Friday, June 29, 2007

Why Europeans don’t have babies

by Katinka Barysch

Europeans live longer, work less and have fewer babies. On current trends, the EU will not have enough workers to pay for its growing number of pensioners. Economists and policymakers have moved beyond scratching their (greying) heads in despair. They focus on what can be done to alleviate and possibly reverse the trend. That is also what they did at last week’s Munich Economic Summit that brought together some of the world’s best people on the subject (

The EU’s average fertility rate is now 1.5, well below the 2.1 needed to maintain the size of a population. In Germany and Italy, the fertility rate is closer to 1, which means that each generation is 60 per cent smaller than the previous one. Even more worrying but less well-known is the fact that population decline – just like population growth – is exponential. In Germany, the birth rate started to fall in the 1960, well before Italy, Spain and other EU countries. By the 1990s, Germany was running short of 20 or 30-something potential mothers. A country that has had low birth rates for decades ends up in a ‘fertility’ trap.

Another fact that is rarely taken into account is how demographics interact with economic geography. Young people and those with skills are the most likely to leave declining areas, and women are apparently more prone to moving than men. Germany’s eastern Laender are a frightening illustration of this trend. The number of young people has dwindled, leaving the over-60s to themselves in some places. And among the 10 per cent of the population that has left the eastern Laender, there were many more women than men. In some towns, there are 160 young men for 100 young women. The fact that those men left behind tend to be unqualified and unemployed gives women little incentive to return. Similar developments can already be observed in some parts of Central and Eastern Europe, as well as in the continent’s northern and southern fringes. Europe will not age homogenously. It will be a patchwork of booming regions and those that are inhabited by octogenarians and angry young men.

No-one is yet talking about demographic micro-management. But all EU countries do need to address the inevitable raise (in many cases doubling) of the old-age dependency ratio (the number of workers to pensioners). The list of possible solutions is by now well known: work longer and harder, accept more immigrants and have more babies. But each remedy has its limits, so Vladimir Špidla, the EU’s social affairs commissioner, talks about ‘mainstreaming’ demographic concerns into all policy areas, not only pension reforms, but also education, tax, labour market and infrastructure policies.

Population decline is a European problem – globally the population is growing by 200,000 a day, adding the equivalent of Switzerland every six weeks. Some of the fastest growth happens in the EU’s vicinity, especially in North Africa and the Middle East. Children and teenagers make up over half of the populations of Iraq and Somalia. Many of them will want to move to where jobs are better and life is more stable.

But immigration can only help to alleviate Europe’s pension pressures, it cannot solve the problem. Hans-Werner Sinn, head of the Ifo Institute that runs the Economic Summit, says that even if immigrants stayed young forever, the EU-15 would need more than 190 million immigrants to keep its dependency ratio constant until 2035.

Similarly, the retirement age would have to go up to 77 if governments were to rely on this step alone to fix the pension problem. Instead, they usually adopt reform packages that include a gradual raise in retirement ages, cuts in state pension payouts and adding fully-funded ‘pillars’ to the pension systems. There are some interesting and encouraging examples of reform, for example the ‘notional contribution’ systems implemented by Sweden, Poland and Latvia. These are pay-as-you-go systems that mimic fully-funded pensions because each worker’s contributions are added up in a notional account’. Since the pension pay-out depends on how much a worker has paid in, people have an incentive to retire later.

In most other European countries reforms have been overly cautious, which may have something to do with the growing voting power of Europe’s elderly. Not only is the number of over-50s rising steadily, they also tend to be more politically active. In the last US presidential election, for example, 70 per cent of those over 65 voted, but only a third of the 18-24 year-olds. Pension reform would have to happen now, before the baby boom generation retires. But there is little sign of this.

