Friday, November 27, 2015

China’s European charm offensive: Silk Road or Silk Rope?

The UK should not imagine that Chinese President Xi Jinping’s October visit means it now has a 'special relationship' with China. The visit was just part of a Chinese charm offensive aimed at the EU. 

Xi Jinping’s state visit to the UK from October 20th-23rd had every possible element of flattery and friendship. The Chancellor of the Exchequer, George Osborne, said before the visit that the UK was China’s “best partner in the West”. Xi told a joint session of Parliament that China and the UK were becoming “an interdependent community of entwined interests”.

China has not, however, singled out the UK for special favours. Chart 1 shows that (even though the UK's trade with China has increased significantly in recent years) Britain is still far from being China’s most important economic partner in Europe.

Chart 1. China's leading EU trade partners, 2013

China is cultivating many European countries: since September 1st 2015, Chinese leaders have met senior representatives of more than 20 EU member-states, as well as at least four European commissioners. That outstrips the amount of senior contact between the US and its European partners over the same period. 
Since Sept 1, #Chinese leaders have met senior representatives of more than 20 #EU member-states
Part of China’s motivation is clearly economic. The EU is China’s largest trading partner (and China is the EU’s second largest trading partner after the US). After decades of fast growth, trade has stagnated since the eurozone crisis began in 2010 (Chart 2). Although Beijing wants its future economic growth to be founded upon domestic consumption more than investment and exports, Chinese experts privately admit that the restructuring needed for this would cause economic dislocation, threatening political stability; better to find new markets or increase exports to existing ones.

Chart 2: EU-China total trade

The search for markets also motivates Xi Jinping’s signature ‘One Belt, One Road’ (OBOR) initiative – designed to create the infrastructure for new land and sea routes between China and Europe (the ‘Silk Road Economic Belt’ and the ‘Maritime Silk Road’ respectively). Large infrastructure projects – whether railways in Central Asia or port facilities around the Indian Ocean – would help China deal with over-production of steel and other products without closing plants and creating unemployment.  

According to a recent report by the Mercator Institute for China Studies and Rhodium Group, China’s annual investment in EU member-states went from virtually zero in the mid-2000s to €14 billion in 2014, with the stock of investment reaching €46 billion. The report projects that the pace of investment will continue to increase. For the EU, the prospect of China investing some of its $3.5 trillion foreign currency reserves in European infrastructure is extremely attractive. The EU-China Summit in Brussels in June agreed to "support synergies" between the Investment Plan for Europe (also known as the Juncker Plan) and OBOR. The Juncker Plan is intended to generate investments of €315 billion over three years, including in infrastructure; China envisages the Asia Infrastructure Investment Bank (AIIB) having $100 billion to put into OBOR-related projects, and has set up a separate $40 billion Silk Road Fund to invest in businesses along the route. The two sides subsequently agreed that the European Commission, the European Investment Bank (EIB) and the Silk Road Fund would identify by December how exactly China could co-operate with the Juncker Plan. 

Potentially, economic co-operation between Europe and China on Silk Road projects could indeed be "all-win", as Chinese leaders describe it. Transit times for goods and agricultural products could be shortened. Central Asian states that have developed little (the hydrocarbon sector aside) since independence from the Soviet Union in 1991 could be connected to global markets. And Europe itself could use Chinese money to boost growth.

The question is whether OBOR is a purely economic project, or has geopolitical overtones. The Chinese are certainly at pains to deny that they have ulterior motives in promoting OBOR. But not everyone is convinced. 

Beijing has sought to allay Russian fears that the Chinese are making a move into Moscow's back-yard. When they met in Moscow in May, Russian President Vladimir Putin and Xi Jinping agreed to co-ordinate the Silk Road Economic Belt and the Russian-led Eurasian Economic Union (whose members include Armenia, Belarus, Kazakhstan and Kyrgyzstan, with Tajikistan to come shortly) – even if neither the Russians nor the Chinese know how exactly to merge two very different concepts. For China, however, a good relationship with Russia is important primarily because it removes a potential obstacle on the road to Europe

For at least some Chinese officials, the relationship with Europe is seen through the prism of China’s competition with the US: European participation in the AIIB is a good thing not only because European countries will contribute to the bank’s capital, but because they defied US opposition to join it. The fact that the UK was the first to break ranks, risking its ‘special relationship’ with the US to win a ‘golden era’ with China, may be seen in Beijing as a significant victory. And the OBOR initiative, which China claims will include 65 countries with a total population of 4.4 billion, may have two other benefits for China. 

First, it may serve as a partial counterweight to two US-promoted free trade agreements, the Trans-Pacific Partnership (TPP – 12 countries, 800 million people) and the Transatlantic Trade and Investment Partnership (TTIP – the EU and the US, 820 million people). TPP and TTIP are designed in part to ensure that Western countries rather than China set future global trade standards. If China embeds itself in the economies of members of TTIP or the TPP, it can encourage those countries to look after China’s interests.

Second, it may reduce the incentives for Europe to stand up to China over its claim to the South China Sea: if goods can be transported from East Asia to Europe in larger quantities and more quickly by land than by sea, the importance of the South China Sea to Europe as a trade route would shrink. And then, why put the relationship with Beijing at risk for little practical advantage?

More broadly, China can play member-states off against each other (the Chinese have told countries from Latvia to Spain that they can host the European terminus of the Silk Road), or against the US, to gain international influence. American officials may now admit privately that the US was wrong to try to persuade its European partners not to join the AIIB; but some Europeans regret that the UK chose to move first and on its own to sign up to the Chinese plan, rather than in co-ordination with the rest of the EU. In so doing, the UK gained bilaterally but weakened Europe’s ability to extract concessions from China on the AIIB’s standards of governance and transparency. 

Beijing uses the lure of economic co-operation to discourage European criticism of China's human rights record. Perhaps the scale of Germany’s economic relationship with China means that Beijing cannot object when the Germans raise their concerns; during her visit to Beijing in October, Merkel held a private meeting with human rights activists and dissidents. But China makes life difficult for other European countries when they take too much interest in human rights (relations with Norway have not recovered from the award of the Nobel Peace Prize to the dissident Liu Xiaobo in 2010). Those who prioritise commercial interests, on the other hand, are rewarded: the Chinese state media praised Osborne for not confronting China over human rights, and Cameron was able to claim that up to £40 billion of trade and investment deals had been done as a result of Xi Jinping's visit. 
No use @eu_eeas & @EU_Commission delivering tough msgs to #China if member-states undermine #EU line
The EU needs a strategy to benefit from China's economic strength without losing sight of Europe's interests and values: 

  • The most important thing is to have a unified European policy towards China, which takes account of the EU's interest in preserving the global order and principles like freedom of navigation. It is pointless for the European External Action Service and the Commission to deliver tough messages, if individual member-states undermine the EU line in order to gain commercial advantage. Germany shows that it is possible to deliver unpalatable messages to China, as long as the trading relationship is important enough to Beijing; and the collective EU trading relationship is the most important of all.
  • The Commission and the European External Action Service should ensure that they have a coherent approach to the OBOR initiative, ideally with one senior figure looking at both its technical aspects and geopolitical implications.
  • Europe needs to remember that China is not its only partner in the region. Countries like Japan, South Korea and Vietnam are also important, politically and economically, and have their own interests; the EU should weigh these against its desire to gain Chinese approval and economic benefits.
  • The EU should make clear to China that European interests in the South China Sea go beyond free passage for European shipping; the principles of maritime law at stake there have global implications. The EU is right to stay neutral on the substance of claims, but it should back the Philippines in saying that an international tribunal is the right body to adjudicate between claimants.
  • The EU should offer advice to ASEAN on practical matters like maritime surveillance and fisheries management in the region, as a way of removing some of the sources of possible clashes.
  • China and its neighbours need a multilateral dialogue on the South China Sea. The EU should build on the precedent of the Asia-Europe foreign ministers’ meeting in Luxembourg on November 5th and 6th, where EU ministers discussed the South China Sea in private with counterparts from all the littoral states, including China. 
  • The EU should revive efforts to co-ordinate policy towards China with the US. Then-US Secretary of State Hilary Clinton and then-EU High Representative for foreign policy Catherine Ashton issued a statement on the Asia-Pacific region in 2012, setting out a number of shared objectives and calling for regular high-level dialogue; but there has been little subsequent follow-up. The interests of Washington and Brussels will not always coincide, but often they will, whether it is on protection of intellectual property rights, compliance with WTO standards or freedom of navigation. 
  • The EU should make sure that it focuses on getting China to meet European standards of economic governance and investment protection, rather than relaxing its standards to attract the Chinese to Europe: no Chinese company should be able to flout EU rules in the way that the Russian gas company Gazprom was able to for many years.
No #Chinese company shld be able to flout #EU rules in the way that #Gazprom was able to for years
The UK should not start acting as China's champion in Europe; but it should pay attention when Xi says that the UK "as an important member of the EU" should play "a more positive and constructive role" in the development of EU-China relations; if the US and China are both urging the UK to remain an active EU member, they must have good reasons. As a state with global political, security and economic interests, Britain should work with partners (particularly Germany, still the member-state with the greatest clout in Beijing) to build a more coherent EU policy towards China. An economic Silk Road between China and Europe could be a boon to both; but the EU should avoid being politically bound to China with a silk rope.

