by Charles Grant
One Frenchman, Jean Monnet, invented the European Commission, and another, Jacques Delors, was its greatest president. Yet the French are increasingly hostile to this Brussels institution. Those who spent time in France during the 2005 referendum on the EU constitutional treaty will remember that the No campaign was fired up by the belief that the Commission had become too ‘Anglo-Saxon’ (ie, economically liberal). Since then anti-Commission sentiment seems to have grown in France, at least to judge from the discussion at the recent ‘Franco-British colloque’, an annual gathering of politicians, journalists and business leaders from Britain and France.
Speaking at the opening dinner at this year’s meeting, in Versailles, Prime Minister François Fillon complained that the Commission had failed to lead during the financial crisis. During the off-the-record sessions that followed, French politicians and chief executives repeatedly attacked the Commission for its alleged weakness and ‘ultra-liberal’ economic philosophy. To give an example, the chairman of one of France’s biggest manufacturing companies was asked if the EU should take on a new role in regulating banking. “Absolutely not – because if the EU applies rules, the Commission will write them,” he said. “And the Commission will write the rules that the British government tells it to write. So we should keep the Commission out of banking regulation and give the job to the European Central Bank.” That comment is not particularly logical: even if the ECB were handed responsibility for supervising banks, the rules would still be drawn up by the European Commission, Council of Ministers and Parliament. But it does reflect the mood in the French establishment.
Several factors explain this hostility. The French are right about the Commission’s economic philosophy. The top jobs – President José Manuel Barroso, Competition Commissioner Neelie Kroes, Single Market Commissioner Charlie McCreevy and (until recently) Trade Commissioner Peter Mandelson – are or have been held by liberals. The same applies to many of the key officials. Thus at a recent CER seminar in Brussels on sovereign wealth funds, the director-general for trade, David O’Sullivan (an Irishman) argued that the EU should not try to regulate these funds. Instead it should welcome sovereign wealth funds that wished to invest in the EU. On a broad range of policy issues, ranging from state aid to the liberalisation of energy markets to France’s bid to stop foreigners investing in ‘strategic industries’, Paris has been in conflict with Brussels.
The French are also right that the Commission is weaker than it was in the good old days of Jacques Delors. It was rather slow off the mark to respond to the beginnings of the financial crisis, last autumn, though of course it has no sway over monetary or fiscal policy. Barroso lacks Delors’s empire-building ambition, and he is sometimes reluctant to get into fights with big countries (because he is so willing to be reappointed, some say). But although I am an admirer of Jacques Delors, I think that if Barroso tried to behave like him he would get nowhere. The member-states are much less willing than they were 20 years ago to tolerate an ambitious, agenda-setting Commission. They have got the more modest Commission they wanted. And to be fair to Barroso and his colleagues, it is difficult to lead the EU when – as in the second half of 2008 – a man as hyper-active as President Sarkozy holds the presidency. Sarkozy’s style was to sideline EU institutions. In fact by the end of 2008 the Commission had made something of a comeback, with its plan for an EU-wide economic stimulus, endorsed by the December European Council.
When the French complain that the Commission is a) too liberal and b) too weak, they should note the risk of a contradiction. A mightier Commission that, for example, pushed through a radical reform of the Common Agricultural Policy (CAP) might not be to Paris’s taste.
A third reason why the French have turned against the Commission is, I think, wounded national pride. France used to dominate the institution. Indeed, as recently as the 1990s, French was the predominant language within it. In the current Commission, France did not get one of the top jobs. Five years ago President Chirac sent Jacques Barrot, a middleweight politician, to Brussels, and he was given the relatively unimportant job of transport (though recently he moved to more important job of justice and home affairs). The more the French believe they have lost control of EU institutions, the less they like them.
Which is why the make-up of the new Commission is so important. Normally the commissioners are appointed during the summer months, after the June European Council decides on the president. This year the appointments may be postponed until the end of the year, to give Ireland the chance to vote Yes to the Lisbon treaty in the autumn (unless the Lisbon treaty comes into effect, the number of commissioners appointed must – under existing Nice treaty rules – be less than the number of member-states).
France is, understandably, determined to have one of the top economic jobs in the Commission. So is the UK. Barroso is likely to be reappointed but the British should not assume that economic liberals will get all the top jobs. One rumour in Paris is that Michel Barnier, currently agriculture minister, will be the French appointment. In his favour, he is a convinced European and has a broad range of experience, including stints as foreign minister and commissioner for regional policy. But his critics complain about his self-important manner and point out that he defends the CAP more staunchly than many other French politicians.
In Britain, of course, many people – including some Conservative politicians – still assume that the Commission is committed to tighter regulation and interventionist or left-of-centre economic policies. Interestingly, at the colloque in Versailles, half a dozen senior Tories (both members of the shadow cabinet and policy advisers) were listening to the debates. They said very little when the French attacked the Commission. That is not surprising: they would be uncomfortable either supporting the French criticism of economic liberalism, or defending the powers of the Commission. But I hope those Conservatives listened carefully, and that they may have seen that the Commission is, on many policy issues, a potential ally for the British.
Charles Grant is director of the Centre for European Reform.
Thursday, January 29, 2009
Friday, January 23, 2009
After the gas conflict
by Katinka Barysch
On January 20th, Russian gas started flowing again through Ukraine, after a two-week shut-down that had left people in South East Europe freezing and factories idle. The relief across Europe was palpable but the confusion about what happened is still there.
First, both Russia and Ukraine said that the dispute was about money that Naftogaz, the Ukrainian gas company, owed to Russia’s monopoly Gazprom for last year’s deliveries. Then it was about the price the Ukrainians should pay in 2009 for the Russian (or Turkmen) gas that it uses domestically. Then Ukraine tore up a contract about gas transport to Europe and threw transit fees into the negotiations too. If this was not complicated enough, the dispute then centred on ‘technical’ gas that is needed to keep up volumes in Ukraine’s pipelines. When a handful of European gas companies offered to buy this technical gas in order to get things moving again, the Russians said that this wasn’t really the problem. At one point, Russia claimed that it was sending gas to Ukraine but Ukraine refused to accept it. Ukraine said the gas was coming down the wrong pipe and could only be delivered to Europe if it shut off supplies to Ukrainian factories and households. A group of observers cobbled together by the EU to find out whether gas was actually flowing from Russia to Ukraine never got down to work. The role of RosUkrEnergo, the lucrative trading company at the heart of the Russian-Ukrainian gas deliveries was, as always, unclear. Add the frosty political climate between an angry and increasingly desperate Russia and a divided and even more desperate Ukraine, and the situation is almost impossible for outsiders to understand.
Rumours and conspiracy theories proliferated. PR efforts were ramped up. Insults flew. Various ‘insiders’ offered diametrically opposed accounts of what was happening. The overall impression was that neither the Russians nor the Ukrainians wanted the EU to understand what the stand-off was about. If the parties involved prefer confusion and obscurity, any attempt at mediation – as launched by the EU, numerous European governments and the gas companies in the EU – is bound to fail.
In theory, the conflict has now been resolved. Prime Ministers Putin and Tymoshenko signed a deal on January 19th that is said to be very similar to an understanding they had already reached back in October (details of supply contracts are not usually published, not even those between Gazprom and EU energy companies). According to press reports, the new agreement runs for ten years, and therefore eliminates the haggling that has become an annual ritual since the early 1990s. As from next year, Ukraine will no longer receive subsidised gas from Russia but pay a price that is linked to the one of fuel oil, like all companies in the EU do. In turn, Gazprom will no longer get a discount on the transit fees it will pay Ukraine for shipping more than 120 billion cubic metres gas westwards every year. Under such a deal, there would be no place for shady middlemen – although RosUkrEnergo is reportedly moving into Ukraine’s domestic gas trade.
Does this mean that a repeat of the gas war is unlikely or even impossible? It is hard to say. The EU should not speculate but recount those things it knows for sure: first, both Russia and Ukraine considered it more important to fight for their narrow interests in this energy dispute than to defend their reputations as reliable supplier and transit state, respectively. This is deeply worrying. Second, Russia will not break up Gazprom. Ukraine has rejected the idea of running its pipeline system as a three-way consortium with Russian and European involvement. Monopolies have a tendency to become opaque and greedy unless properly regulated and monitored. Neither Russia nor Ukraine seem keen on doing this. An unpublished contract may or may not be enough to ensure the reliability of Gazprom and Naftogaz (and any intermediary that may yet follow RosUkrEnergo). Third, Russian gas accounts for a quarter of total EU consumption, and 80 per cent of this comes through Ukraine. For some EU countries the dependency is 100 per cent. Even if the supplier was Norway and the transit country Switzerland, this would be an uncomfortable position to be in.
To increase their energy security in the face of such uncertainty, the Europeans do not need to do anything they are not doing – or planning to do – already. The EU has already agreed targets for using more renewables and saving energy (although the latter is non-binding). A new liberalisation directive – if properly enforced – should help to build a more integrated EU energy market. The objective of constructing more interconnections between national gas markets has been there for years. A new initiative to link South East European gas markets (called NETS: new European transmission system) looks a little more concrete, and could get a boost since South East Europe was the region worst affected by the cut-off. On January 26th and 27th, the Hungarians are hosting a ‘Nabucco summit’ for consortium members and potential suppliers for this planned pipeline through Turkey and the Balkans. The project could do with a political push, as well as fresh ideas for financing it. As for its potential supplies, the EU is stepping up efforts to get a big contract with Azerbaijan. And two of the Nabucco consortium members, Austria’s OMV and Germany’s RWE, announced in December that they are dusting off plans to build a trans-Caspian pipeline to get Turkmen gas into Nabucco.
At their spring summit in March, EU leaders will discuss the Commission’s ‘strategic energy review’ (published in November, 2008). It contains useful ideas, for example a proposal to pool EU resources for securing contracts with outside suppliers such as Azerbaijan and Turkmenistan. EU leaders now need to focus on what they can do through concrete steps and investments to increase the EU’s energy security, not speculate about whether Russia and Ukraine may stick to their latest deal.
Katinka Barysch is deputy director of the Centre for European Reform.
On January 20th, Russian gas started flowing again through Ukraine, after a two-week shut-down that had left people in South East Europe freezing and factories idle. The relief across Europe was palpable but the confusion about what happened is still there.