Meanwhile, family-friendly policies are becoming increasingly popular, across the political spectrum. Munich’s assembled economists were unanimous that higher birth rates cannot solve Europe’s pension problem in the short run. Even an immediate doubling of the birth rates would only have an impact on dependency ratios in 30 years or so. But in the long run, Europe will need more babies to mitigate the economic consequences of an ageing and shrinking workforce. Can and should governments get involved?

Economists have calculated that bringing up a child costs €150,000 to €300,000 and that each child contributes a net €140,000 to a country’s pension system. The parents bear the costs but the benefits also go to those pensioners that have not raised children themselves. Therefore, some economists suggest that people with children should pay less tax and get bigger pensions. Others argue that state-funded childcare institutions are a better and more immediate way of redistributing money to those with children. The fact that France offers day care for all children over three may have helped with its impressive fertility rates. But childcare facilities alone do not make a difference: Germany’s eastern Laender have many more nurseries but fewer babies than the western part of the country.

A quick fix will not work. France has had pro-family policies since the 1870s. In Scandinavia, support for women and children runs through all aspects of life. David Willetts, the Conservative Party’s Secretary of State for Education and Skills approvingly speaks of ‘state feminism’. Nor do values or religion explain birth rates. Fertility rates are lowest in traditionalist countries with rigid family structures, such as Italy, Greece or Spain, but also Japan, South Korea and Iran. They are highest in those places that allow women to combine work with bringing up children. France’s 35-hour week gives parents plenty of free time to look after their offspring. Flexible labour markets in the UK and the US offers part-time job and makes it easier for women to go back to work after a maternity break.

Germany is almost an example of how not to do it. Education takes too long, often up to 20 years, which forces many women to delay having kids until their 30s. Women now tend to be better educated than men. But they struggle to find matching partners since many high-earning men prefer traditional stay-at-home wives. Over 40 per cent of German women expect that having a baby would be the end of their professional career. They have a point: schools close at mid-day and private child care is expensive. Part-time jobs are rare and often come without perks and social security. The expectations towards women that juggle work and kids are crushing, says Regine Stachelhaus, who admits that she only managed to bring up her son and run Hewlett Packard in Germany because her musician husband did not work regular hours.

Incidentally, Frau Stachelhaus was the only female speaker at this two-day conference. I counted fewer than ten women among the 150-odd participants. I would have though that women have a lot to contribute to debates about having babies, juggling work and families and caring for the elderly.

Katinka Barysch is chief economist at the Centre for European Reform.

Tuesday, June 26, 2007

What the summit says about the EU

by Katinka Barysch

At 4.30am on Saturday 23rd June, after 36 hours of wrangling, EU leaders agreed on a deal to revive parts of the failed EU constitutional treaty. The biggest changes will concern not the transfer of powers from the member-states to EU institutions, but the way the Union functions. They are:

* A semi-permanent president of the Council will replace the 6-monthly rotating presidency. The various formations of the Council of Ministers will still be chaired by the rotating presidency.

* The exception is the Council of Foreign Ministers, which will be chaired by the new High Representative for EU Foreign and Security Policy (this post is a merger of those held by the current High Representative, Javier Solana, and the commissioner for external relations, Benita Ferrero-Waldner).

* A new double-majority voting system for the Council of Ministers, under which a decision is passed when it is backed by 55% of the members-states, so long as these represent 65% of the EU’s population.

* The powers of both national parliaments and the European Parliament in EU law-making will be strengthened.

*From 2014 onwards, the Commission will only have 18 members (the seats will rotate among the 28 EU member-states, with Croatia likely to join before 2014).

This summit was the most critical meeting of EU leaders since the 2004 enlargement and the 2005 failure of the constitutional treaty. It is therefore interesting to look at what the negotiations and the outcome say about the state of the Union.


The summit confirmed Angela Merkel's role as Europe’s star politician. Few doubted that she had the ability to get a deal, following her success at the EU’s March summit on climate change and the G8 meeting earlier in June. However, the Brussels summit was a particularly difficult balancing act. Merkel not only needed a successful conclusion to the German EU presidency. She also needed to save the grand coalition between her Christian Democrats (CDU) and the Social Democratic Party (SPD). In the week preceding the summit, the coalition had come to the brink of collapse over plans to introduce a general minimum wage in Germany.

