parliamentary elections (while Hamas would only secure 26 per cent). Even if Hamas were to fare better in the elections, having members of Hamas in a government of national unity would be better than leaving the group in continued isolation: over the nearly four years since Hamas has been in sole control of Gaza, Israeli border closures and military strikes (in response to the sustained rocket attacks) have led to poverty and alienation amongst the population of Gaza. And Hamas and other militant groups have built a significant military arsenal in preparation for another conflict with Israel – in large part with the help of Iran.
The Arab spring makes the continued boycott of Hamas even more problematic. The upheaval in Egypt is giving more room for manoeuvre to militant groups and outside actors - including Iran - within its Sinai region which borders Israel. Moreover, future governments in Egypt, Tunisia and possibly other countries in the region, may well contain Islamist groups. Having to deal with such groups is likely to make it harder for the EU and the US to continue sidelining Hamas.
If Israel, the US and the EU help to reunite the Palestinians over the next few months, they will limit the influence of nefarious groups in and around Gaza. They will incorporate Hamas into the political process at a time when the group has less popular support than moderate Palestinian factions. And importantly, Israelis and Palestinians will be putting themselves in a much stronger position to secure a lasting peace when the turmoil in their neighbourhood starts to settle.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform
Friday, April 08, 2011
The June European Council: Migrants on their minds
by Hugo Brady
In June, EU leaders will meet in Brussels for their next quarterly summit chaired by Council President Herman Van Rompuy. Some of them – Britain's David Cameron and France's Nicolas Sarkozy – are currently fighting a war in Libya. Others, like Angela Merkel and Silvio Berlusconi, are facing political upheaval at home. European leaders from both north and south are watching anxiously as the markets continue to pound the euro. But everyone – apart perhaps from the newer members to the east – is worried about immigration. Hence, if events allow, Van Rompuy wants to focus the forthcoming meeting on border control, immigration and refugee policy.
This could easily become a bad tempered, inconclusive affair. First, the summit is supposed to take a broad strategic view of EU immigration and asylum policies. But instability in North Africa will inevitably skew discussion towards the present. Silvio Berlusconi, Italy's prime minister, is adamant that his country needs help to manage a "human tsunami" from Libya and Tunisia. Berlusconi's demands for “solidarity” from fellow EU countries essentially mean their agreement to take in some of the 20,000 or so migrants currently housed in tent camps on the island of Lampedusa and in the mainland region of Puglia. The EU has committed money, a humanitarian mission and border guards from its Frontex border agency. Nonetheless, the Italians want more help. The country’s ‘realist’ immigration policy – heavily reliant on co-operation with dictators such as Muammar Gaddafi and Tunisia’s Ben Ali – is in tatters following EU-supported uprisings.
EU refugee rules say that migrants who claim asylum must be accepted by the first member country they reach. Exceptions can only be made in an emergency if overwhelming numbers suddenly arrive en masse. Although 20,000 is a large number of people, it is nowhere near the influx that followed the 1999 Kosovo war. Then, Albanian Kosovars fled to Western Europe in their hundreds of thousands leading EU governments to provide for some deviation to the first-country-of-arrival rule. Furthermore, several North European countries – including, in this instance, France – typically accept more asylum seekers than Italy, both proportionately and in overall numbers. As it stands, the current situation will not prompt the re-think demanded by Italy, Malta and some other Mediterranean member-states.
Second, European leaders back an EU immigration policy only in so far as it means tighter border controls and more repatriation. To satisfy this demand, the European Commission has proposed giving Frontex more powers and is due to publish in 2012 a raft of legislation intended to upgrade Schengen area border controls with new technology. EU countries have little interest in the Commission’s other ideas to facilitate more legal immigration, however. This was true even when Europe’s economic conditions were favourable and unemployment relatively low. But the creation of more legal migration routes into the EU, like a single European residency permit, would greatly strengthen the Commission's hand in negotiations with neighbouring countries on border checks and the return of unauthorised immigrants.
Third, EU leaders have discussed all of these issues before and achieved little. In 2008, they signed a European 'migration pact' at the urging of France, when summit agendas were still set by a different rotating presidency every six months. The pact declared that the free movement of people between EU countries and the existence of the Schengen area of passport-free travel meant that national immigration policies must also be linked. The text committed all member-states to tighter border controls and more repatriation of immigrants illegally resident on their territories. But – like the Union for the Mediterranean agreed the same year – the pact's confident language and forthright assertions failed to make much difference in practice.
Given that several EU leaders are vulnerable to political challenges at home from the far right, the temptation to push immigration policy upwards to the European level is understandable. But the idea that 'Europe' will help to reduce illegal immigration dramatically is largely an illusion. An EU immigration policy will not of itself drastically decrease the numbers of unskilled migrants arriving on European shores or over-staying tourist visas. Immigration trends are driven by so-called push and pull factors: disparities of wealth, the contrast between instability at home and the high quality of life in Europe, and demand for cheap labour. And even enlightened policies aimed at discouraging emigration from migrants' home countries – trade liberalisation and development aid – tend to produce ambiguous effects. Conditions improve in the poorer country but so too does the mobility of its people and their aspiration for a better life abroad.
With maddening constraints like these, what can Van Rompuy credibly hope to achieve in June? To start with, he can try to steer the talks away from demands for solidarity to a concept he has stressed during the eurozone crisis: mutual responsibility. In the immigration context, this would mean that EU countries need to work together much more pro-actively to prevent future migratory pressures endangering free movement and passport-free travel. One idea would be to create bilateral partnerships between EU countries that struggle to maintain the external border and those that have resources to spare or face less migratory pressure. These partnerships would involve core teams of experts with the relevant skills being seconded to external border countries for long periods. In addition, Van Rompuy could open a debate on whether the creation of a European border guard – EU officials with powers to direct Schengen country border controls – might be necessary.
