What would a Brexit mean for EU competition policy?

The debate over Britain’s future in the EU has to date failed to highlight the threat posed to EU competition policy and enforcement, which both play a critical role in underpinning the single market. Yet a British exit from the EU could have important repercussions for competition policy.

Several dangers present themselves. The first is the risk that the ground-rules for EU competition policy could be weakened in any future treaty renegotiation without the British at the table. Secondly, even absent such an explicit renegotiation, removing Britain’s input into policy and enforcement might encourage some drift in the way existing rules are applied. Thirdly, and regardless of the possibility of renegotiation or drift, there would be heavy additional costs for both government and for business. Lastly, a British exit could harm the global dialogue between competition authorities.

The threat of a tectonic shift in competition policy if the UK left the EU cannot be ruled out. It was, after all, the UK that led the counter-attack against President Sarkozy’s attempts to demote the principle of “undistorted competition” during the 2007 negotiations that led to the Lisbon treaty. Some crafty drafting in a new protocol, added to the Treaty at Britain’s behest, somehow did enough to allow the European Commission to maintain that nothing had changed. But the Sarkozy tendency, present even before today’s economic crisis, is far from a spent force: the forces of protectionism are alive and well, in France and elsewhere. A future treaty renegotiation could witness renewed calls to promote European champions, protect strategic national industries and slacken state aid disciplines.

Even without a change in the ground rules, a British exit from the EU might still weaken EU competition policy. National competition authorities together form the European Competition Network (ECN). The ECN co-ordinates policy with the European Commission, and national authorities are consulted on individual decisions via an advisory committee. The UK is an active voice in all these fora. Over time, Britain’s absence from them would probably lead to policy drift, as other voices became more prominent in the debate. British companies active across Europe would remain subject to EU competition rules, regardless of Brexit. But the UK would have voted itself off the committee that sets and applies the rules.

A British exit from the EU would also impose instant additional costs. Since Britain would no longer be part of the one-stop shop for reviewing mergers, these would need to be separately reviewed by the UK’s future Competition and Markets Authority (CMA). This would place extra costs on businesses, as well as an increased burden on the CMA, which would need more staff (and a budget to match). The same would apply to action against cartels and cases involving abuses of dominant market positions: complainants and defendants would have to meet in an additional and unnecessary forum. Of course, the UK could, like Norway, allow the Commission in Brussels to adjudicate on its cases. But with no British officials left in the Commission, and with policy possibly veering away from the UK’s attachment to free competition, this seems unlikely.

Finally, a British exit from the EU could harm the dialogue between competition authorities. Competition laws have proliferated around the globe. When the UK joined the EEC in 1973, there were only a handful of active jurisdictions, with the US far out in the lead, both in policy thinking and in enforcement. Today’s club of anti-trust authorities, the International Competition Network (ICN), counts members from 111 countries. Chinese policy is now a major pre-occupation, with India’s new law also starting to be felt. The spreading burden of compliance should bring its own reward, with markets becoming more open and competitive around the globe. But aligning these systems is also becoming a real challenge. The EU has been a key mover in the ICN, and has long since been recognised as a twin motor of global anti-trust action and advocacy alongside the US. Indeed, in recent years the EU has been much the more vigorous enforcer of the two. But a British exit from the EU would weaken the EU’s standing in the international anti-trust dialogue, and exclude the UK from the collective clout that goes with being part of the EU. It would also deprive the US of an interlocutor within the EU camp that shares its common law heritage. Worse, if the EU falls prey to protectionism, there could be more fundamental damage to the dynamic of anti-trust enforcement around the globe.

Competition policy in Europe has always been about more than just free competition: it also serves the goal of breaking down barriers between countries. Single market legislation removes legislative barriers, and competition policy ensures that firms do not erect private barriers in their place. Believers in the single market should pause to reflect whether the UK is better on the inside of EU competition policy, or on the outside looking in.

