Europe's struggle for influence in Egypt

Egypt tests Europe’s ability to influence events in its southern neighbourhood. In January 2011, the protestors in Tahrir Square brought down President Mubarak, despite lukewarm support from Western countries. After Mubarak’s removal from power, the EU adopted a new policy based on the ‘more for more’ principle; the more a country enacts democratic reforms, the more EU aid it can expect. In November 2012, after the elections that led to Mohamed Morsi’s brief presidency, the European Union announced a package of grants and loans totalling nearly €4.2 billion. The following week President Morsi announced his autocratic grab for Egypt’s constitutional powers. When European officials complained about the violation of religious or women’s rights in Egypt, Muslim Brotherhood officials would retort by pointing at rising Islamophobia in Europe. Now, in spite of intense American and European diplomatic pressure, the interim government has used disproportionate force to disperse the pro-Morsi sit-ins, killing more than 800. A cycle of violence has ensued as dozens of policemen and security officers have been killed in response. Egypt now balances on the precipice of further violent conflict.

Europe’s diplomatic relations with Morsi’s government were troubled, but things are no easier now. The liberals and the moderates in the current government  ‒ those that the EU and Washington considered allies  ‒  have either been co-opted or outflanked by the hardliners. Prime minister Hazem el-Beblawi, a liberal economist, supported the crackdown against the sit-ins and has suggested the Muslim Brotherhood’s licence to operate as a political party could be revoked. Another moderate and key interlocutor of the West, Mohamed ElBaradei, is no longer influential after he resigned in protest at the violence and even faces legal charges over that decision. Meanwhile, Tamarod, a grass roots protest movement which appeared to share Western values, is becoming more nationalist and has called for tearing up Egypt’s peace treaty with Israel and an end to American military aid.

Following last week’s violence, the EU has decided to stop the sale of all ‘arms that can be used internally’. In practice the EU measure is likely to halt the export of small arms, munitions and possibly armoured personnel carriers. The army and police are too powerful for the EU’s decision to influence the internal balance of power. And if the Egyptian military run out of guns and bullets, there are many more suppliers able to replenish its stocks. Given the proliferation of arms from places like Libya, the same also holds true for the Islamists. And so, the EU’s decision will do little to bring the parties back to the table. It seems calculated to make clear that Europe disapproves of the violence, but not of the new regime.

If it had wanted to make a stronger point, the EU could have suspended aid, withdrawn its ambassadors, made a common demarche on the Egyptian ministry of foreign affairs or slapped economic sanctions on the assets and movements of senior government or military officials. Of course, the EU could still do all these things, but it seems unwilling to antagonise the Egyptian government. Egypt is too important for several European interests; a secure Suez Canal, enduring Arab peace with Israel and the fight against militant Islam.

Behind closed doors US and European security and intelligence communities will have welcomed Morsi’s replacement by General Abdel Fattah al-Sisi. Morsi’s government looked the other way while lawlessness flourished in the Sinai peninsula. Militants have bombed the natural gas pipeline to Israel and Jordan thirteen times in the past two years. The peninsula has become a conduit for Libyan arms to Hamas and Syria’s rebel groups (intelligence agencies have been particularly concerned about the spread of shoulder-fired missiles that can shoot down helicopters and planes). In the Sinai, there are nearly daily attacks against the police and army (in mid-August 24 police officers were killed in an ambush). Despite their restrictions on arms exports, most European governments probably hope that Egyptian security forces have enough weapons to reimpose order in Sinai.

But the overthrow of Morsi is unlikely to bring peace. Al Qaeda’s chief, Ayman al-Zawahiri, has called on his followers to resist the interim government in Cairo. The Egyptian economy is on life support. Sectarian attacks on Coptic Christians and their churches have increased. The Suez Canal – a maritime chokepoint that carries roughly 8 per cent of global seaborne trade  ‒  is at risk. This puts Europe in the uncomfortable position of giving preference to its security interests over its liberal values, without being sure that it can protect either.

The larger story of Europe’s pursuit of influence in Egypt relates to the changing balance of power in its southern neighbourhood. With America unwilling to get involved, European countries have tried, with mixed success, to take the lead on issues in Libya, Mali and Syria. In Egypt the EU now finds itself competing with the Gulf countries for influence. Saudi Arabia, Kuwait and the UAE – primarily concerned with domestic support for the Muslim Brotherhood – have welcomed the assault on the Brotherhood and have given the interim government a cheque worth $12 billion, almost €9 billion.  Reasoning that Cairo, if it wanted, could simply ignore Europe and rely on the Gulf states, the EU has decided to keep its aid and trade relationship intact. It is betting that by denouncing the violence, stopping arms sales but maintaining other ties, Brussels will be able to keep doors in Cairo open.

One positive for the EU in the Egyptian crisis is that member-states are allowing Catherine Ashton to coordinate EU policy. She was the first European leader to visit Egypt after the fall of Mubarak, and the only senior foreign official to have visited Morsi after his detention. This gives her credibility in Europe and in the region. European governments should mandate Ashton, and the EU’s Special Representative for the region, Bernardino Leon, to coordinate efforts with the Gulf states and the US and reach out to the interim government to help establish a national political dialogue.

Europe’s influence also relies on the power of its markets. Europe’s aid package is less than half of the Gulf states’ financial commitment, but Egypt needs foreign investment and deeper trade relations, rather than a line of credit. Once stability has been restored, the EU should be prepared to help the country deal with its vicious cycle of unemployment, inflation, capital flight, rising debts, falling currency reserves and increasing budget deficit (running at roughly 12 per cent of GDP) by further opening its markets to Egyptian goods. In time, the Egyptian government will have to reduce its subsidies on fuel and bread – actions that could spark popular unrest. The EU has also made macro-financial assistance to Egypt – worth €500 million – conditional on the successful negotiation of an IMF loan. European leaders should continue to push the interim government to strike a deal even though the political environment is not ready for this yet.

While the Brotherhood is suppressed, the military is the most organised political institution in the country. Under current conditions, a rush to the ballot box would almost certainly mean victory for the military’s candidate, perhaps al-Sisi himself, and enrage the Brotherhood’s supporters. At a conference in Cairo in March, one of the speakers, since elevated to a very senior position in government, said that if Morsi’s government failed, it would mean the bankruptcy of political Islam in Egypt. His words now read like a policy prescription. The interim government has detained 75 senior members of the Muslim Brotherhood, including Morsi himself. Under the existing electoral law, given their criminal indictments, many of the Brotherhood’s leadership would not be eligible to participate in the elections. By purging the Brotherhood, General al-Sisi hopes to stop his opponents from playing a meaningful role in Egypt’s politics.

The EU has an interest in a pluralist democracy, not in military rule sanctioned through quick elections. However difficult it may be, to give the opposition parties a fair chance it would be sensible to gather all parties (including the Brotherhood) in a process that lets them determine the timing of the elections. The recently created European Endowment for Democracy could also use its admittedly limited funds to support some of Egypt’s nascent political parties.

If the military insist on pushing the Brotherhood underground, however, this is likely to create security problems of its own. As avenues for democratic participation are closed to the Brotherhood, the likelihood increases that its supporters will resort to violence (as happened in Algeria in 1991 when the military intervened to deprive Islamists of their election victory, sparking civil war). The Brotherhood’s hardliners will gain influence, condemning the US and Europe as anti-Islamic and hypocritical for condoning the overthrow of a democratically elected government. The Brotherhood could also reverse its earlier renunciation of violence. Political Islam in Egypt would become more anti-Western and less amenable to democratic ideas, opening the way for a rise in violent extremism, including against Western interests, in a region that is rife with conflict. Tragically, Europe’s access to Cairo’s powerbrokers would then become even more important, even as its policy choices become more unpalatable.

Rem Korteweg is a senior research fellow at the Centre for European Reform.

How the EU can help Kerry with Israeli and Palestinian peace talks

As soon as US Secretary of State John Kerry announced the resumption of peace talks between Israel and the Palestinians, the EU promised to do everything it could to support the new American initiative. The Middle East peace process has been a top EU priority for years. But Europeans are conscious that they lack the diplomatic clout to be a major player. Palestinians and Israelis think that EU member-states are too frequently divided among themselves. Many Israelis also argue that even though the EU and Israel have close ties, the Union does not give sufficient importance to their security concerns. Nevertheless, Europeans played a modest role in helping the US convince Israelis and Palestinians to sign up to new talks. And the EU can make further contributions to the peace process.

In July, as Secretary Kerry negotiated assiduously with Israeli Prime Minister Benjamin Netanyahu and Palestinian President Mahmoud Abbas to give peace talks another chance, the EU high representative for foreign affairs Catherine Ashton announced that the EU would no longer give grants and scholarships to companies and educational institutions based in Israeli settlements. In addition, a leaked letter from Ashton detailed EU plans to require products from settlements to be labelled as such when sold in the EU. The Union, which has long argued that Israeli settlements are illegal under international law, had been working on both initiatives for a while. But the timing of the announcement and the leaked letter helped in a small way to convince both President Abbas and Prime Minister Netanyahu to agree to peace talks.