The EU has four funds for helping member-states to return illegal immigrants, integrate minorities, care for refugees and maintain modern border controls. Taken together, these account for 0.5 per cent (around €550 million) of the EU's annual budget. With inward migration to Europe more likely to rise than fall in the coming years, President Van Rompuy could propose to the assembled leaders that they agree now to double the amount of money allocated to these funds in the next EU multi-annual budget for 2014-2021.
Lastly, Van Rompuy could take forward calls from Germany for the EU to conclude 'mobility partnerships' on immigration with Egypt and Tunisia. These are agreements – managed by the European Commission – whereby some EU countries offer temporary work visas to citizens of a country that, in return, collaborates on border checks and repatriation. Here Van Rompuy could go further and propose that those countries that adhere in practice to UN accords banning the use of torture and providing for refugee protection would be entitled to much more generous terms than those that do not. By encouraging neighbouring countries to treat their own refugees better, the EU would begin to extend the concept of mutual responsibility beyond its own borders. When ready, Libya too should be offered this choice.
The president of the European Council might consider these initiatives too piecemeal to offer to EU leaders as solutions to their immigration worries. They do not amount to a grand European bargain on migration. But, as he watches the black cars pull up in June, Van Rompuy might recall a favourite motto of Pope John 23rd: "See all. Forgive much. Change a little."
Hugo Brady is a senior research fellow at the Centre for European Reform.
In June, EU leaders will meet in Brussels for their next quarterly summit chaired by Council President Herman Van Rompuy. Some of them – Britain's David Cameron and France's Nicolas Sarkozy – are currently fighting a war in Libya. Others, like Angela Merkel and Silvio Berlusconi, are facing political upheaval at home. European leaders from both north and south are watching anxiously as the markets continue to pound the euro. But everyone – apart perhaps from the newer members to the east – is worried about immigration. Hence, if events allow, Van Rompuy wants to focus the forthcoming meeting on border control, immigration and refugee policy.
This could easily become a bad tempered, inconclusive affair. First, the summit is supposed to take a broad strategic view of EU immigration and asylum policies. But instability in North Africa will inevitably skew discussion towards the present. Silvio Berlusconi, Italy's prime minister, is adamant that his country needs help to manage a "human tsunami" from Libya and Tunisia. Berlusconi's demands for “solidarity” from fellow EU countries essentially mean their agreement to take in some of the 20,000 or so migrants currently housed in tent camps on the island of Lampedusa and in the mainland region of Puglia. The EU has committed money, a humanitarian mission and border guards from its Frontex border agency. Nonetheless, the Italians want more help. The country’s ‘realist’ immigration policy – heavily reliant on co-operation with dictators such as Muammar Gaddafi and Tunisia’s Ben Ali – is in tatters following EU-supported uprisings.
EU refugee rules say that migrants who claim asylum must be accepted by the first member country they reach. Exceptions can only be made in an emergency if overwhelming numbers suddenly arrive en masse. Although 20,000 is a large number of people, it is nowhere near the influx that followed the 1999 Kosovo war. Then, Albanian Kosovars fled to Western Europe in their hundreds of thousands leading EU governments to provide for some deviation to the first-country-of-arrival rule. Furthermore, several North European countries – including, in this instance, France – typically accept more asylum seekers than Italy, both proportionately and in overall numbers. As it stands, the current situation will not prompt the re-think demanded by Italy, Malta and some other Mediterranean member-states.
Second, European leaders back an EU immigration policy only in so far as it means tighter border controls and more repatriation. To satisfy this demand, the European Commission has proposed giving Frontex more powers and is due to publish in 2012 a raft of legislation intended to upgrade Schengen area border controls with new technology. EU countries have little interest in the Commission’s other ideas to facilitate more legal immigration, however. This was true even when Europe’s economic conditions were favourable and unemployment relatively low. But the creation of more legal migration routes into the EU, like a single European residency permit, would greatly strengthen the Commission's hand in negotiations with neighbouring countries on border checks and the return of unauthorised immigrants.
Third, EU leaders have discussed all of these issues before and achieved little. In 2008, they signed a European 'migration pact' at the urging of France, when summit agendas were still set by a different rotating presidency every six months. The pact declared that the free movement of people between EU countries and the existence of the Schengen area of passport-free travel meant that national immigration policies must also be linked. The text committed all member-states to tighter border controls and more repatriation of immigrants illegally resident on their territories. But – like the Union for the Mediterranean agreed the same year – the pact's confident language and forthright assertions failed to make much difference in practice.
Given that several EU leaders are vulnerable to political challenges at home from the far right, the temptation to push immigration policy upwards to the European level is understandable. But the idea that 'Europe' will help to reduce illegal immigration dramatically is largely an illusion. An EU immigration policy will not of itself drastically decrease the numbers of unskilled migrants arriving on European shores or over-staying tourist visas. Immigration trends are driven by so-called push and pull factors: disparities of wealth, the contrast between instability at home and the high quality of life in Europe, and demand for cheap labour. And even enlightened policies aimed at discouraging emigration from migrants' home countries – trade liberalisation and development aid – tend to produce ambiguous effects. Conditions improve in the poorer country but so too does the mobility of its people and their aspiration for a better life abroad.
With maddening constraints like these, what can Van Rompuy credibly hope to achieve in June? To start with, he can try to steer the talks away from demands for solidarity to a concept he has stressed during the eurozone crisis: mutual responsibility. In the immigration context, this would mean that EU countries need to work together much more pro-actively to prevent future migratory pressures endangering free movement and passport-free travel. One idea would be to create bilateral partnerships between EU countries that struggle to maintain the external border and those that have resources to spare or face less migratory pressure. These partnerships would involve core teams of experts with the relevant skills being seconded to external border countries for long periods. In addition, Van Rompuy could open a debate on whether the creation of a European border guard – EU officials with powers to direct Schengen country border controls – might be necessary.