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

Friday, November 20, 2015

Merkel after Paris

In spite of speculation that the German chancellor’s refugee policies may be her downfall, Merkel’s relatively open and liberal stance on refugees makes it easier for her to respond robustly to the attacks in France through security and foreign policy. 

For years, Angela Merkel’s personal popularity ratings have been stratospheric and her Christian Democratic bloc (CDU/CSU) has had a robust lead in opinion polls. But during the refugee crisis, Merkel’s relatively open stance has led to her approval ratings dropping to their lowest level since 2011. Meanwhile the increasingly far-right party Alternative für Deutschland (AfD) has gained in popularity. The terrorist attacks in Paris on November 13th have predictably provoked more criticism of Merkel’s refugee policies. But it would be premature to call time on the Merkel era. The combination of her open rhetoric and harsh measures to limit illegal immigration is allowing the CDU/CSU to maintain its hold over the political centre ground. Polling indicates that support for the Christian Democrats is stabilising, as voters faced with a security crisis rally around their leader. Merkel’s position as party leader and chancellor is not in danger.

In August, 45 per cent of Germans saw more advantages than disadvantages from immigration. This number dropped to 35 per cent in September and has since stayed stable at around that level (37 per cent in November). In light of these figures and weakening poll numbers, sceptics evoke a historical analogy. They recall that former Social Democrat chancellor Gerhard Schröder fell as a result of a reform package to liberalise the labour market that incited rebellion in his party, leading to the rise of the new The Left party. Merkel is looking at a similar rebellion over her policy towards refugees, they say. They point to angry voices on the CDU/CSU’s right wing, who no longer feel represented by their party leader, and to the rise of the AfD.

Up until now, the Christian Democrats have successfully prevented the emergence of a mainstream party to their right for three reasons. First, the CDU and its Bavarian sister party CSU is a broad coalition, with the CSU’s leaders traditionally allaying the anxieties of Germany’s more conservative voters (whether Bavarian or not), while the chancellor has held the centre ground. A few rebelling members of parliament, within limits, is part of this strategy. Even today, 86 per cent of CDU/CSU members are happy with Merkel as chancellor, and 81 per cent want her to run again in 2017. 

Second, party discipline has always been strong in these parties, because they have often prioritised power over ideological purity or costly leadership quarrels. Third, right-wing populist parties have attracted xenophobes, anti-Semites, and nationalists, which quickly taints their brand in a Germany wary of its past. 

But the CDU/CSU faces new challenges. It needs to cover an even wider spectrum than in the past: the middle ground of German politics is more liberal, while far-right voters feel less constrained by the country’s past. Forty-three per cent of Germans see the country’s Willkommenskultur (welcome culture) as too politically correct, according to a poll, and feel they cannot openly express their concerns about the refugee crisis. Such sentiments are a fertile breeding ground for populist parties that claim to be giving a voice to ‘concerned citizens’. The increasingly far-right party AfD has won supporters – enough to win seats in the Bundestag if elections were held today – after transforming itself from  an anti-euro party into an increasingly far-right, nationalist and anti-refugee party. After the terrorist attacks in Paris, polling by the conservative Insa Institute put the AfD as Germany’s third-strongest party for the first time, at more than 10 per cent. 

But AfD cannot threaten Merkel without restraining the xenophobic rhetoric of some of its regional leaders, which is proving difficult. Moreover, even if the AfD entered the Bundestag, it could not seriously harm the CDU/CSU’s prospect of retaining power, nor Merkel’s chances of being re-elected chancellor in 2017. As long as Merkel keeps to the centre ground, the arithmetic of German politics favours the CDU/CSU: the AfD would reduce the relative share of the left parties (SPD, The Greens and The Left) in the Bundestag, making Merkel’s party even more indispensable for any governing coalition. 

The chancellor’s stance on refugees has been less impetuous than many have claimed. Merkel’s approach has been rooted in her usual crisis management strategy. She develops her policies cautiously over time – waiting for a public consensus to form, weighing her political options, and working towards a solution that keeps her in power. As the refugee crisis unfolded, the chancellor initially remained on the sidelines of the debate and only chose to ‘be bold’ when a Willkommenskultur materialised throughout Germany. If she had insisted on traditionally conservative and restrictive policies, she would have vacated the centre ground to the SPD and The Greens. Instead, she integrated many of the more left-wing policies on refugees into a Christian-conservative narrative. This strategy has served her well in the past, on issues such as the introduction of a minimum wage or withdrawal from nuclear power. 
#Merkel has integrated left-wing policies on #refugees into a Christian-conservative narrative
Polls show that the German population’s biggest concerns about refugees are linked to the economic and fiscal impact, followed by worries over heightened competition in the housing market and the influence of Islam in Germany. Merkel knows that Germany has the economic strength to cope with the additional costs of integrating refugees, as a study by DIW, a think-tank, has recently confirmed. Germany is running a budget surplus so it can easily finance expenses such as housing for refugees, as even the fiscally-conservative Bundesbank has recently argued. Moreover, in the current European economic situation of low demand and low inflation, additional spending by Germany is a welcome stimulus. Over the medium term, if Germany manages to integrate refugees into the labour market, its demographic problems could be partially mitigated. 

Merkel’s main objective at the moment is to demonstrate that she is in control. Her relatively open and liberal stance on refugees makes it easier for her to respond robustly to the attacks in France through security and foreign policy. Germany had already implemented tougher rules on refugees, including faster deportation, in October. After Paris, Merkel is aiming for resettlements of refugees currently living in or passing through Turkey according to a specific allocation key. In exchange, Ankara would promise to block refugees outside of that quota from coming to Europe. This policy allows Merkel to limit immigration without imposing an absolute cap that would be difficult to uphold.
#Merkel's liberal stance on refugees makes it easier for her to respond robustly to the #ParisAttacks
In foreign policy, her first step was to offer financial and political incentives to Ankara to help reduce the flow of Syrian refugees. At the G20 summit in Antalya, two days after the attacks in Paris, the chancellor stressed the importance of securing Europe’s external borders and Turkey’s crucial role in the process. Her policy has contributed to the EU turning a blind eye to Turkey’s human rights record – in particular recent attacks on the freedom of the press – and to re-energising Turkey’s accession process. Tougher security policies in Germany, or even German involvement in the war against Daesh, could follow – while the chancellor maintains her open and liberal rhetoric on refugees.

Merkel retains the support of a large part of Germany’s political spectrum. A recent poll found that 60 per cent of Germans believe that no other politician in Germany could do a better job of steering the country through the refugee crisis and responding to the threat of terrorism. She still has room to further tighten policies on refugees, while being more assertive on security and foreign policy. Merkel looks like remaining the EU’s dominant political figure for some time to come.

Christian Odendahl is chief economist and Sophia Besch is the Clara Marina O'Donnell fellow at the Centre for European Reform.

Tuesday, November 17, 2015

Terrorism in Paris: Aux armes, citoyens?

Western indecision in Syria has allowed Daesh to grow strong, and enabled it to attack Europe. The Western response must be resolute abroad, and subtle at home, if it is to defeat Islamist extremism.

Sometimes an event occurs that should create clarity of purpose and lucidity of priorities. The Paris attacks are such an event. The tragedy must galvanise European and international support for a co-ordinated offensive against Daesh. Yet questions remain about how best to deal with terrorism at home.

France has seen terrorism’s face before: most recently in January, when Charlie Hebdo and a Jewish supermarket were the targets. But never, in modern times, has the soul of France been so thoroughly penetrated. French president Francois Hollande called the terrorist attacks in Paris on November 13th “an act of war” by Daesh, the so-called ‘Islamic State’ terrorist organisation. And France’s first reaction has been war-like: the French air force launched heavy bombing raids on Raqqa, the headquarters of Daesh in Syria, on November 15th. That may bring some satisfaction, though it will not solve the problem of Islamist terrorism in Europe.