Alec Burnside is Managing Partner in the Brussels office of Cadwalader, Wickersham & Taft LLP.

Division and indecision over Syria

The deal on chemical weapons reached by Russia and the United States marks the latest chapter in the West’s effort to stay out of Syria’s civil war. After Russia’s diplomatic initiative, a military strike has been avoided. The White House says that diplomacy backed by a credible military threat has succeeded, and European leaders claim that their appeal for a UN process was heard. Obama’s wish to avoid military solutions may have created new momentum for negotiations with Iran. But this moment of jubilation could be short-lived: a daunting task at the UN awaits; military action may still be needed; and transatlantic cohesion has been damaged.

For more than two years, US and European governments have successfully navigated developments that could otherwise have formed a casus belli and led to Western entanglement in Syria. In the summer of 2012, the Syrian military shot down a Turkish air force jet, and was accused by Ankara of lobbing mortars over the Turkish-Syrian border and staging car bombings in southern Turkish towns. The attack on a NATO member-state could have triggered military action against Syria, but instead the alliance showed restraint and sent German, Dutch and US air defence batteries to southern Turkey.

In November 2012, France and the UK – followed a month later by the US  –  stated that President Assad no longer represented the Syrian people, but no action was taken to force a change of regime. The US and Europe have also long resisted arming the rebel groups. When it became clear in early 2013 that Assad was winning, the European Union – under French and British leadership – and the United States lifted the arms embargo. But the subsequent flow of arms to rebels has been limited, reflecting concerns that the weapons might end up with Al Qaeda affiliates. The US, UK and France have been providing jeeps and communications technology, and possibly small arms, but most heavier material, mortars and anti-tank weapons, are sent by Qatar and Saudi Arabia.

The aftermath of the chemical weapons attack on August 21st is the closest the US and its allies have come to military intervention in Syria. If it were not for the use of poison gas, the US and others would have remained on the side-lines, but moral imperatives and presidential credibility required action, however reluctant. European division and US foot-dragging followed.

What makes the current crisis so uncomfortable and damaging for the West is that it is largely self-inflicted; Obama’s red lines on the use of chemical weapons, when crossed, forced his hand. European divisions have made matters worse, particularly when Britain’s prime minister David Cameron – initially in favour of a strike – deferred to the House of Commons and lost, while the French president remained committed to military action. Without a united Franco-British front, Germany, the Netherlands and others continued to prevaricate and say they had not been asked to support a military strike, or – like Poland – did not have relevant military capabilities. Other European states, including Italy, Spain and Belgium, believed the UN should act. Only Denmark backed the French.

Meanwhile, more than two weeks of intense diplomacy passed before the EU’s High Representative Catherine Ashton was able to forge a common European position. A carefully-worded statement agreed on September 7th said that “a clear and strong response is crucial” to the poison gas attack, but it fell short of calling for military action. Instead it urged the Security Council to push for a political solution.

A divided West was inching towards a military intervention for which there was little political appetite and even less public support. President Putin’s initiative to get rid of Syria’s chemical weapons could be the ‘deus ex machina’ to avoid an unwanted military campaign.

While it is impossible to know for sure, Putin’s diplomacy may be informed by the fear that any US military involvement could decisively turn the tables on Assad. A shift in the military balance would cause Moscow to lose an ally in the region and perhaps its Mediterranean naval base, but Putin’s support for Assad is fuelled by the concern that Al Qaeda-linked groups might take over in Syria and could eventually spread to Russia.