Of course, the Obama administration was the key driver behind Abbas and Netanyahu’s endorsements of new negotiations. But according to European officials, the Palestinian president felt emboldened by the fact that the EU was willing to put international pressure on Israel. Israel, for its part, is always worried about being isolated. Netanyahu asked Kerry to convince the EU to revisit the decisions on the settlements. But Kerry told Netanyahu that he would not ask the EU to back down, and that unless Israel took part in peace talks, Tel Aviv risked similar action by other countries in the future. According to officials, the exchange between Kerry and Netanyahu weighed on the Israeli prime minister’s decision to support negotiations.

The EU helped the Americans coax the parties to the negotiating table because it has some economic leverage over them. Israel has an association agreement with the EU, and so many of its exports to Europe benefit from preferential trade terms. The Union disburses research funds and scholarships to Israeli industry and universities. And the EU is the largest donor to the Palestinians. In recent years, the European Commission and member-states have together provided €500 million a year. Amongst other things, this money has helped Palestinians develop the institutions required to function as an independent state – though more Palestinian nation-building will be needed before a two-state solution can be viable. The EU’s economic weight could be of significant help to both Israelis and Palestinians if they reached a peace deal. European states could help stabilise the region through further aid and trade concessions. The EU is already reflecting on how it could deepen bilateral ties with Israel in response to the progress in the peace process, a move the Israeli authorities greatly welcome.

Europe could also help the negotiations by making clear that if a deal was reached it would offer peacekeepers to prevent violence. Over the years, a number of European politicians have raised this possibility. Europeans already provide peacekeepers to UN monitoring missions along the Lebanese and Israeli border, and the Golan Heights. But if Europeans want their offer to be credible, they need to reassure Israelis and Palestinians that their peacekeepers would not be passive observers. Instead European troops would be given a mandate to use force if necessary to stop outbreaks of violence. EU states have sometimes imposed limitations on what troops or police forces can do when deployed, for a variety of reasons including minimising the risks to personnel. This was the case for example during an EU police monitoring mission along the border between Gaza and Egypt between 2005 and 2007. As a result, Israel never felt the mission was credible.

Finally, and controversially, the EU can support the peace effort by helping to bring Hamas into the process. The militant group, regarded by the EU, US, Israel and many other countries as a terrorist organisation, has been in sole control of Gaza for six years. Hamas, which frequently clashes militarily with Israel, is popular among Palestinians in the West Bank as well as in Gaza. Without its endorsement President Abbas will be incapable of reaching a durable peace settlement with Israel. In recent years, Egypt, Qatar and several EU governments have grudgingly reached this conclusion. Qatar and Egypt – even under former President Hosni Mubarak – have tried unsuccessfully to reconcile the warring Palestinian factions. The EU has made clear that it would be willing to work with a Palestinian unity government which included Hamas, if President Abbas were comfortable with the deal and Hamas renounced violence.

The need to include Hamas in a peace deal is also recognised by some Israeli officials, including former heads of Mossad – the Israeli national intelligence agency – and by some in the US government. During her last year in office, former Secretary of State Hillary Clinton asked her department to work out how to engage with the militant group. But the US government is unlikely to stop boycotting Hamas, given strong Congressional opposition to the organisation.

If the talks between Netanyahu and Abbas develop into something meaningful, Secretary Kerry should make use of Europe’s willingness to engage with Hamas. With the consent of President Abbas and the Israeli government, the US should discreetly encourage the EU to make the public case for including Hamas in the peace negotiations.

Even with a co-ordinated transatlantic effort, the prospects for the nascent peace initiative are not good. Not only must Hamas and President Abbas’ Fatah party be reconciled for any Palestinian state to work, but Netanyahu will also have to ensure his coalition supports a deal (and he would then probably have to win a referendum on withdrawal from many of the West Bank settlements); meanwhile many of the Arab countries whose support will be essential, above all Egypt, are in turmoil. Hezbollah could seek to re-establish its credibility in the Middle East – damaged by its support for Syrian President Bashar Assad – through a new military confrontation with Israel. More generally, spill-over from the Syrian conflict could destabilise both Lebanon and an increasingly fragile Jordan. But the talks are worth pursuing, with strong EU backing: if they fail, it is unclear how long Mahmoud Abbas can remain Palestinian president, and few other Palestinian politicians are as supportive of a negotiated peace. Secretary Kerry would probably have preferred a better hand of cards on taking office. But the next hand could be even worse.

Clara Marina O'Donnell is a senior research fellow at the Centre for European Reform.

Putin's Russia: Stability and stagnation

After a week in Russia I concluded that Russia is very stable – perhaps too stable. President Vladimir Putin appears to want little political or economic reform, lest it lead to instability. Nevertheless, divisions are appearing in his entourage: some favour clamping down hard on the opposition, while others counsel softer tactics. Sometimes Putin backs one group, sometimes the other. On foreign policy, too, Putin seems to have two faces. The pragmatic Putin wants to work with the US in dealing with common problems. But another Putin views the US as a hostile power that is trying to destabilise Russia, and is happy to do things – like sheltering the fugitive Edward Snowden – that infuriate it.

In Moscow, both opposition leaders and the more liberal government officials agree that the need for political and economic change is greater than ever, but that the chances of serious reform are close to zero. After mass demonstrations in the winter of 2011-12, optimists thought the regime would attempt to win back the support of the middle classes by modernising the country’s governance. But these days nobody expects much to change.

Russia’s leaders worry that big economic or political reforms could upset vested interests, create losers and perhaps strengthen the opposition. The government has in fact attempted some reforms of the university, school and healthcare systems, in order to save money, but these have been unpopular. Reform of the pension system – which would mean curbing pension rights – has been mooted for over a decade but frequently put off. There always seems to be an excuse for postponing major reform.

The slowdown of the economy has come as a shock to Russia’s rulers. In 2010, 2011 and 2012, Russia grew at close to 4 per cent. This year growth may be less than 2 per cent. The government initially blamed the slow-down of the world economy: demand for Russia’s natural resources was diminishing. But in April, when Putin gathered key ministers and experts to discuss the economy at the Black Sea resort of Sochi, they concluded that some of the problems were home-grown.

Officials list the structural problems: the absence of spare industrial capacity (in the 2000s the economy could grow quickly by turning on Soviet-era plants); the lack of labour mobility in Russia (old Soviet ‘mono-towns’ are propped up by the state); an ageing population; and, especially, the falling rate of private sector investment. Net capital outflow of $40 billion in the first half of the year did not help, but inadequate rule of law is perhaps the major deterrent to investment. Not much is being done about it. “The leaders put too much emphasis on stability,” said a former senior official. “There is a lack of energy at the federal level”.

More sustainable and less volatile growth requires Russia to wean itself off dependency on natural resources. One official admitted that though diversification remained a political objective, achieving it would be extremely difficult. Russia had to respect its natural strengths, which were raw materials, ‘mathematically-intense services’ (like data processing and computing) and land, said the official – who noted that Australia did quite well despite depending on exports of natural resources.

A high oil price provides cash for the government to satisfy vested interests and undermine potential opponents. But even a lower oil price would not necessarily trigger much reform, officials warn. “Everyone understands we need a crisis before you get institutional reform”, said one. “But they hope you can escape the crisis. Nobody in government or opposition has a really good plan for implementing reforms.” Even opposition leaders doubt that a drop in the oil price would spur reform. “There are no examples in Russian history since the USSR of bad economic performance provoking political unrest,” said one. “And if there are more demonstrations, so what?”

But if reform driven by bottom-up protests seems unlikely, for the time being, could splits in the ruling elite lead to top-down change? There is no longer a division between Putinites and followers of Prime Minister Dmitri Medvedev, because he is no longer a significant player. But the Putinites seem to be dividing between siloviki (those linked to the security establishment) and pragmatists. The battle between them is not yet dangerous to the stability of the regime, because Putin is clearly in charge.

The siloviki, led by, among others, Alexander Bastrykin (the head of the ‘investigative committee’) want to crush dissent. The siloviki ensured that Alexei Navalny, an opposition leader, was sentenced to five years’ hard labour in July. They do not want him to compete in September’s Moscow mayoral election.

But after one night in prison, Navalny was released. This means that he can – while his appeal is pending – run for mayor of Moscow. He can thank the pragmatists, who include Sergei Sobyanin, the current mayor of Moscow, for his release. Sobyanin, it seems, wants to run against Navalny in a free and fair election, as he knows this would enhance his legitimacy and that he would win easily. The Navalny affair is a reminder of the degree to which the courts are controlled by the executive.