First, both Russia and Ukraine said that the dispute was about money that Naftogaz, the Ukrainian gas company, owed to Russia’s monopoly Gazprom for last year’s deliveries. Then it was about the price the Ukrainians should pay in 2009 for the Russian (or Turkmen) gas that it uses domestically. Then Ukraine tore up a contract about gas transport to Europe and threw transit fees into the negotiations too. If this was not complicated enough, the dispute then centred on ‘technical’ gas that is needed to keep up volumes in Ukraine’s pipelines. When a handful of European gas companies offered to buy this technical gas in order to get things moving again, the Russians said that this wasn’t really the problem. At one point, Russia claimed that it was sending gas to Ukraine but Ukraine refused to accept it. Ukraine said the gas was coming down the wrong pipe and could only be delivered to Europe if it shut off supplies to Ukrainian factories and households. A group of observers cobbled together by the EU to find out whether gas was actually flowing from Russia to Ukraine never got down to work. The role of RosUkrEnergo, the lucrative trading company at the heart of the Russian-Ukrainian gas deliveries was, as always, unclear. Add the frosty political climate between an angry and increasingly desperate Russia and a divided and even more desperate Ukraine, and the situation is almost impossible for outsiders to understand.
Rumours and conspiracy theories proliferated. PR efforts were ramped up. Insults flew. Various ‘insiders’ offered diametrically opposed accounts of what was happening. The overall impression was that neither the Russians nor the Ukrainians wanted the EU to understand what the stand-off was about. If the parties involved prefer confusion and obscurity, any attempt at mediation – as launched by the EU, numerous European governments and the gas companies in the EU – is bound to fail.
In theory, the conflict has now been resolved. Prime Ministers Putin and Tymoshenko signed a deal on January 19th that is said to be very similar to an understanding they had already reached back in October (details of supply contracts are not usually published, not even those between Gazprom and EU energy companies). According to press reports, the new agreement runs for ten years, and therefore eliminates the haggling that has become an annual ritual since the early 1990s. As from next year, Ukraine will no longer receive subsidised gas from Russia but pay a price that is linked to the one of fuel oil, like all companies in the EU do. In turn, Gazprom will no longer get a discount on the transit fees it will pay Ukraine for shipping more than 120 billion cubic metres gas westwards every year. Under such a deal, there would be no place for shady middlemen – although RosUkrEnergo is reportedly moving into Ukraine’s domestic gas trade.
Does this mean that a repeat of the gas war is unlikely or even impossible? It is hard to say. The EU should not speculate but recount those things it knows for sure: first, both Russia and Ukraine considered it more important to fight for their narrow interests in this energy dispute than to defend their reputations as reliable supplier and transit state, respectively. This is deeply worrying. Second, Russia will not break up Gazprom. Ukraine has rejected the idea of running its pipeline system as a three-way consortium with Russian and European involvement. Monopolies have a tendency to become opaque and greedy unless properly regulated and monitored. Neither Russia nor Ukraine seem keen on doing this. An unpublished contract may or may not be enough to ensure the reliability of Gazprom and Naftogaz (and any intermediary that may yet follow RosUkrEnergo). Third, Russian gas accounts for a quarter of total EU consumption, and 80 per cent of this comes through Ukraine. For some EU countries the dependency is 100 per cent. Even if the supplier was Norway and the transit country Switzerland, this would be an uncomfortable position to be in.
To increase their energy security in the face of such uncertainty, the Europeans do not need to do anything they are not doing – or planning to do – already. The EU has already agreed targets for using more renewables and saving energy (although the latter is non-binding). A new liberalisation directive – if properly enforced – should help to build a more integrated EU energy market. The objective of constructing more interconnections between national gas markets has been there for years. A new initiative to link South East European gas markets (called NETS: new European transmission system) looks a little more concrete, and could get a boost since South East Europe was the region worst affected by the cut-off. On January 26th and 27th, the Hungarians are hosting a ‘Nabucco summit’ for consortium members and potential suppliers for this planned pipeline through Turkey and the Balkans. The project could do with a political push, as well as fresh ideas for financing it. As for its potential supplies, the EU is stepping up efforts to get a big contract with Azerbaijan. And two of the Nabucco consortium members, Austria’s OMV and Germany’s RWE, announced in December that they are dusting off plans to build a trans-Caspian pipeline to get Turkmen gas into Nabucco.
At their spring summit in March, EU leaders will discuss the Commission’s ‘strategic energy review’ (published in November, 2008). It contains useful ideas, for example a proposal to pool EU resources for securing contracts with outside suppliers such as Azerbaijan and Turkmenistan. EU leaders now need to focus on what they can do through concrete steps and investments to increase the EU’s energy security, not speculate about whether Russia and Ukraine may stick to their latest deal.
Katinka Barysch is deputy director of the Centre for European Reform.
Thursday, January 08, 2009
Gaza, Europe and empty gestures
by Clara Marina O'Donnell
'We're fed up with empty gestures', the Israeli prime minister told a high level delegation from the EU. Several foreign ministers and EU officials had come to the Middle East to try to help end the war raging in Gaza between Israel and Hamas, which has killed over 700 Palestinians and 10 Israelis in the twelve days since it started. The EU has been calling for a ceasefire and the reopening of Gaza’s borders.
Ehud Olmert’s chastising comments, reported by the Jerusalem Post on January 6th, summarised neatly the difficulties the EU faces in trying to help Israel ensure its security while alleviating the plight of Palestinians. Many Israeli leaders believe the EU does not have much to offer to improve their security and therefore pay little attention to the EU in times of crisis. But the EU should not be seen as irrelevant.
It will never have the leverage of the US (nor should it aspire to), but it does have stakes in the region. Among other things, the EU is Israel’s main trading partner and the largest provider of financial assistance to the Palestinians. In order to have more leverage in peace talks and mediation, the EU should play a stronger role in providing security for both sides.
So far, European countries have shied away from offering any serious commitments to improve the security between Israel and its neighbours. In recent years Europe has sent various missions to the region as part of monitoring or peacekeeping operations. The EU has a monitoring mission at the Rafah crossing (EUBAM, which has been dormant since Hamas has been in sole control of Gaza) and Europe has contributed the bulk of the troops to UNIFIL, the UN’s mission which supervises peace in South Lebanon. But both deployments have limited mandates. They focus on monitoring but avoid engagement with hostile forces.
As a result, Israel underlines the limitations of UNIFIL by pointing to Hezbollah’s rearming, which has been taking place unhindered since the end of the Israel-Lebanon war of 2006. And Israel has always been dissatisfied with EUBAM: it would like to see EU monitors intercept weapon smugglers, if necessary with the use of force. But the EU has been reluctant to take on such a role. Unsurprisingly, Israel hasn’t considered the offer to reinstate EUBAM as a deal clincher in the EU’s current efforts to promote a ceasefire in Gaza. In the midst of heavy fighting, it doesn’t seem particularly useful to offer this small scale monitoring mission (which, in addition, in order to function needs non-Hamas Palestinian officials, who all fled Gaza in June 2007).
European countries are understandably reluctant to send their troops to troublespots in this politically sensitive region. But the EU should be less risk averse and offer troops when monitoring missions are a necessary component of peace-building measures supported by local parties. The EU might not only help bring stability and give Palestinian civilians the impression that there is progress; it would also be taken more seriously by Israel, and subsequently acquire stronger leverage in the peace process.
At the time of writing, ideas were being discussed at the UN to end the conflict in Gaza. Amongst other initiatives, a French-Egyptian proposal would open the borders of Gaza and strengthen measures to combat the smuggling of weapons into the territory, including through the presence of an international force. Unknowns in the proposals still need to be addressed, not least how to secure the necessary consent of Hamas. But the EU should offer to take part in any international monitoring force, and support a strong mandate for that force. Israel will agree to end its military offensive and it will consider opening the borders to Gaza only if an international force is capable of genuinely limiting weapons smuggling. If Israel feels the force is underperforming it will only be a matter of time until Tel Aviv undertakes another military operation in Gaza.
An end to the violence and to Gaza’s economic isolation will be only two of the many difficult steps needed to reverse the deterioration of the last two years. In the long term Palestinian rockets and weapons smuggling can only be stopped if Hamas and other Palestinian factions lose the desire to fight. In order to achieve this Hamas will need to be engaged by Israel and the wider international community. But in the short term, by offering serious monitors, at least the EU can make a contribution to stabilising the conflict in Gaza, and can hope to reverse the perception of its empty gestures.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
'We're fed up with empty gestures', the Israeli prime minister told a high level delegation from the EU. Several foreign ministers and EU officials had come to the Middle East to try to help end the war raging in Gaza between Israel and Hamas, which has killed over 700 Palestinians and 10 Israelis in the twelve days since it started. The EU has been calling for a ceasefire and the reopening of Gaza’s borders.
Ehud Olmert’s chastising comments, reported by the Jerusalem Post on January 6th, summarised neatly the difficulties the EU faces in trying to help Israel ensure its security while alleviating the plight of Palestinians. Many Israeli leaders believe the EU does not have much to offer to improve their security and therefore pay little attention to the EU in times of crisis. But the EU should not be seen as irrelevant.
It will never have the leverage of the US (nor should it aspire to), but it does have stakes in the region. Among other things, the EU is Israel’s main trading partner and the largest provider of financial assistance to the Palestinians. In order to have more leverage in peace talks and mediation, the EU should play a stronger role in providing security for both sides.
So far, European countries have shied away from offering any serious commitments to improve the security between Israel and its neighbours. In recent years Europe has sent various missions to the region as part of monitoring or peacekeeping operations. The EU has a monitoring mission at the Rafah crossing (EUBAM, which has been dormant since Hamas has been in sole control of Gaza) and Europe has contributed the bulk of the troops to UNIFIL, the UN’s mission which supervises peace in South Lebanon. But both deployments have limited mandates. They focus on monitoring but avoid engagement with hostile forces.
As a result, Israel underlines the limitations of UNIFIL by pointing to Hezbollah’s rearming, which has been taking place unhindered since the end of the Israel-Lebanon war of 2006. And Israel has always been dissatisfied with EUBAM: it would like to see EU monitors intercept weapon smugglers, if necessary with the use of force. But the EU has been reluctant to take on such a role. Unsurprisingly, Israel hasn’t considered the offer to reinstate EUBAM as a deal clincher in the EU’s current efforts to promote a ceasefire in Gaza. In the midst of heavy fighting, it doesn’t seem particularly useful to offer this small scale monitoring mission (which, in addition, in order to function needs non-Hamas Palestinian officials, who all fled Gaza in June 2007).
European countries are understandably reluctant to send their troops to troublespots in this politically sensitive region. But the EU should be less risk averse and offer troops when monitoring missions are a necessary component of peace-building measures supported by local parties. The EU might not only help bring stability and give Palestinian civilians the impression that there is progress; it would also be taken more seriously by Israel, and subsequently acquire stronger leverage in the peace process.
At the time of writing, ideas were being discussed at the UN to end the conflict in Gaza. Amongst other initiatives, a French-Egyptian proposal would open the borders of Gaza and strengthen measures to combat the smuggling of weapons into the territory, including through the presence of an international force. Unknowns in the proposals still need to be addressed, not least how to secure the necessary consent of Hamas. But the EU should offer to take part in any international monitoring force, and support a strong mandate for that force. Israel will agree to end its military offensive and it will consider opening the borders to Gaza only if an international force is capable of genuinely limiting weapons smuggling. If Israel feels the force is underperforming it will only be a matter of time until Tel Aviv undertakes another military operation in Gaza.