In spite of comments by President Obama that a strike would be limited – or in Secretary Kerry’s words “unbelievably small” – any military action has unpredictable consequences. A strike was meant to ‘deter and degrade’ Assad’s capability to use chemical weapons. The US was aiming for a ‘Goldilocks’ intervention; too soft, and it would only be a symbolic punishment; too hard, and it might topple Assad, strengthening jihadist rebel groups. But reality is never so straightforward, and the adversary always has a vote in a conflict. Assad could make life difficult for any US-led coalition, for instance by using chemical weapons again; placing human shields around potential targets; or using Syrian-sponsored Hezbollah to strike Western assets or Israel. US credibility would then demand further escalation. By regaining diplomatic momentum, Putin was able to protect his interests, and his client in Damascus. Whatever the outcome, Moscow will have bought time for Assad, and Russia will step up its arms shipments to Syria, hoping to tilt the military balance in favour of Assad. The US, UK and France should consider balancing this by increasing their efforts to arm moderate rebels.

The agreement between Russia and the US will have to be enshrined in a UN Security Council resolution. France, the US and UK prefer a resolution under chapter 7 of the UN charter, which could allow the use of force in the event of non-compliance. But Russia has said an explicit reference to military action is unacceptable.

If the Russians stand firm, Obama will face a choice between a resolution without ‘teeth’, or circumventing the gridlocked Security Council. In the first case, the Russians and the Syrian regime will claim that UN-backed military enforcement is off the table; and Obama will be criticised by US hawks in Congress for weakness. But the outcome could be more ambiguous. During the Iraq crisis ten years ago, the UN Security Council adopted resolution 1441, pushing Iraq to fulfil its disarmament obligations. It was adopted under chapter 7, but did not explicitly mention the use of force. The Security Council could pass a similar resolution now.

Washington and Moscow have an interest in agreeing a resolution because the alternatives are less palatable. But given the distance between the Russian and US positions, a face-saving compromise would leave the enforcement mechanism deliberately vague. In 2003, as Saddam Hussein continued to defy the UN weapons inspectors, this clause – and its lack of specificity – became the focus of a dispute in the Security Council. Unfortunately, a similar resolution on Syria will sow the seeds for future US-Russian disagreement. The technical obstacles associated with a verification mechanism in a war zone are plentiful, and if Syria breached the resolution, a fractured West could still end up being drawn into the conflict.

Nevertheless, if a resolution is adopted and the Syrians carry out their side of the bargain, this may do more than just prevent Syria’s future use of chemical weapons. Iran’s new moderate president, Hassan Rouhani – strengthened by a policy of US restraint in Syria – has signalled a willingness to talk to Obama. This positive momentum offers the best hope for some time to move diplomacy on Iran’s nuclear programme forward, and should be embraced by the US and Europe.

Progress on chemical weapons could also create some momentum for a general ceasefire and the start of a peace process. The EU ought to be able to unite around this goal, at least. It should now start working with Russia, the US, Iran as well as the groups in Syria to get the Geneva 2 negotiations underway in the hope of moving towards a political solution.

A stalemate at the UN would be damaging; Putin could say he produced an olive branch that the US was unwilling to accept, and paint Obama as a warmonger; while members of Obama’s own party and isolationist Republicans will accuse him of risking US entanglement in another war. The EU would find itself in an uncomfortable position. Fundamental to the EU’s foreign policy is support for international norms, of which the prohibition on chemical weapons is one (the 2003 EU security strategy describes the proliferation of weapons of mass destruction as “potentially the greatest threat to our security”) and support for the United Nations is another. These conflicting norms would ensure that Europe remained divided.

The worst option for US credibility is if a resolution is not agreed and the United States shies away from military action. Credibility is an important currency in international relations. It would be seen as a victory in Damascus, Tehran and Moscow, it would sap the morale of Syria’s rebels and it would send a message that the use of chemical weapons may go unpunished. It would make Israel and Saudi Arabia uncertain about US assistance on Iran’s nuclear programme. Pyongyang’s hand would be strengthened, and among allies in the Asia-Pacific – where US security guarantees are considered crucial to check the rise of China – signs of US weakness would make leaders nervous. Western impotence in Syria will reduce America’s – and by extension the West’s – international standing, strengthening those that believe Western decline creates opportunities to expand their influence.

