Monday, April 30, 2012

Why France is threatening to leave Schengen

Nicolas Sarkozy appears ready to send the EU's Schengen area to the guillotine in order to win re-election to the French presidency. Last week, Claude Guéant, France's minister for the interior, was despatched to a meeting of his EU counterparts in Luxembourg with a stark warning: Schengen's common border – which stretches from the Baltic to the Mediterranean to the Aegean – must be secure by the end of 2012. Otherwise, France will leave the 26-country passport-free zone, or so says Sarkozy on the stump. 

Guéant's move seems like crude electioneering to most observers. Marine Le Pen, the anti-immigration, anti-EU leader of the National Front, won 18 per cent of the vote in the first round of France's presidential election. Sarkozy must poach a sizable chunk of these votes in order to beat socialist rival, François Hollande, in the run-off on May 6th. Furthermore, although Guéant complained to his ministerial colleagues that 400,000 people enter the Schengen area illegally each year, this figure must be seen in context: the passport-free zone benefits some 650 million legitimate travellers annually.

Yet France's ultimatum is about more than simple pandering to the far-right. French scepticism of the Schengen project goes right back to its inception in 1995, when border controls were first abolished between the original five members: the Benelux three, France and Germany. If Germany gave up its beloved deutschmark in the cause of European integration, France sacrificed sole control over its own borders and reluctantly accepted the free movement of people between EU member-states. Whereas Germany was able to ensure that the European Central Bank reflected its own economic orthodoxy, France had no such means to export its traditions of robust border security to countries guarding the new external frontier. Hence its authorities initially refused to drop border controls after 1995, citing smuggling at the Belgian border and a row with the Netherlands over its liberal drugs policy, to the general consternation of fellow Schengen members.

The Schengen area does have common rules on borders and visas that detail the standards its members must maintain in their border checks and consular procedures. But such stipulations are purely technical in nature and deliberately limited in scope. For example, Schengen countries have only recently agreed to harmonise the background information required from travellers applying for a visa in their consulates abroad. Their governments are highly unlikely to be able to agree anything like a coherent immigration or common security policy in the short-term.

Schengen members are reviewed once every five years for their compliance with the basic technical requirements by teams of border guards and police from their peers, led by the EU presidency. These inspections produce 'recommendations' for improvements to be made but there is very little to force the country in question to follow them up. Greece has completed two such peer reviews and received reams of recommendations since joining Schengen in 2000. But Frontex – the EU's border agency – still reported in early 2012 that the country will remain the largest source of illegal entry to the passport-free zone until at least 2013, with illegal entries remaining as high as 50,000 per year. See
Such figures are based only on the number of migrants caught trying to cross the border: the total number of detected and undetected illegal entries is higher.

The net result of all this is that France views the Schengen area very much the way Britain sees its membership of the EU. The French feel trapped inside a club in which they claim higher standards than others while having little faith that fellow members can be kept even to the minimalist rules to which they have signed up. That is why Sarkozy hoodwinked his Italian counterpart, Silvio Berlusconi, into pushing for a review of the Schengen regime in April 2011, after Tunisian migrants began to reach France over its open border with Italy following the unrest of the Arab spring.*

Currently, Schengen members can re-introduce border checks for up to 30 days if either public security or 'order' is at stake, without asking permission of other members or the European Commission. The latter condition is defined quite strictly in EU law: countries usually only invoke it to ensure the security of major events like international sporting tournaments or political summits. (Switzerland, one of Schengen's four non-EU members, invokes the clause annually to maintain security at the World Economic Forum in Davos, for example.) But, if the Greeks are going to permit 50,000 illegal entries to their – and, potentially, French – territory each year, France feels entitled to argue that Schengen's border code should include a third condition for the unilateral re-introduction of border controls: large-scale illegal immigration.