Since the start of the campaign against Daesh in September 2014, European governments have believed they could dislodge the ‘Islamic State’ from its sanctuary in Iraq and Syria through airstrikes. Yet Daesh has remained able to plot attacks abroad, attract recruits and gain millions of dollars selling oil. In the past month alone, Daesh has claimed, or is believed to have been behind, successful attacks in Ankara, the Sinai, Beirut and now Paris. This should now focus the attention of governments in the West and elsewhere.

Hollande’s rhetoric is reminiscent of George W Bush’s declaration of a ‘global war on terror’ against Al Qaeda after the 9/11 attacks in 2001. Daesh, in contrast to Al Qaeda in 2001, resembles a state in that it holds territory, which can be conquered. The priority should be to destroy the safe haven Daesh has in Iraq and Syria.

In his speech before the joint session of parliament on November 16th, Hollande told his defence minister to invoke article 42.7 of the Treaty on European Union. This ‘solidarity clause’ obliges other member-states to offer aid “by all the means in their power” in response to an armed attack. The clause has never been invoked before, and so its impact remains to be seen, though an EU military intervention is not likely. At the least, the clause forces traditionally neutral EU member-states, like Austria and Finland, to assist. Additionally, its invocation acknowledges that the EU has an important role to play in the battle against Daesh, especially within Europe’s borders. France would also have every right to invoke NATO’s article 5  which would declare that it has been the subject of an armed attack, calling on its allies to help it. However, Hollande appears to prefer working through a coalition of the willing, rather than bringing NATO in. NATO’s presence in Syria might complicate any co-operation with Russia. Hollande is also seeking a UN Security Council resolution. If it explicitly mandates the use of force, it would be an additional rallying cry for a broad coalition.
Western airstrikes limited to Iraqi territory have so far been practically useless #ParisAttacks 
Airstrikes, particularly limited to Iraqi territory as many European airstrikes are, have been practically useless. Air power by itself rarely wins wars. If the West can find reliable allies who can fight on the ground (including Kurdish forces, despite Turkish concerns), it should help them to do so. Yet the fight may require Western ‘boots on the ground’. The United States has already decided to send up to 50 Special Forces to fight Daesh. European governments should follow suit.

The lessons of past interventions in Afghanistan, Iraq and Libya are not that the West should never intervene militarily, but that it should not start a war without a plan for the day after. In Syria and Iraq, the day after has to include a political process to end the conflicts that have created the governance vacuum, which Daesh has filled. The difficulty of doing so, of course, should not be under-estimated.
After the #ParisAttacks #Putin may argue that Assad is the answer in Syria. He is not.
Russia’s president Vladimir Putin may argue that Syria’s president Bashar al-Assad is the answer in Syria. He is not. Indeed, Assad has done his best to ensure that Daesh is the only opponent left on the battlefield: Syrian and Russian forces have struck against other groups fighting Assad much more often than against Daesh. Though perhaps not immediately, Assad will have to make way to allow Syria to move towards a more peaceful future. In its response, the West will have to work with many countries that have ulterior motives in Syria, including Russia, Turkey and Saudi Arabia.

Europe must not be taken in by Putin’s suggestion that the West, Russia and Assad are now all on the same side in fighting against terrorism. Putin’s game in Syria is cynical. However, the presence of Russian forces in Syria means that the West has no choice but to co-ordinate with Russia, at least to ensure that Western and Russian aircraft stay out of each other’s way.

Europe must work with Turkey’s president Recep Erdogan: despite European concerns about increased authoritarianism in Turkey, the recent attack in Ankara suggests a convergence of interests to fight Daesh. Western governments have to convince Turkey not to undermine the relatively successful Kurdish fight against Daesh for fear of strengthening Kurdish separatists in Turkey. Aside from the military campaign against Daesh, Europe’s external borders must be better secured, for which Turkey’s co-operation is crucial.

The West also has to reconsider its relationship with Saudi Arabia: many of the most disturbing aspects of Daesh’s behaviour in Iraq and Syria reflect Riyadh’s regional propagation of its intolerant, fundamentalist Wahhabist ideology, including through Saudi-funded mosques and Islamic schools in Western countries. Saudi efforts to stop Daesh and its ideology have so far been half-hearted, as it chooses to prioritise fighting against Iranian-backed rebels in Yemen instead.

Despite the semblance of statehood, Daesh is also a network, and its offshoots have already emerged elsewhere across the Middle East. Assuming it can be defeated in Iraq and Syria, Daesh could well metastasise in Libya, Nigeria, Sinai, Afghanistan or elsewhere in the Levant. Still, it is better to disrupt Daesh and keep it on the run, than allow the benefits of a profitable sanctuary to accrue. This means Europe should prepare for a prolonged fight against the group.
#EU governments must balance the use of force abroad & the rule of law at home #ParisAttacks
European governments must balance the use of force abroad and the need to keep working within the framework of the rule of law at home. Daesh wants Western governments to over-react, thereby polarising communities and mobilising new recruits. Instead, Europe must avoid clamping down hard on Muslim communities. Though politicians like Marine Le Pen, Nigel Farage and Geert Wilders will call for de facto anti-Muslim measures, Europe must stay true to its liberal and tolerant values. Police and security services should respond strongly to populist vigilantes and extremists who may step up violent attacks against Muslim targets.

One of the terrorists that attacked Paris on Friday left a fake Syrian passport behind. He had allegedly used it to enter the EU through Greece. This could well have been a planned move to reignite the already heated debate on Europe’s asylum policies — why would a terrorist leave a passport behind? European governments should not fall into Daesh’s trap by responding with knee-jerk reactions such as closing borders (though border controls may be necessary temporarily, to pursue and apprehend the suspects of the attacks). A ‘fortress Europe’ aimed at keeping out predominantly Muslim refugees would fuel the narrative of European Christians oppressing and fighting against Muslims.

More to the point, closing borders would give a false sense of security. There has always been a risk that jihadists may enter the EU posing as refugees. Identifying and stopping them demands adequate registering and fingerprinting on their arrival in the EU, and intelligence sharing among the 28 member-states, not a closing of the borders. In fact, many European plots have involved terrorists from Western countries. Some members of Daesh are jihadists with French, Belgian or British passports, returning from conflict zones (such as Syria) to strike in their home countries. To close the borders would do nothing to stop them: international law prohibits a country from denying entry to its own nationals — and if they are not spotted and put under surveillance by intelligence services, they can continue their activities unhindered from within their home countries. Others have not even left the country: Daesh propaganda ‘instructs’ its acolytes around the world to carry out attacks in its name.

Like many criminal organisations, Daesh mainly relies on difficult-to-trace internet communications which defy national borders. Instead of seeking false security in national isolation, more — and better — European intelligence and law enforcement co-operation is needed. To that end, the European Parliament should speed up an agreement on the use of passenger data for terrorist investigations (a directive that it has blocked for over four years, over privacy concerns). The EU should also overcome its problems with the US in the field of data sharing and co-ordinate with Washington to get access to US intelligence, including its no-fly lists, which includes known terrorists.

The attacks in Paris show that the Schengen agreements, and particularly the Schengen Information System (SIS) ‒ a database used by European governments to track persons of interest – are still not functioning properly. The SIS could be used in combination with other databases (such as Eurodac, which contains fingerprints of asylum seekers) to verify the identity of those arriving in Europe. The European Parliament has been reluctant to allow the interconnection of several databases for fears of privacy intrusion. It is now time for the Parliament to drop some of these claims and realise that such intelligence may benefit the EU as a whole: should a Schengen crisis emerge, it would challenge the EU project in its entirety. Europe should not dismantle Schengen, but improve it, by processing refugees more effectively, deploying many more border guards at Europe’s outer borders and improving information sharing among the member-states. These measures will be costly and take time to implement. But the EU can no longer accept an external border where massive inflows of third country nationals are dealt with in places which barely have electricity — such as the ‘processing centre’ on the Greek island Leros, where the allegedly fake refugee (on his way to carry-out the suicide attack in Paris) was fingerprinted.

But even if the EU had taken all these steps, the attacks might still not have been prevented. 14 years after 9/11, European governments remain unable to control the drivers of radicalisation in second- and third-generation Western Muslims. That leaves one, burning question: why have European citizens become so attracted to Daesh’s ideology that they are willing to kill, kill themselves and be killed, in its name? That is the clarity we still desperately seek.

Camino Mortera-Martinez is a research fellow and Brussels representative and Rem Korteweg is a senior research fellow at the Centre for European Reform.