Deal or no deal, the crisis has negatively affected transatlantic relations. In 2011, then-Secretary of Defense Robert Gates complained publicly that Europe was not equitably sharing the burden of military risks and expenses. Not much has improved since then. In Libya, eight out of twenty-eight NATO allies participated in the bombing phase of the air campaign. Now an even smaller number of Europeans would stand by the US. Washington has not drawn upon NATO’s command headquarters or common surveillance assets (as happened in Libya) or even mentioned NATO. The US probably wanted to avoid bringing Europe’s division into the North Atlantic Council, where unanimous support would be needed. While much has been made of the US rebalance towards Asia and the consequent need for Europe to bear a greater burden for security in its neighbourhood, most of Europe is still passing the buck to Washington. Once again, the US and Russia get to sort out a security issue in Europe’s neighbourhood without Europe being at the table.

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

Continuity and change in Germany's EU policy

However the Germans vote on September 22^nd, Berlin’s attitude to the EU is not going to change much. The opposition Social Democrats call for a bit less austerity in Southern Europe but otherwise support most of Chancellor Angela Merkel’s policies. Nonetheless German policy on Europe is evolving – independently of the elections – in some important respects.

Germany is making a new effort to revive its damaged relationship with France. It is moving towards accepting a full banking union, including a resolution regime, though not, for now, on terms acceptable to most of its partners. It is recognising – with some regret – that there will not be a significant revision of the EU treaties in the coming years. And it is increasingly critical of the European Commission and the European Parliament.

The big strategic decisions on Germany and the EU are taken by politicians like Guido Westerwelle, the foreign minister, and Wolfgang Schäuble, the finance minister, and, above all, Merkel. But the key officials in the Chancellor’s office, the foreign ministry and the finance ministry are hugely influential on EU policy. That is not surprising, given that they – unlike most politicians – understand the technicalities of the EU’s inner workings.

These officials are more relaxed about the euro than they were six months ago. They think that modest progress in Ireland, Portugal and Spain is vindicating their insistence on austerity in these countries. They regard Greece as a hopeless case, but too small to threaten the euro’s survival. Italy is a much bigger worry, because its political system seems to make structural economic reform impossible.

As for the Official Monetary Transactions (OMT) – the bond-buying scheme unveiled by the European Central Bank a year ago, which reduced the cost of borrowing for the Southern Europeans – it should be “a bazooka that is left in the cupboard”, according to one official. If ever used, the ECB’s independence could be compromised: politicians would put pressure on the bank to deploy the OMT to achieve a particular spread for a country’s bonds, he says. And what would the ECB do if, once an OMT programme had started, its beneficiary stopped reforming? This official thinks that if a country applies the right policies, as Spain has done recently, it does not need OMT. And if a country chooses the wrong policies, OMT cannot save it.

Germany’s constitutional court in Karlsruhe is due to rule on the legality of the OMT this autumn. The view in Berlin is that court is unlikely to ban the OMT outright, though it may set conditions for its use.

German officials think that France, unlike Italy, is capable of reform. But in his first year as president, President François Hollande infuriated German officials: he tried teaming up with Spain’s and Italy’s leaders to oppose Merkel at summits, and did very little to revitalise France’s economy. The Germans talked of moving ahead without France. The French found the Germans’ tone patronising.

But this summer the atmosphere between Paris and Berlin has improved a little.  The Germans understand that they cannot lead Europe on their own. They say they have learned that lecturing France will not persuade it to reform. Only if France believes that it is an equal partner of Germany’s, they think, is there a chance if it reforming. Meanwhile Hollande has not tried to manoeuvre against Merkel in the European Council since February (when he was in a minority of one over the EU budget). At the end of May, a joint Hollande-Merkel letter floated ideas such as a eurozone budget, a bank resolution regime, contracts for economic reform and a permanent president for the Eurogroup (which brings together the countries in the euro).