Moreover, after the G8 summit, SPD leaders were incensed that Merkel was taking too much credit for Germany’s foreign policy successes. So Merkel took care to consult more with the SPD. And in a very unusual step, she allowed her foreign minister, the SPD’s Frank-Walter Steinmeier, to join the opening dinner of EU heads of state and government. This was meant to signal that the SPD was an equal partner in the treaty negotiations. It seems to have worked. Merkel got plenty of compliments for her summit performance, not only from the CDU (and its sister party, the CSU), but also from the SPD.

Merkel delivered more than many people had expected, in fact. The official objective of the German presidency was to get a negotiating mandate for a new inter-governmental conference (IGC): it was not strictly necessary for Merkel to get agreements on the minutiae of the new treaty. But aware that the subsequent Portuguese presidency would not have the same diplomatic clout, Merkel aimed to settle as many outstanding issues as possible. The resulting deal was so comprehensive that it surprised even the optimists.


The country that came closest to wrecking Merkel’s summit was Poland. Lech and Jaroslav Kaczynski, respectively president and prime minister, had raised the stakes through their “square root or death” rhetoric. After Merkel refused to re-open the debate about the voting system, the Kaczynskis threatened to veto the entire package. Merkel, in turn, raised the spectre of convening the IGC without Poland. Merkel got most of Europe’s sympathies after Jaroslav Kaczynski said that Germany owed Poland the new voting system: if it had not been for the second world war, Poland’s population today would be 66 million, instead of 38 million. Perhaps someone should have reminded Poland that the EU was set up to overcome the divisions of the world wars, not to perpetuate them.

Merkel alone could not sway the Kaczynskis. It took the help of several others, notably France’s Nicolas Sarkozy, Britain’s Tony Blair, Spain’s José Luis Zapatero and Lithuania’s Valdas Adamkus. Finally, the Poles compromised: the EU will adopt the double majority voting system – not in 2009, when the new treaty is likely to come into force but in 2014 (followed by another three-year transition period). Poland also secured a clause on energy solidarity in the treaty, and a clause that insulated Polish law-making on morality, family and religion from the treaty's charter of rights.

Lech Kazcynski welcomed the EU’s “solidarity” in these matters, but many member-states will take the summit as yet another sign that Poland is Europe’s trouble-maker. Warsaw appears to have drawn the wrong lesson from its success at the recent EU-Russia summit. At the Samara meeting, Merkel and Commission president José Manuel Barroso expressed solidarity with Poland over the Russian ban on Polish meat imports. (Warsaw has been blocking the start of negotiations on a new EU-Russia treaty since late 2006 because of the ban). By siding with Poland Merkel and Barroso also raised hopes that the country would in turn show a more constructive stance on the new EU treaty. However, the opposite happened. The Polish government now seems to think that the use or threat of a veto is a good way of getting what you want in the EU. In the end, Poland could be the biggest loser from the summit. It has secured a bit more voting power until 2014. But this could be pretty useless if other EU countries are unwilling to forge coalitions with a government that is seen as uncompromising. Some of Poland’s traditional allies in Central Europe already turned against it at the summit.


President Sarkozy continued his hyper-active and unpredictable diplomacy that had also been on show during the G8 summit. Although Sarkozy, like Blair, helped Merkel to broker a deal with the Poles, he also criticised her for attempting to isolate Poland. It would be impossible, he said, that less than 20 years after the fall of the Berlin Wall, the EU should exclude the greatest of the East European countries. Surely the contrast to the dismissive tone that Jacques Chirac had adopted vis-à-vis the new members was no coincidence. Sarkozy also made it very clear that he would not put all his EU eggs into the Franco-German basket.