The European Commission has the job of ensuring that Europe's borders remain as open as possible to trade and the free movement of people. Cecilia Malmström, the EU Commissioner for Home Affairs, fears that France's proposed new exemption would result in a tit-for-tat retaliatory imposition of border controls across the passport-free zone. Instead, she has proposed that countries may re-instate border checks but only if the border code is also amended to give the Commission the right to approve specific incidences lasting longer than five days.

However, Guéant, backed up by Germany, Austria and others, made clear last week that Schengen governments consider the latter idea an unconscionable – and opportunistic – power grab. Never before has the Commission had the power to stop a country guarding its own borders. This doomed attempt to establish a confederal arrangement for managing Schengen exposes the contradiction facing the passport-free zone: governments want more control over their own but also over other countries' border decisions simultaneously. (French authorities are dismissive of inspections by EU-led teams evaluating their own implementation of Schengen rules but expect countries like Greece to fall into line.) At the same time, Commission officials must beware of over-reaching: a world of difference exists between winning formal legal powers over a sensitive area of policy and having the moral authority to intervene in national decisions on immigration and security.
France's problems with the Schengen area were there before Sarkozy, and they will remain after he leaves office. So there must be a re-think if the current tensions within the passport-free zone are to ease. One preliminary idea is for Malmström to take a zero-tolerance approach to non-compliance with the existing border and visa codes (as well as EU rules on the security of passports) by bringing countries to the European Court of Justice for minor infractions. That would help convince other members that the passport-free zone is a club where those who do not play by the rules are swiftly taken to task. “France is attached to Schengen, but to a Schengen that works”, said Michel Barnier, then France's Europe minister, in 1995. Given that other members – even Schengen's biggest supporter, Germany –  seem to be losing patience with the current system's imperfections, the Commission needs to put this sentiment at the core of any further attempts at reform.

* For a fuller analysis of the politics of the Schengen area, please see the CER report:
Saving Schengen: How to protect passport-freetravel in Europe
Hugo Brady is a senior research fellow at the Centre for European Reform.

Wednesday, April 18, 2012

Governance reforms have left the euro's flawed structure intact

Eurozone policy-makers often complain that they are not given enough credit for all the changes they have pushed through since the Greek sovereign debt crisis broke out. It is an understandable reaction. Since 2010, they have presided over a major overhaul of the eurozone’s governance framework. They have adopted a ‘Euro Plus Pact’, which commits countries to pushing through supply-side reforms; a ‘Six-Pack’, which strengthens the old Stability and Growth Pact and adds a new framework for monitoring economic imbalances; and a ‘Fiscal Stability Treaty’ (or ‘compact’), which requires member-states to implement balanced budget rules into their national law. In addition, they have created a bail-out fund (or firewall) to provide liquidity assistance to distressed sovereigns.

European leaders are right on one point: most of these changes would have seemed inconceivable only two years ago. More doubtful, however, is their claim that the changes represent a major step towards greater fiscal union. True, the new framework implies substantial new constraints on sovereignty (as several member-states have already found out). But in a more fundamental sense, the eurozone’s essential character remains unchanged. It is still what it was when it was originally launched: a currency which is embedded in a fiscally decentralised confederation, rather than a fully-fledged federation (such as the US). The thrust of all the reforms has been to reaffirm the eurozone as a rules-based currency union. The animating principle remains collective responsibility, rather than solidarity.

Consider what the eurozone still lacks compared with, say, the US. It has no federal budget for macroeconomic stabilisation: the EU budget is too small (at 1 per cent of GDP) and it cannot in any case go into deficit. Individual states are separately, not jointly, responsible for backstopping the banking system – unlike in the US. And the eurozone lacks a federal agency that issues government debt for the currency union as a whole. In other words, after all the repair work that has been carried out since 2010, the eurozone’s basic institutional configuration remains what it was before the crisis broke out. Because its member-states are reluctant to share the costs of a common currency, critical functions that are performed at the federal level in the US are undertaken at national level in the eurozone.