Tuesday, November 10, 2015

In-work benefits for EU migrants: How the British government dug itself into a hole

The UK could make both Britons and EU migrants wait four years before having access to in-work benefits, but the ECJ might still rule it illegal.

Today, David Cameron gave a speech and sent a letter to Donald Tusk, the European Council president, setting out his EU reform demands. Most of the reforms are not surprising, and compromise is achievable. But Cameron appears to be upping the ante on his key demand that is most difficult to achieve: that immigrants from the EU should be denied in-work benefits, such as tax credits and housing benefit, for four years.
#Cameron appears to be upping the ante on his key demand that is most difficult to achieve #CHspeech
The speech was accompanied by some new statistics claiming that 43 per cent of EU migrants receive a UK benefit in the first four years of residence in the country. The 43 per cent figure is surprisingly high, and is based upon administrative data, which is not available to the general public. By contrast, data from the official, publicly available Labour Force Survey, puts the figure at 21 per cent in the first quarter of 2015. The government has made the decision to continue to push for the four-year demand, despite the fact that it would require treaty change, unless similar measures were applied to Britons.

The Centre for European Reform has repeatedly argued that the four-year demand was discriminatory and violated the EU’s treaties. In December 2014, shortly after Cameron’s speech announcing the demand, Camino Mortera-Martinez pointed out that article 45 of the Treaty on the Functioning of the European Union (TFEU) forbids discrimination against workers “as regards employment, remuneration and other conditions of work and employment”. Tax credit payments are dependent on workers’ hours and income, and whether they have children, so restricting them would amount to discrimination between Britons’ and EU immigrants’ income from the same job.
CER has repeatedly argued that the 4-year demand was discriminatory & violated EU treaties #EUref
In May 2015, I noted that this discrimination could be quite large: the new universal credit, which will lump together housing benefit and tax credits, would more than double the income of the average central and east European migrant with a child in the UK. Withdrawing in-work benefits from migrants would lead to many British workers receiving higher incomes than EU immigrants for doing the same job. This is a violation of a founding principle of the EU – that workers and companies should be free to do business anywhere in the single market without discrimination. Would Britain accept the French government applying different income tax rates to French nationals and Britons living in France? No. Discrimination through tax credits amounts to the same thing.

Then why is David Cameron proposing it? At the time of his migration speech, the political context was challenging for No. 10: public hostility to immigration was increasing, and the rise of UKIP fed Tory fears that the party would deprive the Conservatives of a majority at the 2015 election. Cameron wanted ideas that would take the heat out of the migration issue. Open Europe, a think-tank with close links to the Conservatives, came up with one. Damian Chalmers, a professor of EU law at the London School of Economics, and Open Europe’s Stephen Booth, called for a three year pause before EU migrants could access most benefits, to be enshrined in EU law through a new directive. (‘Directives’ are secondary EU legislation that must not conflict with the underlying EU treaties.) They said this had a legal basis, because articles 20 and 21 of the TFEU say the Council of Ministers can make secondary laws on welfare, which seems to suggest that the treaties do not have the final word on the issue. But, as the University of Essex professor Steve Peers wrote at the time, this is true for migrants who do not work in their host state. For those who do work, discrimination is not allowed in the treaties, and secondary laws are only permitted when they accord with TFEU’s article 46, which allows only “measures required to bring about freedom of movement for workers”, not measures that restrict it.

At the time of Cameron’s speech, many Conservatives were demanding quotas to limit the number of EU migrants. Indeed, late drafts of the speech included this demand – despite the fact that it was evidently incompatible with the EU treaties or what Britain’s partners would accept. At the last minute, Angela Merkel, the German chancellor, helped to persuade Cameron to abandon quotas. So Cameron took up Open Europe’s proposal – which they had marketed as a way to “save free movement” by, it was hoped, making the issue less toxic for British voters.

As a result, the four-year waiting period for in-work benefits went into the Conservatives’ election manifesto. Of all the British government’s demands in its EU renegotiation, this is the only one that looks unachievable. One suggestion, floated by government sources in August, might be to act unilaterally, and make a domestic policy change: stop EU migrants from getting in-work benefits for four years as well as Britons between the ages of 18 and 22. On the face of it, this idea might solve the government’s difficulties, but in reality, it is still legally problematic. Since migrants from the EU tend to be older than 22, and more likely to have children than British 18-22 year-olds, the ECJ might rule that the policy amounted to de facto discrimination.

The government may find it somewhat easier to reform rules on out-of-work benefits, payments of child benefit overseas and the right of people from countries joining the EU to work in other member-states, as my colleague Charles Grant explains in his recent analysis of Cameron’s demands. But Cameron has been very specific about what he wants on in-work benefits and his government is now in a difficult position. Free movement is the EU policy that British voters most dislike. Other EU governments, however, will not amend the treaties to accommodate the British. For some, such as Poland, this is because it would be directly against their national interest, and for many, it is because they view the principle of non-discrimination as a central plank of the single market. If treaty change to make discrimination between EU workers legal were put on the table, countries more hostile than the UK to free trade might demand discrimination in other areas – between national and foreign companies, for example – and the single market process could go into reverse.
The only out of #Cameron’s in-work benefits trap is to remove benefits from Britons & #EUmigrants
As my late colleague Philip Whyte put it: “The reality is that the EU keeps its members ‘honest’ by anchoring their behaviour”. The EU limits protectionism by enforcing a body of laws – laws which may not violate treaty principles. Any changes to that fundamental principle of the single market will always be very difficult to make. It appears that the only way out is to withdraw benefits from young Britons as well as EU migrants, and hope that the ECJ rules in favour of the reform.

John Springford is a senior research fellow at the Centre for European Reform.

Thursday, November 05, 2015

25 years on: How the euro's architects erred

A quarter of a century after the euro’s conception, the flaws in its design have become apparent. EU leaders have fixed some of them but the euro needs better policies in order to be a successful currency.

It is almost 25 years since European finance ministers, meeting in Rome in December 1990, launched an ‘inter-governmental conference’ on Economic and Monetary Union (EMU). Their work emerged a year later as the Treaty of Maastricht, which set out a roadmap for creating what became the euro.
At that time I was a journalist in Brussels, interviewing many of those involved in the conception of the euro. Most of them assumed that the euro would encourage trade and investment across frontiers, thereby deepening the single market and boosting competition. They thought that an independent European Central Bank (ECB) would keep inflation and interest rates low, encouraging investment and job creation. They were also convinced that the euro would strengthen the political bonds between the European nations.

The euro has in fact delivered real benefits to some of its members, particularly in northern Europe. But since 2010, the euro’s difficulties have forced its supporters to challenge some of their assumptions: the eurozone has under-performed compared with other advanced economies (its output is still below pre-crisis levels); high unemployment in southern Europe has contributed to the rise of populist parties; and countless acrimonious emergency summits have pitted north against south, or more recently, against just Greece. Even in Britain, which has no plans to join the euro, its problems have tarnished the EU’s reputation.

A quarter of a century on, it is worth taking stock of what went wrong with EMU and what its future holds. Were its architects driven by political priorities, at the expense of economic fundamentals? What were the biggest flaws in their plans? And are today’s EU leaders doing enough to save the project?

Nowadays, many people view the euro as the child of a Franco-German bargain over German unification that had little to do with economics. However, EMU was initially an economic project, spurred by the success of the single market programme that Jacques Delors, the president of the European Commission, had launched in 1985.

In 1987 a seminal report by Tommaso Padoa-Schioppa, an Italian economist, had a profound effect on Delors. Padoa-Schioppa predicted that the imminent liberalisation of capital controls, a key part of the single market programme, would destabilise the Exchange Rate Mechanism (ERM) that then linked most EU currencies. He argued that of the three objectives of a stable ERM, free movement of capital and national autonomy on monetary policy, only two were possible at the same time.

Delors feared that if the ERM fell apart – as it very nearly did in 1993 – the single market would be threatened: gyrating currencies could provoke the return of protectionist barriers. He concluded that national monetary policies would have to go and persuaded Chancellor Helmut Kohl of the case for monetary union. In June 1988 the European Council asked Delors to chair a committee of central bank governors that would draw up a plan for EMU. A year later EU leaders endorsed the Delors report – before anyone thought the Berlin Wall might fall.

At the end of that year, when the two halves of Germany were starting to move together, Franҫois Mitterrand, France’s president, made EMU unstoppable: he told Kohl that he would not support reunification unless Germany gave up the Deutschmark (which was very popular with most Germans). The Delors report, amended to reflect German concerns, became the basis of the Maastricht treaty’s provisions on EMU.