The EU has four funds for helping member-states to return illegal immigrants, integrate minorities, care for refugees and maintain modern border controls. Taken together, these account for 0.5 per cent (around €550 million) of the EU's annual budget. With inward migration to Europe more likely to rise than fall in the coming years, President Van Rompuy could propose to the assembled leaders that they agree now to double the amount of money allocated to these funds in the next EU multi-annual budget for 2014-2021.
Lastly, Van Rompuy could take forward calls from Germany for the EU to conclude 'mobility partnerships' on immigration with Egypt and Tunisia. These are agreements – managed by the European Commission – whereby some EU countries offer temporary work visas to citizens of a country that, in return, collaborates on border checks and repatriation. Here Van Rompuy could go further and propose that those countries that adhere in practice to UN accords banning the use of torture and providing for refugee protection would be entitled to much more generous terms than those that do not. By encouraging neighbouring countries to treat their own refugees better, the EU would begin to extend the concept of mutual responsibility beyond its own borders. When ready, Libya too should be offered this choice.
The president of the European Council might consider these initiatives too piecemeal to offer to EU leaders as solutions to their immigration worries. They do not amount to a grand European bargain on migration. But, as he watches the black cars pull up in June, Van Rompuy might recall a favourite motto of Pope John 23rd: "See all. Forgive much. Change a little."
Hugo Brady is a senior research fellow at the Centre for European Reform.
Thursday, March 31, 2011
Europe's damaging obsession with 'competitiveness'
by Simon Tilford
Many European policy-makers and business leaders believe that a country's economic growth prospects depend on its ability to capture a growing share of global markets. Indeed, European policy-makers are obsessed with national 'competitiveness' and genuinely appear to think that prosperity is synonymous with trade surpluses. Of course, imports have to be financed by exports. But the focus on trade competitiveness risks drawing attention away from Europe’s underlying problem, which is very weak productivity growth.
The idea of economic growth being determined by a battle for global market shares in manufactured goods is easy for politicians to grasp and to communicate to their electorates. Countries have little in common with firms, but referring to Deutschland AG, or UK plc, is conceptually attractive and seductively easy. Economies running external surpluses are regarded as 'competitive' irrespective of their productivity or growth performance. The trade balance is seen as a country's 'bottom line', as if countries were firms. The trade balance is nothing of the sort, but is simply the difference between domestic savings and investment or more broadly, between aggregate spending and output.
Governments obsessed with national competitiveness are likely to pursue damaging economic policies. If economic growth is seen as being dependent on the cost competitiveness of exports, governments will focus on things that might make sense for exporters but not for their economies as a whole. A fixation with exports leads to labour market policies aimed at artificially holding down wage growth, which redistributes income from labour to capital and exacerbates inequality. The secular decline in the proportion of national income accounted for by wages and salaries over the last 10 years in nearly every EU economy is a major obstacle to a recovery in private consumption. The flipside of the decline in wage and salaries – a steep rise in the proportion of national income accounted for by corporate profits – has not resulted in booming investment. This is no surprise. An individual firm can cut wages without undermining demand for whatever good or service it produces. But this does not work if all firms attempt this simultaneously. The resulting weakness of overall demand depresses companies' incentives to invest, and with it productivity growth.
In short, cutting the proportion of national income accounted for by wages, accepting a secular rise in inequality and boosting the proportion of national income accounted for by corporate profits is no way to deliver sustainable economic expansion. But it is what happens when governments believe that economic salvation lies in winning a growing share of export markets.
The EU's economic prospects will largely be down to its domestic rate of productivity, not the size of its trade surplus. There is a very strong correlation between growth in labour productivity and economic growth, which holds for countries with trade surpluses as well as those with deficits.
Unfortunately, the data show a remarkable decline in productivity growth across Europe, from around 3.5 per cent annually in the 1970s to barely 1 per cent in the 2000s. And productivity growth has been almost as weak in the eurozone's core as in its troubled periphery. Governments across the region should focus on raising productivity – not just in the most internationally exposed sectors like manufacturing, but in less tradeable sectors such as services too. Service sectors now account for around two-thirds of economic activity. Without stronger productivity across the service sector economic growth will prove elusive.
Why has Europe's productivity performance, with a few notable exceptions been so bad? There are two core problems. The first is inadequate skills levels. Europeans are terrifically complacent about labour skills. Some countries – the Nordics, the Netherlands – do well. The picture elsewhere is patchy at best. Germany has good vocational training, Britain more than its fair share of top universities, France good technical education. Other countries, especially in the south, perform poorly in most areas. The second cause is inadequate competition. In too many sectors, incumbents are protected. This is justified in terms of upholding 'social justice' or defending 'national champions'. What it leads to is so-called rent-seeking; the ability of particular groups in society to extract disproportionate rewards for their work. Where this tendency is strongest, productivity levels are weakest.
Europe's economic growth prospects may be poor. But this has little to do with what is happening elsewhere. Europe’s leaders will find that improving education and throwing open hitherto protected markets is a long and arduous task. But unlike the obsession with 'competitiveness' such reforms will lead Europe onto the path of sustainable growth.
Simon Tilford is chief economist at the Centre for European Reform.
Many European policy-makers and business leaders believe that a country's economic growth prospects depend on its ability to capture a growing share of global markets. Indeed, European policy-makers are obsessed with national 'competitiveness' and genuinely appear to think that prosperity is synonymous with trade surpluses. Of course, imports have to be financed by exports. But the focus on trade competitiveness risks drawing attention away from Europe’s underlying problem, which is very weak productivity growth.