Sarkozy also surprised his European peers with a last-minute request to delete the commitment to “free and undistorted” competition from the EU treaty while “full employment” and “social progress” will remain as objectives. A fight-back by the British and the Commission followed, with the result that the competition objective will be included in a protocol attached to the new treaty, but business and competition lawyers are nevertheless worried.

There are two interpretations of Sarkozy’s move. He may need something visible and popular to help him stave off calls for a repeat referendum. After all, many French voters said they had disliked the constitution because they found it too liberal. Alternatively, this was his opening salvo in an attempt push for less liberal, more protectionist EU policies. After the summit he said that the elimination of the clause would allow for an EU competition policy that protects “national champions”.


Any further protectionist initiatives would put Sarkozy on collision course with Gordon Brown, who is soon to become prime minister. Blair and Brown had displayed a rare spirit of co-operation when they worked out the UK’s negotiating position and red lines ahead of the summit. It seems odd that they made a last minute demand to cut the powers and resources of the new foreign minister, given that Britain had been behind the initiative to create the foreign minister. The fact that Britain eventually dropped its demands (with the exception of the renaming, so that the foreign minister becomes the High Representative) suggests that these may have been tactical moves to get Britain what it really wanted: opt-outs from justice and home affairs and social security, and safeguards that the charter of fundamental rights will not impinge on British law. With his popularity now exceeding that of David Cameron, Brown should be able to avoid a referendum on the treaty. Meanwhile, the other European leaders will like the fact that Brown decided to work with Blair towards a summit success, rather than threatening to block the new treaty to appease the eurosceptics at home.

The EU

The Brussels summit has shown that the EU-27 can still reach difficult decisions. Long and arduous talks are nothing new for the EU. The 2000 Nice summit also took until the early morning hours and was, if anything, more vexing than last weekend’s meeting. Moreover, the EU cannot be neatly divided into old and new Europe. Hungary, Slovakia and – after some prevarications – also the Czech Republic had rebuffed Polish suggestions that the Visegrad four should stick together. The summit may also be taken as a sign that large countries still call the shots, perhaps more so than before enlargement. Germany, France, Britain, Poland and to a lesser extent Spain were the main players during the summit. The need to avoid a repeat referendum had strengthened the Dutch voice in the negotiations. Among the smaller countries, only two came into view: Lithuania (useful as a mediator with Poland) and Luxembourg (as the self-declared spokesman of those countries that had already ratified the constitution).

Katinka Barysch is chief economist at the Centre for European Reform.

Thursday, June 21, 2007

What do you do with a problem like Poland?

by Paweł Świeboda

Behind the scenes, Angela Merkel has striven to get agreement on a mandate for treaty change ahead of this week’s EU summit. She has by now dealt with concerns of most of the key players in the debate – France, the Netherlands and the UK. But Poland, and its objections to a new EU voting system of ‘double majority’ voting, seems immovable.

Warsaw’s ruling Kaczyński brothers are a unique political phenomenon. Some of their thinking comes straight from the 19th century and their rhetoric can be aggressively nationalist. Their negotiating position is rigidly negative, even going against the grain of public opinion in Poland itself. They seem undecided as to whether they want Poland to be a confident big member-state or a claustrophobic one that is stuck in a fortress mentality.

The Kaczyńskis are wrong to oppose the introduction of the double majority voting rules, according to which a measure would pass if it wins the support of 55 percent of the member-states, representing 65 per cent of the EU's population. This system would make the EU more democratic and more transparent. Their alternative voting proposal, based on a formula linked to the square root of member-state populations, is pure political fiction. Only the eurosceptic Czechs support it, and then only tentatively. Poland’s real intention is to delay discussions on the treaty in the hope that the process gets derailed at a later stage.