German officials hope that after the general election they can restart the Franco-German motor with a grand bargain. France would accept Merkel’s idea of contracts – it would have to negotiate structural reforms with the Commission – and Germany would agree to a modest eurozone budget, to reward countries that undertake painful reforms. Some Germans believe that these contracts would be the most effective means of getting France to reform. The bargain would also cover a bank resolution regime, which France is keen to see implemented. None of these steps would require treaty change.

Despite their new, softer line on France, some Germans still worry that the French will exploit Germany’s willingness – in the event of a serious crisis – to do whatever is necessary to keep it in the euro, and that they will therefore shy away from difficult reforms. France would then slowly drift into Southern Europe and Germany would find it hard to lead the EU on its own.

Banking union is currently a major bone of contention between Berlin and Paris. Schäuble wants a resolution regime with a first phase “based on effective co-ordination between national authorities; and effective fiscal backstops, also including the European Stability Mechanism (ESM) as last resort.” (see FT article by Schäuble). The Commission, however – backed by most member-states, including France – wants to run a centralised system that draws on a new resolution fund. The Germans think the Commission would not be capable of acting quickly to resolve a bank, and that, given the fund’s initial small size, they might end up having to pay to clean up others’ banks. They also argue that the Commission is abusing the treaties by using a single market article as the legal base for its proposal.

At the moment, the two camps are far apart. But German officials are convinced that the EU needs a viable resolution regime. A possible compromise, one suggests, could involve Germany accepting the Commission as the resolution authority, provided the ESM is the backstop. Germany likes the ESM because it is run by a German and it has an effective veto over its money being spent.

Many German politicians, being committed to a federal Europe, retain some affection for the Commission and the European Parliament. But the key officials have become very critical of both bodies. They say that the Parliament has too much power and is out of touch. So when it comes to the proposed ‘new’ method of choosing the Commission president – the idea is that after the 2014 European elections, the party with the most MEPs would appoint its designated candidate – German officials are wary. They fear that this method could lead to a powerful Commission-Parliament alliance against the Council of Ministers (in which Germany is a dominant force). This wariness extends to senior German politicians. Without the co-operation of Angela Merkel and her European People’s Party, MEPs may struggle to impose the president of their dreams on the European Council.

Officials complain that the Commission lacks economic expertise, that it produces too many meddlesome rules, and that it spends too much time worrying about its own power. It annoyed them recently by pushing ahead with a directive banning certain greenhouse-gas coolants that are used in Mercedes air conditioners. And they are frustrated that the Commission gave France extra time to meet the 3 per cent budget rule, without first extracting commitments on structural reform.

Some German officials are keen to build up the ESM as an alternative to the Commission for eurozone governance. They admit that the ESM currently lacks economic expertise but think that in the long run it could evolve into a European Monetary Fund. They believe that in contrast to the Commission it is not subject to political pressure. However, some foreign ministry officials understand that Germany is rather isolated in its desire to bash the Commission. For example, Poland – an important German ally – is usually supportive of the Commission. These officials therefore believe that any German attempt to promote the ESM as an alternative will not get very far.

Another source of tension between Berlin and Warsaw is the Eurogroup. The Poles – like the British – want the key body for taking decisions in the EU to remain the 28-member Council of Ministers. They worry that building up the Eurogroup could hurt countries outside the euro, as well as the single market. Some German officials are ready to go along with France’s wish to develop eurozone-specific institutions. Merkel, however, is keen to maintain the importance of the 28, partly because of her warm relations with the Polish and British prime ministers.

Twelve months ago, German officials were all for treaty change; six months ago, they really hoped it would be possible, but recognised that it might not be. Now they think that in an ideal world, treaty change would be desirable, but they are mostly reconciled to its postponement for a long time. The reason is simple: the only other member-state that wants treaty change is the UK, which means that the chances of the whole EU adopting a new treaty are zero.