Many oligarchs, liberals and moderates see Sobyanin as a possible successor to Putin. A former governor of Tyumen region, deputy prime minister and head of the presidential administration, he is a grey, Chernomyrdin-like figure. Sobyanin is very loyal to Putin and said to be effective. One former official who has worked with him said that if Sobyanin was in charge he would try to make moderate improvements to the system.

Navalny, who began as an anti-corruption campaigner, is emerging as the most credible opponent of Putin, though he lacks large-scale support (opinion polls suggest that he would be lucky to win 10 per cent of the votes in Moscow) and his own party has not been registered. The most liberal opposition leaders do not trust him to be a real democrat.

The Republican Party seeks to bring together all the liberals but has very little money and too many leaders. One of the party’s four co-leaders, Vladimir Milov, recently walked out to found his own party. Of the others, Vladimir Ryzhkov voted against the Republicans backing Navalny for mayor of Moscow, but Mikhail Kasianov and Boris Nemtsov voted in favour and so the party will support him. The opposition looks like remaining weak – and Russian politics are on course to remain stable.

Russia’s relations with the US, however, are in flux. The ‘reset’ – the warm tone that prevailed between Presidents Barack Obama and Dmitri Medvedev – had disappeared before Putin returned to the presidency in May 2012. This year the atmosphere has gradually soured.

Fathoming Putin’s intentions towards the Americans is difficult. Ask senior Russians how Putin sees the US and you get two different answers. One is that Putin would like a business-like relationship in which the two sides can deal with common challenges, like terrorism, Afghanistan, Iran, Syria and so on – even though they will often criticise each other. Putin understands that the US is the pre-eminent superpower and that he must work with it on some of these issues. Thus Putin personally backed last year’s Exxon-Rosneft deal – perhaps worth up to $500 billion – to develop hydrocarbon resources in the Black and Arctic Seas.

The other answer is that Putin really is paranoid about the US. He takes at face value the often insincere rhetoric of American politicians about the importance of spreading democracy and human rights. He thinks that the US will inevitably try to intervene to overturn regimes it dislikes, as it did in Afghanistan, Iraq, Libya and Serbia. Putin does not distinguish between Republicans and Democrats, believing them all to be interventionist (this upsets some of Obama’s people, since Obama and Secretary of State John Kerry opposed the Iraq war). This hostility to the US explains the clampdown on Russian NGOs that get foreign (and notably American) funding.

Both these views of Putin are probably true. He switches from one face to the other, which makes him a difficult partner for the Americans.

Obama has two priorities with Russia but is making little progress with either. One is arms control. Speaking in Berlin in June, Obama proposed new cuts to nuclear arsenals. For several years Russia has complained that American plans for missile defence could affect its strategic nuclear capability and therefore limit its enthusiasm for cutting warheads. In March the US said it was scrapping the fourth and final phase of its planned missile defence system in Europe. But Russia has not responded to that move or to the Berlin speech. One reason may be its desire to maintain a significant nuclear superiority vis-à-vis China.

Obama’s other priority is Syria. Putin has gone along with the idea of a ‘Geneva II’ peace conference, but this has been stymied by the West’s inability to deliver the opposition (though this is because the opposition is losing, which – in the view of US officials – is partly because of Russia’s support for President Assad). Most Russians believe that events in Syria are proving them right: they always warned that much of the opposition would turn out to be nastier than Assad’s regime. Syria will remain a source of discord for the foreseeable future.

There are other irritants in the US-Russia relationship. Russia has banned American exports of pigs and cattle, because the meat contains the chemical ractopamine. Meanwhile the ‘Magnitsky list’ annoys the Russian government: Congress has passed an act that enables the administration to impose visa bans and asset freezes on officials linked to the death in custody of Sergei Magnitsky, a lawyer and whistle-blower.

And now Russia has granted temporary asylum to another whistle-blower, Snowden. American officials think that Putin under-estimates how much Snowden matters to the Obama administration, which sees him as a serious criminal, and therefore how much the affair can damage the Moscow-Washington relationship. Obama may now be unwilling to meet Putin in Moscow in September, after the G20 summit in St Petersburg, as had been envisaged.

Those who know Obama well say that he is unwilling to spend time on subjects that do not deliver results. So the lack of progress on arms control and Syria, plus the Snowden affair, may lead to Obama minimising the time that he spends on Russia. Not that that is likely to upset Russia’s leaders a great deal. What they care most about is stability within Russia, an objective that they are – for now – achieving.

Charles Grant is director of the Centre for European Reform

Hope and trials in Myanmar

Myanmar has a long and difficult road ahead to achieve political stability, democracy and economic development. Hope rests on Aung San Suu Kyi to pull the nation together and lead the reforms after the 2015 election. Are Myanmar’s, and the world’s, expectations too high?

I went to Myanmar recently as part of the ‘young global leaders’ club organised by the World Economic Forum. I saw a country changing fast, full of anticipation but with an uncertain destiny. Yangon, the country’s old capital and commercial hub, illustrates Myanmar’s economic challenges, while Naypyidaw, the eerie new administrative capital, shows its political challenges.

Ramshackle Yangon (formerly Rangoon) almost comes as a shock, so used are we to ultra-modern and gleaming Asian cities. There are no multi-storey department stores, branded coffee shops or air-conditioned office towers. It feels weird to walk through crowded alleys where not a single person is on a mobile phone. Even though the price of a SIM card has come down from $1,000 a couple of years ago to around $60 today, mobile phone penetration in Myanmar is still only 4 per cent (in Thailand: 117 per cent). Internet penetration is even lower.

Myanmar is one of the world’s poorest countries. A quarter of the people live on less than $1.25 a day (though all statistics in Myanmar should be treated with great caution). The McKinsey Global Institute has calculated that even under a best-case scenario in which annual GDP growth doubles, GDP per head (on a PPP basis) would reach only $5,000 in 2030 – roughly where Morocco and Mongolia are today. While other ASEAN economies are thriving on the production of cars, electronics and consumer goods, almost half of Myanmar’s output comes from agriculture. The biggest export items are jade, logs and natural gas.

Training a skilled workforce will take decades: children stay in school for only four years on average, while the higher education system – 164 universities overseen by 13 ministries – is designed to prevent student revolts rather than produce good doctors and engineers. Frequent power-cuts make manufacturing difficult. Logistics are a struggle in the absence of modern road and rail networks. And only North Korea has a less developed banking sector.

But Myanmar offers plenty of opportunities, too. Labour is cheaper than in other Asian countries so Myanmar will attract the garment trade and other low value-added industries. McKinsey thinks that Myanmar could ‘leapfrog’ several stages of development by using digital technology to upgrade education, health-care and finance. Its strategic location between China, India and South East Asia could be attractive to investors. And the country has plenty of natural resources, including vast swathes of fertile land.

The West has lifted almost all economic sanctions. So far, however, potential foreign investors remain cautious: foreign direct investment was a paltry $1.4 billion in the year to April 2013 – though this was a fivefold increase on the previous year, when sanctions were still in force. If economic reforms reached a critical mass, that sum could quickly multiply.

That is a big ‘if’. A visit to Naypyidaw, in the centre of the country, suggests that the political system may not yet be able to sustain ambitious economic reforms. Naypyidaw is military dictatorship set in concrete: a vast expanse of emptiness (the city is seven times the size of Singapore), dotted with enormous official buildings (the parliament is bigger than the Pentagon) and connected by eight-lane highways (24 lanes in front of the presidential palace). These are completely empty – devoid of cars, mopeds or people. Although the government has forced civil servants to relocate and claims (implausibly) a population of 1 million, this place resembles a ghost town.

Other than official palaces and pastel-coloured condominiums for civil servants, Naypyidaw offers little else: a big new airport with few staff and even fewer passengers, a conference centre donated by China, a couple of American-style hypermarkets surrounded by deserted parking lots, a replica of Yangon’s golden Shwedagon pagoda and a zoo with penguins. The city also has a surprisingly large number of hotels, with lots more being built – presumably in preparation for the South East Asian games that Myanmar is hosting later this year and its forthcoming ASEAN chairmanship. But who will stay in them once these events are over?

Some say that the astrologer of Than Shwe, the former military dictator, told him to build the new capital in the middle of nowhere; others that the junta simply wanted an inland capital to avoid an American invasion or bombing (in Naypyidaw the ministerial buildings are several miles apart). Construction began in 2001, in secret. Five years later, the Burmese learnt about the new capital when it appeared on daily weather reports. Naypyidaw makes sure that Myanmar’s people are far removed from their rulers.