Do not dismiss the twins’ stance as hopelessly irrational. Votes matter in the EU. While countries almost never formally cast their vote, the allocation of votes represents a balance of power that counts from the very beginning of the law-making process. When an EU presidency tries to strike a deal in the Council, it is well aware whether it carries a qualified majority with it. The double majority system, originally agreed in the constitutional treaty negotiations, is a sensible expression of the EU’s nature as a union of states and citizens. But it does disproportionately favour bigger member-states, and could lead to them dominating almost all EU business. The combined votes of the three bigger member-states, with a smaller companion, can block any legislation and hence control the EU’s agenda.

The Kaczyński brothers are also right to point out that other member-states have asked for and are getting concessions in the treaty debate. So why deny Poland the right to have problems with the current deal that the Germans are presenting? True, the double majority voting system lies at the core of a delicately balanced compromise that took years to negotiate and finalise. And the Poles’ aggressive tactics and almost palpable desire for a stand-off with Germany are hardly conducive to building the alliances they need to achieve their goal. On the other hand, Berlin’s plan to isolate Warsaw and place it under insurmountable pressure will not work. Better to offer Poland a sensible compromise instead.

Poland should first of all accept that the double majority voting system is here to stay. It remains the best available compromise on an extremely sensitive issue for the member-states. To undo it would risk triggering interminable arguments over the institutions, which no country wants and which the EU cannot afford. But the Germans should offer the Poles a way out of their problem. Germany could accept that the EU retains the old Nice rules – which give Poland a particularly good deal – until 2014, for the issues that matter most to Poland. These issues would include talks on reforming the EU’s budget, and funding to develop the EU’s poorest regions. It is true that the overall agreement on the EU budget requires unanimity. But Poland fears losing its bargaining power over the legislative acts which translate the budget agreement into practice, and which are subject to majority vote. The EU has done this kind of deal before. During the negotiation of the Maastricht treaty, the member-states agreed to continue using old voting rules on controversial environmental issues for a transition period.

There are other possible concessions that could be offered to the Poland. The government’s mathematicians have calculated that Poland’s influence on EU votes would increase if the number of countries needed for an agreement was lowered below 55 per cent; or if the population requirement was raised above 65 per cent. Hence an adjustment these thresholds could help. Warsaw could also be compensated with extra seats in the European Parliament – that is an issue on which it was badly treated in the initial deal on the constitutional treaty.

Finally, Germany could offer to restrain its own position in the new voting system by accepting a cap on its population estimate – say at 70 million. This would seal Polish-German reconciliation inside the European Union (and help take some of the sting out of the enlargement debate and the eventual accession of Turkey). After all, it took many years for France to feel comfortable with the notion that Germany would gain a greater voting weight than itself in the Council of Ministers.
Angela Merkel is on the right track in trying to forge an agreement at the Brussels summit. Her leadership has been impressive thus far. But she should not underestimate the dogged determination of Poland’s leaders or make the mistake of thinking that they will fold under enough pressure. They will not.

By Paweł Świeboda, director of DemosEuropa, Warsaw

Friday, June 15, 2007

Turkey before the election

by Katinka Barysch

I have recently come back from Turkey, where the mood is a mixture of relief, hope and anxiety: relief that the army has remained in the barracks; hope that the early election in July will result in a workable compromise between the AKP and the secularists; and anxiety that the crisis that started in April has done lasting damage to Turkish society and its political system.

As far as elections go, the parliamentary poll on July 22nd will be fairly momentous. Even seasoned political observers cannot predict the outcome. There have been no reliable opinion polls since the Erdogan government was forced to abort the presidential election and call an early parliamentary one. Moreover, Turkey’s electorate is fickle at the best of times, and recent dramatic events may have swung millions of voters. Finally, the smaller parties are merging, or trying to do so, to increase their chances of overcoming Turkey’s 10 per cent threshold for parliamentary representation.

Few people doubt that the AKP will once again be the strongest force. Its share of the vote could even slightly exceed the 34 per cent it received in 2001. However, its ultimate political strength will depend on how many parties manage to overcome the 10 per cent threshold. Only two did so at the last election (the AKP and the centre-left Republican People's Party, or CHP), while 45 per cent of votes were ‘wasted’ on parties that did not enter parliament.