The idea of economic growth being determined by a battle for global market shares in manufactured goods is easy for politicians to grasp and to communicate to their electorates. Countries have little in common with firms, but referring to Deutschland AG, or UK plc, is conceptually attractive and seductively easy. Economies running external surpluses are regarded as 'competitive' irrespective of their productivity or growth performance. The trade balance is seen as a country's 'bottom line', as if countries were firms. The trade balance is nothing of the sort, but is simply the difference between domestic savings and investment or more broadly, between aggregate spending and output.
Governments obsessed with national competitiveness are likely to pursue damaging economic policies. If economic growth is seen as being dependent on the cost competitiveness of exports, governments will focus on things that might make sense for exporters but not for their economies as a whole. A fixation with exports leads to labour market policies aimed at artificially holding down wage growth, which redistributes income from labour to capital and exacerbates inequality. The secular decline in the proportion of national income accounted for by wages and salaries over the last 10 years in nearly every EU economy is a major obstacle to a recovery in private consumption. The flipside of the decline in wage and salaries – a steep rise in the proportion of national income accounted for by corporate profits – has not resulted in booming investment. This is no surprise. An individual firm can cut wages without undermining demand for whatever good or service it produces. But this does not work if all firms attempt this simultaneously. The resulting weakness of overall demand depresses companies' incentives to invest, and with it productivity growth.
In short, cutting the proportion of national income accounted for by wages, accepting a secular rise in inequality and boosting the proportion of national income accounted for by corporate profits is no way to deliver sustainable economic expansion. But it is what happens when governments believe that economic salvation lies in winning a growing share of export markets.
The EU's economic prospects will largely be down to its domestic rate of productivity, not the size of its trade surplus. There is a very strong correlation between growth in labour productivity and economic growth, which holds for countries with trade surpluses as well as those with deficits.
Unfortunately, the data show a remarkable decline in productivity growth across Europe, from around 3.5 per cent annually in the 1970s to barely 1 per cent in the 2000s. And productivity growth has been almost as weak in the eurozone's core as in its troubled periphery. Governments across the region should focus on raising productivity – not just in the most internationally exposed sectors like manufacturing, but in less tradeable sectors such as services too. Service sectors now account for around two-thirds of economic activity. Without stronger productivity across the service sector economic growth will prove elusive.
Why has Europe's productivity performance, with a few notable exceptions been so bad? There are two core problems. The first is inadequate skills levels. Europeans are terrifically complacent about labour skills. Some countries – the Nordics, the Netherlands – do well. The picture elsewhere is patchy at best. Germany has good vocational training, Britain more than its fair share of top universities, France good technical education. Other countries, especially in the south, perform poorly in most areas. The second cause is inadequate competition. In too many sectors, incumbents are protected. This is justified in terms of upholding 'social justice' or defending 'national champions'. What it leads to is so-called rent-seeking; the ability of particular groups in society to extract disproportionate rewards for their work. Where this tendency is strongest, productivity levels are weakest.
Europe's economic growth prospects may be poor. But this has little to do with what is happening elsewhere. Europe’s leaders will find that improving education and throwing open hitherto protected markets is a long and arduous task. But unlike the obsession with 'competitiveness' such reforms will lead Europe onto the path of sustainable growth.
Simon Tilford is chief economist at the Centre for European Reform.
Wednesday, March 16, 2011
Turkey, the EU and the Mediterranean uprisings
by Katinka Barysch
The revolts in Tunisia, Egypt and Libya have brought home to many people that Turkey has become a force to be reckoned with in this region. Turkey enjoys lots of credibility in the Arab world. It has burgeoning trade ties and solid political relations with many Middle Eastern and Mediterranean countries. As the EU scrambles to revamp its own neighbourhood policy, it would do well to work closely with Turkey. Turkey would also gain. Sadly, there is little evidence of such co-operation to date.
Asked at a recent Aspen roundtable in Istanbul whether the EU and Turkey were co-ordinating their responses to the revolts in the Arab world, Ali Babacan, a veteran minister in the Erdogan government, said: "We work a lot with the Americans, like we do on Afghanistan, but not with Europe." The main reason, he said, was that his country's plan to join the EU was going nowhere.
The EU - in acknowledgement of Turkey’s growing international clout - has offered Ankara a foreign policy dialogue outside the accession process. But the dialogue has yet to start in earnest. Most of the interaction between Turkey and the EU still revolves around a largely blocked accession process. Foreign Minister Ahmet Davutoglu - at the same Aspen roundtable - added a second reason why foreign policy co-ordination had been slow to get off the ground. Turkey, he explained, did not bother to work with the EU because the EU's own neighbourhood policy was weak and inconsistent.
Davutoglu and his colleagues in Ankara should reconsider. The uprisings in the Arab world are spurring the EU to rethink its neighbourhood policy (see Charles Grant, 'A new neighbourhood policy for the EU'). They could also wreck Turkey's 'zero problems with the neighbours' approach to its region - which is already in trouble after Turkish attempts to mediate in several regional conflicts failed and Ankara fell out with Israel.
Although today's Turkey likes to see itself as a regional leader, its influence in the Middle East, and even more so in the Maghreb, is still rather fresh and fragile. During the Cold War years, Turkey was largely isolated in its neighbourhood. It clung to its NATO allies while viewing its southern neighbours as sources of Islamic extremism, Kurdish separatism and other potential security threats.
In the 1990s, there were initial attempts to make up with old adversaries like Syria and Iran. These accelerated after the AK party took power in 2002. Turkish mediation efforts, for example between Israel and Syria or Iran and the West, have produced no tangible results. But over the last decade, Turkey has created a web of political, economic and civil society ties with almost all of the countries around its borders. Turkey has scrapped visa requirements for Syrians, Tunisians, Lebanese, Libyans and Moroccans; it is building a free trade zone with various Mediterranean countries; and Turkish traders, builders and bankers are active across the region, as are Turkish business federations and other non-governmental organisations.