The top officials say that if there is to be a new EU treaty, it would have to be negotiated in 2016, as the various election and referendum calendars allow no other possibility. Any new treaty would be a small, “surgical” change that would not require a convention (a suitable model may be the fiscal compact, last year’s non-EU treaty that did not require ratification by all signatories before entering into force). But these officials acknowledge that there may well be no new treaty of any sort, and they say that the EU can cope perfectly well with the existing ones. (The finance ministry would still like a treaty amendment to strengthen the independence of the EU’s new banking supervisory mechanism, but that is a long-term objective. Its own plans for a resolution regime would not require an amendment in their first phase.)

Germany’s recoiling from treaty change will be unwelcome news to some British Conservatives. They have been counting on the EU needing a new treaty, and thus a British signature, in order to extract concessions – such as the repatriation of powers – from Britain’s partners. It seems unlikely that the British government will enjoy that kind of leverage before the referendum that David Cameron has promised in 2017.

Charles Grant is director of the Centre for European Reform

The Commons vote on Syria:The world turned upside down

Prime Minister David Cameron made a strong case for taking military action to punish the Syrian regime for using chemical weapons. Labour leader Ed Miliband said that he was willing to consider it. It took a combination of party political manoeuvring and a rebellion by Conservative isolationists to defeat the government on August 29th, ensuring that Britain would not join in any operation. The vote is already affecting the UK’s relationship with the US. It may also reduce still further Europe’s willingness to equip and train for conflicts outside its borders. It does not (yet) mean that Britain has pulled up the drawbridge, but it will make it harder for future governments to get involved in wars, even for noble causes.

The vote in the Commons did not necessarily reflect a majority against the principle of military action. Four hundred and ninety MPs voted to start a process that could lead to military action. But they were split: the government, with no support from Labour MPs, put forward one set of conditions that would have to be met; the Labour Party, with no support from the coalition’s MPs, proposed a slightly different set. Only 52 MPs voted against the use of force in any circumstances by opposing both the government and opposition proposals.

The main reason that the government lost was that 30 Conservative and 9 Liberal Democrat MPs voted against the government motion (with many others absent or not voting). There was a sense among the Conservative rebels that this was not Britain’s fight: comments included "Our job in this parliament is to look after our own people" and "The world needs to act. The world, however, does not equal the UK". There was a striking amount of criticism of the US, occasionally bordering on hostility, from some Conservatives.

A closer look at the 30 Conservative rebels is revealing: 26 of them also rebelled against the government and voted in favour of a referendum on the UK's EU membership in October 2011. In the past, many Conservative eurosceptics have favoured an Atlantic alternative of closer partnership with the US rather than the EU. There is now a significant group, however, for whom the choice is not between Europe and the open sea, but between (as they see it) the illusion of "punching above our weight" and the reality of being a medium-sized power with domestic problems to fix. Their position resembles that of the populist UK Independence Party, which – to quote their website – opposes "needless foreign adventures that don't directly affect us as a nation".

To judge from opinion polls, this scepticism about UK involvement in distant conflicts reflects the popular mood; but in the past national politicians have been more willing to ignore such sentiments in favour of maintaining Britain's status as a leading world power and defender of international norms. If the Prime Minister and Ed Miliband had been more confident that taking action was the right thing to do, they might have found it easier to agree on a motion that government and opposition could both back. As it was, the Prime Minister had no hesitation in confirming on the night of the vote that the government would abide by what he considered to be the will of Parliament: Britain would not take part in any military action against Syria. Ministers have been surprisingly ready to say that there will not be another vote unless circumstances change very significantly – almost as though defeat had come as something of a relief to them. It is not clear how bad things would have to get in Syria before they would revisit the issue.

While publicly the US administration has expressed understanding for the situation, in his speech on August 30th Secretary of State John Kerry pointedly left the UK out of a list of US allies in dealing with Syria. British military staff attached to US Central Command headquarters (from which any Syria operation will be run) are reportedly being excluded from discussions. It is certainly an exaggeration to speak of the demise of the special relationship – not least because the unique intelligence relationship between the UK and US will certainly continue. But at least since the invasion of Iraq in 2003, Britain's willingness to turn up has been more important to the US than any practical military contribution it could make. If the UK loses the political will even to play a symbolic role in operations, that will certainly erode the basis of the relationship.