If the past two years have taught us anything, it is that the eurozone’s fiscally decentralised structure makes it a fundamentally unstable construct. One reason is that because the member-states do not monopolise the currency in which they issue their debt, the bond markets may treat the fiscally weaker among them as if they had issued it in a foreign currency. Another reason is that banks and states interact very differently in a fiscally decentralised currency union than they do in a federal one. Thus, in the US, the fiscal position of an individual state has no bearing on depositors’ confidence in a bank that is incorporated in that state; in the eurozone it does. Equally, banks in the US pose no direct threat to the solvency of the state in which they are incorporated; in the eurozone they do.

If one accepts that the eurozone is unstable because it is structurally flawed, what does this mean for its future? An optimistic case would go something like this. The US did not become a fiscally integrated monetary union overnight; we should not expect the eurozone to do so either. The elaborate system of rules on which Germany has insisted is necessary to establish a pan-European ‘stability culture’. Once that culture has been established, greater fiscal integration will be possible. In the meantime, embryonic federal institutions are slowly emerging. The eurozone’s bail-out fund could be viewed as a nascent debt agency. And the European Supervisory Authorities that were set up in 2011 could develop into a unified banking supervisory system with common fiscal resources to rescue and recapitalise banks.

A more pessimistic reading is that the focus on rules conceals deep-rooted opposition to the very prospect of fiscal union. One sign of this opposition is the European Central Bank’s emergence as the eurozone’s leading (but still largely covert) cross-border financier. Another sign is the IMF’s involvement in the bail-outs of Greece, Ireland and Portugal (it is unprecedented for the IMF to provide support to the sub-units of an entity that, like the eurozone, is running a current-account surplus). A third sign is the institutional sequence which the eurozone has followed: whereas in the US the federal assumption of state debts preceded the adoption of balanced budget rules by the states, in the eurozone balanced budget rules for the member-states have come first and the rest has yet to follow.

At best, then, the eurozone is in a state of institutional limbo. It has acquired some of the form, but little of the substance of a proper fiscal union. For the time being, the assumption (or hope) is that the eurozone will extricate itself from the crisis – and become a more stable arrangement over the long term – if it ‘Europeanises’ German discipline. Among creditor countries, the hope is not that collective discipline will make fiscal union (properly conceived) possible, but unnecessary. But they under-estimate the peculiar vulnerabilities to which the eurozone’s fiscally decentralised structure exposes its indebted members: not only are the latter particularly vulnerable to ‘sudden stops’ in private-sector capital flows, but they are also condemned to pursuing self-defeating economic policies.

In the end, it is the politics of the eurozone crisis that make its economics intractable – not the other way round. At root, the eurozone is in crisis because most voters still think of themselves as nationals first and Europeans second. The eurozone’s fiscally decentralised structure simply reflects the fact that solidarity is weaker across European borders than it is within them. The upshot is that EU leaders do not have a democratic mandate to complete the currency union. Their political commitment to the euro remains strong. They will do all they can to prevent the eurozone breaking apart, and will probably succeed. But it is harder to see how a European demos (and hence more stable currency zone) can emerge from the economic pain and mounting cross-border resentment that current policies are causing.

Philip Whyte is a senior research fellow at the Centre for European Reform.

Wednesday, April 11, 2012

Energy efficiency: Made in Denmark, exportable to the rest of the EU?

Denmark uses energy more efficiently than any other EU member-state. Successive governments have implemented ambitious and consistent policies on energy efficiency since the oil shocks of the 1970s. As a result, Denmark today only uses 60 per cent of the energy per unit of GDP of the EU average. Thus it was no surprise when in January the new Danish presidency of the EU’s Council of Ministers identified a draft ‘energy efficiency directive’ as one of its priorities for its six-month term. But Copenhagen’s efforts look unlikely to lead to agreement before the end of June, when the Danish presidency ends. Several member-states, including Germany and France, are trying to weaken key aspects of the draft directive. The Danish government’s desire to oversee agreement on the ‘energy efficiency directive’ is understandable. But a ‘lowest common denominator’ agreement would be worth little. It would be better for Copenhagen to stick to most of the Commission’s proposals, and remind its partners that in the long run these reforms would save them billions of euros. Where necessary, Denmark could point to its own experience to underline the point.