Bizarrely, as Kemal Kirisci points out in a recent GMF-IAI paper ('Turkey: Reluctant Mediteranean power'), Turkey's neighbourhood policy has moved from its security-obsessed origins to good old-fashioned European functionalism – the belief that economic integration and lots of low-level exchanges will bring political understanding and stability. The EU's Mediterranean policy has also involved scrapping trade barriers. And it talks about nice things such as democracy and good governance. But in reality it has taken a security-first approach, focusing mainly on fighting terrorism, fundamentalism, and illegal migration.
The revolts in Northern Africa have already forced the EU to think harder about how to help introduce democracy and create economic opportunities in its southern neighbours. Turkey, meanwhile, will probably move security back to the heart of its neighbourhood policy, especially if political upheaval spreads closer to its borders, and if some of the new regimes in the region start quarrelling with Israel or Iran.
Both Turkey and the EU will grapple with finding a balance between the objectives of stability and democracy in their neighbourhood policies. Unlike the EU, Turkey has not in the past claimed to be promoting democracy in the Arab world. Erdogan has managed to gain the admiration of the Arab street - partly through supporting Palestinians and criticising Israel - while at the same time snuggling up to some of the region’s most autocratic rulers, including Colonel Gaddafi, Mahmoud Ahmadinejad and Bashar al-Assad. Erdogan's initial reaction to the Arab uprisings was equally inconsistent. He called on Egypt's President Mubarak to leave and he welcomed Tunisia's move to democracy. But in the case of Libya, Erdogan has been holding out against sanctions and any kind of military intervention. And he has never criticised Ahmadinejad for rigging elections or Assad for clamping down on his opponents. In the new political environment, Turkey's standing in the Arab world will suffer unless its approach to democracy promotion becomes more coherent and consistent.
Turkey's ruling AK party, which itself has some roots in outlawed Islamist forces, has strengthened ties with various Islamist movements in its neighbourhood, including the Muslim Brotherhood in Egypt. The AKP could help turn such movements into electable political parties. However, at a time when the Erdogan government is accused of moving towards religious conservatism and political authoritarianism, collaboration with Islamists elsewhere would scare people inside Turkey and outside. They would ask whether Turkey was trying to promote democracy or Islamism in its foreign relations. Such suspicions would be mitigated if the AKP's ties with Islamists in Egypt and elsewhere were part of an EU-supported democratisation and institution-building programme.
The EU would also benefit greatly from working with Turkey - and not only because Turkey brings valuable regional links and expertise to the table. Having lost much of its kudos by focusing aid and political attentions on various autocratic regimes, the EU could regain soft power by working with Turkey - a country that still enjoys much esteem across the Arab world.
The revamp of respective neighbourhood policies could be an opportunity for the EU and Turkey to get serious about foreign policy co-ordination and thus improve their strained bilateral ties. Co-operation should go beyond political dialogue between Brussels and Ankara and involve business federations, foundations and other non-governmental organisations that can help Mediterranean countries become more stable and prosperous. Without this kind of co-ordination, rivalries and misunderstandings between the EU and Turkey could further undermine their bilateral relationship and the effectiveness of their respective neighbourhood policies.
Katinka Barysch is deputy director of the Centre for European Reform
The revolts in Tunisia, Egypt and Libya have brought home to many people that Turkey has become a force to be reckoned with in this region. Turkey enjoys lots of credibility in the Arab world. It has burgeoning trade ties and solid political relations with many Middle Eastern and Mediterranean countries. As the EU scrambles to revamp its own neighbourhood policy, it would do well to work closely with Turkey. Turkey would also gain. Sadly, there is little evidence of such co-operation to date.
Asked at a recent Aspen roundtable in Istanbul whether the EU and Turkey were co-ordinating their responses to the revolts in the Arab world, Ali Babacan, a veteran minister in the Erdogan government, said: "We work a lot with the Americans, like we do on Afghanistan, but not with Europe." The main reason, he said, was that his country's plan to join the EU was going nowhere.
The EU - in acknowledgement of Turkey’s growing international clout - has offered Ankara a foreign policy dialogue outside the accession process. But the dialogue has yet to start in earnest. Most of the interaction between Turkey and the EU still revolves around a largely blocked accession process. Foreign Minister Ahmet Davutoglu - at the same Aspen roundtable - added a second reason why foreign policy co-ordination had been slow to get off the ground. Turkey, he explained, did not bother to work with the EU because the EU's own neighbourhood policy was weak and inconsistent.
Davutoglu and his colleagues in Ankara should reconsider. The uprisings in the Arab world are spurring the EU to rethink its neighbourhood policy (see Charles Grant, 'A new neighbourhood policy for the EU'). They could also wreck Turkey's 'zero problems with the neighbours' approach to its region - which is already in trouble after Turkish attempts to mediate in several regional conflicts failed and Ankara fell out with Israel.
Although today's Turkey likes to see itself as a regional leader, its influence in the Middle East, and even more so in the Maghreb, is still rather fresh and fragile. During the Cold War years, Turkey was largely isolated in its neighbourhood. It clung to its NATO allies while viewing its southern neighbours as sources of Islamic extremism, Kurdish separatism and other potential security threats.
In the 1990s, there were initial attempts to make up with old adversaries like Syria and Iran. These accelerated after the AK party took power in 2002. Turkish mediation efforts, for example between Israel and Syria or Iran and the West, have produced no tangible results. But over the last decade, Turkey has created a web of political, economic and civil society ties with almost all of the countries around its borders. Turkey has scrapped visa requirements for Syrians, Tunisians, Lebanese, Libyans and Moroccans; it is building a free trade zone with various Mediterranean countries; and Turkish traders, builders and bankers are active across the region, as are Turkish business federations and other non-governmental organisations.