An end to the violence and to Gaza’s economic isolation will be only two of the many difficult steps needed to reverse the deterioration of the last two years. In the long term Palestinian rockets and weapons smuggling can only be stopped if Hamas and other Palestinian factions lose the desire to fight. In order to achieve this Hamas will need to be engaged by Israel and the wider international community. But in the short term, by offering serious monitors, at least the EU can make a contribution to stabilising the conflict in Gaza, and can hope to reverse the perception of its empty gestures.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
Wednesday, January 07, 2009
Just another gas crisis?
by Katinka Barysch
Russia has cut off the gas flowing to and through Ukraine – again. Like in January 2006, Moscow and Kyiv are blaming each other, while a convoluted mix of political intrigues, shady middlemen and broken contracts makes it almost impossible for outsiders to ascertain which side is at fault. But the current interruption in gas supplies to Europe is different in many ways from that three years ago.
First, the interruption is more severe but some EU countries appear to be better prepared. In January 2006, when Gazprom first turned off the tap over a pricing dispute with Kyiv, the volumes affected were much smaller. On January 7th 2009, Russian gas supplies through Ukraine (which account for over 80 per cent of all Russian gas sales to Europe) stopped altogether. The bigger EU countries, such as Germany, Italy and France, have plenty of gas in storage and they can use more Norwegian or Algerian or domestic gas instead. However, some of the newer member-states are not so lucky. Bulgaria, Slovakia, Hungary and Poland, with little storage or access to alternative suppliers will have to ration gas. A spike in energy prices is the last thing Europe’s struggling industries need at the moment. Calls for European ‘energy solidarity’ will suddenly acquire a new meaning.
Second, the political dynamics are very different. In 2006, when memories of the orange revolution were still rather fresh, many Europeans were quick to blame Russia for using energy to punish pro-western Ukraine. Now Ukraine’s squabbling, self-serving leaders attract little sympathy. The fact that Ukraine does not have a functioning government mattered less as long as its economy was doing well. But now it has become one of the main obstacles to resolving the crisis.
Russia has considerably beefed up its PR efforts, having warned of potential supply cuts weeks ago (and blaming the Ukrainians in advance). But the fact that some smart people speculate whether Russia has deliberately caused the gas crisis to destabilise Ukrainian politics or to push up global energy prices shows just how little credibility the country has, especially after the Georgia war. Both Moscow and Kyiv had reassured the Europeans numerous times that gas transit to the EU would not be affected. Now half of Europe is living of its own gas storage or switching to fuel oil. Gazprom’s mantra that it, really is, a reliable supplier sounds hollow. But so does Ukraine’s claim to be the innocent victim of neo-imperialist policies.
Third, the stakes for both Ukraine and Russia are a lot higher. In 2006, Ukraine’s economy grew by more than 7 per cent despite higher gas prices, as exports of steel and chemicals boomed. At the end of 2008, Ukraine’s economy was in meltdown, with industrial production down 30 per cent year on year in November. The Ukrainian currency has plummeted 40 per cent against the dollar since September. So paying for imports – including energy – would be a lot harder even if gas prices stayed the same. The IMF, which has pledged $16 billion to shore up the Ukrainian economy, will demand that the government phase out energy subsidies to keep the budget deficit under control. That means that more of any gas price increase will have to be passed on to households. With inflation already running at 20 per cent and presidential elections coming up next year, Ukraine simply cannot afford a rise to $450 per 1,000 cubic metres, as requested by Gazprom after the negotiations broke down.
Russia is also in a very different position. Its external surplus and reserves are dwindling. Gazprom, like most Russian companies, is seriously short of cash. Ukraine buys more than 40 billion cubic metres of gas from Russia a year, which makes it one of Gazprom’s bigger customers. So the price of these sales does matter for Russia. However, the costs of a sustained interruption of gas flows would be immeasurably higher. Not only because Gazprom could face an avalanche of law suits from European companies if supply contracts were breached, but also because Gazprom could lose its standing in its biggest and most lucrative market. That is already happening.
The final, and perhaps most important, difference between the 2006 and today is that Europe is more likely to draw the right conclusions. After the 2006 cut-off, the Europeans panicked – and then the EU proceeded to lecture Russia on how to run its energy sector and export business while individual EU countries rushed to sign long-term bilateral agreements with Gazprom to secure their own supplies. This did not work. Today, the Europeans will (hopefully) focus on what they can do together to increase their energy security: build a functioning internal gas market, invest more in gas storage and focus on alternative sources of gas, for example from the Caspian via Nabucco and in the form of LNG from Northern Africa and the Middle East. They also need to reinforce their efforts to achieve their 20 per cent energy savings target and explore alternative sources of power, namely renewables and nuclear. If the gas standoff reminds the Europeans of the importance of such measures, Russia and Ukraine will have done the EU a favour.
Download the CER’s book ‘Pipelines, politics and power: The future of EU-Russia energy relations’ for free http://www.cer.org.uk/pdf/rp_851.pdf
Katinka Barysch is deputy director of the Centre for European Reform.
Russia has cut off the gas flowing to and through Ukraine – again. Like in January 2006, Moscow and Kyiv are blaming each other, while a convoluted mix of political intrigues, shady middlemen and broken contracts makes it almost impossible for outsiders to ascertain which side is at fault. But the current interruption in gas supplies to Europe is different in many ways from that three years ago.
First, the interruption is more severe but some EU countries appear to be better prepared. In January 2006, when Gazprom first turned off the tap over a pricing dispute with Kyiv, the volumes affected were much smaller. On January 7th 2009, Russian gas supplies through Ukraine (which account for over 80 per cent of all Russian gas sales to Europe) stopped altogether. The bigger EU countries, such as Germany, Italy and France, have plenty of gas in storage and they can use more Norwegian or Algerian or domestic gas instead. However, some of the newer member-states are not so lucky. Bulgaria, Slovakia, Hungary and Poland, with little storage or access to alternative suppliers will have to ration gas. A spike in energy prices is the last thing Europe’s struggling industries need at the moment. Calls for European ‘energy solidarity’ will suddenly acquire a new meaning.
Second, the political dynamics are very different. In 2006, when memories of the orange revolution were still rather fresh, many Europeans were quick to blame Russia for using energy to punish pro-western Ukraine. Now Ukraine’s squabbling, self-serving leaders attract little sympathy. The fact that Ukraine does not have a functioning government mattered less as long as its economy was doing well. But now it has become one of the main obstacles to resolving the crisis.
Russia has considerably beefed up its PR efforts, having warned of potential supply cuts weeks ago (and blaming the Ukrainians in advance). But the fact that some smart people speculate whether Russia has deliberately caused the gas crisis to destabilise Ukrainian politics or to push up global energy prices shows just how little credibility the country has, especially after the Georgia war. Both Moscow and Kyiv had reassured the Europeans numerous times that gas transit to the EU would not be affected. Now half of Europe is living of its own gas storage or switching to fuel oil. Gazprom’s mantra that it, really is, a reliable supplier sounds hollow. But so does Ukraine’s claim to be the innocent victim of neo-imperialist policies.
Third, the stakes for both Ukraine and Russia are a lot higher. In 2006, Ukraine’s economy grew by more than 7 per cent despite higher gas prices, as exports of steel and chemicals boomed. At the end of 2008, Ukraine’s economy was in meltdown, with industrial production down 30 per cent year on year in November. The Ukrainian currency has plummeted 40 per cent against the dollar since September. So paying for imports – including energy – would be a lot harder even if gas prices stayed the same. The IMF, which has pledged $16 billion to shore up the Ukrainian economy, will demand that the government phase out energy subsidies to keep the budget deficit under control. That means that more of any gas price increase will have to be passed on to households. With inflation already running at 20 per cent and presidential elections coming up next year, Ukraine simply cannot afford a rise to $450 per 1,000 cubic metres, as requested by Gazprom after the negotiations broke down.
Russia is also in a very different position. Its external surplus and reserves are dwindling. Gazprom, like most Russian companies, is seriously short of cash. Ukraine buys more than 40 billion cubic metres of gas from Russia a year, which makes it one of Gazprom’s bigger customers. So the price of these sales does matter for Russia. However, the costs of a sustained interruption of gas flows would be immeasurably higher. Not only because Gazprom could face an avalanche of law suits from European companies if supply contracts were breached, but also because Gazprom could lose its standing in its biggest and most lucrative market. That is already happening.
The final, and perhaps most important, difference between the 2006 and today is that Europe is more likely to draw the right conclusions. After the 2006 cut-off, the Europeans panicked – and then the EU proceeded to lecture Russia on how to run its energy sector and export business while individual EU countries rushed to sign long-term bilateral agreements with Gazprom to secure their own supplies. This did not work. Today, the Europeans will (hopefully) focus on what they can do together to increase their energy security: build a functioning internal gas market, invest more in gas storage and focus on alternative sources of gas, for example from the Caspian via Nabucco and in the form of LNG from Northern Africa and the Middle East. They also need to reinforce their efforts to achieve their 20 per cent energy savings target and explore alternative sources of power, namely renewables and nuclear. If the gas standoff reminds the Europeans of the importance of such measures, Russia and Ukraine will have done the EU a favour.
Download the CER’s book ‘Pipelines, politics and power: The future of EU-Russia energy relations’ for free http://www.cer.org.uk/pdf/rp_851.pdf
Katinka Barysch is deputy director of the Centre for European Reform.
Tuesday, December 16, 2008
What the summit says about the EU
by Katinka Barysch
The EU summit on December 10th-11th was a success in so far as EU leaders managed to agree on all major agenda items. The fact that there was a lot of bitter wrangling and a big dose of compromise was only to be expected against the backdrop of a rapidly worsening European economy. However, the longer-term consequences of these compromises are worrying.
* Lisbon treaty
The most unequivocally positive but least noticed deal of the summit concerned the future of the Lisbon treaty. Under quite a bit of pressure from their European colleagues, the Irish government eventually agreed to attempt a repeat referendum in the second half of 2009. Ireland obtained the pledge of legally binding guarantees that the Lisbon treaty would not affect their country’s tax system, neutrality and laws on abortion and gay marriage (since the other EU countries do not want to re-ratify the Lisbon treaty, these clauses will be tacked on to Croatia’s accession treaty which EU countries will need to ratify around 2010-11). EU leaders also agreed that each country would keep its ‘own’ commissioner, abandoning the unworkable and unpopular (in particular among smaller countries such as Ireland) plan to move towards a rotation system.
The outcome of a second referendum is still hard to call. Acute economic worries could turn the Irish against any initiative put forward by their unpopular government. On the other hand, pro-treaty campaigners will raise the spectre of Ireland being marginalised in, or even pushed out of, the EU in case of a second No – an uncomfortable thought at a time of extreme uncertainty.