Monetary union was driven by the politics not only of reunification but also of the ERM, which had evolved into a German-led system of semi-fixed exchange rates. Realignments of currencies were rare, and whenever the Bundesbank shifted interest rates, for the sake of the German economy, the other central banks in the ERM had to follow suit immediately. France and the other countries, finding this German hegemony unacceptable, saw EMU as a means of curbing it. Yet ironically the euro has now become, to a considerable extent, a means for Germany to cajole the rest of the eurozone to adopt its preferred economic policies.
Design flaws of the #EMU: 1st the #EZ has lacked a system for making fiscal policy counter-cyclical
With hindsight, the plans for EMU had at least five serious design flaws. First, the eurozone has lacked a system for making fiscal policy counter-cyclical. When growing, economies need fiscal discipline, but in recession they need freedom to borrow. Lack of discipline has proved to be a particular problem in Greece. During the Maastricht negotiations, German finance minister Theo Waigel insisted on binding rules on budget deficits, with the prospect of fines for governments that borrowed more than 3 per cent of GDP. A strange alliance of Delors and Norman Lamont, the British finance minister, argued that binding rules would in practice be unenforceable. Lamont trusted financial markets to discipline a country that over-borrowed, by demanding a higher rate of interest. Delors said that a country in difficulties would need credits from the EU, which would then impose conditions, including budget cuts. But they lost the argument.

Waigel was right that the markets were fallible: not believing in the Maastricht treaty’s no-bail-out rule, they went on lending to Greece at almost the same interest rate as they lent to Germany, until 2010. But Delors and Lamont were correct that binding rules were unenforceable; France and Germany first broke the 3 per cent rule in 2003 and many others have done so since.

A second problem is that the plans for monetary union lacked provisions for a ‘banking union’, which is now recognised as an essential component. EMU’s parents failed to foresee that the euro would engender a cross-border intermingling of bank assets and liabilities, with the result that if a large bank or a sovereign government wobbles, the reverberations may destabilise banking systems across the EU. A bank bail-out may affect creditors in several countries and lead to difficult questions on who should pay. Nor did the parents foresee the danger of ‘doom loops’: if a bank holds a lot of debt of its own government, which then in a crisis has to bail out the bank, a vicious circle may destabilise both. Such problems emerged after the financial crisis of 2008, which spurred the eurozone to create a ‘single supervisory mechanism’ and a ‘single resolution mechanism’ – including a small recapitalisation fund – for its banks.

Third, EMU’s architects should have created a lender of last resort – one that, in a crisis of confidence, could stabilise financial markets by lending to governments. In 2012, when there was a danger that the markets would tear apart the euro, the ECB plugged the gap by announcing a scheme known as OMT for buying sovereign bonds. This calmed the markets without being used. Also in 2012, governments set up the European Stability Mechanism (ESM), a €500 billion bail-out fund, which has provided credits to countries in difficulty. And in 2014 the ECB added ‘quantitative easing’ to its armoury, a bond-buying scheme for curbing deflation.

A fourth omission was the absence of any means to ensure that eurozone members adopted structural economic reforms, to prevent their economies diverging. The Maastricht treaty set convergence criteria as conditions for joining the single currency, but those covered only public debt, budget deficits, inflation and exchange rate stability (Delors lost the argument for an unemployment criterion).

At the time, the case for adopting economic rather than financial convergence criteria did not appear strong. The peripheral EU economies were growing faster than those of the core; some of them, including Italy, were enacting painful economic reforms in order to show their fitness for the euro; many people assumed that, since the southern countries would no longer be able to restore competiveness by devaluing, they would have no choice but reform; and the Commission’s own analysis suggested that poorer countries would benefit most from EMU, since their inflation and interest rates would drop rapidly.

And that is what appeared to be happening, at least in the early 2000s, as Greece, Ireland and Spain enjoyed credit-fuelled booms. But these obscured and in some ways worsened the growing divergence of competitiveness between the eurozone’s core and periphery. While the biggest problems have been in the south, France and even the fairly successful Germany have often ignored the Commission’s strictures on reform (Germany still suffers from over-regulated services markets and France from an inflexible labour market).

Flowing from this fourth problem was a fifth: too many countries joined the club too quickly. Karl Otto Pӧhl, the Bundesbank president during the Maastricht negotiations, expressed doubts about letting in the southern Europeans. So did Wolfgang Schäuble, now Germany’s finance minister, who as a senior parliamentarian in 1994 co-authored a paper calling for a group of core countries (but not Italy) to proceed with a single currency and federalism. They were right that several southern economies were not strong enough to flourish in EMU. But such concerns were cast aside in order to satisfy leaders who did not want their countries excluded from this grand prestige project.

Given these design flaws, the euro’s problems in recent years are hardly surprising. But eurozone leaders have taken important steps to make EMU work better, building the ESM, the banking union and OMT. They have done enough to preserve the euro but not to ensure economic growth across the entire monetary union.

An unholy alliance of federalists and eurosceptics argues that only the radical centralisation of economic decision-making in the eurozone’s institutions can ensure its long-term prosperity. But this will not happen in the foreseeable future. There is not enough trust among governments or agreement on what needs doing, and electorates will not support the transfer of substantial new powers to supranational institutions. But in any case the federalists and eurosceptics are mistaken. Though the mutualisation of eurozone sovereign debts or a mechanism for transferring money from north to south would be desirable, such revolutionary steps are not essential. The eurozone can in fact flourish with better policies.

The excessive, German-driven austerity imposed on the peripheral countries – which has led to deflation, shrinking economies and growing debt burdens – needs to be softened (and has already been somewhat softened over the past year). Countries such as Greece, Italy and France need to speed up structural reform. In Greece, public debts are unsustainable and need to be partially written off. In the long run, both the ESM and the bank recapitalisation fund will need more resources. And, crucially, Germany needs to rebalance its own economy: with an extraordinary current account surplus of over 7 per cent of GDP, stemming from low levels of investment and weak domestic consumption, it should be doing much more to generate growth at home and elsewhere in Europe.
When EMU was designed, many Germans feared it would turn into a French-led enterprise, pursuing un-Germanic policies. They need not have worried. The economic weakness of France, the diminished stature of the Commission, the introversion of Britain and the strength of the German economy have combined to leave Berlin in charge.
My biggest worry for the #euro's future is the intellectual isolation of #Germany’s financial elite
My biggest worry for the future of the euro is the intellectual isolation of much of Germany’s financial elite from the rest of the world. The problem is not so much that German policy-makers are wrong on everything – for example they are right that structural reform is essential and that Keynesians can over-prioritise the short term – but rather that some of them think they have little to learn from others. I have heard senior German figures speak of Southern European, French or Anglo-Saxon economic analysis contemptuously. I have also heard them refuse to consider the eurozone’s overall fiscal stance, while insisting that the German, French and Italian economies be treated as separate entities.

What the eurozone needs are not federal institutions – desirable though they might be – so much as a Germany that is more sensitive to its partners’ needs, less arrogant in dealing with them, more open to others’ economic thinking, and more willing to acknowledge that the eurozone economies all affect each other.

Charles Grant is director of the Centre for European Reform. An earlier version of this article appeared in Chatham House’s The World Today, October-November 2015.

Wednesday, October 28, 2015

Changing the guard in Poland but not much change for Cameron?

In Sunday’s general election in Poland, voters decisively rejected the previous centre-right coalition government in favour of Law and Justice (PiS) – a party which is socially conservative but economically left-leaning. Its electoral victory is likely to lead to a departure from the country’s consensual style in the EU. Among other things, this could complicate the prospects for agreement on how to deal with the refugee crisis in Europe. It could also threaten the hopes of the British prime minister, David Cameron, for a quick deal on EU reform: Law and Justice may try to use the British renegotiation to unpick what it does not like in the current EU agenda.

Law and Justice won almost 38 per cent of the vote; only 24 per cent favoured the status quo and voted for Civic Platform (PO) – the party of European Council president Donald Tusk, which led a coalition government for the last eight years. Law and Justice will have 235 MPs in the 460 seat ‘Sejm’ (the lower chamber of the Polish parliament). This ten-seat majority allows Law and Justice to govern alone. But such a narrow majority could make the government vulnerable to internal squabbles, so the party may well try to persuade individual MPs to swap parties. In the Polish electoral system MPs can change their party allegiance without triggering a by-election. The natural candidates are MPs from ‘KUKIZ 15’, a populist right-wing party. Other parties which will be represented in the Sejm include ‘Nowoczesna’, a liberal party; and the Polish Peasant Party, which was in coalition with Civic Platform.