Bizarrely, as Kemal Kirisci points out in a recent GMF-IAI paper ('Turkey: Reluctant Mediteranean power'), Turkey's neighbourhood policy has moved from its security-obsessed origins to good old-fashioned European functionalism – the belief that economic integration and lots of low-level exchanges will bring political understanding and stability. The EU's Mediterranean policy has also involved scrapping trade barriers. And it talks about nice things such as democracy and good governance. But in reality it has taken a security-first approach, focusing mainly on fighting terrorism, fundamentalism, and illegal migration.
The revolts in Northern Africa have already forced the EU to think harder about how to help introduce democracy and create economic opportunities in its southern neighbours. Turkey, meanwhile, will probably move security back to the heart of its neighbourhood policy, especially if political upheaval spreads closer to its borders, and if some of the new regimes in the region start quarrelling with Israel or Iran.
Both Turkey and the EU will grapple with finding a balance between the objectives of stability and democracy in their neighbourhood policies. Unlike the EU, Turkey has not in the past claimed to be promoting democracy in the Arab world. Erdogan has managed to gain the admiration of the Arab street - partly through supporting Palestinians and criticising Israel - while at the same time snuggling up to some of the region’s most autocratic rulers, including Colonel Gaddafi, Mahmoud Ahmadinejad and Bashar al-Assad. Erdogan's initial reaction to the Arab uprisings was equally inconsistent. He called on Egypt's President Mubarak to leave and he welcomed Tunisia's move to democracy. But in the case of Libya, Erdogan has been holding out against sanctions and any kind of military intervention. And he has never criticised Ahmadinejad for rigging elections or Assad for clamping down on his opponents. In the new political environment, Turkey's standing in the Arab world will suffer unless its approach to democracy promotion becomes more coherent and consistent.
Turkey's ruling AK party, which itself has some roots in outlawed Islamist forces, has strengthened ties with various Islamist movements in its neighbourhood, including the Muslim Brotherhood in Egypt. The AKP could help turn such movements into electable political parties. However, at a time when the Erdogan government is accused of moving towards religious conservatism and political authoritarianism, collaboration with Islamists elsewhere would scare people inside Turkey and outside. They would ask whether Turkey was trying to promote democracy or Islamism in its foreign relations. Such suspicions would be mitigated if the AKP's ties with Islamists in Egypt and elsewhere were part of an EU-supported democratisation and institution-building programme.
The EU would also benefit greatly from working with Turkey - and not only because Turkey brings valuable regional links and expertise to the table. Having lost much of its kudos by focusing aid and political attentions on various autocratic regimes, the EU could regain soft power by working with Turkey - a country that still enjoys much esteem across the Arab world.
The revamp of respective neighbourhood policies could be an opportunity for the EU and Turkey to get serious about foreign policy co-ordination and thus improve their strained bilateral ties. Co-operation should go beyond political dialogue between Brussels and Ankara and involve business federations, foundations and other non-governmental organisations that can help Mediterranean countries become more stable and prosperous. Without this kind of co-ordination, rivalries and misunderstandings between the EU and Turkey could further undermine their bilateral relationship and the effectiveness of their respective neighbourhood policies.
Katinka Barysch is deputy director of the Centre for European Reform
Tuesday, March 15, 2011
What cuts in US defence budget will mean for the transatlantic alliance
by Tomas Valasek
The US defence budget seems set to fall as Washington begins to restore order in its finances. Spending on the military has reached such heights – $700 billion, or 20 per cent of the US federal budget – that it has become too large for deficit-cutters to ignore. Even traditionally pro-defence Republicans now argue that military expenditures need to be reduced along with other government expenses. Europe, too, will feel the pinch: many of the American soldiers currently based on the continent seem certain to go, and some joint weapons programmes will be cancelled. In case of future crises in Europe, NATO’s and the EU’s ability to respond will be tested. The US will expect Europe to lead but European allies themselves have been reducing forces and budgets.
Congress is poised to cut the White House’s request for defence for the fiscal year (FY) 2011 by $15-$20 billion. That might seem low relative to the $700 billion total but of that amount roughly $160 billion is set aside for operations in Iraq and Afghanistan, and will decrease as those conflicts wind down. And much of the remaining money is tied up in non-discretionary spending such as pensions and healthcare for military personnel (the latter alone costs the Pentagon over $50 billion a year). The brunt of the cuts in FY 2011 will therefore fall on the pool of $200-$300 billion that pays for purchases of new equipment, foreign military assistance, overseas bases and non-core military operations. Money spent abroad will be particularly vulnerable to cuts – more and more Americans say that the US government should look after its own rather than, say, wealthy Europeans (all foreign aid is in for big reductions).
The effect of US defence budget cuts on Europe will be five-fold. First, some of the 80,000 US soldiers left in Europe as assurance to NATO allies will most probably leave; Gates said in January 2011 that “it is clear that we have excess force structure in Europe”. The Balts and others in Europe who continue to fear possible trouble with Russia will wonder whether the US has enough forces ready to defend them. But their unease will be tempered by the many military exercises that the US held in the region last year. In 2010, Washington also successfully lobbied the rest of NATO to draft a defence plan for the Baltic. This was done in order to re-affirm US intent to uphold the alliance’s mutual defence pledge, and it seems to have worked: judging by mood at events such as this month’s GLOBSEC conference in Bratislava, the Balts and other Central Europeans are more at ease with Obama. Besides, as Stephen Flanagan of CSIS, a Washington think-tank, points out, “the 50,000 troops that will stay in Europe would be more than double the US ground presence in South Korea, where there is daily risk of imminent war.” Many of the new allies have been busy cutting defence budget themselves: they say that the fiscal crisis leaves them no choice, but the cuts also suggest that they feel little imminent threat from the East. This will make Washington less reticent about withdrawing troops from Europe.