If the Irish say Yes next year, the treaty could come into force at the start of 2010. If more evidence was needed, the war in Georgia and the struggle to find a concerted response to the financial crisis confirmed that the institutional changes contained in the Lisbon treaty are needed, in particular the streamlining of the EU’s foreign policy machinery and the abolition of the rotating presidency.
* Economic stimulus
Most media attention ahead of the summit had focused on the EU governments disagreeing about the Commission’s proposal for a €200 billion economic stimulus programme. Since the EU’s own central budget is both small and mostly tied up in farm aid and regional spending, €170 billion would have to come from the member-states. The UK and France in particular had criticised Germany for not doing enough to revive its economy, especially since years of prudence had left the country with a sound budget and big external surplus. Chancellor Angela Merkel pointed to the €12 billion worth of measures already passed by the German Bundestag (which the government expects to lead to investment of €50 billion), while her finance minister, Peer Steinbrueck, accused the UK of moving towards “crass Keynesianism” in a newspaper interview. The impression that Germany was isolated in Europe was reinforced when Gordon Brown invited Nicolas Sarkozy and Commission President Jose Manuel Barroso to an economics summit on December 8th but not Merkel.
In the end, EU leaders backed a somewhat watered down stimulus package amounting to “about” 1.5 per cent of EU GDP. However, since this so-called package consists of vastly different national efforts – some already passed, some still under discussion, and many containing spending items that had in any case been planned – it is hard to predict the impact on Europe’s contracting economy. Bruegel, a Brussels-based think-tank, has calculated that the tax cuts and additional spending announced by Europe’s 13 biggest economies for 2009 would amount to only 0.53 per cent of their GDP. The bulk of the planned measures (amounting to 1.16 per cent of GDP) consist of additional credit and spending brought forward, which will have a much more limited impact on demand.
* Climate change
The most important deal of the summit did not concern economics but the EU’s long-term commitment to fight climate change. The French presidency was determined to forge an agreement on how to implement the EU’s 20-20-20 targets from March 2007 before the Czechs – not necessarily known for their green credentials – take over the EU’s rotating presidency in January 2009. To the relief of many – and in particular the 10,000 delegates at the UN conference on climate change that was taking place at the same time in Poznan, Poland – EU leaders managed to clinch a deal, albeit at a price.
EU states kept their commitment to increase the share of renewable sources to 20 per cent and to cut total greenhouse gas emissions by 20 per cent compared with 1990 levels, both by 2020. An agreement on the (non-binding) target of achieving energy savings of 20 per cent was left to later. However, following heavy lobbying from Austria, Italy, Germany and the new member-states, a gradual move towards auctioning all emissions permits from 2013 onwards was delayed. Making energy generators and manufacturers pay for their emissions permits provides greater up-front incentives for investments in energy-savings technologies, it eliminates opportunities for windfall profits and it generates additional revenue that can be used for investments in environmental technology, such as carbon capture and storage.
Under the EU’s summit compromise, power generators in Western Europe will have to pay for all their emission rights from 2013 but those in Central and Eastern Europe will still get most of them for free until 2020. Poland in particular, which still relies on coal for more than 90 per cent of its electricity, had argued that full auctioning would at least double its power prices. Germany had led the group of those countries that had warned that saddling European producers with the cost of pollution permits would force them to relocate to countries with lax environmental standards, such as Ukraine or China. This sounds credible for energy-intensive industries, such as cement and aluminium but not for other manufacturing sectors, which could gain long-term competitiveness if forced to invest in new, energy-efficient production technologies. Now all industries that face cost increases of 5 per cent or more from being part of the emissions trading scheme will continue to get their pollution permits for free – which is more than 90 per cent of all EU industries. Equally controversial is a clause that allows EU countries to achieve a significant part of their emission reduction targets by investing in environmental projects in developing countries. Such offset projects are a lot more difficult to verify and they take the pressure off EU countries to invest in green technologies at home.
Despite an immediate outcry from Green MEPs (calling the compromise a “free for all”), the European Parliament is likely to adopt the package on December 17th. In case it does not, Sarkozy has already said he would call an emergency EU summit before year-end.
Troubling outlook
The December summit has shown that the EU can act even under very difficult circumstance. However, some of the longer-term implications are troubling. First, the fact that EU countries found it so hard to agree on what is little more than a rag-bag of national economic measures shows that the scope for economic policy co-ordination in the EU, and even within the eurozone, is limited. Given that the euro may yet come under pressure (spreads between German government bonds and those issued by Greece, Italy and Spain are still widening), the EU needs to overcome this handicap.
Second, although the EU has in principle stuck to its 20-20-20 targets – still the most ambitious in the world – its role as global leader in climate change has been weakened. The argument that the current economic downturn would make it impossible for European companies to shoulder the costs of emission rights is not convincing: the move to full auctioning would in any case not have started until 2013, a couple of years after even the most pessimistic forecasters say growth will return. By putting the interests of business lobbies first, the EU has weakened its hand in the crucial 2009 Copenhagen summit. How will the Europeans respond when China and India argue that economic development takes priority over fighting climate change?
Thirdly, the summit showed the limits of EU solidarity. EU governments – all EU governments – will put the interests of their own taxpayers and business lobbies first. What came as a surprise to many was that Germany – traditionally seen as the “good European” – is now just as willing to fight for its national interest as traditionally more assertive countries such as France and the UK.
Katinka Barysch is deputy director of the Centre for European Reform.
The EU summit on December 10th-11th was a success in so far as EU leaders managed to agree on all major agenda items. The fact that there was a lot of bitter wrangling and a big dose of compromise was only to be expected against the backdrop of a rapidly worsening European economy. However, the longer-term consequences of these compromises are worrying.
* Lisbon treaty
The most unequivocally positive but least noticed deal of the summit concerned the future of the Lisbon treaty. Under quite a bit of pressure from their European colleagues, the Irish government eventually agreed to attempt a repeat referendum in the second half of 2009. Ireland obtained the pledge of legally binding guarantees that the Lisbon treaty would not affect their country’s tax system, neutrality and laws on abortion and gay marriage (since the other EU countries do not want to re-ratify the Lisbon treaty, these clauses will be tacked on to Croatia’s accession treaty which EU countries will need to ratify around 2010-11). EU leaders also agreed that each country would keep its ‘own’ commissioner, abandoning the unworkable and unpopular (in particular among smaller countries such as Ireland) plan to move towards a rotation system.
The outcome of a second referendum is still hard to call. Acute economic worries could turn the Irish against any initiative put forward by their unpopular government. On the other hand, pro-treaty campaigners will raise the spectre of Ireland being marginalised in, or even pushed out of, the EU in case of a second No – an uncomfortable thought at a time of extreme uncertainty.
If the Irish say Yes next year, the treaty could come into force at the start of 2010. If more evidence was needed, the war in Georgia and the struggle to find a concerted response to the financial crisis confirmed that the institutional changes contained in the Lisbon treaty are needed, in particular the streamlining of the EU’s foreign policy machinery and the abolition of the rotating presidency.
* Economic stimulus
Most media attention ahead of the summit had focused on the EU governments disagreeing about the Commission’s proposal for a €200 billion economic stimulus programme. Since the EU’s own central budget is both small and mostly tied up in farm aid and regional spending, €170 billion would have to come from the member-states. The UK and France in particular had criticised Germany for not doing enough to revive its economy, especially since years of prudence had left the country with a sound budget and big external surplus. Chancellor Angela Merkel pointed to the €12 billion worth of measures already passed by the German Bundestag (which the government expects to lead to investment of €50 billion), while her finance minister, Peer Steinbrueck, accused the UK of moving towards “crass Keynesianism” in a newspaper interview. The impression that Germany was isolated in Europe was reinforced when Gordon Brown invited Nicolas Sarkozy and Commission President Jose Manuel Barroso to an economics summit on December 8th but not Merkel.
In the end, EU leaders backed a somewhat watered down stimulus package amounting to “about” 1.5 per cent of EU GDP. However, since this so-called package consists of vastly different national efforts – some already passed, some still under discussion, and many containing spending items that had in any case been planned – it is hard to predict the impact on Europe’s contracting economy. Bruegel, a Brussels-based think-tank, has calculated that the tax cuts and additional spending announced by Europe’s 13 biggest economies for 2009 would amount to only 0.53 per cent of their GDP. The bulk of the planned measures (amounting to 1.16 per cent of GDP) consist of additional credit and spending brought forward, which will have a much more limited impact on demand.
* Climate change
The most important deal of the summit did not concern economics but the EU’s long-term commitment to fight climate change. The French presidency was determined to forge an agreement on how to implement the EU’s 20-20-20 targets from March 2007 before the Czechs – not necessarily known for their green credentials – take over the EU’s rotating presidency in January 2009. To the relief of many – and in particular the 10,000 delegates at the UN conference on climate change that was taking place at the same time in Poznan, Poland – EU leaders managed to clinch a deal, albeit at a price.
EU states kept their commitment to increase the share of renewable sources to 20 per cent and to cut total greenhouse gas emissions by 20 per cent compared with 1990 levels, both by 2020. An agreement on the (non-binding) target of achieving energy savings of 20 per cent was left to later. However, following heavy lobbying from Austria, Italy, Germany and the new member-states, a gradual move towards auctioning all emissions permits from 2013 onwards was delayed. Making energy generators and manufacturers pay for their emissions permits provides greater up-front incentives for investments in energy-savings technologies, it eliminates opportunities for windfall profits and it generates additional revenue that can be used for investments in environmental technology, such as carbon capture and storage.
Under the EU’s summit compromise, power generators in Western Europe will have to pay for all their emission rights from 2013 but those in Central and Eastern Europe will still get most of them for free until 2020. Poland in particular, which still relies on coal for more than 90 per cent of its electricity, had argued that full auctioning would at least double its power prices. Germany had led the group of those countries that had warned that saddling European producers with the cost of pollution permits would force them to relocate to countries with lax environmental standards, such as Ukraine or China. This sounds credible for energy-intensive industries, such as cement and aluminium but not for other manufacturing sectors, which could gain long-term competitiveness if forced to invest in new, energy-efficient production technologies. Now all industries that face cost increases of 5 per cent or more from being part of the emissions trading scheme will continue to get their pollution permits for free – which is more than 90 per cent of all EU industries. Equally controversial is a clause that allows EU countries to achieve a significant part of their emission reduction targets by investing in environmental projects in developing countries. Such offset projects are a lot more difficult to verify and they take the pressure off EU countries to invest in green technologies at home.
Despite an immediate outcry from Green MEPs (calling the compromise a “free for all”), the European Parliament is likely to adopt the package on December 17th. In case it does not, Sarkozy has already said he would call an emergency EU summit before year-end.