The big hope now is that the reform ambitions of President Thein Sein have more substance than the city in which he reigns. Over the last three years, the speed of Myanmar’s democratic opening has been breath-taking: Aung San Suu Kyi has been released from house arrest and her National League for Democracy (NLD) allowed to run in last year’s by-elections; most political prisoners have been set free; press censorship has been lifted; and the blacklist of foreigners and dissidents barred from entering the country has been cut drastically.

However, Myanmar still lacks many of the necessary ingredients for a successful reform programme: policy is made in a haphazard fashion and there is no medium-term roadmap; state administration is weak since civil servants have traditionally been appointed for their loyalty rather than their skills; and levels of corruption are on par with Afghanistan and Sudan.

Investors will stay wary as long as the outcome of the reform process remains uncertain. The army and its cronies, who used to benefit handsomely from Myanmar’s monopolistic and over-regulated economic system, appear resigned to the reforms, but may start pushing back. Perhaps the biggest risks stem from the country’s long-standing ethnic and religious conflicts. Around 60 per cent of the population are Buddhist Burman (or Bamar) people, while the rest are from various ethnic and religious minorities fighting for equality and economic opportunity. The government has now concluded ceasefires with all the armed groups, most recently in May with the Kachin Independence Army in the far north of the country. These conflicts were the cause of and justification for military rule over 60 years. Myanmar will not achieve liberal democracy unless it deals with them in a sustainable way.

The International Crisis Group warns that the ceasefires will fail without first, a political settlement in the shape of a constitution that gives significant autonomy and rights to the minorities; second, a workable plan for integrating the often war-ravaged minority areas (home to 70 per cent of the country’s natural resources) into Myanmar’s economy; and third, an effort to root out the cronyism and crime on which many of the country’s military have flourished.

Then there is the separate issue of the Rohingyas – an oppressed Muslim minority whose origins and right to be in Burma are disputed, unlike those of other ethnic groups. The growing tensions surrounding the Rohingyas have fostered some nasty Buddhist nationalism and violence against Muslims in Myanmar. 

Although some journalists and NGOs are speaking out about the need for a comprehensive settlement of the minorities problem, most people react with palpable unease when asked about it. Aung San Suu Kyi hesitated before condemning the violence against the Rohingyas, and when she did, she remained vague and cautious. Her reticence has upset some of her supporters in the West. One person who knows her well says that she is the only person who can unify her nation but that she needs to pick her fights carefully: if she pushes too hard on the minority issue now, her chances of becoming president in 2015 might diminish. Another of Aung San Suu Kyi’s contacts welcomes her transition from “icon to politician”, predicting that as president she would be more courageous on the ethnic minority conflicts than the present government.

At the World Economic Forum in Naypyidaw in early June, Aung San Suu Kyi declared that she would like to run for president in 2015. But this cannot happen unless the government changes the constitution, which prohibits people with foreign spouses and children from running for the office. Aung San Suu Kyi is the widow of the British academic Michael Aris, and her two children have British citizenship. If she is allowed to run and wins, she is almost bound to disappoint, given how enormous Myanmar’s challenges are. “There is perhaps too much hope”, she said in a briefing recently.

Given Aung San Suu Kyi’s iconic image and the sincerity with which Thein Sein seems to be pursuing reform, the West stands ready to help Myanmar with money, advice and trade. The EU has responded sensibly to Myanmar’s opening. It has lifted sanctions in a two-stage process, reinstating the so-called GSP preferences (free market access to goods from poor countries) and widening its aid effort beyond humanitarian programmes. The EU’s priorities – peace, democracy and development – seem right, and probably in that order too. The challenge now is to find ways of turning ambition into reality, including through co-ordination with the US on the one hand and China on the other.

Myanmar is so backward that even ‘capacity building’ – strengthening local administrations and the infrastructure needed to absorb aid programmes – will be difficult. At the same time, there is so much international goodwill that a surge of aid seems inevitable.  Among several things that can be done, the EU should help to channel aid towards capacity building. Despite all the difficulties and inevitable disappointments, this is a time and a place where anything is possible.

Katinka Barysch was until recently deputy director of the Centre for European Reform

Don't let England's poujadists kill London's golden goose

One of the UK’s key economic advantages is its success at attracting skilled immigrants. In particular, the ability of London to generate the wealth that Britain depends on to finance its public services is inextricably linked to the city’s openness to ideas, capital and immigrants. But Britain’s immigration debate is now all about how to make it harder for newcomers rather than making the country more attractive to them. To a large extent, this is being driven by the concerns and fears of suburban and rural voters, especially older ones. The readiness of politicians from across the political spectrum to pander to these fears is damaging the economy, feeding euroscepticism and with it the possibility of the UK quitting the EU.

The government wants to reduce net immigration to less than 100,000 a year. To this end it has tightened up the regime for student visas and for skilled immigration into the UK from outside the EU (non-EU countries account for two-thirds of the net immigration: the EU the remainder). There is little the government can do about EU immigrants, which explains the increasingly hysterical campaign to reduce their access to benefits. The government argues that the scale of immigration is prejudicing the employment prospects of lower-skilled British workers (over the last year more than half of new jobs went to immigrants, and youth unemployment is at a record high, ergo they are taking British jobs); placing a further burden on an already overwhelmed National Health Service (NHS) and school system; and leading to abuse of the country’s welfare system.

These claims are either wrong or misleading. Net immigration into the UK is not particularly high. It certainly rose following the opening up of the UK labour market to the new eastern European members of the EU in 2004. Over the 8 years to 2011 net immigration averaged 214,000 a year, before falling to 165,000 in 2012. In the context of a country as populous as the UK, this is a relatively modest inflow – adding about 0.3 per cent to population each year. And it is not especially high in a European context: over the last ten years, net immigration in Britain has been higher than France and Germany, but lower than in Italy or Spain. Talk of ‘mass immigration’ is well wide of the mark.

The UK is also very good at attracting skilled immigrants: almost 40 per cent of first generation immigrants have a university degree; the comparable figures for France and Germany are half that, and even lower for Spain and Italy. Indeed, the south-east of England is home to the biggest concentration of foreign professionals anywhere on earth. The reasons for this success range from the English language to the greater readiness of UK employers to recognise foreign qualifications. Many other first generation immigrants have vocational qualifications in skills like construction, which are in short supply in the UK. Even those in unskilled work are probably not displacing many local workers: these jobs tend to pay at or near the minimum wage – if employers hire immigrants, whose English is sometimes patchy and who often move on quickly, it must be partly because the locals are unwilling to take these jobs.

First generation immigrants tend to live in the most economically dynamic parts of the UK. This is inevitable – immigrants are drawn to where the work and opportunities are. But these areas are also wealthy and dynamic because of their openness. Contrary to popular myth, the areas of greatest immigration are not the ones with the greatest hostility to migration. London, for example, is easily the most tolerant region of the UK. The areas where there is most hostility to immigrants tend to be those where there are fewest immigrants, or where cultural and religious differences are pronounced, as in some northern English towns.

Openness largely explains London’s long renaissance and emergence as the only world city in Europe. It is perhaps the UK’s most precious economic asset. Huge amounts of tax revenue are redistributed from London to the rest of the country. According to the Centre for Economics and Business Research, one in every five pounds earned in London goes to subsidise other regions of the UK. Without this redistribution (and a smaller but still very large one from the rest of south-east England), the bleak economic prospects of swaths of Britain would be even bleaker. Of course London should be supporting the rest of the UK; it is easily the wealthiest region of the country. But the British government needs to resist popular pressures for controls which would erode London’s ability to generate that wealth.

British politicians need to think about what policies are needed to help London and its environs exploit its unique position. First, they should reverse the cap on student visas. This ill-thought out step has already damaged British universities – one of the country’s most successful export-industries – by making it harder for people to study in the UK. The number of foreign students in Britain is a much envied source of soft power (many either stay or retain long-term links with the country) and export earnings. While other European countries urgently try and attract more foreign students, Britain fashions ways of deterring them.

Second, the government should lift or scrap the caps placed on non-EU skilled immigrants. Given the increasingly fierce global competition for such workers, it is self-defeating to limit the number allowed into the country.

Third, the government should stop stigmatising EU immigrants. There is no evidence of benefit tourism or health tourism. If anything, the reverse is the case; EU immigrants in the UK are on average much younger that UK ones living elsewhere in the EU, and more likely to be in work than the native population. If there is a country in the EU with legitimate cause to resent health tourism, it is Spain, which must cope with large numbers of elderly Britons.

Fourth, it needs to open the way for more construction. The crippling cost of property is now a serious threat to the prosperity of London and the south of England generally; unless action is taken firms will find it increasingly hard to entice people to work there. It will, in turn, be impossible to build these houses unless contractors can rely on imported labour. Britain has an acute shortage of skilled construction workers and there is little indication that the unemployed elsewhere in the country have any desire to do this kind of work in London. There is a reason why London’s building sites are full of Poles rather than Liverpudlians.