Second, the military assistance that the US provides to help allies to modernise and re-arm will continue to fall. In the past decade, the US generously funded equipment purchases in Europe, with most money going to the new allies. Low-interest US loans allowed Poland to buy F-16 fighter jets, while Romania purchased C-130 cargo planes with US aid. But in recent years, assistance to countries such as Egypt or Pakistan has taken priority – of the $5.4 billion in 'foreign military financing', which the US set aside for 2011, $4.7 billion will go to Middle East and North Africa. The proportion of the aid going to wealthier and less strategic European countries will be slashed further when, as expected, the overall volume of military assistance falls. In the past, US defence companies would have had a decent shot at thwarting cuts in such assistance: they tend to be its main beneficiaries as most of the money ends up with them in the form of procurement orders. But the mood in the US is changing: Republicans in particular argue that the US government should not be in the business of funding new jobs, and that the best job-creation strategy lies in cutting expenses, thus restoring order in the federal budget. Should military assistance to Europe be slashed, as seems likely, programmes such as Romania’s planned purchase of F-16 fighter jets that are financed with US monies would likely be postponed or cancelled. With defence budgets falling in virtually all NATO countries, there is little hope that European allies would pick up the slack.
Third, US personnel on operations in Europe – in Bosnia-Herzegovina and in Kosovo – will likely be reduced or withdrawn altogether. Because their numbers are low to begin with, the short-term impact will be minimal. Only 20 US soldiers remain in Bosnia in a force that once counted 20,000 American troops. The US has about 800 soldiers left in Kosovo, where the overall NATO force is being reduced from 14,000 to 2,500. Should a new crisis break out in the Balkans, the Pentagon will be able to send more soldiers from bases elsewhere in Europe (primarily Germany). But this reserve force too is being reduced. The downsized Pentagon will be far less willing than in the 1990s to lead military operations in Europe. In the future, Washington will look to its allies to assume main responsibility for dealing with the Balkans and other crises on Europe’s periphery. The defense department’s resistance to a no-fly zone in Libya could be a sign of things to come.
Fourth, those European companies that do business in the US will lose some of their orders – but so will their US competitors. Signs of renewed protectionism have been few so far. While the Pentagon recently chose Boeing over a Franco-German consortium EADS to build a new generation of tanker aircraft, “this is mainly because Boeing’s planes were $2 billion cheaper”, says Andrew Koch, an analyst with Scribe Strategies and Advisors, a Washington consultancy. The European companies have worked hard to erase their US competitors’ advantage: the likes of BAE Systems and EADS pledge to build equipment in the US using American workers, so they are likely to have as many members of Congress on their side as their US counterparts. While competition for US defence contracts will toughen, European companies are not necessarily losing ground to US ones.
Fifth, the future of new weapons funded jointly by the US and its allies is in doubt. Already, the Pentagon has announced that it was pulling out of a US-German-Italian project to build a new generation of medium-range missile defences. This is in large part because the project, MEADS, has suffered technical problems. But the Pentagon, in announcing the decision, also cited financial constraints as a factor. The more the US cuts defence spending, the higher the risk that NATO’s own flagship, continent-wide missile umbrella could be at risk. Announced in November 2010, the system envisions combining future US radars and missiles to be stationed mainly in Central Europe with yet-to-be-developed European sensors and interceptors. But few European governments have come forward pledging money for it. It is not obvious why the US Congress would fund a programme to defend European mainland, which the Europeans themselves are unwilling to support.
Politically, cuts in US defence spending are sure to rankle in Europe. A setback to NATO’s missile defences could be particularly divisive, with new allies lamenting a chance to host US military bases, and with NATO losing one of its key initiatives, which it also has been hoping to use to entice Russia into a closer relationship. The effect of US reductions will be compounded by cuts to military spending in Europe: there is a risk that reductions on one side of the Atlantic will be used to justify corresponding cuts across the sea. NATO remains the most powerful military block in the world but it will lose some of its ability to handle multiple crises simultaneously.
The main challenge for US and European defence communities for the next few years will be to keep NATO’s mutual defence pledge credible: this will require allies to prioritise missions and to hone their ability to diffuse crises before they require deployment of large forces. Even if no such crises occur, the Americans and Europeans will be busy managing the political fallout from cancelled procurement programmes and reduced operations. To minimise damage, the Pentagon should keep allies apprised of its cost-cutting measures. For their part, the Europeans need to co-ordinate better their own reductions in defence budgets, so as to make sure that enough money and resources are left to cover any shortfalls that US cuts will create.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
The US defence budget seems set to fall as Washington begins to restore order in its finances. Spending on the military has reached such heights – $700 billion, or 20 per cent of the US federal budget – that it has become too large for deficit-cutters to ignore. Even traditionally pro-defence Republicans now argue that military expenditures need to be reduced along with other government expenses. Europe, too, will feel the pinch: many of the American soldiers currently based on the continent seem certain to go, and some joint weapons programmes will be cancelled. In case of future crises in Europe, NATO’s and the EU’s ability to respond will be tested. The US will expect Europe to lead but European allies themselves have been reducing forces and budgets.
Congress is poised to cut the White House’s request for defence for the fiscal year (FY) 2011 by $15-$20 billion. That might seem low relative to the $700 billion total but of that amount roughly $160 billion is set aside for operations in Iraq and Afghanistan, and will decrease as those conflicts wind down. And much of the remaining money is tied up in non-discretionary spending such as pensions and healthcare for military personnel (the latter alone costs the Pentagon over $50 billion a year). The brunt of the cuts in FY 2011 will therefore fall on the pool of $200-$300 billion that pays for purchases of new equipment, foreign military assistance, overseas bases and non-core military operations. Money spent abroad will be particularly vulnerable to cuts – more and more Americans say that the US government should look after its own rather than, say, wealthy Europeans (all foreign aid is in for big reductions).