The CHP has performed badly in opposition, and its leader, Deniz Baykal, has few friends. But the party will benefit from people’s determination not to waste their votes again and from its recent merger with the other centre-left party (Democratic Left Party, DSP). The centre-right parties – Motherland (Anap) and the True Path Party (DYP) – also tried to merge, unsuccessfully. Even if they get their act together before July, the unedifying spectacle of squabbling party leaders will have put off their supporters. Instead, there could be up to a dozen MPs from the Kurdish South-East in the new parliament. Although their party (the Democratic Society Party, or DTP) will not get 10 per cent of the vote nation-wide, its candidates stand a good chance as independents. Another wild card is the ultra-nationalist MHP (Nationalist Action Party) which may gain from blaming any future terrorist attacks on the AKP. If, as seems likely, the Erdogan government does not give the Turkish army the mandate it wants to move against PKK guerrillas in northern Iraq, the MHP will portray the government as weak on security issues.

If the CHP plus more than one other party get into parliament, the AKP would fall short of an absolute majority. Speculation about possible coalitions is already rife. A government led by the AKP and including a centre-right party would probably be good news for economic reforms and EU accession. But mutual distrust and disagreements over the issue of secularism would leave it fragile. An alternative scenario is a left-right (and maybe nationalist) coalition designed to keep the AKP out of power. Many Turks already fear a return to the bad old days of policy paralysis and political infighting.

That would be very bad news. Turkey needs a strong and focused government, to navigate through possible tensions with the EU, to deal with the PKK terrorism threat and to consolidate and build on the impressive economic achievements of recent years.

The first test for the new parliament will be the presidential election. Erdogan’s government wants to shift this election from the parliament to the people. But the required law is now stuck in the constitutional court and will eventually go to a referendum. Meanwhile, following constitutional court ruling in May, the first round of the presidential ballot in parliament now requires a two-thirds quorum to be valid. That means that any party in parliament (or a coalition of parties) can hold the government to ransom. Under these circumstances, Abdullah Gul’s presidential bid looks doomed.

The AKP may face the choice between putting forward a candidate who looks more acceptable to the secularists, or risk yet another round of elections. Or worse. The army has not withdrawn its threat of intervention in case the AKP insists on Gul as their presidential candidate.

Some people say that the current stand-off has done too much damage to Turkey already. It has revealed how deep the divisions still run in Turkish society. The Kemalists accuse the AKP of using the education system, the courts and local administration for a ‘slow motion’ Islamist coup. AKP supporters, in turn, accuse the army of doing much the same.

The fact that there is no trust in Turkish politics makes checks and balances all the more important. It seems that this – not Gul’s personality or faith – was the reason why so many people were upset about his presidential candidacy. The president has traditionally been a counter-weight to the government, so was the army. Neither seeks to run the country but both have intervened at times – be it through vetoing laws or rattling sabres – when they thought that the government was crossing a ‘red line’. Erdogan’s single-party government – so much stronger and more effective than most of its predecessors – did not look like a threat as long as the president and the army retained their independence. The nomination of Gul as presidential candidate raised the spectre of an unusually strong prime minister and a popular president both coming from the same political camp. And since the president is also (nominally) the head of the army and (practically) signs off on senior army appointments (as well as those in the judiciary and education), the army itself feared that it could be ‘infiltrated’ by Islamists.

The army argues that it is needed in politics as long as Turkey’s institutions are weak. But democratic institutions cannot prove their resilience as long as the army sees itself as the ultimate arbiter in Turkish politics. The generals probably took May’s mass demonstrations in Istanbul, Ankara and Izmir (according to some counts, 10 per cent of the electorate marched in the streets) as a sign of approval and support. They are probably wrong. It may just be a sign that Turkish democracy is vibrant, and Turkish voters are willing and able to defend their preferred way of life. Most Turks want neither an Islamist government nor a military one. Democratisation, EU negotiations, reforms and economic growth mean that the Turkish people have a lot to lose if things go wrong now.