How should the government address the rising anti-immigrant feeling that threatens the UK’s economic vibrancy and even its membership of the EU? It can do little about ignorance, other than to stop legitimising it by playing up to it. Instead of scape-goating the migrants that Britain needs, the government should concentrate on addressing the underlying cause of the popular frustration: an acute shortage of affordable housing, even in many economically depressed parts of the country; a lack of vocational training for those that do not go to university, and over-burdened public services. If there is a shortage of primary school places in London, the answer is to build more primary schools. Most countries in Europe would do anything for this problem: with the populations ageing rapidly, European countries (including Britain) need all the young people they can get. If the NHS lacks capacity in London, expand that capacity. After all, immigrants pay tax. Indeed, the OECD calculates that in the UK they pay more into the pot than they take out.

Britons, especially those living outside London, will all be much the poorer if politicians fail to challenge the widespread belief that immigration is a burden rather than a boon.

Simon Tilford is deputy director of the Centre for European Reform.

What is wrong with the European Commission?

The European Commission, a crucial EU institution, is beset with difficulties. It is popular with neither governments nor voters. Twenty years ago, many people looked to the Commission to set the EU’s agenda and take the lead in managing crises. But few people expect the Commission to play that role today.

Ever since the time when Jacques Delors ran the Commission (1985 to 1995), its authority vis-à-vis EU governments has been waning. The member-states – and especially the big ones – have sought to constrain an institution that they consider over-mighty.

The Lisbon treaty, in force since 2009, created two important institutional innovations: the permanent president of the European Council, a post now occupied by Herman Van Rompuy; and the European External Action Service (EEAS), a body now led by Catherine Ashton. Both of these carry out some tasks that the Commission used to do and have contributed to its sense of insecurity.

Paradoxically, the euro crisis has led to the Commission gaining unprecedented formal powers – on the surveillance of national economic policies – but further eroded its standing and credibility. National governments have provided the money for helping countries in trouble, so they set the terms for bail-outs. The Commission has had to leave the high politics to the European Council, and often to a few key governments, while focusing on its subordinate though important technical role.

The eurozone’s travails have accelerated a longstanding shift in the nature of EU governance. The EU used to take few executive decisions that were politically salient. The Commission proposed laws and regulated, while the Council of Ministers and European Parliament passed laws. Both the Commission and the Council acted, from time to time, as an executive – for example the former blocked corporate mergers and the latter imposed sanctions on countries in other parts of the world.

But the euro crisis has drawn the EU into taking increasingly political executive decisions. The EU has forced heavily-indebted counties to cut budget deficits, pass painful reforms and wind up banks. The Commission may propose such measures, but only eurozone prime ministers or finance ministers have the authority to take these decisions.

These are long-term trends, but personalities also matter. The current ‘college’ of commissioners contains few heavyweight politicians. Within the Commission, Barroso is a strong leader who dominates his colleagues; given the number of commissioners – one for each of the 28 member-states – he may have no choice but to rule with a firm hand. But outside the Commission, some governments complain about what they perceive as weak leadership. During Barroso’s second term as president, which started in 2009, Berlin, Paris and London have become more critical of the Commission. Even some of the smaller member-states, traditionally allies of the Commission, complain about it more than they used to.

A number of governments accuse the Commission of failing to prioritise; of implementing new initiatives too slowly; or of focusing insufficiently on fixing the eurozone. Some of this is unfair: the politicians who criticise the Commission for not coming up with relevant solutions to the eurozone’s problems are sometimes the same ones who get annoyed when it does propose a big idea, such as eurobonds. And while the Germans have sometimes whinged about the Commission being too soft on countries under surveillance, many others believe that it has been too Germanic in its enthusiasm for budgetary discipline. Evidently, the Commission cannot please everyone.

Two reasons, in particular, explain the member-states’ diminishing confidence in the Commission. First, they argue that the Commission proposes too many detailed rules, particularly in areas such as the environment, food safety and social policy. In May 2013, for example, Polish ministers complained about Commission attempts to regulate the shale gas industry and to ban menthol cigarettes – both of which are popular in Poland. In the same month the Commission proposed banning olive oil in re-usable bottles, but then climbed down after a storm of protest. Earlier in the year, German politicians sharply criticised a Commission proposal to set quotas for women on company boards.

Some senior Commission officials acknowledge that the institution can be over-active. But they blame the increasing sway of the Parliament over the Commission. And that is the second reason why some national capitals have turned against the Commission.

The Parliament has exerted more influence over the second Barroso Commission than the first, and not only because the Lisbon treaty gave it more power. Lobbyists and NGOs find it quite easy to get MEPs to support their projects for new EU rules. The Parliament then puts pressure on commissioners to come up with new directives. They are loath to annoy the Parliament since it can make trouble. Another reason why commissioners like to propose new rules is to justify their existence. The Commission’s secretariat-general works hard to cull what it regards as superfluous legislative proposals, but does not always win arguments against commissioners.

None of this is to say that that the Commission should ignore the Parliament. That body is better placed than any other to vet the work of commissioners and, working with the Court of Auditors, to criticise their mistakes. Before the appointment of the last two Commissions, the Parliament played an admirable role in questioning sub-standard commissioners-designate and forcing them to withdraw. Given the Parliament’s powers of co-decision over new laws, the Commission cannot and should not ignore it.

The problem is that over the past four years the Commission has become much closer to the Parliament than to the Council on many issues. The Commission should be accountable to both – it is appointed by governments and approved by the Parliament. But it should also be independent of both.

The politicisation of the Commission is a problem. There has always been some ambiguity over its contradictory roles:  it is a political body that initiates legislation and brokers compromises among the member-states, but also a technical body that polices markets and rules, and negotiates on behalf of the member-states. During the euro crisis the Commission’s technical role has grown, which makes the ambiguity more problematic. When it pronounces, say, that France may be given two further years in which to meet the 3 per cent budget rule, is that the result of objective economic analysis or a reflection of the shifting political climate in national capitals? This ambiguity gives governments and others an excuse to criticise the Commission.

Politicisation can mean favouring political parties. Some socialist politicians claim that the Commission has been over-indulgent of Viktor Orban, the prime minister accused of curtailing political pluralism in Hungary, because his European People’s Party is the leading force in the Commission and the Parliament. There is not much evidence for that particular allegation, but if the Commission becomes too party-political, its ability to carry out technical functions effectively – or in this case, to act as a guardian of liberal democracy – may be compromised.

Next year’s European elections could accelerate the Commission’s politicisation. Most of the pan-European political parties say they will each designate a candidate for Commission president. After the elections they want the European Council to propose the candidate of the party with the most MEPs as president – and then the Parliament to invest him or her. Were the European Council to propose any other name, MEPs would reject it.

If this scheme works, there might be a bit more interest in the European elections. But it is far from certain that the political parties and the European Council will, in the end, play this game. If they do allow the Parliament to appoint Barroso’s successor, the Commission is likely to become more beholden to the Parliament – and the leading party within it – than is currently the case.

Such an outcome would be alarming, because the EU needs a strong and independent Commission – to consider the wider European interest, draw governments’ attention to long-term trends, propose solutions to pressing problems (whether in the wider EU or the eurozone), work doggedly to deepen the single market, and perform its monitoring role in eurozone governance. As the eurozone integrates, one key task will be to ensure a smooth relationship between the countries inside the euro and those outside it. Decisions made by the eurozone should not damage or fragment the single market.

So what can be done to strengthen this flagging institution? The most important step requires not a treaty amendment or an institutional reform, but simply an agreement among heads of government. They should decide to reinforce the Commission’s independence by appointing strong figures as commissioners, and above all by ensuring that a heavyweight politician takes on the presidency.

The member-states should mandate the new president and his team to maintain their independence from the European Parliament, and support them in their efforts to do so. After the last European elections the Commission and the Parliament reached an ‘inter-institutional agreement’, covering future legislation and procedures, which gave the Parliament several things that it wanted. The Council of Ministers spurned the opportunity to make this a tripartite arrangement; if it had done, it could have balanced the legislative activism of the Parliament and pulled the Commission closer to it. After the next European elections the three main EU institutions should seek a tripartite accord on the EU’s work programme.

As for reform of the Commission itself, the problem of too many commissioners needs to be tackled. There are not enough important jobs for 28 of them, and with so many people around the table, substantive discussions are almost impossible. The one-commissioner-per-country rule encourages both governments and those they appoint to the Commission to assume – in breach of the treaties – that the job of commissioners is to represent their homeland.

So the next president should divide his or her commissioners into seniors – who could become vice presidents – and juniors. There should be an informal understanding that, though all commissioners are of equal legal status, the senior ones will co-ordinate the work of the juniors in their particular areas of responsibility. The seniors should meet regularly. In the longer run, when the treaties are re-opened, the EU should adopt a system whereby big countries would always have a commissioner (though not necessarily one of the top jobs) and smaller countries would take it in turns.