The effect of US defence budget cuts on Europe will be five-fold. First, some of the 80,000 US soldiers left in Europe as assurance to NATO allies will most probably leave; Gates said in January 2011 that “it is clear that we have excess force structure in Europe”. The Balts and others in Europe who continue to fear possible trouble with Russia will wonder whether the US has enough forces ready to defend them. But their unease will be tempered by the many military exercises that the US held in the region last year. In 2010, Washington also successfully lobbied the rest of NATO to draft a defence plan for the Baltic. This was done in order to re-affirm US intent to uphold the alliance’s mutual defence pledge, and it seems to have worked: judging by mood at events such as this month’s GLOBSEC conference in Bratislava, the Balts and other Central Europeans are more at ease with Obama. Besides, as Stephen Flanagan of CSIS, a Washington think-tank, points out, “the 50,000 troops that will stay in Europe would be more than double the US ground presence in South Korea, where there is daily risk of imminent war.” Many of the new allies have been busy cutting defence budget themselves: they say that the fiscal crisis leaves them no choice, but the cuts also suggest that they feel little imminent threat from the East. This will make Washington less reticent about withdrawing troops from Europe.
Second, the military assistance that the US provides to help allies to modernise and re-arm will continue to fall. In the past decade, the US generously funded equipment purchases in Europe, with most money going to the new allies. Low-interest US loans allowed Poland to buy F-16 fighter jets, while Romania purchased C-130 cargo planes with US aid. But in recent years, assistance to countries such as Egypt or Pakistan has taken priority – of the $5.4 billion in 'foreign military financing', which the US set aside for 2011, $4.7 billion will go to Middle East and North Africa. The proportion of the aid going to wealthier and less strategic European countries will be slashed further when, as expected, the overall volume of military assistance falls. In the past, US defence companies would have had a decent shot at thwarting cuts in such assistance: they tend to be its main beneficiaries as most of the money ends up with them in the form of procurement orders. But the mood in the US is changing: Republicans in particular argue that the US government should not be in the business of funding new jobs, and that the best job-creation strategy lies in cutting expenses, thus restoring order in the federal budget. Should military assistance to Europe be slashed, as seems likely, programmes such as Romania’s planned purchase of F-16 fighter jets that are financed with US monies would likely be postponed or cancelled. With defence budgets falling in virtually all NATO countries, there is little hope that European allies would pick up the slack.
Third, US personnel on operations in Europe – in Bosnia-Herzegovina and in Kosovo – will likely be reduced or withdrawn altogether. Because their numbers are low to begin with, the short-term impact will be minimal. Only 20 US soldiers remain in Bosnia in a force that once counted 20,000 American troops. The US has about 800 soldiers left in Kosovo, where the overall NATO force is being reduced from 14,000 to 2,500. Should a new crisis break out in the Balkans, the Pentagon will be able to send more soldiers from bases elsewhere in Europe (primarily Germany). But this reserve force too is being reduced. The downsized Pentagon will be far less willing than in the 1990s to lead military operations in Europe. In the future, Washington will look to its allies to assume main responsibility for dealing with the Balkans and other crises on Europe’s periphery. The defense department’s resistance to a no-fly zone in Libya could be a sign of things to come.
Fourth, those European companies that do business in the US will lose some of their orders – but so will their US competitors. Signs of renewed protectionism have been few so far. While the Pentagon recently chose Boeing over a Franco-German consortium EADS to build a new generation of tanker aircraft, “this is mainly because Boeing’s planes were $2 billion cheaper”, says Andrew Koch, an analyst with Scribe Strategies and Advisors, a Washington consultancy. The European companies have worked hard to erase their US competitors’ advantage: the likes of BAE Systems and EADS pledge to build equipment in the US using American workers, so they are likely to have as many members of Congress on their side as their US counterparts. While competition for US defence contracts will toughen, European companies are not necessarily losing ground to US ones.
Fifth, the future of new weapons funded jointly by the US and its allies is in doubt. Already, the Pentagon has announced that it was pulling out of a US-German-Italian project to build a new generation of medium-range missile defences. This is in large part because the project, MEADS, has suffered technical problems. But the Pentagon, in announcing the decision, also cited financial constraints as a factor. The more the US cuts defence spending, the higher the risk that NATO’s own flagship, continent-wide missile umbrella could be at risk. Announced in November 2010, the system envisions combining future US radars and missiles to be stationed mainly in Central Europe with yet-to-be-developed European sensors and interceptors. But few European governments have come forward pledging money for it. It is not obvious why the US Congress would fund a programme to defend European mainland, which the Europeans themselves are unwilling to support.
Politically, cuts in US defence spending are sure to rankle in Europe. A setback to NATO’s missile defences could be particularly divisive, with new allies lamenting a chance to host US military bases, and with NATO losing one of its key initiatives, which it also has been hoping to use to entice Russia into a closer relationship. The effect of US reductions will be compounded by cuts to military spending in Europe: there is a risk that reductions on one side of the Atlantic will be used to justify corresponding cuts across the sea. NATO remains the most powerful military block in the world but it will lose some of its ability to handle multiple crises simultaneously.
The main challenge for US and European defence communities for the next few years will be to keep NATO’s mutual defence pledge credible: this will require allies to prioritise missions and to hone their ability to diffuse crises before they require deployment of large forces. Even if no such crises occur, the Americans and Europeans will be busy managing the political fallout from cancelled procurement programmes and reduced operations. To minimise damage, the Pentagon should keep allies apprised of its cost-cutting measures. For their part, the Europeans need to co-ordinate better their own reductions in defence budgets, so as to make sure that enough money and resources are left to cover any shortfalls that US cuts will create.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
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