Failure to take firm action on energy efficiency would be bad news for the European economy. The Commission’s proposals are sensible, shifting the emphasis away from overall medium- and long-term targets – of which the EU has too many – towards annual obligations and specific actions which EU governments will have to take. Philip Lowe, EU director general for energy policy, correctly points out that using energy more efficiently would reduce the cost of importing energy, which was €400 billion in 2011, and create hundreds of thousands of new jobs. The EU has a non-binding target to become 20 per cent more energy efficient, compared to the predicted ‘business as usual’ trend, by 2020. At present it has only become nine per cent more efficient. Lowe argues that the extra energy used under the scenario without greater energy efficiency would cost member-states at least €34 billion by 2020. Such counterfactual calculations are not precise, but it is clear that failure to act on energy efficiency will cost the EU many billions – hard to justify under any circumstances, but even more so when finances are stretched.

The Commission has proposed two annual obligations. First, member-states should renovate at least 3 per cent of the large public buildings in their country. Second, energy retailers should take action to deliver 1.5 per cent energy saving among their clients.

Both these proposals are modest and achievable, and are essential to delivering substantial energy savings. Yet several member states, led by Germany and France, are trying to weaken them substantially. The obligation to renovate public buildings would, as well as delivering energy savings, put governments in a position of leading by example, as the Commission has pointed out. But some governments are trying to reduce this obligation to cover only properties owned and occupied by central government, which would significantly dampen the intended impact of the proposed reform. The Presidency should stick to the Commission’s approach on this issue.

On the energy retailers’ obligation, Austria is arguing that action taken since 2005 should be taken into account. This is a valid point. Retailers who have taken action to get their clients to use energy more efficiently will find it harder to make efficiency improvements in the future – unless they get substantial numbers of new clients – because the ‘low hanging fruit’ has already been picked. Clients’ buildings will have been insulated, inefficient boilers replaced, and so on. So there is scope for compromise with the member-states on this issue.

However, Poland and Sweden are seeking to cut the annual savings obligation from 1.5 per cent to 1.2 per cent. This would substantially reduce the impact of the obligation, and should be strenuously resisted by the Danes and other member-states.

Some governments, led by France, are also arguing that some of the energy sold by retailers to Emissions Trading System (ETS) sectors should be excluded from the requirement on retailers. This would not be a sensible approach. The ETS, the EU’s cap-and-trade scheme for greenhouse gases, has had little impact on energy efficiency so far, and with prices at around €7 per tonne of carbon dioxide will have even less impact in future unless the system is strengthened. (At the time of the last amendment to the ETS directive in 2009, prices of around €30 per tonne were anticipated.) Progress on energy efficiency could lead to a further fall in the carbon price unless the overall cap was lowered, as less energy being used would mean lower emissions from key sectors, including the power sector, so lower demand for allowances. The draft ‘energy efficiency directive’ does include proposals to withdraw (or ‘set aside’, to use the Brussels jargon) a number of allowances in response to energy efficiency measures, so that energy savings do not lead to further falls in allowance prices.

A recent report from the academic network Climate Strategies argues correctly that set aside is a necessary step to prevent further reductions in allowance prices, but will not deliver price stability or predictability. Stability and predictability are needed in order to attract investment into energy efficiency and low-carbon energy supply sectors. Nor will set aside increase the ETS price significantly. So set aside is not sufficient. But it is a necessary first step, and should be included in the ‘energy efficiency directive’.