Another useful treaty change would be to give the European Council the right to sack the Commission. The Parliament has that power and by threatening to use it forced the resignation of the Santer Commission in 1999. If the treaties said that either body could sack the Commission, its equidistance between governments and MEPs would be reinforced. And that would help to give the EU the strong and independent Commission that it needs.

Charles Grant is director of the Centre for European Reform

Turkey’s Twitter generation is its European future

The protests that started in Istanbul’s Gezi Park two weeks ago have spread across Turkey and show little sign of dying down. They signify a clash between a modernising Turkish society and a still rigid and old-fashioned political system. The protests have resulted in the tragic loss of several lives and are endangering Turkey’s hard-won economic stability as investors take fright. But they also have a silver lining. They might force the government to reconsider its rejection of pluralism. And they might even help to revive Turkey's moribund accession process to the EU.

Turkey's government has spent millions of euros over the last decade on European advertising campaigns to update its image and lessen public opposition to its EU membership bid. The Gezi Park protestors have had a more profound impact on Turkey’s international image in just a few weeks. European news bulletins and social media have been showing a new generation of Turks who, in articulate English, explain how much they value democracy, personal freedoms and tolerance between people with different lifestyles. The colourful banners of Taksim Square have replaced the stock images of mosques, Anatolian peasants or monumental Bosphorus bridges. The huge change that has taken place in Turkish society over the past two decades is suddenly evident to European voters, many of whom previously equated Turkey with Islamism, Kurdish terrorists and mass migration. The images from Gezi Park resonate particularly with younger Europeans who see it as Turkey’s version of the Occupy movements, the Spanish ‘Indignados’ and German ‘Wutbürger’. It is these younger Europeans who will vote on Turkish EU accession if and when the accession negotiations are finished.

The Twitter effect is a new element in the Turkey-EU relationship. The laughable failure of Turkey’s mainstream press to cover the protests accurately has driven people to rely on Twitter and Facebook as their main source of news. Twitter could not have asked for a better marketing campaign than Erdogan’s ranting against “lies on social media”. Turkey is also a trending topic in social media conversations within the EU: here, comments are at the same time becoming more in favour of Turkish accession (because of its people) and more sceptical of it (because of its government).

The EU’s dilemma is how to encourage Turkish society without rewarding the government. The conditionality of the accession talks is a blunt weapon. Germany or another member-state might be tempted to block the opening of the next chapter in the negotiations (on regional policy) to express disdain about government’s brutal reaction to the protests. But such sanctions would only feed the paranoia that Erdogan’s party is spreading about alleged international plots against Turkey. They would reduce the EU’s leverage still further.

Instead, the EU should hug Turkey closer at this great moment in Turkey’s democratic journey. The EU is right to criticise police violence and repression of the media in unequivocal terms – and it should also engage in an intense dialogue with the Turkish government about how to increase pluralism and personal freedoms. There are chapters in the negotiations that could help to guide Turkey through this major transition – such as Chapters 23 and 24 on fundamental rights, justice and home affairs – which Cyprus and other EU countries should unblock.

In a way, the Gezi Park protests are a victory of the accession process so far. Erdogan rose to power by reassuring Turkey’s more liberal, secular classes that he was serious about EU accession and the democratic and economic opening this entailed. Especially during his early years in power, Erdogan significantly strengthened the freedoms of assembly, association and expression. Today’s protests are the result of this enormous opening of the Turkish political space.

Walking around Taksim Square before it was cleared by the police, I saw the vast variety of political opinions and causes represented there: pictures of imprisoned Kurdish leader Abdullah Öcalan were held up next to a banner for the Muslim Anti-Capitalist League; environmentalists sat in their tents alongside self-declared Communists; youngsters played music while headscarved mothers pushed prams round the park. The atmosphere was festive and friendly, a remarkable display of tolerance and mutual respect. Most of the protesters eschewed violence even in the face of police brutality. The dozens of causes gathered there have conflicting ideologies and visions for Turkey. What unites them is a desire for more pluralism and space for dissent. The fact that these small, diverse organisations immediately sprouted when a breath of oxygen came into the public space is testament to the vibrancy of Turkish civil society.

The problem is that Erdogan’s old-fashioned leadership is more and more at odds with this more pluralist and modern society. The battles between police and protestors are part of a much bigger battle between ‘leader knows best’ politics and modern social participation. Many, if not most, Turks still favour strong leadership and the education system promotes a reverence for Mustafa Kemal Atatürk as the father of the nation.

But Erdogan’s reaction to the protests has made the paternalistic style look like Victorian parenting techniques in a modern family. Erdogan initially refused to enter a dialogue with the rebellious children until they stopped disobeying him. Turkey’s citizens, however, are no longer content to be infantilised. They do not want the prime minister to tell them to drink yoghurt, bear three children and stop drinking alcohol after 10 pm. Erdogan’s ministers, who blamed banks, speculators, a global conspiracy – anyone but themselves – for the protests only showed how out of touch they are with important parts of their own society. Erdogan would have done better to copy Spain’s Mariano Rajoy in his dialogue with the Indignados than Vladimir Putin lambasting Pussy Riot.

Erdogan’s AKP is not alone in having missed or misinterpreted Turkey’s social opening. The other big parties that have dominated Turkish politics for decades fared no better. The secularist centre-left CHP party – which Erdogan has accused of organising the protests – was nowhere to be seen in Gezi Park. Therefore, Gezi Park is also an expression of frustration about the AKP’s (or more precisely Erdogan’s) dominance of Turkish politics, not only over the last 15 years but also for the foreseeable future. It is an outcry of the many social groups who feel disenfranchised by the AKP’s ‘tyranny of the majority’.

The underlying problem is that the AKP fears pluralism. It equates criticism of the government with treachery to the Turkish state that needs to be punished. There is a chance that these protests will help Turkey to start accepting its diversity. If the protests keep spreading, Erdogan and his party will be forced to accept that the expression of opinions and beliefs that they dislike is part of any modern democracy. Europeans should help this process along, not reject Turkey at this critical moment.

Heather Grabbe is director of the Open Society European Policy Institute in Brussels. She was senior advisor to Olli Rehn when he was Commissioner for enlargement. She previously wrote on EU-Turkey relations while deputy director of the Centre for European Reform.

Can national parliaments make the EU more legitimate?

The EU has long had a problem of legitimacy, but the euro crisis has made it worse. According to Eurobarometer, 72 per cent of Spaniards do not trust the EU. The Pew Research Centre finds that 75 per cent of Italians think European economic integration has been bad for their country, as do 77 per cent of the French and 78 per cent of the Greeks.

For more than 60 years, the EU has been built and managed by technocrats, hidden from the public gaze – or so it has seemed. In fact national governments have taken most of the key decisions, but public scrutiny has been insufficient. This model cannot endure, because the EU has started to intrude – particularly in the euro countries – into politically sensitive areas of policy-making.

Political institutions can gain legitimacy from either ‘outputs’ or ‘inputs’. The outputs are the benefits that institutions are seen to deliver. The inputs are the elections through which those exercising power are held to account. The euro crisis has weakened both sorts of legitimacy.

The outputs are hardly impressive. Economies are shrinking in many member-states, credit is in short supply in southern Europe, unemployment in the eurozone is over 12 per cent, and youth unemployment in Greece, Italy, Portugal and Spain is between 40 and 65 per cent. Neither the EU nor the euro appears to be delivering much in the way of benefits – whether to Greeks who blame Germans for austerity, or to Germans who resent contributing to Greek bail-outs.

Input legitimacy has also suffered. Given the complexity of decision-making, with power shared among many institutions, lines of accountability in the EU have never been easy to follow. But the perception that power is unaccountable is growing, especially in the heavily-indebted eurozone countries.

Power over economic policy has flowed away from national parliaments and governments to financial markets and to unelected institutions. Having mismanaged their economies, Greece, Portugal, Ireland and Cyprus have had to negotiate programmes of deficit reduction and structural reform with the ‘troika’ of the European Commission, European Central Bank and International Monetary Fund. Other countries, such as Italy, Spain and Slovenia, have avoided full bail-out programmes but had to follow the Commission’s budgetary prescriptions in order to avoid reprimands and possible disciplinary proceedings. Decisions on bail-outs and the conditionality that applies to them have been taken by eurozone finance ministers and heads of government. It is not at all clear where and how such decisions can be held to account, as became evident during the messy rescue of Cyprus in March.

There is no silver bullet that can suddenly make the EU respected, admired or even popular among many Europeans. Its institutions are geographically distant, hard to understand and often deal with obscure technicalities. However, unless the EU becomes more legitimate and credible in the eyes of voters, parts of it could start to unravel. For example, at some point eurozone governments may seek to strengthen their currency by taking major steps towards a more integrated system of economic policy-making. But then a general election, a referendum or a parliamentary vote could block those steps and so threaten the euro’s future.