Chart 1: Distribution of seats in Polish Sejm by party
Source: Polish Electoral Commission

The international media have widely portrayed the Polish elections as a victory for an anti-EU party. But Law and Justice does not oppose European integration per se, although it criticises the current institutional balance of powers in the EU. It thinks that the European Commission has interfered too much in the domestic policies of member-states. And it dismisses the last government’s European policy as too submissive to Brussels and Berlin. All in all, there is unlikely to be a revolution in Poland’s European policy, but the new Polish government will become more assertive. When it was in government between 2005 and 2007, Law and Justice proved to be a difficult partner for the rest of the EU. Jarosław Kaczyński (the party’s leader, who was then Poland’s prime minister) made life miserable for Angela Merkel and complicated Germany’s efforts to obtain a consensus around the Treaty of Lisbon in 2007. There is no evidence that this time Law and Justice will be any more co-operative.
How did #CivicPlatform, which presided over robust economic growth, get ousted in PL elections?
Civic Platform’s poor electoral performance has surprised some foreign commentators. Politically, the party transformed Poland from a junior partner in the EU to a credible and well-established member. Economically, the last government presided over robust economic growth – Poland avoided a recession both during the 2008 financial crisis and the subsequent euro crisis (see Chart 2), and its economy grew by 29 per cent in the last eight years. This strong economic performance made Poland more influential in the EU.

Chart 2: Quarterly GDP growth
Source: Haver, Eurostat

But in Poland, the electoral defeat of Civic Platform surprised few. The party was a good administrator of EU structural funds; EU money has helped to modernise the country substantially. For many Poles, the economic growth has not, however, immediately translated into living standards comparable with those in Western Europe. On average, Poles are still worse off financially than their Western counterparts: real consumption per capita in Poland is still lower than the EU average (see Chart 3). Many voters felt that Civic Platform was more interested in consolidating its power than in trying to respond to the concerns of the average Pole. When prominent Civic Platform politicians were illegally recorded discussing state business in crude terms over expensive dinners, it only contributed to the view that Civic Platform was the party of the elite.

These blunders played into the hands of Law and Justice, which positioned itself as the party of all Poles. Beata Szydło, the party’s candidate for prime minister, promised that her government would lower the retirement age, introduce more generous family benefits, and give tax rebates for small businesses. It hopes to finance part of its electoral pledges by imposing a special turnover tax on large retailers, which are largely foreign owned, and on banks. This time, Law and Justice managed to attract voters from all walks of life: from rural and urban areas, with low and high levels of education. By contrast, in the 2011 parliamentary elections residents of the largest cities and people with higher education supported Civic Platform more than Law and Justice.

Chart 3: Real consumption expenditure per capita (in PPS)
Source: Eurostat

Notes: The purchasing power standard (PPS) allows for comparisons across countries with different currencies. The consumption expenditure is measured as actual individual consumption (AIC), which consists of private consumption but adds services consumed by households that are provided by the government or non-profit institutions.

The implementation of Law and Justice’s electoral promises could have repercussions both domestically and on the European stage. Since Poland’s accession to the EU in 2004, the stock of net foreign direct investment has grown by €100 billion. Measures like the proposed turnover tax could reduce foreign investment in Poland, and may be illegal under EU law.

Law and Justice’s policies could also put Poland’s public finances at risk. The Civic Development Forum, a foundation established by Leszek Balcerowicz, the finance minister in the first post-communist government and architect of Poland’s ‘shock therapy’ reforms, argues that implementation of all the electoral pledges of Law and Justice would cost 138 billion zlotys (€34.5 billion); Civic Platform’s proposals would cost only 21.5 billion zlotys (€5.3 billion).

According to recent analysis by Erste Group Research, Law and Justice will either have to be more restrained in implementing its policies or it may risk the European Commission initiating the excessive deficit procedure against Poland. The Commission steps in when an individual member-state is at risk of breaching or has already breached the deficit threshold of 3 per cent of GDP, or when its government debt level is above 60 per cent and is not falling at a satisfactory pace (5 per cent per annum on average over three years). In its programme in 2014, Law and Justice strongly opposed the Commission’s interference in Poland’s budget. Any action by the Commission to initiate an excessive deficit procedure against Poland could thus reinvigorate eurosceptic sentiments among party’s members.

Law and Justice opposes what it thinks is the Commission’s unnecessary zeal in other areas. It heavily criticised the Commission’s scheme to relocate refugees. It condemned the outgoing government for voting in favour of the Commission’s proposal and for abandoning the Czech Republic, Hungary and Slovakia, its partners in the so-called Visegrad Four, who opposed it. Law and Justice at times used unpleasant anti-immigration rhetoric during the electoral campaign, and the next government will almost certainly oppose any proposals to create a permanent mechanism for redistributing refugees.

The refugee issue could lead to tensions not only between Warsaw and the Commission but also with Berlin: Chancellor Angela Merkel supports a more ambitious EU policy towards the refugee crisis. Germany is set to receive more than 800,000 asylum seekers this year, and wants a European solution to what it sees as a European problem. Angela Merkel’s legacy will depend partly on whether she achieves this objective: if the new Polish government decided to stand in her way this could damage Polish-German relations, which under the last government were better than at any point since World War II.

Germany has also helped Poland to navigate through a multi-tier EU, hoping that it would join the eurozone club in the future. Warsaw has successfully used its ‘pre-in’ status to secure a more inclusive ‘euro plus’ mode of governance. This would not have been possible without Berlin’s support. But the new government may be less interested in maintaining this course. In its 2014 programme, Law and Justice pledged that it would keep the Polish zloty. A year later Beata Szydło promised to ditch the post of the official in charge of euro adoption in Poland and postpone discussion of joining the eurozone until the wages of Poles were similar to those of their colleagues in Western Europe.

The party’s mistrust of the euro is good news for David Cameron. Part of the British prime minister’s renegotiation agenda is to obtain safeguards for Britain and other euro-outs so that eurozone decisions cannot damage the single market. A Law and Justice government would probably show more understanding for Cameron’s concerns than Civic Platform did. In 2007 the Polish government, led by Law and Justice, negotiated a mechanism to allow the EU to delay a decision if it threatens the interests of some member-states but they do not have enough votes in the Council to block it (the so called ‘Ioannina bis’ mechanism). Law and Justice may be willing to help Britain to revive this mechanism for euro-outs. As the CER has already argued, Law and Justice would probably also agree to strengthen the role of national parliaments, and might be more sympathetic to Cameron’s plans to obtain an exemption from the goal of ‘ever closer union’.

But will the new government obstruct Cameron’s wish to limit EU migrants’ access to welfare benefits? During the electoral campaign, Law and Justice blamed the previous coalition government for the emigration of young Poles to countries like Britain. The party pledged to create incentives for Poles not to leave Poland. At first sight, it looks as though Cameron’s plans could dovetail with Law and Justice’s objectives, making Law and Justice less critical than Civic Platform of British plans to curb in-work benefits for EU citizens. But in the 2015 presidential campaign Andrzej Duda, the Law and Justice candidate who eventually won the election, promised to nurture relations with the Polish diaspora. A Law and Justice government will continue this course and oppose changes which would discriminate between British and other European citizens. If the new government softened Poland’s stance it would be criticised by Poles both abroad and at home.
Unless #Cameron is ready for a trade-off with Law & Justice he should get ready for a bumpy ride
The British may still think that Law and Justice will be, on balance, more supportive of Cameron’s plans than Civic Platform. Law and Justice belongs to the same group in the European Parliament as the British Conservatives (the European Conservatives and Reformists Group). But British Tories should be wary of their new counterpart’s transactional style. The party may see the British renegotiations as an opportunity to try to get concessions in completely unrelated areas of particular interest to Poland. One area they might target is EU climate policy, seeking concessions on emission targets, given Poland’s heavy reliance on coal. However unlikely they are to get what they want, they could hold up the agreement Cameron needs. He should prepare for a bumpy ride when his reform package is discussed among EU leaders, including with the new Polish prime minister

Agata Gostyńska-Jakubowska is a research fellow at the Centre for European Reform.

Friday, October 16, 2015

Power to the parliaments! But will Cameron’s EU partners join his crusade?

David Cameron wants national parliaments to have more say in the EU, but other European capitals have little appetite for radical change. He should instead focus on improving existing mechanisms for parliaments to influence draft EU legislation. 