Troubling outlook
The December summit has shown that the EU can act even under very difficult circumstance. However, some of the longer-term implications are troubling. First, the fact that EU countries found it so hard to agree on what is little more than a rag-bag of national economic measures shows that the scope for economic policy co-ordination in the EU, and even within the eurozone, is limited. Given that the euro may yet come under pressure (spreads between German government bonds and those issued by Greece, Italy and Spain are still widening), the EU needs to overcome this handicap.
Second, although the EU has in principle stuck to its 20-20-20 targets – still the most ambitious in the world – its role as global leader in climate change has been weakened. The argument that the current economic downturn would make it impossible for European companies to shoulder the costs of emission rights is not convincing: the move to full auctioning would in any case not have started until 2013, a couple of years after even the most pessimistic forecasters say growth will return. By putting the interests of business lobbies first, the EU has weakened its hand in the crucial 2009 Copenhagen summit. How will the Europeans respond when China and India argue that economic development takes priority over fighting climate change?
Thirdly, the summit showed the limits of EU solidarity. EU governments – all EU governments – will put the interests of their own taxpayers and business lobbies first. What came as a surprise to many was that Germany – traditionally seen as the “good European” – is now just as willing to fight for its national interest as traditionally more assertive countries such as France and the UK.
Katinka Barysch is deputy director of the Centre for European Reform.
Monday, December 08, 2008
The Irish send out good vibrations on Lisbon
by Hugo Brady
Ireland’s parliament – the Oireachtas – recently published a lengthy report on where the country’s relationship with the EU stands after the country’s rejection of the Lisbon treaty by referendum. Initially, I feared the study might be heavy on clichéd pieties about Ireland’s relationship with the EU without really dealing with the difficult political situation created by voting down the treaty or suggesting concrete ways out of the mess. In fact - while it fails to completely avoid the clichés (“Ireland’s position at the heart of Europe” etc) – the analysis, compiled by the parliament’s EU committee, is impressively clear, thoughtful and, in places, prescriptive.
The report sets down some sensible parameters for the debate to come:
• Saying no to the Lisbon treaty automatically implies that some further action must be taken. Legally, the EU can continue as it is with the current treaties. In reality, if the treaty is declared dead, other member-states will find ways of working together more closely. Ireland would become increasingly isolated.
• Ireland’s rejection of the treaty is affecting its ability to “promote and defend” its national interests. This is true across a range of policy areas including the EU’s climate change package, the future allocation of money from the common agricultural policy, and responses to the economic crisis. The report also maintains that over-harsh criticism of Ireland’s moves to shore up confidence in its banks and its exclusion from recently established EU discussion bodies points to its near-pariah status amongst other member-states.
• One of the assumptions underpinning investment by multinational companies in Ireland is that the country is and will remain a full member of the EU. Foreign companies which invest in Ireland are worried about the uncertainty thrown up by the current situation but are sticking with the view that the country will ultimately resolve the issue.
The report then ruled out two options Ireland might take to move on from the Lisbon rejection. First, that the country should accept a self-imposed exile from core European policies to allow the rest of the EU to go ahead. This was the cumbersome and unsustainable option taken by Denmark in the early 1990s when the Danes opted-out of EU foreign policy, citizenship, justice co-operation and the single currency.) The other is to attempt to pass the Lisbon treaty – or even parts of it – by parliamentary ratification alone. Even if legally possible and well-intentioned, the committee rightly concluded this deliberate circumvention of a democratic decision would be ill-advised.
Hence the solution, strongly implied by the report’s analysis, is a second referendum on the treaty. The committee also points out the ways in which Ireland’s conduct of its EU policy can be improved to address public perceptions of a lack of control over law-making in Brussels. One is to give Ireland’s parliament powers to prevent the government signing up to EU legislation it disagrees with. Many national parliaments in the EU have this power. Ireland’s – surprisingly – does not. A second is to create a special EU ‘panel’ in the parliament’s upper house, the Seanad. This would be a sort of ‘wise persons’ committee, nominated on the basis of their familiarity with EU matters, to scrutinise legislation and co-ordinate with Ireland’s MEPs. What is striking about these proposed reforms is that they are both inspired by Ireland's eurosceptic neighbour, Britain, where the scrutiny reserve has existed for decades and the House of Lord’s EU affairs committee is considered an authoritative source of reasoned analysis on EU issues.
The committee also heard evidence from key players involved in the most controversial aspects of the debate last June. (The list includes defence, taxation, public services, ethical issues like abortion, and the size of the European Commission.) The committee conclusively dismissed the fear that the treaty could increase EU powers to set national tax rates. But it did agree that it would be desirable for Ireland to have a European commissioner all the time, to “offer legitimacy to the proposals made by the Commission”. It also recommended that Ireland’s already very strict rules for committing troops to peacekeeping operations be made even more explicit by requiring the approval of a two-thirds parliamentary vote.
The positive and constructive tone struck by the report is very welcome, but it should be borne in mind that almost all political parties in the Oireachtas support the Lisbon treaty. This did not prevent its rejection in June in a popular vote and will not – on its own – prevent a second rejection next year. But the report shows how the moderate centre in Ireland is trying to take back control of the debate from well organised populists of the left and right that have wreaked havoc on the country’s foreign policy and its interests abroad. That damage was neatly summed up by Catherine Day, an Irishwoman, and secretary general of the European Commission. "Ireland's image in the European Union has been tarnished by the 'no' vote”, she told the committee. “I can see every day that it has reduced our ability to shape and influence events in the European Union. Other Member States tend to view us now only through the prism of the Lisbon Treaty.”
See: http://www.oireachtas.ie
Hugo Brady is a research fellow at the Centre for European Reform.
Ireland’s parliament – the Oireachtas – recently published a lengthy report on where the country’s relationship with the EU stands after the country’s rejection of the Lisbon treaty by referendum. Initially, I feared the study might be heavy on clichéd pieties about Ireland’s relationship with the EU without really dealing with the difficult political situation created by voting down the treaty or suggesting concrete ways out of the mess. In fact - while it fails to completely avoid the clichés (“Ireland’s position at the heart of Europe” etc) – the analysis, compiled by the parliament’s EU committee, is impressively clear, thoughtful and, in places, prescriptive.
The report sets down some sensible parameters for the debate to come:
• Saying no to the Lisbon treaty automatically implies that some further action must be taken. Legally, the EU can continue as it is with the current treaties. In reality, if the treaty is declared dead, other member-states will find ways of working together more closely. Ireland would become increasingly isolated.
• Ireland’s rejection of the treaty is affecting its ability to “promote and defend” its national interests. This is true across a range of policy areas including the EU’s climate change package, the future allocation of money from the common agricultural policy, and responses to the economic crisis. The report also maintains that over-harsh criticism of Ireland’s moves to shore up confidence in its banks and its exclusion from recently established EU discussion bodies points to its near-pariah status amongst other member-states.
• One of the assumptions underpinning investment by multinational companies in Ireland is that the country is and will remain a full member of the EU. Foreign companies which invest in Ireland are worried about the uncertainty thrown up by the current situation but are sticking with the view that the country will ultimately resolve the issue.
The report then ruled out two options Ireland might take to move on from the Lisbon rejection. First, that the country should accept a self-imposed exile from core European policies to allow the rest of the EU to go ahead. This was the cumbersome and unsustainable option taken by Denmark in the early 1990s when the Danes opted-out of EU foreign policy, citizenship, justice co-operation and the single currency.) The other is to attempt to pass the Lisbon treaty – or even parts of it – by parliamentary ratification alone. Even if legally possible and well-intentioned, the committee rightly concluded this deliberate circumvention of a democratic decision would be ill-advised.
Hence the solution, strongly implied by the report’s analysis, is a second referendum on the treaty. The committee also points out the ways in which Ireland’s conduct of its EU policy can be improved to address public perceptions of a lack of control over law-making in Brussels. One is to give Ireland’s parliament powers to prevent the government signing up to EU legislation it disagrees with. Many national parliaments in the EU have this power. Ireland’s – surprisingly – does not. A second is to create a special EU ‘panel’ in the parliament’s upper house, the Seanad. This would be a sort of ‘wise persons’ committee, nominated on the basis of their familiarity with EU matters, to scrutinise legislation and co-ordinate with Ireland’s MEPs. What is striking about these proposed reforms is that they are both inspired by Ireland's eurosceptic neighbour, Britain, where the scrutiny reserve has existed for decades and the House of Lord’s EU affairs committee is considered an authoritative source of reasoned analysis on EU issues.
The committee also heard evidence from key players involved in the most controversial aspects of the debate last June. (The list includes defence, taxation, public services, ethical issues like abortion, and the size of the European Commission.) The committee conclusively dismissed the fear that the treaty could increase EU powers to set national tax rates. But it did agree that it would be desirable for Ireland to have a European commissioner all the time, to “offer legitimacy to the proposals made by the Commission”. It also recommended that Ireland’s already very strict rules for committing troops to peacekeeping operations be made even more explicit by requiring the approval of a two-thirds parliamentary vote.
The positive and constructive tone struck by the report is very welcome, but it should be borne in mind that almost all political parties in the Oireachtas support the Lisbon treaty. This did not prevent its rejection in June in a popular vote and will not – on its own – prevent a second rejection next year. But the report shows how the moderate centre in Ireland is trying to take back control of the debate from well organised populists of the left and right that have wreaked havoc on the country’s foreign policy and its interests abroad. That damage was neatly summed up by Catherine Day, an Irishwoman, and secretary general of the European Commission. "Ireland's image in the European Union has been tarnished by the 'no' vote”, she told the committee. “I can see every day that it has reduced our ability to shape and influence events in the European Union. Other Member States tend to view us now only through the prism of the Lisbon Treaty.”
See: http://www.oireachtas.ie
Hugo Brady is a research fellow at the Centre for European Reform.
Friday, November 28, 2008
The EU takes on defence procurement
by Clara Marina O'Donnell
The EU is in the middle of a little noticed – but potentially important – debate about defence markets. For the first time, the European Commission could be authorised to help reduce barriers amongst the EU’s segmented national defence markets.
European defence markets remain drawn along national lines. Defence-related goods are exempt from EU single market rules. These exclusions were designed for only the most sensitive components of weapons, material and related technology. The trouble is that governments have used the national security argument to exclude everything, from bullets to uniforms, from open competition. And often national security has been little more than a cloak for protectionism.
Moreover, it is difficult to move defence goods from one member-state to another. Each country has cumbersome administrative procedures for export controls. As a result, defence companies with plants in several member-states have to negotiate different sets of national requirements when they want to move their components from one plant to another. The Commission has estimated that, within the EU, the direct and indirect costs of such barriers to transferring military goods amount to €3.16 billion a year. Since requests to move goods within the EU are hardly ever rejected, the value of such extensive and diverging national checks is questionable.