The best way to improve the EU’s standing would be to improve its ‘outputs’. If European leaders moved quickly to establish a banking union, to strengthen the EU’s financial system; if Germany did more to stimulate demand, thereby helping southern European economies to grow; if structural reform started to restore the competiveness of those economies; and if unemployment started to fall – then EU leaders would look competent, and support for eurosceptics and populists would wane. For the most part such outcomes require not new institutions, but better policies.

Nevertheless EU governance is in bad need of an overhaul. For many federalists, the answer to perceptions of a democratic deficit is simple: when decisions take place at EU level, the European Parliament should exercise democratic control (alongside the Council of Ministers). And if more decisions are being taken at EU level, the powers of the Parliament over them should grow.

However, these arguments face both practical and theoretical difficulties. The practical problem is that the Parliament has serious shortcomings as an institution. Since its first direct elections in 1979, four major treaties have boosted its powers. MEPs now have considerable sway over the EU’s laws, budget and international agreements. Yet in every European election, the turn-out has declined – from 63 per cent in 1979 to just 43 per cent in 2009.

MEPs do a good job in some areas. In recent years they have, for example, improved the directive on hedge funds and private equity, and helped to reform the Common Fisheries Policy. But few voters are aware of the Parliament’s good work and many of them are sceptical that MEPs represent their interests; a lot of MEPs have little connection to national political systems.

Much of the time, the Parliament’s priority appears to be more power for itself. Since the 2009 European elections, MEPs have increased their hold over the Commission, and not only because of the extra powers the Lisbon treaty gave them. One of their techniques is to block what the Commission wants in one area, in order to extract a concession in another. The Parliament always wants ‘more Europe’ – a bigger budget and a larger role for the EU – but there is little evidence that most voters think the same way.

There are also theoretical objections to the Parliament becoming the main body for democratic oversight of the eurozone. In the EU’s usual law-making procedures – known as the ‘community method’ – the Parliament plays an important role. Thus in the last few years it has amended and approved new laws on eurozone budgetary discipline. And it is probably the best-placed body to question the Commission on its monitoring of member-state economies.

However, the money that rescues heavily-indebted member-states has to be voted by national parliaments. The EU budget is not involved to a significant degree, so the European Parliament plays only a minimal role in bail-outs. Decisions on bail-outs and the conditionality that applies to them are taken at EU level by eurozone finance ministers and heads of government. But these decisions have to be implemented by national parliaments: the German Bundestag had to vote money for Cyprus’s bail-out, while the Cypriot parliament had to approve the winding up of Cypriot banks.

These are reasons to increase the involvement of national parliamentarians in eurozone governance – and in the EU more broadly. Critics of their involvement argue that most of them focus on national issues and have little understanding of the wider European interest. Those are valid points. Any attempt to enhance the role of members of parliament (MPs) therefore needs to encourage them to ‘think European’. The European Council has helped heads of government to do so. The prime ministers who attend wear two hats – as national political leaders and members of the EU’s supreme authority. As Luuk van Middelaar, an adviser to Herman Van Rompuy, demonstrates in his excellent new book ‘The passage to Europe’, when national leaders attend the European Council, they start to consider the European interest – sometimes to their own surprise.

So how can MPs play a bigger role in scrutinising the EU? There are increasing numbers of ‘inter-parliamentary’ bodies that bring together MPs and MEPs. These range from the general Conference of European Scrutiny Committees (COSAC) to more specialised groups for foreign policy and Europol. And the recent fiscal stability treaty set up a ‘conference’ that will gather MPs and MEPs to scrutinise the operation of the treaty and discuss wider economic issues. However, these bodies – though useful – are merely consultative and are often treated disdainfully by MEPs. They do not give MPs a sufficient stake in the EU.

Accountability should start at home. Some parliaments, such as that of Denmark, have good systems for holding ministers to account, before and after they attend the Council of Ministers. Others, including that of Britain, scrutinise draft EU laws but do not follow Council meetings closely. National parliaments could improve their systems by emulating best practice across the Union.

The links between national parliaments should be strengthened. The Lisbon treaty created the ‘yellow-card’ procedure, whereby if a third or more of national parliaments believe that a Commission proposal breaches subsidiarity – the principle that decisions should be taken at the lowest level compatible with efficiency – they may ask that it be withdrawn. The Commission must then do so or justify why it intends to proceed. So far this procedure has been used just once, when the Commission withdrew a measure that would have enhanced trade union rights. A small treaty change could turn the yellow-card procedure into a red-card procedure, so that, say, half the national parliaments could force the Commission to withdraw a proposal. A similar system could enable national parliaments to club together to make the Commission propose the withdrawal of a redundant or unnecessary EU law.

A more fundamental reform would be to implement the long-discussed idea of establishing a forum for national parliamentarians in Brussels. The forum’s workload should be modest, so that the best and brightest MPs would want to participate. It should not duplicate the legislative work of the European Parliament. Rather, the forum should ask questions about, and write reports on, those aspects of EU and eurozone governance that involve unanimous decision-making and in which the Parliament plays no significant role.

This forum could become a check on the European Council. It could challenge EU actions and decisions that concern foreign and defence policy, or co-operation on policing and counter-terrorism. On eurozone matters the new body could – meeting in reduced format, without MPs from non-euro countries – question the euro group president or give opinions on bail-out packages. The forum could start work as an informal body and, if it proved useful, be given formal powers – such as the election of the euro group president – through a new treaty.

Hopefully, the forum would encourage MPs to think European. Sceptics and cynics will rightly argue that a new institution cannot on its own make the EU accountable. But in the long run, MPs will have to become more involved in the workings of the EU. Because MPs are usually closer to their constituents than MEPs, and because they are elected on a higher turnout, they stand a better chance of improving the EU’s legitimacy.

Charles Grant is director of the Centre for European Reform.

The CER commission on the UK and the single market

The case for British membership of the EU has always rested primarily on the country’s participation in the single market. The CER’s commission on the UK and the single market held its first meeting this week. It will examine whether participation in the EU helps or hinders Britain’s economy. If the referendum on EU membership takes place, the commission’s report will provide balanced evidence to help the UK make its decision.

Membership of the EU cannot be weighed solely in pounds and pence. But in a period of economic stagnation, any decision about membership will be shaped by the pecuniary costs and benefits. Unfortunately, the British debate has lacked objective analysis of these, with both eurosceptics and europhiles using evidence selectively to make their case. As the UK is not a member of the eurozone, and is unlikely to join, an appraisal of EU membership should centre on the single market.

Martin Wolf of the Financial Times, and Brian Bender, former permanent secretary at the UK business department, introduced the discussion at the inaugural meeting of the commission. There was broad agreement that Britain only has two choices: leave the EU and withdraw from formal participation in the single market, or stay in. Commissioners ruled out a third option: that of joining the European Economic Area. Theoretically, Britain could be in the single market, but not in the EU. The EEA provides Norway, Iceland and Liechtenstein with free access to the single market, but they have to sign up to its rules, and have no say over what the rules are. As one reason for dissatisfaction with EU membership is the loss of sovereignty over rule-making, it was felt that this would be worse than either staying in or leaving.

Few commissioners thought that leaving would be an economic disaster for Britain. There would be little significant impact on jobs, because the level of employment was largely determined by how well the British labour market matched the demand for and supply of workers, rather than the amount of trade that the UK conducts with Europe.

The impact of exit on national income was more contentious. Many estimates put the economic gains from membership of the single market at around 2 per cent of GDP. But some commissioners argued that the immediate impact of leaving would be closer to zero. Others argued that there would be a small negative impact on UK national income in the short term, but there would be a steady erosion of Britain’s attractiveness as a location for foreign investment.

Commissioners questioned whether leaving the EU would allow Britain to extricate itself completely from EU rules in any case. The EU would remain the UK’s largest trading partner, and companies exporting to the rest of Europe would have to conform to EU product standards.

The second option was stay in the EU on current or renegotiated terms. Some commissioners thought that cherry-picking the single market – repatriating social and employment rules, for example – was not really on the table because it would be unacceptable to the other member-states.

One British interest was deepening the single market. A second was making the EU regulate less. Some participants questioned whether these two interests were compatible. The UK liked the single market, but did not like the transfer of rule-making power to Brussels that further integration would entail. So it faced an uncomfortable choice: it may have to cede more sovereignty in order to get more out of its economic relationship with the rest of Europe. And if it decides to promote integration, it may in any case be difficult to get other member-states to sign up to a deeper single market. Countries like France were cooler on the single market than Britain, and their priority was addressing the eurozone’s problems, rather than furthering trade integration. But a focus of the CER’s commission should be the policies needed to open markets in industries in which the UK has a  comparative advantage.