The British Prime Minister, David Cameron, has been touring European capitals to present his package for reforming the EU. Among other things, he wants a stronger role for national parliaments in the EU, but he has yet to make detailed proposals. Philip Hammond, the foreign secretary, calls this the “scoping stage” during which Cameron is testing Europe’s appetite for reforms.

National parliaments can already club together to tell the Commission that a draft EU law is unnecessary if it covers an issue better left to individual member-states to regulate (the ‘subsidiarity principle’). Each national parliament has two votes (one vote per chamber in bicameral parliaments) which it can cast against a Commission proposal. One third of all the votes (or a quarter in relation to justice and home affairs proposals) constitutes a so-called ‘yellow card’; more than half of the votes constitutes an ‘orange card’. The problem is that the Commission can in both cases press on with its proposals. The orange card is only stronger because, when parliaments show one to the Commission, a vote by 55 per cent of the member-states in the Council of Ministers or a simple majority of the European Parliament can block the proposal at the beginning of the legislative process.

Eurosceptics in the Conservative Party have long argued that national parliamentarians rather than unelected technocrats in Brussels should judge whether EU legislation will benefit citizens and enterprises. They want to give parliaments a ‘red card’, so that national legislatures can join together to force the Commission to withdraw draft laws. In their 2015 election manifesto the Tories promised to give parliaments powers to block EU legislation, and eurosceptics want Cameron to deliver on this pledge.

In July 2015 the House of Lords EU Select Committee advised David Cameron to look at more constructive ways for MPs to get involved in the EU. The peers favour a ‘green card’, whereby parliaments could suggest that the Commission propose laws, or amend or repeal existing EU legislation. A green card procedure might tackle the misconception in Brussels that national parliamentarians are more interested in blocking EU decision-making than in making the Union more effective. The Lords think that EU leaders would give a warmer welcome to ideas which promoted a positive role for parliaments. The UK’s Europe minister, David Lidington, has acknowledged the idea but refused to say whether the green card would be part of the renegotiation package.

David Cameron stands little chance, however, of getting support for green and red cards from all 27 member-states. Probably only The Netherlands, Hungary and Denmark would back him. Since the Dutch voted down the EU’s constitutional treaty in 2005, their government hopes that national MPs, who are often more attuned to voters’ concerns than MEPs, can help to narrow the gap between the EU and its citizens. Cameron can also count on Hungary’s prime minister. Viktor Orbán’s firm opposition to the Commission’s push for mandatory refugee quotas has been popular with Hungarians. If a red card procedure could block similar Commission proposals in future, then Orbán could further boost his ratings at home by endorsing Cameron’s idea. Denmark would probably back green cards, if not red ones. The chair of the Danish European affairs committee in the last parliament, Eva Kjer Hansen, championed green cards, arguing that MPs are “in politics to seek solutions, not just block things”. Now that she is in the liberal government of Lars Løkke Rasmussen, she should not find it too difficult to convince the Danish prime minister to support it.

There are also several other EU countries which are unlikely to stand in Cameron’s way. Ireland may not be convinced about the added value of Cameron’s proposals: between 2010 and 2013 Ireland opposed only five Commission proposals on the grounds of subsidiarity: Irish parliamentarians are not desperate to participate in EU decision-making. But Ireland will probably not put its long-standing political, cultural and economic ties with Britain at risk over the issue of national parliaments.

None of these countries, however, want treaty change, so Cameron will have to come up with creative ideas for introducing red or green cards without reopening the EU treaties. According to the treaties it is the European Commission that proposes new legal acts and decides whether to withdraw or persist with a proposal in the face of a yellow card. But there is nothing to stop Cameron from proposing a gentleman’s agreement to the Commission, whereby it would undertake to respect green or yellow cards. If Cameron fails to get such an agreement, he could try urging the Council of Ministers or the European Parliament to make a political commitment to drop a Commission proposal after national parliaments show an orange card.

But the European Parliament and the Commission, both of which are sceptical about any radical changes to the involvement of national parliaments, will resist such ideas. They think that parliaments’ main role is to hold their governments to account for their European policy, not to police the EU’s decision-making process. These institutions think that, were parliaments exerting greater pressure on their governments to raise their concerns and suggestions in Brussels, they would not need cards to make their voice heard.

From the perspective of the European Parliament, a bigger role for national parliaments could alter the current institutional balance in the EU, by which the European Parliament keeps the European Commission on a tight rein. MEPs do not have the right to propose laws, but the Treaty on the Functioning of the European Union gives the European Parliament the right to ask the Commission to submit a new legislative proposal. The Commission has to justify itself to MEPs if it decides to reject such a request. The new Commission has promised to legislate less rather than more, so it is likely that MEPs will resort to this mechanism more often. But national parliaments, if they had a green card, could steal the European Parliament's thunder.

The European Commission opposes red and green cards, too, because it fears losing its monopoly on legislative proposals. But if the success or failure of negotiations with the UK were at stake and Cameron managed to convince more member-states to back his ideas, the Commission might be ready to compromise – though it would probably attach conditions. Some EU officials have suggested that if a member-state has opted out of a policy area (such as justice and home affairs or the euro), then its parliament should not count towards the number of parliamentary chambers needed to show a card. If that rule were applied, it would make it more difficult for Westminster to build a coalition of parliaments to oppose deeper co-operation in these areas. British eurosceptics would find such a compromise difficult to swallow.

But most member-states, including Germany and France, will not be prepared to make far-reaching concessions on national parliaments. They complain that MPs show little interest in European affairs, fail to use the full potential of the existing yellow card procedure and should not take on new European responsibilities. Spain may prove to be most opposed: it frets that if parliaments had the right to veto Commission proposals they could create chaos and paralyse the decision-making process. Some member-states, like Belgium, Latvia and Slovenia, also fear that giving national parliaments red or green cards would weaken the supranational institutions: smaller and newer member-states have traditionally relied on the Commission and on the European Parliament to help them defend their interests. They worry that larger states have greater policy-making capability and more human resources.

But there is some good news for David Cameron: member-states do not want the British prime minister to leave the negotiating table empty-handed. They are keen to improve the existing yellow card procedure, which is not working properly. One problem is the current eight week deadline for showing a yellow card: some parliamentary chambers, including the House of Lords, have struggled to submit their objections to Commission proposals in time because of their parliamentary timetables. Another problem is that parliaments can only show the Commission a yellow card when they think that the subsidiarity principle has been breached. They cannot challenge the Commission’s draft laws if they fear that the proposals exceed what is necessary to achieve the objectives set out in EU treaties (the ‘proportionality principle’).

Cameron should therefore focus on suggesting improvements to the current yellow card procedure rather than demanding the impossible. 
The British government's own review of the balance of competences between the EU and the UK makes some useful recommendations in the report on the subsidiarity and proportionality principles. Cameron and his renegotiation team should also monitor an initiative by Luxembourg’s parliament. Marc Angel, the chair of Luxembourg's parliamentary committee on foreign and European affairs, defence, cooperation and immigration has established a working group composed of representatives of all national parliaments and the European Parliament, to look at the potential of the green card system and explore the scope to improve the current yellow card procedure. Its first meeting will take place on October 30th.

Finally, the British prime minister should be prepared to go to the European Parliament and argue for his ideas on making the EU more democratic. He has criticised the Parliament in the past, but he needs to accept that it is not going away, and MEPs need to be involved in any discussion of the EU’s democratic deficit. In September Martin Schulz, the Parliament’s president, invited David Cameron to address the plenary and elaborate on his reform package, eurosceptics will try to dissuade him from addressing MEPs. They will argue that the British prime minister is accountable only to the British parliament and should not waste his time in Strasbourg, but Cameron should ignore them. If any of his proposed reforms require changes to EU legislation, they will need the Parliament’s imprimatur. The sooner Conservative eurosceptics understand this, the better.

This insight is part of on-going research supported by a grant from the Open Society Foundations.

Agata Gostyńska-Jakubowska is a research fellow at the Centre for European Reform.

Wednesday, October 07, 2015

Beware cheap oil!

Europe’s economies welcome the collapse of oil prices. But serious foreign policy problems await if oil remains cheap.

When oil prices go up, governments of oil-importing countries worry. But when oil prices go down, there is a sigh of relief. Low oil prices give European economies a boost, but in terms of foreign and security policy, Europe’s neighbourhood faces more instability as oil-producing countries struggle with a fiscal crunch.