As Europe's paltry defence budgets are barely adequate to maintain today’s spending programmes, the current system makes little sense. So the Commission has proposed two new directives. The first is designed to open a substantial amount of defence procurement to EU competition. The Commission suggests new procurement procedures, specially tailored for defence needs (while recognising that some goods, like nuclear technology and cryptology, will always have to be exempted due to national security). The second proposed law aims to simplify procedures to move goods around the EU. It would encourage member-states to use so-called general licences. (Broadly speaking, goods which benefit from a general licence can move across borders without importers having to ask for specific licences to do so.)
The two draft directives have the potential to bring about significant improvements. Defence companies would get access to previously closed markets, while ministries of defence, and European taxpayers, would benefit from cheaper defence goods. Easier transfer of goods across the EU would make life a lot easier for defence companies. And delays in importing new kit needed by national militaries would be reduced.
In practice it remains to be seen what difference the directives, if agreed, would make. Member-states are trying to maintain maximum control of the initiatives. They get to decide what military goods are considered safe for general licences, and it is likely that only the least sensitive goods will qualify at the outset. In addition the cut-off point for military goods that are considered too sensitive to be subject to open procurement procedures has been left very vague. Here, too, member-states are likely to be very conservative for the foreseeable future.
The impact of the proposals, and particularly the procurement directive, will depend on the willingness of defence companies and the European Commission to contest decisions by member-states, and take them to the European Court of Justice. It is unlikely that large high-tech defence programmes will be open to competition for many years to come. Large defence companies will probably be unwilling to contest decisions made by their biggest customers: national defence ministries. But it is not unreasonable to foresee that in the medium term the directive could have a substantial impact on less sensitive defence sectors, low-value, high-volume goods such as rifles, tanks or even military catering. Defence ministries will have stronger incentives to open up such non-sensitive sectors as a way to cut costs. In addition, such goods are produced by a multitude of smaller companies across the EU that are not always dependent on one defence ministry. Some might conclude they have less to lose and be more willing to take a ministry of defence to court.
The most important impact of the directives would be the cultural shift they would represent. By adopting the initiatives, member-states would be accepting the Commission's oversight in an area they have hitherto jealously guarded. Defence ministries would no longer have the final say in their defence procurement.
The directives would be a minor but incremental step towards improving Europe's defence market. But it is far from certain that they will come into force. The timetable is tight. (The directives need to be agreed before the European Parliament’s term ends in spring 2009, otherwise the turnover of experts in the Commission and Parliament could postpone an agreement by several years.) In addition there are still serious stumbling blocks which member-states and the European Parliament need to agree on. Amongst other things some smaller member-states fear local industry might lose out from more open markets. The big defence companies are concerned about the impact on national research budgets and large-member states, in particular the UK, are trying to defend their case. Some member-states have admitted they will shed no tears if the whole package collapses. But it would be a mistake not to agree the package. With current defence budgets, Europeans cannot hope to maintain a proper defence industrial base without a new approach to their defence market. And if the EU really wants to reinforce its global role, it has no choice but to improve its military muscle.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
The EU is in the middle of a little noticed – but potentially important – debate about defence markets. For the first time, the European Commission could be authorised to help reduce barriers amongst the EU’s segmented national defence markets.
European defence markets remain drawn along national lines. Defence-related goods are exempt from EU single market rules. These exclusions were designed for only the most sensitive components of weapons, material and related technology. The trouble is that governments have used the national security argument to exclude everything, from bullets to uniforms, from open competition. And often national security has been little more than a cloak for protectionism.
Moreover, it is difficult to move defence goods from one member-state to another. Each country has cumbersome administrative procedures for export controls. As a result, defence companies with plants in several member-states have to negotiate different sets of national requirements when they want to move their components from one plant to another. The Commission has estimated that, within the EU, the direct and indirect costs of such barriers to transferring military goods amount to €3.16 billion a year. Since requests to move goods within the EU are hardly ever rejected, the value of such extensive and diverging national checks is questionable.
As Europe's paltry defence budgets are barely adequate to maintain today’s spending programmes, the current system makes little sense. So the Commission has proposed two new directives. The first is designed to open a substantial amount of defence procurement to EU competition. The Commission suggests new procurement procedures, specially tailored for defence needs (while recognising that some goods, like nuclear technology and cryptology, will always have to be exempted due to national security). The second proposed law aims to simplify procedures to move goods around the EU. It would encourage member-states to use so-called general licences. (Broadly speaking, goods which benefit from a general licence can move across borders without importers having to ask for specific licences to do so.)
The two draft directives have the potential to bring about significant improvements. Defence companies would get access to previously closed markets, while ministries of defence, and European taxpayers, would benefit from cheaper defence goods. Easier transfer of goods across the EU would make life a lot easier for defence companies. And delays in importing new kit needed by national militaries would be reduced.
In practice it remains to be seen what difference the directives, if agreed, would make. Member-states are trying to maintain maximum control of the initiatives. They get to decide what military goods are considered safe for general licences, and it is likely that only the least sensitive goods will qualify at the outset. In addition the cut-off point for military goods that are considered too sensitive to be subject to open procurement procedures has been left very vague. Here, too, member-states are likely to be very conservative for the foreseeable future.
The impact of the proposals, and particularly the procurement directive, will depend on the willingness of defence companies and the European Commission to contest decisions by member-states, and take them to the European Court of Justice. It is unlikely that large high-tech defence programmes will be open to competition for many years to come. Large defence companies will probably be unwilling to contest decisions made by their biggest customers: national defence ministries. But it is not unreasonable to foresee that in the medium term the directive could have a substantial impact on less sensitive defence sectors, low-value, high-volume goods such as rifles, tanks or even military catering. Defence ministries will have stronger incentives to open up such non-sensitive sectors as a way to cut costs. In addition, such goods are produced by a multitude of smaller companies across the EU that are not always dependent on one defence ministry. Some might conclude they have less to lose and be more willing to take a ministry of defence to court.
The most important impact of the directives would be the cultural shift they would represent. By adopting the initiatives, member-states would be accepting the Commission's oversight in an area they have hitherto jealously guarded. Defence ministries would no longer have the final say in their defence procurement.
The directives would be a minor but incremental step towards improving Europe's defence market. But it is far from certain that they will come into force. The timetable is tight. (The directives need to be agreed before the European Parliament’s term ends in spring 2009, otherwise the turnover of experts in the Commission and Parliament could postpone an agreement by several years.) In addition there are still serious stumbling blocks which member-states and the European Parliament need to agree on. Amongst other things some smaller member-states fear local industry might lose out from more open markets. The big defence companies are concerned about the impact on national research budgets and large-member states, in particular the UK, are trying to defend their case. Some member-states have admitted they will shed no tears if the whole package collapses. But it would be a mistake not to agree the package. With current defence budgets, Europeans cannot hope to maintain a proper defence industrial base without a new approach to their defence market. And if the EU really wants to reinforce its global role, it has no choice but to improve its military muscle.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
Monday, November 24, 2008
PCA? The EU needs a real Russia debate
by Katinka Barysch
Was the EU right to resume negotiations on a new partnership and co-operation agreement (PCA) with Russia despite Moscow not fully complying with the Georgia ceasefire plan? Probably not. But the real problem with the EU’s decision is that it has not been accompanied by a more strategic debate about EU-Russia relations.
The last EU-Russia summit on November 14th in Nice was remarkable not only because of the EU’s apparent U-turn with regard to the PCA talks. It was also exceptionally brief (with only two hours for discussion) and largely free of the antagonistic exchanges that have come to characterise these six-monthly meetings. In one respect, however, the summit felt familiar: it was preceded by much disagreement among the EU members. In the end it was only Lithuania that held out against a resumption of PCA talks, with the Commission and the other 26 EU governments supporting it – some more grudgingly than others. Germany, France and Italy were keen to demonstrate that the EU still considers Russia a partner. Many of the Central and East European members supported the PCA talks simply because they feared the alternative: if EU-Russia relations remained blocked, bilateral relations between Moscow and the big EU member-states would inevitably grow stronger and the interests and concerns of the smaller ones would be sidelined.
When European leaders decided to “postpone” the PCA talks at their emergency summit on September 1st, they said they would only revisit that decision if and when Russia complied with the six-point ceasefire plan that Nicolas Sarkozy had brokered in the midst of the Georgia war. Russia has pulled troops out of Georgia proper, it has allowed EU monitors to work in Georgia (albeit not in Abkhazia and South Ossetia) and it has embarked on multilateral peace talks with the Georgians in Geneva, all as promised. What Russia has not done is withdraw all its troops to the positions they held before August 7th, another condition of the six-point plan. Observers think that Russia has three times as many troops in South Ossetia and Abkhazia as before the war and that it is building up military installations there. President Medvedev says that Russia’s recognition of South Ossetia and Abkhazia is “irreversible”, so troop strengths are a matter of negotiations between Moscow and the “sovereign governments” there.
The Europeans know that holding up PCA talks – the conclusion of which is in any case several years away – will not make Russia compromise on something that it considers so close to its national interest. But they already knew that the suspension was of predominantly symbolic value when they decided on it on September 1st (while rejecting other possible sanctions). They could at least have asked Russia to do something symbolic in return, for example expressing a commitment to strengthening the arms control regime in Europe.
The signal the EU has sent now is that it is prepared to accept new realities in the Caucasus and return to business as usual. In fact, the EU did so long before the November 14th summit. After a lull in September, EU-Russia co-operation restarted in October, with several EU-Russia ministerial councils (on energy, foreign affairs and justice and home affairs) and various technical working groups getting together that month. It makes little sense for the EU to continue co-operation at all levels, from expert meetings to summits, while keeping the PCA talks on hold. So unfreezing the talks was consistent, if not exactly brave.
EU politicians do have a point when they say that the Europeans need to continue to engage with Russia in areas ranging from energy security to preventing Iran’s nuclear bomb. What is troubling, however, is that the decision on the PCA was not accompanied by a more thorough debate on the future of the EU’s Russia policy. EU leaders did ask the Commission to conduct an “audit” of the different policy areas that matter for the EU and Russia, such as energy, trade, foreign policy, research and visas. The result is an anodyne, technical document that does little more than illustrate the fact that the EU and Russia depend on each other in many ways. The implicit conclusion is: let’s continue working together. But the document does not answer the question why. Is co-operation a means to an end (it was once seen as a way towards a “strategic partnership” and “common values”)? Is it meant to further the EU’s interests? If so, which ones and how? Or does the EU proceed with the dozens of co-operation and support programmes simply because it cannot agree on an alternative?
The Europeans need a more political, strategic debate about what they want and need from Russia. This will take time. The Georgia war has not narrowed the gap between the different national positions as much as many people had initially predicted. But this gap makes a political debate on Russia all the more urgent. By next year the Europeans will have to forge a coherent response to Medvedev’s proposal for a new European security architecture. Sarkozy told Medvedev at the Nice summit that the idea would be discussed within the framework of the OSCE in 2009. But Sarkozy did not necessarily speak on behalf of his EU colleagues, many of whom suspect strongly that Russia simply wants to split the Europeans and drive a wedge between Europe and the US. Nor did all EU governments welcome Sarkozy’s idea of a ‘deal’ on missiles under which the US would suspend the deployment of missile defences in Poland and the Czech Republic while Russia would withdraw the threat of putting Iskander missiles into Kaliningrad.