Commissioners were divided on whether Britain should seek to reform the EU to make it a less active regulator. Participants from the business world said that the European Commission and Parliament had become hyper-active and too keen to regulate, which was costly for Britain. Others disagreed, and said that EU regulation hardly tied up Britain’s economy in red tape: by OECD measures, Britain had among the least regulated labour and product markets in the developed world. The EU’s institutions had failings, they said, but also benefits for the UK: the EU acted as a counterweight to national protectionism; and a common external trade negotiator had more bargaining power than Britain would wield on its own.

The commission meetings that follow will take evidence from experts in particular areas of the single market: the free movement of labour, of goods and services, and of capital, to assess whether the single market works for Britain in these areas. The report, which will be published in the spring of 2014, will provide a cool-headed appraisal of the UK’s two options.  If commissioners find that staying in would be best for Britain, the report will propose reforms to deepen Britain’s trade integration with Europe.

John Springford is secretary to the commission and a CER research fellow. More details about the commission can be found here.

Tilting at European windmills

Britain’s European debate is moving from process (referendum when? how?) to substance – the question of whether the costs of EU membership outweigh the benefits. This debate is healthy. What baffles me is that some of the most frequently made arguments in this debate are baseless yet enduring.

I have done a number of public debates with UKIP leader Nigel Farage and other zealous eurosceptics. Such debates are not part of my job: the Centre for European Reform is an independent think-tank, not a campaigning organisation. Yet as an analyst, I believe that the debate about Europe should be well informed.

Hard-core eurosceptics often base their arguments around claims that are simply not correct. Their pro-European counterparts are then left to protest lamely that the eurosceptics are economical with the truth. The eurosceptics have the initiative; the pro-Europeans have the moral high ground. As long as eurosceptics get away with telling the public that EU windmills are dangerous giants, the debate about Europe will be skewed.

One of the most frequently repeated arguments in the British EU debate is that “the Commission in Brussels dictates 75 per cent of our laws” (this is a quote from UKIP’s website but I have heard the number repeated in public debates and in the national media).  The European Commission does not dictate laws; it is allowed to propose laws. But it is the ministers from the (elected) EU governments that negotiate and agree them, together with the (elected) European Parliament.

The 75 per cent figure comes from a statement that Hans-Gerhard Pöttering, then president of the European Parliament, made in 2009:  "Today approximately 75 per cent of the European Union legislation is decided by the European Parliament together with the Council of Ministers and has a direct impact in our daily lives.” Note: Pöttering was talking about the share of EU legislation that is influenced by the European Parliament. He did not refer to national legislation.

So what is the true share of UK legislation linked to EU directives? There is no easy answer. First, EU laws and national laws cannot be compared like for like. EU regulations apply directly in the member-states. EU directives are implemented through national laws and regulations. Sometimes one national law implements four EU directives, sometimes four national laws implement one EU directive.

A lot of British business regulation is likely to be related in some way or another to the single market and hence to the EU. But the EU does not get much involved in setting British rules governing tax (other than VAT and excise duties), social security, pensions, education, policing (except cross-border operations), spatial planning or the health service. The House of Commons Library has tried to calculate the percentage of secondary legislation in the UK that results from EU requirements and concluded that "[t]his figure has fluctuated between 8 and 10 per cent in the last decade". OpenEurope, a eurosceptic think-tank, has spent a couple of years looking at the question of how much British law can be traced back to the EU. The researchers concluded that it was not possible to determine the share with any kind of accuracy.

Nor is it a straightforward question how much EU regulation costs the UK. The anti-EU Bruges Group claims that EU regulation costs the UK £28 billion a year, but it is not clear where this figure comes from. Some eurosceptics have also claimed that EU regulation cost the UK over £100 billion over the last decade. This figure is probably based on research that OpenEurope did in 2010. It should be used with great caution.

OpenEurope looked at the impact assessments attached to 2,000 UK business regulations since 1998. (Many national governments, as well as the EU, try to estimate the potential positive and negative impacts of planned pieces of legislation before they enact them.) OpenEurope’s researchers then added up the estimated costs of the proposed regulations as well as the estimated benefits. They found that the 2,000 pieces of regulation could have cost the economy a total of £176 billion since 1998, and that £124 billion of this could have come from regulation that was in some way related to EU policies. I say “could have” because the £176 billion and £124 billion figures are made up of ministerial estimates of potential costs, not actual costs.

The researchers also added up the estimated benefits of the regulations and found that they are significantly bigger (by 60 per cent) than the estimated costs. In other words, although regulations can be burdensome, their net effect on the economy is thought to be positive because they usually help business to trade with one another as well as making workers more productive and products safer. OpenEurope says that the positive net effect is smaller for EU-related regulations than for national regulations. But it admits that it is particularly hard to quantify the benefits of EU regulation since impact assessments do not usually take into account wider benefits, such as access to the single market or the price decreases resulting from stronger international competition.

The costs of EU regulation also depend on how it is implemented in the individual EU countries. Some governments go beyond what is required by the EU. A 2006 review found no evidence that the UK was doing more ‘gold plating’ than other EU countries. But any meaningful estimate of the burden of EU regulation would have to consider the share of costs added at the national level.

These costs would then have to be set against the benefits of being a member of the single market and the world’s largest trading bloc. These benefits are every bit as hard to calculate as the costs of EU membership. Therefore, when pro-Europeans use figures such as the 3.3 million jobs that directly depend on exports to the EU or the £3,300 that every British household gains from being inside the EU each year, they should also be taken with more than a pinch of salt.

Eurosceptics claim that access to the European market is no longer worth much since Britain now “mostly” trades with non-EU countries. It is true that the share of British exports that go to the other EU countries has fallen to just below 50 per cent and that sales to emerging markets are growing faster  –  that is exactly what you would expect, given that the eurozone is in recession while many emerging markets are still growing briskly.

But British exports to emerging economies are starting from a surprisingly low base: in 2007, 3.3 per cent of UK exports went to the BRIC countries; by 2012, that share had risen to 5.6 per cent. Britain still sells more to Germany than to Brazil, Russia, India, China and South Africa, Australia, New Zealand and Canada – combined. Another key export market for Britain is the US – with which the EU is currently negotiating a free trade and investment agreement.

Eurosceptics often imply that if Britain severed its ties with the EU, it would trade more with emerging markets. In a purely arithmetical sense this might well be true: if British business found it more difficult to access markets in France, Spain and Poland they might try harder to sell things in India and Indonesia. But the idea that the EU is holding Britain back is spurious. Germany sells six times as many goods and services to China as the UK does. If it is the EU holding Britain back, why is it not holding back Germany?

Another figure that the eurosceptics like to use is £50 million: that is supposed to be the daily British contribution to the EU budget. This number has some validity, although it is outdated. In 2011 the gross UK contribution to the EU budget was £13.83 billion, or £37 million a day. Is this a lot or a little? It depends how you look at it. As a share of GDP, the UK’s gross contribution is the lowest of any EU country, lower than those of poorer countries such as Poland or Bulgaria. And of course, Britain also gets money back from the EU for its farmers, universities and poorer regions. Once these revenues are factored in, Britain’s net contribution amounts to roughly 1 per cent of total government spending.

Even 1 per cent is a lot if, as many eurosceptics claim, the money is wasted. UKIP calls the European Union a “bureaucratic monster” and sometimes implies that most EU spending goes to meddlesome bureaucrats. In reality, around 5 per cent of the EU budget is spent on administration, and half of that on the European Commission. The European Commission has 23,000 employees, less than Birmingham City Council. It is true that EU officials are “unelected”, as are the 32,000 officials in the British Home Office and those of any other state administration around the world. No doubt, the EU’s bureaucracy could be streamlined and made more effective but the real potential for savings – as many British politicians have pointed out for years – is in the common agricultural policy and funds for poorer regions.

The latest figure that has crept into the European debate is £150 billion – that is supposed to be the sum that the UK could lose through the euro crisis, according to the Bruges Group. Among the heroic assumptions underlying this calculation is that all other 26 EU countries would go bankrupt simultaneously so that Britain would be lumbered with the entire £60 billion costs of a lending facility called the European Financial Stabilisation Mechanism; that the European Investment Bank (an AAA-rated infrastructure lender) would fold; and that Britain would be called upon to bail out the European Central Bank if the euro broke up.

The fundamental truth is that the European Union is an extremely complex undertaking that cannot easily be reduced to simple numbers – either on the positive or on the negative side. But perhaps by feeding random numbers, half-truth and fiction into the debate, the hard-core eurosceptics will force other politicians and journalists to do a better job of explaining what is really at stake in Britain’s EU membership.

Katinka Barysch is deputy director of the Centre for European Reform.