Between 2005 and 2014 there was an extended period of high oil prices. From 2011 to 2014, Brent oil averaged $107 per barrel. But in mid-2014 prices plummeted. Oversupply – booming US shale oil production in combination with unchanged levels of production in OPEC countries – met falling demand, particularly from a slowing Chinese economy. Supply disruptions, sanctions and conflicts – which removed more than 3 million barrels per day from the market in 2015 – had little effect on the downward trend in oil prices. On October 6, Brent oil was trading at around $52 per barrel.

Source: IMF, EIA

The period of high oil prices had negative consequences. It led to a massive transfer of wealth from Western economies to oil producing ones, which weighed on European recoveries and filled the state coffers of (mostly) less democratic states. Defence spending, repression and corruption increased in the Middle East and Russia. Since oil products are a key ingredient in fertilisers, high oil prices contributed to soaring food prices, putting extra strain on import-dependent emerging economies, like Egypt. This was one of the factors that led to the 2011 Arab Spring uprisings. Pirates and militant groups in the Gulf of Guinea specialised in stealing crude oil from pipelines and tankers.

Now, developments in both supply and demand are likely to depress prices for some time, perhaps until the end of the decade. The markets are bearish about prospects in the years ahead: oil futures contracts for early 2020 currently trade at less than 60 US dollars ($). On the supply side, American shale or ‘tight’ oil production can respond to price changes more quickly than conventional production can. Rystad Energy, a Norwegian energy consultancy, estimates that on average US shale oil becomes economic to produce at $58 per barrel; so increased US supply could slow global price rises above that level. In addition, in mid-2016 sanctions on Iran’s oil sector will end; as it attempts to win back market share it could soon add one million barrels per day to global output, increasing the world’s excess capacity.

On the demand side, China is slowly moving away from energy-intensive heavy manufacturing towards domestic and urban services, and its growth rates will inevitably fall from stellar to merely robust. The recovery in the eurozone is shaky, the IMF has corrected its global growth forecast downwards and overall energy efficiency gains mean the world confronts a depressed demand for oil, for now.

So, is the current price decline a good thing? Unfortunately a sustained period of low oil prices will create its own foreign and security policy problems. Low oil prices hurt the bottom line of oil-exporting countries. The IMF expects the export earnings of the Gulf states this year to decline by $287 billion due to the price collapse. Since 2011 governments across the Middle East have increased social spending to keep their populations happy in the wake of the Arab Spring uprisings. They may now struggle to maintain that spending.

In many oil-exporting states, those who control the oil wealth control most of the economy. If expected oil proceeds decrease in countries where ethnic, tribal or religious communities compete for political influence – as in many countries in the Middle East – this could become a cocktail for instability and conflict.  Jihadist groups in the region may find it easier to recruit disgruntled youth when economic problems rise. The risk of social unrest may lead governments to increase repression, resulting in human rights violations, terrorism and migratory pressures.

The chart below shows the depth of a country’s state coffers and the oil price at which oil-exporters can balance their books (called the ‘fiscal breakeven price’). The size of the bubble reflects the population that needs to be kept happy. An oil-exporter would prefer to be in the lower right-hand corner: able to balance the books with a low oil price, and with substantial government reserves to withstand years of low oil prices. Countries in the upper left-hand corner have breakeven prices in excess of the current oil price, and small financial buffers.

Source: IMF, Deutsche Bank, World Bank

Only Kuwait still earns money at current prices. Saudi Arabia can weather low oil prices for a long time due to its massive reserves, but others are not so fortunate. Bahrain has a high breakeven price, limited government reserves, large debts and a high rate of oil and natural gas extraction; only about ten years’ worth, at current rates. Under these difficult economic conditions, tensions between the ruling Sunni minority and the Shi’a majority could boil over, as they did during the Arab Spring. Despite its small financial buffer, Iraq sits on massive oil wealth and has a relatively low fiscal breakeven price. This suggests that if it is able to attract investment into its oil sector, it could prosper despite low oil prices. But the fight against the Islamic State terror group and Baghdad’s inability to reach a revenue-sharing agreement with the Kurds mean this may be difficult.
#SaudiArabia can weather low #oil prices due to its reserves - others however are not so fortunate
Outside the Middle East, crude oil, natural gas and oil products make up 90 per cent of Nigeria’s exports. It has limited reserves, a high breakeven price and a large and growing population that demands improved social services and economic opportunity. Groups like Boko Haram could exploit such grievances.

The Russian economy is heavily dependent on oil as Andrey Movchan from Carnegie’s Moscow centre explains. The chart above suggests that it has substantial reserves to deal with low oil prices, but Ian Bond and Christian Odendahl have argued that Russia’s state coffers may not be as full as the official statistics suggest. Russia has responded to low oil prices by pumping record quantities of crude, but Western sanctions against its financial and oil sectors as a result of its intervention in Ukraine are making it hard for Russia to replace depleted oil fields. If low oil prices persist, President Vladimir Putin will have to choose between maintaining social spending and pushing on with his expensive programme of defence modernisation. Although Russia’s vulnerability to oil price fluctuations should convince him to diversify the Russian economy, Putin may prefer to distract public opinion with military adventures abroad. It is worth remembering that Iraq’s president Saddam Hussein invaded neighbouring Kuwait in 1990 during a period of low oil prices.
If low #oil prices persist, #Putin faces a choice between social spending & #defence modernisation
Metal prices have fallen along with the oil price, and so developing countries that are dependent on mineral extraction face similar difficulties: copper accounts for 73 per cent of Zambia’s exports; 60 per cent of Mauritania’s exports comprise iron ore and copper; 90 per cent of the Democratic Republic of Congo’s exports consist of copper, cobalt and oil. The longer the price slump lasts, the more weak governments in these countries – many of which have a history of civil strife – will struggle.

The role of the US in both global oil markets and (potentially) Middle Eastern politics will change. American shale oil will continue to put downward pressure on prices. It makes the United States, not Saudi Arabia, the global swing-producer; and it challenges the cohesion of the OPEC oil cartel, as maintaining market share rather than high prices becomes the overriding concern for OPEC’s members.

In Europe, the impact of low oil price is mixed. The economic effects are clearly positive: low oil prices boost household incomes and reduce production costs. The impact of the Chinese slowdown, a negative for the European economy, is partially off-set by the subsequent fall in the oil price. But persistently low prices may complicate the EU’s efforts to reduce its dependence on Russian gas by delaying investment and production in some of Europe’s most important gas and oil suppliers, including Algeria and Azerbaijan. The Shah Deniz-2 gas project in the Caspian, bringing gas from Azerbaijan to Europe and a critical element in the EU’s efforts to increase its supply of non-Russian gas, loses money at current prices.

From a climate perspective, there is both good and bad news. The exploitation of high-cost energy sources will be delayed, including off-shore Arctic resources, complex ultra-deepwater fields and Canadian tar sands. Perhaps $200 billion in capital expenditures, mostly involving deepwater and oil sands projects, has been deferred due to the oil price bust, say energy consultants at WoodMackenzie. (Some Arctic projects and oil sands production could become economic again at $70 per barrel.) The controversial development of European shale resources might be unnecessary (and uneconomic) with the current oil and gas glut.

In the longer term, low oil prices should create an incentive for oil producers to modernise their economies to reduce their dependence on hydrocarbon exports – if they can afford the necessary investment and show the political will. If so, Europe should be prepared to assist them with the transition.

But low oil prices also challenge European climate policy, which rested on the assumption that oil prices would continue to rise, gradually making renewables and other low-carbon technologies more attractive. Low oil prices are linked to a drop in the carbon price. Meanwhile, coal has also become cheaper. Robust regulation rather than market forces will thus be needed to achieve Europe’s climate objectives. This also has consequences for the international climate conference in Paris in December. In a low oil-price environment, reaching binding decisions on climate targets becomes much harder. Though the US and China may push for an agreement in Paris, emerging economies like India and Turkey – which experience soaring energy demand  –  may be more reluctant to commit to costly emissions-reductions strategies.

Finally, and most urgently for European policy-makers, the arc of instability around Europe’s southern and eastern periphery, full of oil-exporting countries, will get more unstable if the oil slump lasts. This could lead to more regional conflict, an increased risk of terrorism, new refugee flows to Europe and more stress on EU countries struggling to cope with mass migration. European governments should consider this when debating spending priorities: a world of low oil prices will demand investment in development and humanitarian aid, security and in capable military forces.
The arc of instability around #Europe may get more unstable if cheap #oil lasts
Oil prices that are neither too high nor too low are good from a foreign policy perspective. But because the oil market tends to overshoot and undershoot, a ‘goldilocks’ oil price will remain elusive. For now, Europe should be ready for its neighbourhood to stay turbulent as long as cheap oil reigns.

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