Katinka Barysch is chief economist at the Centre for European Reform.

Monday, June 11, 2007

G8 and world politics

by Katinka Barysch

Angela Merkel can be content with the outcome of the G8 summit in Heiligendamm which she chaired with her by now characteristic mix of modesty, determination and pragmatism. Many people had predicted that the meeting would end in acrimony because of US-European disagreements on climate change and because of mounting tensions between Russia and the West. Instead, Merkel brokered a couple of impressive-looking headline agreements. Moreover, the meeting has proved those people wrong who say that the G8 is an irrelevant talking shop. Heiligendamm showed it is an important tool for global governance.

This meeting will be mainly be remembered for the US U-turn on climate change. In the run-up to the summit, the US officials had said that there was no chance that the Bush administration would sign up to ambitious numerical targets, such as those endorsed by the EU summit in March 2007 (also headed by Merkel). But at Heiligendamm, George W Bush backed, at least in principle, the objective of cutting greenhouse gas emission by 50 per cent by 2050. The US still insists that binding targets will need to involve China, India and other emerging powers. But it is nevertheless significant that he agreed to the start negotiations on a post-Kyoto regime in the framework of the United Nations.

The G8 countries also reconfirmed their aid commitments made at the Gleneagles summit in 2005, namely to write off multilateral debt worth $60 billion, to raise annual overseas development assistance to $50 billion (of which half should go to African countries) and to provide universal access to HIV treatment by 2010. But NGOs said this ‘recommitment’ did not amount to much, given that the G8 countries are already falling behind on their objectives and still oppose annual spending targets. Similarly, although the G8 leaders promised to spend $60 billion over coming years on fighting HIV, malaria and other diseases in developing countries, they did not add a timetable.

The summit agreements are big steps towards longer-term goals, but they leave the most controversial questions to be resolved at a later point in time. Neither was there much progress on other issues on the G8 agenda, such as the Doha trade round, Kosovo, Iran and the regulation of hedge funds.

What the summit did do, however, is provide a very useful snapshot of global politics at a time of leadership changes in many of the key countries.

Well done Angela!
Merkel has cemented her role as Europe’s leading political figure, and she has now added a global dimension. Previous achievements had already earned her a reputation as a skilled mediator and negotiator. Her tireless pre-summit diplomacy on climate change appears to have paid off. Her strategy was also smart. Knowing that failure to reach a climate deal would be blamed on the US (and not damage her popularity at home), she was in a strong position. She had played down expectations of a deal ahead of the summit while still leaning heavily on President Bush. Although the G8 agreements owe much to Merkel’s political skills and convictions, they are also evidence of a longer-term trend towards a more self-confident Germany which is not afraid to shoulder global responsibilities.

The new George W
Bush’s apparent U-turn on CO2 targets was partly motivated by the fear to antagonise or embarrass Merkel – a sign that she has successfully mended US-German relations after the falling-out over Iraq. Bush also wants good ties with Merkel as part of his broader efforts to strengthen US-EU relations. Some observers spotted a belated turn towards multilateralism. Having long been dismissive of multilateral organisations, Bush has now agreed that the UN should be the framework for post-Kyoto negotiations. On other issues too, Heiligendamm saw a more co-operative and conciliatory US president. He was friendly to Vladimir Putin, despite the latter’s aggressive hectoring ahead of the summit. He also promised that the US would cough up half of the $60 billion committed to healthcare initiatives in Africa.