France is also resisting the Commission proposal that most new power stations should capture and use the heat created when fuel is burnt to generate electricity (an approach called combined heat and power, or ‘co-generation’). France’s opposition is presumably due to its desire to keep the cost of new nuclear power stations down. The French get over three-quarters of their electricity from nuclear power. Nuclear power stations create heat, which can be used in buildings or industrial facilities. Switzerland got 7.5 per cent of its heat from nuclear power stations in 2009. Within the EU, Slovakia got over 5 per cent of its heat from nuclear stations in 2009. Hungary and the Czech Republic also use nuclear heat. But in the EU’s main nuclear players, such as France and the UK, the heat is simply expelled into rivers and seas.

Combined heat and power becomes a more usable technology when a country has installed a district heating system, to transport the heat to homes and factories. In the Nordic countries heat produced in this manner is transported up to a hundred kilometres. A small amount of heat is lost en route, but since it would otherwise just have been pumped into the atmosphere or the seas, this does not represent wastage. Denmark installed extensive district heating networks in the late 1970s and 1980s, and now tops the European league of combined heat and power as a proportion of total energy generated. So whatever the Danish government does to try and get agreement on energy efficiency before the end of June, and whatever its temptation to act as chairman of the Council rather than leader, it should remain firm in support of the Commission proposal on combined heat and power.

Stephen Tindale is an associate fellow at the Centre for European Reform.

Monday, April 02, 2012

The US-Russia reset is over

Can the ‘reset’ between Washington and Moscow survive Vladimir Putin’s return to the Russian presidency in May? That is a question I posed to many people on a recent trip to Moscow. Opinions differed, but some of the best-informed analysts and officials expected the reset to fade away.

Vice-President Joe Biden first used the term at the Munich Security Conference in February 2009, when he said that it was time to press the reset button in the US-Russia relationship. Barack Obama and Dmitri Medvedev, both recently elected as presidents of their respective countries, took up the challenge, and the climate between Moscow and Washington improved.

The reset brought considerable benefits to both sides. Moscow obtained an agreement on co-operation on civil nuclear power technology, help with its WTO membership application and an implicit understanding that the US would not directly challenge Russia’s key interests in its own backyard (for example, in Ukraine). The US benefited from Moscow allowing men and supplies for the NATO mission in Afghanistan to pass through Russia. Moscow refused to deliver S-300 surface-to-air missiles to Iran and in June 2010 agreed to more UN Security Council sanctions against that country. Both parties were happy to sign the New Start agreement that will reduce their strategic nuclear arsenals.

The warm personal chemistry between Medvedev and Obama contributed to the reset’s success. For example, their interventions sorted out some of the difficulties in the negotiation of the New Start agreement. And in March 2011, Medvedev’s decision not to veto UNSC Resolution 1973 – a decision opposed by Putin and much of the Russian security establishment – gave the US and its allies legal cover to intervene militarily in Libya.

Prime Minister Putin, who has remained the pre-eminent figure in Moscow during the Medvedev presidency, never used the word but allowed the reset to happen. The prospects for its continuation, however, look bleak. Putin has a less benign view of the US than Medvedev. During the recent presidential election campaign, Putin resorted to tough anti-American rhetoric, accusing opposition demonstrators of being paid by the US. He wrote an essay on Russian foreign policy, published in February in Moskovskie Novosti, which accused the US of promoting human rights and supporting humanitarian interventions simply to advance its own commercial and geopolitical interests. Those who have heard him talk in private say that Putin’s suspicion and mistrust of the US is genuine, rather than mere electoral rhetoric.

Arguments over human rights are likely to cause further strains in the relationship. Within Russia, NGOs funded by Western foundations or governments are facing new forms of harassment. The appointment of Mike McFaul – a longstanding advocate of democracy-promotion – as ambassador in Moscow has fuelled suspicions of US intentions. McFaul has been vilified in the Russian media for meeting representatives of NGOs. All this is likely to lead to more American criticism of Russia, fuelling more paranoia about Western plans to undermine Putin’s regime, and so on.