There is also a question of why President Obama has now decided to consult Congress before taking military action – something which clearly was not envisaged before the British vote. Was the President's position weakened by David Cameron’s defeat, so that he felt he had to give in to pressure from Congressional Republicans to offer them the same chance that British MPs had had to debate military action? Comments by White House officials suggest a degree of irritation with the British for starting down this road. If (as is possible) Obama fails to get the support of at least the House of Representatives, the administration may well put part of the blame on the British. Another CER Insight in the coming days will deal with other international implications of a possible strike on Syria.

Within Europe, the Commons vote threatens to undermine improving Franco-British ties on defence and security. David Cameron and Francois Hollande are not natural soul-mates, and Hollande did not initially share Nicolas Sarkozy's enthusiasm for defence co-operation with the UK. But Britain's willingness to provide modest logistical help in the initial stages of France's Mali operation earlier this year, and subsequent shared views on Syria (including on the question of partially lifting the EU's arms embargo to allow weapons deliveries to the opposition) had started to turn things round. This renewed alignment between the UK and France, and the embarrassment of failing to back them in Libya in 2011, seemed to be nudging Germany in the direction of supporting action in Syria (Foreign Minister Guido Westerwelle said on August 26th that if the use of chemical weapons were confirmed by UN inspectors, then Germany would "be among those who think that some consequence will have to be drawn"). After the British vote, and probably not by coincidence, Chancellor Merkel's spokesman seemed to rule out any German involvement, leaving France isolated as the only European country likely to join the US in military operations.

The British vote comes at an inconvenient time in the preparations for the December European Council discussion on European security and defence policy. The UK has been a keen promoter of increased European defence capabilities, particularly those such as strategic airlift which would enable European countries to play a more active part in expeditionary operations. But if reluctant partners believe, rightly or not, that the UK itself is losing the political will to undertake such operations, they are unlikely to respond to British pressure to spend more on such capabilities (though they may be relieved that the UK will no longer try to push them into wars at the behest of the US).

In NATO the vote may have an impact on the unresolved division between allies who believe that the alliance's main focus should be on territorial defence, and those who see the main threats to transatlantic security as global, not European, and want NATO to be able to act beyond its borders. Again, the UK's credibility as a strong supporter of an expeditionary outlook for NATO is likely to be reduced, while the position of countries like Poland (which has ruled out taking part in action against Syria and is more focused on security issues in its immediate neighbourhood) may be strengthened.

The Commons vote may turn out to have little long-term impact on the UK’s world view. Any response to Assad’s use of chemical weapons is hedged with uncertainty. If a limited strike fails to prevent the future use of nerve gas, what would the Western reaction be? What impact would a strike have on regional security? Would it destroy any hope of improving the West’s relations with the new president of Iran, making conflict more likely? Perhaps in other circumstances, with more clarity about the ramifications of action, a parliamentary majority could be found. Perhaps next time the government would do a better job of rounding up its members to vote. Perhaps next time the Labour Party, having exorcised the demons of 2003 and the decision to invade Iraq, could vote on the merits of the case when an atrocity needs to be punished.

But equally, the vote could turn out to be the signal for a strategic shift in favour of insularity. By voting – almost by accident – against even a modest military gesture, British MPs risk sending the message that in future the UK will be content to stay on the side-lines, regardless of what is happening in distant lands. For all the expressions of dismay from veteran statesmen like Tony Blair, former Foreign Secretary Sir Malcolm Rifkind and former Liberal Democrat leader Lord Ashdown, public opinion seems happy with that; and current political leaders seem disinclined to court unpopularity by reiterating the case for interventionism. For a country with global economic and security interests, that is a risky position to take, and a bad example to set.

Ian Bond is director of foreign policy at the Centre for European Reform.

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