Russia is back
Putin’s belligerence in the run-up to the G8 had fuelled fears that Heiligendamm would be the chilliest East-West encounter since Russia officially joined the G8 in 1998. Putin had threatened to re-direct Russian nuclear missiles towards Europe if the US went ahead with stationing parts of its missile defence system in the Czech Republic and Poland. Having failed to drive a wedge between the US and the Europeans, Putin then suggested that the US should station missile defences at Gabalan, a Russian-operated base in Azerbaijan. Security experts say that the proposal, first muted in 2004, is unattractive to the US not only because it implies shared control over a key US military installation, but also because Gabala is too close to Iran to intercept a potential attack from there. If Putin knew that the US answer would be No, his prime aim must have been to set the agenda – to first raise tensions and subsequently defuse them. Such behaviour is becoming typical of a resurgent Russia. Putin’s shrewd mixture of harsh statements followed by statesman-like conciliation is also meant for home consumption, ahead of the parliamentary election in December and the presidential changeover in early 2008.

Bye bye Blair
Heiligendamm was Blair’s last international summit but one (he will still attend the European Council on June 21st and 22nd). It should have been a grand finale for him, given that it made progress on climate change and poverty alleviation, his two top foreign policy priorities. But any sense of triumph Blair may have felt must have been dampened by the absence of public recognition. Blair has always argued that his decisions to send troops to Iraq and not criticise Bush in public were paying off in terms of the private influence in Washington. Diplomats say that Blair worked hard to mediate between Merkel and Bush before and during Heiligendamm. But in the end it was Merkel who received the credit for having persuaded Bush. At least Blair’s imminent departure from the political scene allowed him to talk openly about differences with Putin.

Welcome Sarkozy
For Nicolas Sarkozy the G8 meeting was the first opportunity to mingle with the leaders of the world’s biggest countries as French president. With parliamentary elections imminent, Heiligendamm was the perfect opportunity for Sarkozy to show his skills as statesman. He did so by putting forward a compromise proposal for the final status of Kosovo (rejected by Putin) and by calling for more international attention to Darfur (vaguely accepted). Sarkozy’s conciliatory language after a long private meeting with Putin raised concerns that he would follow Jacques Chirac’s uncritical stance on Russia. But Sarkozy made big efforts to distance himself from his polished predecessor by talking very openly, by not trying to steal Merkel’s show and by being nice to Bush.

A bigger club
The other G8 members – Italy, Canada and Japan – played a more marginal role, whereas some non-G8 countries got a lot of attention. Leaders from emerging Asia, Africa and South America have long taken part as observers in G8 meetings. It is now clear that the eight current members cannot fix any global priorities – whether climate change, Doha, global imbalances, terrorism or poverty – without the co-operation of other emerging powers. China’s economy is already much bigger than those of Italy and Canada, and China is also on course to overtake the US as the world’s number-one emitter of greenhouse gases. Both China and India have more than twice as many people as the US or all the European G8 members together. And the legitimacy of many G8 initiatives will depend on African or Latin American countries having a say.

Nevertheless, the Heiligendamm meeting decided against broadening the club’s membership. Instead, a new ‘Heiligendamm process’ will regularly bring together ministers from the G8 and the five ‘outreach countries’ (China, India, Brazil, Mexico and South-Africa), to discuss issues ranging from energy to intellectual property rights.

Some say that taking in China would destroy the democratic credentials of the G8 (although that argument is a lot less potent given Russia’s slide towards authoritarianism). Others fear for the club’s effectiveness. Merkel said, for example, that if the poorer nations had already been part of the G8, a compromise on climate change would have been impossible. But neither are the newcomers in a hurry to become full members. India and China – while keen to make their voices heard – insist that their status as developing countries does not allow them to shoulder the same global responsibilities as the current G8 countries.

Heiligendamm showed that the G8 is not just a talking shop as some of its critics have alleged. There was real drama as the sherpas haggled over the final communiqué until the last minute. And the results are important milestones in long-term fights against climate change and poverty. But the meeting also showed clearly that to remain relevant in the future, the G8 will eventually have to include China, India and other emerging powers.

Katinka Barysch is chief economist at the Centre for European Reform.