Another thorny issue is missile defence. Much of the Russian security establishment appears to believe that America’s plans for missile defence are aimed at Russia – though in Washington those working on missile defence say that Iran is the rationale (a handful of American thinkers also see China as a reason for investing in missile defence). Russian strategists are attached to the concept of ‘mutually-assured destruction’ and worry that American missile defence would necessitate a rethinking of that Cold War principle. Medvedev has threatened to respond to the US systems by deploying cruise missiles to Kaliningrad and building Russian missile defence systems.

However, some senior Russians do not view American plans for missile defence as a threat, at least until the early 2020s, when the US says it will deploy more sophisticated interceptors. But even then, some of these Russians acknowledge, the number of interceptors that the US intends to deploy could not significantly stymie Russia’s ability to rain nuclear missiles on the US. According to these Russians, the loud barks from the security establishment are an attempt to set red lines and warn the Americans that they should take Russia’s interests into account as they develop their system.

Syria and Iran are causing great strains. Russian strategists view the turmoil in the Middle East almost exclusively in terms of a conflict between Iran, on the one hand, and Saudi Arabia and the US on the other. Syria is not only Iran’s ally but also Russia’s best friend in the region. Russia has friendlier relations with Iran than with Saudi Arabia. The Russian government believes that geopolitics will drive the US to use force against not only Iran but also Bashar al-Assad’s regime in Syria. Most Russians believe that only ill will come of the Arab spring: the likely result in many countries, they predict, will be fundamentalist Islamist regimes backed by Saudi Arabia.

Putin is ardently opposed to any kind of humanitarian intervention in Syria. This position seems to be based partly on principle – the Russians are even more firmly attached than the Chinese to absolute state sovereignty. Their belief that the West abused the terms of UNSC Resolution 1973 to justify striking Libya has reinforced their hostility to Western intervention anywhere else. Their position is also based on realpolitik: Syria buys a lot of Russian arms, provides Russia with a naval base and helps to prevent US-Saudi dominance in the Middle East.

One subject that has fostered co-operation between Washington and Moscow is Afghanistan. Putin views the US presence in the country as a bulwark against the spread of Islamist fundamentalism. Russia and the US work together on counter-narcotics operations. But even on Afghanistan there are tensions: Moscow opposes both Washington’s schemes to retain military bases after its troops depart in 2014, and its plans to encourage the Afghan economy to integrate with those of Central Asia, on the grounds that they will increase America’s sway in the region. In any case, the Russians believe that once US troops leave the country, the Americans will have fewer reasons to co-operate with Moscow (though Washington still hopes that the two sides will be able to work together on counter-narcotics and counter-terrorism programmes).

In purely electoral terms, Obama is unlikely to suffer from a cooler relationship with the Russian leadership. His Republican challengers have attacked him for being soft on Russia. If Mitt Romney won the presidency, US-Russia relations would probably face a frosty period. If Obama won, though the reset of recent years would be unlikely to continue, both he and Putin would see good reasons to stop the relationship turning hostile. Russia’s seat on the UNSC means that the US needs its help in tackling Iran and other problems in the Middle East. And Russia knows that stormy relations with the West could damage its efforts to modernise its economy.

Russia also wants to avoid becoming too dependent on China, a country with which it currently enjoys good relations but that it mistrusts. For the time being, however, Putin appears to view US hegemony as a bigger danger than the rise of Chinese power. As he wrote in Moskovskie Novosti, he sees the emergence of the BRICS grouping (Brazil, Russia, India, China and South Africa) as geopolitically significant. “We have to co-ordinate more closely on foreign policy matters and work together more closely at the UN…When BRICS is really up and running, its impact on the world economy and politics will be considerable.” Whether the BRICS will ever be cohesive enough make such an impact is debatable. But Putin clearly has faith in the potential of the BRICS to constrain US power.

Charles Grant is director of the Centre for European Reform.