The PCA negotiations – which will be conducted mainly by the European Commission – will not provide the answer to such questions.
Katinka Barysch is deputy director of the Centre for European Reform.
Was the EU right to resume negotiations on a new partnership and co-operation agreement (PCA) with Russia despite Moscow not fully complying with the Georgia ceasefire plan? Probably not. But the real problem with the EU’s decision is that it has not been accompanied by a more strategic debate about EU-Russia relations.
The last EU-Russia summit on November 14th in Nice was remarkable not only because of the EU’s apparent U-turn with regard to the PCA talks. It was also exceptionally brief (with only two hours for discussion) and largely free of the antagonistic exchanges that have come to characterise these six-monthly meetings. In one respect, however, the summit felt familiar: it was preceded by much disagreement among the EU members. In the end it was only Lithuania that held out against a resumption of PCA talks, with the Commission and the other 26 EU governments supporting it – some more grudgingly than others. Germany, France and Italy were keen to demonstrate that the EU still considers Russia a partner. Many of the Central and East European members supported the PCA talks simply because they feared the alternative: if EU-Russia relations remained blocked, bilateral relations between Moscow and the big EU member-states would inevitably grow stronger and the interests and concerns of the smaller ones would be sidelined.
When European leaders decided to “postpone” the PCA talks at their emergency summit on September 1st, they said they would only revisit that decision if and when Russia complied with the six-point ceasefire plan that Nicolas Sarkozy had brokered in the midst of the Georgia war. Russia has pulled troops out of Georgia proper, it has allowed EU monitors to work in Georgia (albeit not in Abkhazia and South Ossetia) and it has embarked on multilateral peace talks with the Georgians in Geneva, all as promised. What Russia has not done is withdraw all its troops to the positions they held before August 7th, another condition of the six-point plan. Observers think that Russia has three times as many troops in South Ossetia and Abkhazia as before the war and that it is building up military installations there. President Medvedev says that Russia’s recognition of South Ossetia and Abkhazia is “irreversible”, so troop strengths are a matter of negotiations between Moscow and the “sovereign governments” there.
The Europeans know that holding up PCA talks – the conclusion of which is in any case several years away – will not make Russia compromise on something that it considers so close to its national interest. But they already knew that the suspension was of predominantly symbolic value when they decided on it on September 1st (while rejecting other possible sanctions). They could at least have asked Russia to do something symbolic in return, for example expressing a commitment to strengthening the arms control regime in Europe.
The signal the EU has sent now is that it is prepared to accept new realities in the Caucasus and return to business as usual. In fact, the EU did so long before the November 14th summit. After a lull in September, EU-Russia co-operation restarted in October, with several EU-Russia ministerial councils (on energy, foreign affairs and justice and home affairs) and various technical working groups getting together that month. It makes little sense for the EU to continue co-operation at all levels, from expert meetings to summits, while keeping the PCA talks on hold. So unfreezing the talks was consistent, if not exactly brave.
EU politicians do have a point when they say that the Europeans need to continue to engage with Russia in areas ranging from energy security to preventing Iran’s nuclear bomb. What is troubling, however, is that the decision on the PCA was not accompanied by a more thorough debate on the future of the EU’s Russia policy. EU leaders did ask the Commission to conduct an “audit” of the different policy areas that matter for the EU and Russia, such as energy, trade, foreign policy, research and visas. The result is an anodyne, technical document that does little more than illustrate the fact that the EU and Russia depend on each other in many ways. The implicit conclusion is: let’s continue working together. But the document does not answer the question why. Is co-operation a means to an end (it was once seen as a way towards a “strategic partnership” and “common values”)? Is it meant to further the EU’s interests? If so, which ones and how? Or does the EU proceed with the dozens of co-operation and support programmes simply because it cannot agree on an alternative?
The Europeans need a more political, strategic debate about what they want and need from Russia. This will take time. The Georgia war has not narrowed the gap between the different national positions as much as many people had initially predicted. But this gap makes a political debate on Russia all the more urgent. By next year the Europeans will have to forge a coherent response to Medvedev’s proposal for a new European security architecture. Sarkozy told Medvedev at the Nice summit that the idea would be discussed within the framework of the OSCE in 2009. But Sarkozy did not necessarily speak on behalf of his EU colleagues, many of whom suspect strongly that Russia simply wants to split the Europeans and drive a wedge between Europe and the US. Nor did all EU governments welcome Sarkozy’s idea of a ‘deal’ on missiles under which the US would suspend the deployment of missile defences in Poland and the Czech Republic while Russia would withdraw the threat of putting Iskander missiles into Kaliningrad.
The PCA negotiations – which will be conducted mainly by the European Commission – will not provide the answer to such questions.
Katinka Barysch is deputy director of the Centre for European Reform.
Monday, November 10, 2008
What 'Obama effect' for transatlantic relations?
by Tomas Valasek
Europe got the president it wanted on November 4th. Obama will have Europe's goodwill and with it, a window of opportunity to restore transatlantic co-operation on key security issues. The list of common challenges includes, but is not limited to, Afghanistan, Iran and Russia.
Whether Obama succeeds or not depends in part on how willing he will be to try out new approaches. Europe will expect the next president to change the substance of US foreign policy as much as its style. On some issues like Iran and Afghanistan, Obama plans changes; on other like Russia he offered few new ideas during the campaign. He will have to think creatively on all fronts.
Afghanistan will be on top of the US priorities for Europe. Obama will put more troops in the country and expect Europe to do the same. And even though all European governments are short on troops and money, many will respond in kind.
But while a 'surge' worked in Iraq, more troops will not automatically be the right approach to Afghanistan. Western soldiers act like a magnet for terrorists from across the region, mainly Pakistan. Obama will need a Pakistan strategy more than an Afghanistan surge. In fact, he should consider talking to some of the current enemies from among the Taliban in Afghanistan, to build local alliances against the most radical insurgents coming from Pakistan.
On Iran, Obama said he was willing to speak directly to the Tehran government. This would be a much welcome change. The EU has been talking to Iran since 2003 but senior EU diplomats involved in negotiations say the talks cannot succeed without the US joining in. They may not succeed anyway; Iran may be far too determined to acquire nuclear weapons. But even so, a US participation in the talks would help build transatlantic consensus on further steps like a tighter embargo.
It is important that Obama does not just talk to Iran without getting something back - he is the last card the West has to play. Talking to Ahmadinejad now could also strenghten him in presidential elections, which is not in the US or European interest. So Obama should show he is willing to talk, but only at the right moment and under the right conditions.
On Russia, Obama will have a delicate task on his hands. Moscow appears determined to divide the EU member-states. It also wants to drive a wedge between the more Moscow-friendly European capitals and the United States. Obama's victory does not appear to have changed Russian policy: on the day US election results were announced the Russian president Dmitry Medvedev gave a speech criticising US 'aggression' and 'unilateralism'.
Obama's immediate priority should be to help to strengthen the EU consensus on Russia, and to bring Europe's and America's policies closer to one another. This requires two things. First, Obama will need to convince Berlin, Paris, Rome and other capitals that Washington will not gratuitously provoke Moscow. So the US should stop pushing for a Membership Action Plan (MAP) for Ukraine and Georgia. Instead of MAP, which has become a red flag to not only Moscow but also to Berlin and Paris, NATO should use its special Ukraine and Georgia councils to expand security assistance to the two countries, and to give them a clear set of criteria for future membership.
At the same time, Obama needs to re-assure NATO allies on Russian borders that Washington would not abandon them in case of a Russian aggression. To that end, Obama should work with other allies to organise 'table top' military exercises assessing NATO's readiness to defend the Baltic states against a military attack.
Bosnia is on neither Obama's nor Europe's list of priorities but it should be. Years of 'hands-off' Western policy allowed nationalists to once again flourish there. The US and Europe must urgently re-engage. The office of high representative (HR, usually a senior European diplomat) will close soon, under Russian pressure. Instead, EU governments and the US should use the full power of traditional diplomatic tools like the prospect of EU membership, and the implied threat of military intervention, to keep nationalist politicians from tearing the country apart. Above all, Obama and the EU need to pay more attention to Bosnia; the country is vulnerable and could collapse.
There are other areas, where Europe and the US will need to re-think their policies. For example, Turkey's relations with the US and Europe are at their lowest point in decades. The ideas put forth above are therefore not meant to be read as an exhaustive list but rather as a sample.
President Obama will find that dealing with Europe is not easy. Eight years of the George Bush government left Europe distrustful of the US. But Obama is surrounded by an excellent team of advisors, who understand Europe and are well positioned to guide Obama through European sensitivities. Most importantly, candidate Obama has shown tremendous empathy and intellectual curiosity on the campaign trail. And he has a first-rate mind. He seems well aware of the need for course correction in places like Iran. This bodes well for the transatlantic relationship.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
Europe got the president it wanted on November 4th. Obama will have Europe's goodwill and with it, a window of opportunity to restore transatlantic co-operation on key security issues. The list of common challenges includes, but is not limited to, Afghanistan, Iran and Russia.
Whether Obama succeeds or not depends in part on how willing he will be to try out new approaches. Europe will expect the next president to change the substance of US foreign policy as much as its style. On some issues like Iran and Afghanistan, Obama plans changes; on other like Russia he offered few new ideas during the campaign. He will have to think creatively on all fronts.
Afghanistan will be on top of the US priorities for Europe. Obama will put more troops in the country and expect Europe to do the same. And even though all European governments are short on troops and money, many will respond in kind.
But while a 'surge' worked in Iraq, more troops will not automatically be the right approach to Afghanistan. Western soldiers act like a magnet for terrorists from across the region, mainly Pakistan. Obama will need a Pakistan strategy more than an Afghanistan surge. In fact, he should consider talking to some of the current enemies from among the Taliban in Afghanistan, to build local alliances against the most radical insurgents coming from Pakistan.
On Iran, Obama said he was willing to speak directly to the Tehran government. This would be a much welcome change. The EU has been talking to Iran since 2003 but senior EU diplomats involved in negotiations say the talks cannot succeed without the US joining in. They may not succeed anyway; Iran may be far too determined to acquire nuclear weapons. But even so, a US participation in the talks would help build transatlantic consensus on further steps like a tighter embargo.
It is important that Obama does not just talk to Iran without getting something back - he is the last card the West has to play. Talking to Ahmadinejad now could also strenghten him in presidential elections, which is not in the US or European interest. So Obama should show he is willing to talk, but only at the right moment and under the right conditions.
On Russia, Obama will have a delicate task on his hands. Moscow appears determined to divide the EU member-states. It also wants to drive a wedge between the more Moscow-friendly European capitals and the United States. Obama's victory does not appear to have changed Russian policy: on the day US election results were announced the Russian president Dmitry Medvedev gave a speech criticising US 'aggression' and 'unilateralism'.
Obama's immediate priority should be to help to strengthen the EU consensus on Russia, and to bring Europe's and America's policies closer to one another. This requires two things. First, Obama will need to convince Berlin, Paris, Rome and other capitals that Washington will not gratuitously provoke Moscow. So the US should stop pushing for a Membership Action Plan (MAP) for Ukraine and Georgia. Instead of MAP, which has become a red flag to not only Moscow but also to Berlin and Paris, NATO should use its special Ukraine and Georgia councils to expand security assistance to the two countries, and to give them a clear set of criteria for future membership.
At the same time, Obama needs to re-assure NATO allies on Russian borders that Washington would not abandon them in case of a Russian aggression. To that end, Obama should work with other allies to organise 'table top' military exercises assessing NATO's readiness to defend the Baltic states against a military attack.
Bosnia is on neither Obama's nor Europe's list of priorities but it should be. Years of 'hands-off' Western policy allowed nationalists to once again flourish there. The US and Europe must urgently re-engage. The office of high representative (HR, usually a senior European diplomat) will close soon, under Russian pressure. Instead, EU governments and the US should use the full power of traditional diplomatic tools like the prospect of EU membership, and the implied threat of military intervention, to keep nationalist politicians from tearing the country apart. Above all, Obama and the EU need to pay more attention to Bosnia; the country is vulnerable and could collapse.
There are other areas, where Europe and the US will need to re-think their policies. For example, Turkey's relations with the US and Europe are at their lowest point in decades. The ideas put forth above are therefore not meant to be read as an exhaustive list but rather as a sample.
President Obama will find that dealing with Europe is not easy. Eight years of the George Bush government left Europe distrustful of the US. But Obama is surrounded by an excellent team of advisors, who understand Europe and are well positioned to guide Obama through European sensitivities. Most importantly, candidate Obama has shown tremendous empathy and intellectual curiosity on the campaign trail. And he has a first-rate mind. He seems well aware of the need for course correction in places like Iran. This bodes well for the transatlantic relationship.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
Friday, November 07, 2008
The Commission’s economic forecasts are still too complacent
By Simon Tilford
On the face of it, it appears churlish to accuse the Commission of complacency when it is forecasting no growth in the eurozone economy in 2009 and a deep recession in the UK. But the Commission has a tendency to be slow to downgrade its forecasts and its latest forecasting round is no exception. The Commission’s forecasts of economic stagnation next year – 0.2 per cent in the EU and 0.1 per cent in eurozone – already looks out of date. It is hard to conceive how either the EU or the eurozone will escape deep recessions in 2009. The indications of an unprecedented slump in economic activity are multiplying all the time.
Of the EU-15 economies, the Commission is probably right to be most pessimistic about Britain and Ireland, forecasting economic contractions of 1 per cent and 0.9 per cent respectively in 2009. There is no doubt that these two economies will be among the hardest hit within the EU. Both are experiencing huge falls in house prices, and their credit markets have effectively seized up. British consumers are easily the most indebted in the EU. The UK’s household savings rate was actually negative in the first half of 2008. If it were to rise back to its long-term average of 8 per cent over the next three years, the British economy would experience a deep slump.
But it is the Commission’s forecasts for a number of other member-states that stand out. Its forecasts for Germany and Spain look least credible, at zero and -0.2 in 2009 respectively. Germany’s economic strategy in recent years has been based almost entirely on export success combined with high domestic savings rates and low consumption. This leaves it hugely vulnerable to the unfolding economic crisis. The IMF expects world trade volumes to rise by just 2.1 per cent in 2009 and trade between the advanced economies to decline by 0.1 per cent. After appearing to hold up relatively well over the early part of 2009, German industrial orders are now in free-fall (falling 8 per cent in October), as most of the country’s key export markets are either in recession, or growing much less rapidly. Business expectations have fallen to their lowest levels since 1992. Germany’s specialisation in capital goods, chemicals and premium cars stood the country in good stead during the cyclical upturn in 2004-06, but with demand for all three in reverse, Germany has become very vulnerable.
Nor will the domestic economy come to the rescue. Germany has avoided the house price boom entirely and German households are not that indebted. But a recovery in domestic consumption has proved elusive. After falling steadily for over two years, unemployment is about to start rising, which will no doubt prompt Germany’s risk-averse households to further increase the proportion of their incomes that they save.
The EU’s forecast for Spain is also too sanguine. Spanish unemployment is rising very rapidly, industrial production is falling (by 8.8% in October), the pace of decline in house prices is accelerating and demand for Spanish exports is under severe pressure. The collapse in construction sector activity will impose a severe drag on the Spanish economy next year. In the circumstances, it is hard to see how the decline in output could be held down to as little as 0.2 per cent.
The Commission expects zero growth in both Italy and France. Italy and France have not experienced house price booms of the scale seen in Spain or the UK, but in both countries industrial production is under huge pressure, as a result of collapse in consumer sentiment and a big fall in export orders. Consumer and business surveys point clearly to recessions next year, rather than economic stagnation.
The IMF’s forecasts look more realistic than those of the Commission. It is forecasting a decline in EU output of 0.2 per cent and 0.5 per cent for the eurozone. This means recessions in Germany (0.8 per cent), Spain (0.7 per cent) and France and Italy (0.5 per cent and 0.6 per cent respectively.) The IMF was heavily criticised earlier in the year for allegedly being too pessimistic about Europe’s economy’s outlook, but it has been vindicated as the European economy slowed dramatically even before the intensification of the financial crisis in September.
The aggressive cuts in interest rates by the ECB and the Bank of England (BoE) over the last six weeks have come too late to have that much impact on next year’s economic growth. Interest rate reductions normally work with a lag of about 18 months. Some governments are at the limits of their borrowing capacity and can do little to directly stimulate economic activity by cutting taxes or boosting expenditure. But others have scope to offset the severity of the downturn. The EU urgently needs member-states that have run-up huge current account surpluses and which have strong fiscal positions to boost demand. Germany and the Netherlands are the obvious candidates. Their current account surpluses are not sustainable in the present climate, and they need to rebalance their economies. Germany, in particular, requires a far more significant stimulus package than the one put together by the German government, which will have a marginal impact. If the governments of big surplus countries fail to take concerted action, their surplus savings will condemn themselves and Europe as a whole to an even deeper recession.
Simon Tilford is chief economist at the Centre for European Reform
On the face of it, it appears churlish to accuse the Commission of complacency when it is forecasting no growth in the eurozone economy in 2009 and a deep recession in the UK. But the Commission has a tendency to be slow to downgrade its forecasts and its latest forecasting round is no exception. The Commission’s forecasts of economic stagnation next year – 0.2 per cent in the EU and 0.1 per cent in eurozone – already looks out of date. It is hard to conceive how either the EU or the eurozone will escape deep recessions in 2009. The indications of an unprecedented slump in economic activity are multiplying all the time.
Of the EU-15 economies, the Commission is probably right to be most pessimistic about Britain and Ireland, forecasting economic contractions of 1 per cent and 0.9 per cent respectively in 2009. There is no doubt that these two economies will be among the hardest hit within the EU. Both are experiencing huge falls in house prices, and their credit markets have effectively seized up. British consumers are easily the most indebted in the EU. The UK’s household savings rate was actually negative in the first half of 2008. If it were to rise back to its long-term average of 8 per cent over the next three years, the British economy would experience a deep slump.
But it is the Commission’s forecasts for a number of other member-states that stand out. Its forecasts for Germany and Spain look least credible, at zero and -0.2 in 2009 respectively. Germany’s economic strategy in recent years has been based almost entirely on export success combined with high domestic savings rates and low consumption. This leaves it hugely vulnerable to the unfolding economic crisis. The IMF expects world trade volumes to rise by just 2.1 per cent in 2009 and trade between the advanced economies to decline by 0.1 per cent. After appearing to hold up relatively well over the early part of 2009, German industrial orders are now in free-fall (falling 8 per cent in October), as most of the country’s key export markets are either in recession, or growing much less rapidly. Business expectations have fallen to their lowest levels since 1992. Germany’s specialisation in capital goods, chemicals and premium cars stood the country in good stead during the cyclical upturn in 2004-06, but with demand for all three in reverse, Germany has become very vulnerable.
Nor will the domestic economy come to the rescue. Germany has avoided the house price boom entirely and German households are not that indebted. But a recovery in domestic consumption has proved elusive. After falling steadily for over two years, unemployment is about to start rising, which will no doubt prompt Germany’s risk-averse households to further increase the proportion of their incomes that they save.
The EU’s forecast for Spain is also too sanguine. Spanish unemployment is rising very rapidly, industrial production is falling (by 8.8% in October), the pace of decline in house prices is accelerating and demand for Spanish exports is under severe pressure. The collapse in construction sector activity will impose a severe drag on the Spanish economy next year. In the circumstances, it is hard to see how the decline in output could be held down to as little as 0.2 per cent.
The Commission expects zero growth in both Italy and France. Italy and France have not experienced house price booms of the scale seen in Spain or the UK, but in both countries industrial production is under huge pressure, as a result of collapse in consumer sentiment and a big fall in export orders. Consumer and business surveys point clearly to recessions next year, rather than economic stagnation.
The IMF’s forecasts look more realistic than those of the Commission. It is forecasting a decline in EU output of 0.2 per cent and 0.5 per cent for the eurozone. This means recessions in Germany (0.8 per cent), Spain (0.7 per cent) and France and Italy (0.5 per cent and 0.6 per cent respectively.) The IMF was heavily criticised earlier in the year for allegedly being too pessimistic about Europe’s economy’s outlook, but it has been vindicated as the European economy slowed dramatically even before the intensification of the financial crisis in September.
The aggressive cuts in interest rates by the ECB and the Bank of England (BoE) over the last six weeks have come too late to have that much impact on next year’s economic growth. Interest rate reductions normally work with a lag of about 18 months. Some governments are at the limits of their borrowing capacity and can do little to directly stimulate economic activity by cutting taxes or boosting expenditure. But others have scope to offset the severity of the downturn. The EU urgently needs member-states that have run-up huge current account surpluses and which have strong fiscal positions to boost demand. Germany and the Netherlands are the obvious candidates. Their current account surpluses are not sustainable in the present climate, and they need to rebalance their economies. Germany, in particular, requires a far more significant stimulus package than the one put together by the German government, which will have a marginal impact. If the governments of big surplus countries fail to take concerted action, their surplus savings will condemn themselves and Europe as a whole to an even deeper recession.
Simon Tilford is chief economist at the Centre for European Reform
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