by Hugo Brady
The financial crisis is challenging many of our assumptions about the course of politics and world affairs. Gordon Brown – only weeks ago portrayed as nearing the end of his time as UK prime minister – has been elevated to European, even global leadership status. After years of pan-European financial integration, the EU is heading back to national banking systems, with heavy state involvement. And the French desire for a different kind of globalisation – considered either hopelessly vague or a form of Gallic envy a short time ago – might well be realised in the coming months. Cliché or not, these are interesting times indeed.
The crisis may have another unlikely outcome: it may save the Lisbon treaty, rejected by Ireland in a referendum last June. The French government, and many others, want the Irish to hold a second referendum, preferably next spring. But they greatly under-estimate just how difficult reversing the June decision is going to be. (In fact, the chances of a second referendum before next autumn are very slim, despite the difficulties this poses for the 2009 European Parliament elections and the appointment of a new European Commission.) They also believe – rightly in a sense – that the current government of Brian Cowen, Ireland’s taoiseach, is part of the problem, not the solution.
Ireland is faring worse than most other countries in the current economic turmoil. Burst housing and credit bubbles have placed incredible strain on public finances. The approval ratings of the current coalition – led by Cowen's Fianna Fáil party – are in free fall after it unveiled a hugely unpopular budget that includes the removal of free medical benefits for the elderly. The opposition accuses the government of punishing the vulnerable for the bankers’ mistakes. With only a thin majority to rely on, the collapse of the government is a possibility.
In a previous CER Insight, I wrote about how challenging it was for the Irish government back in 2002 to hold and win a second referendum on the Nice treaty.
See: Tough choices to avoid euro-paralysis, June 2008. One important – and overlooked – component was the general election held between the two votes. Though the Nice treaty issue was not prominent in the campaign, the change of government wiped the political slate clean and provided some legitimacy for the previous decision to be re-visited.
The chances of this happening in the case of the Lisbon treaty have suddenly increased. If the present government falls, there will be three options. There may be a general election. Or Fianna Fáil may form a new coalition with new partners. More probable is the formation of an alternative government, led by the largest opposition party, Fine Gael, backed up by the Irish Labour party and others.
A Fine Gael-led coalition government would still have a mountain to climb to convince the Irish electorate to say yes to Lisbon. First the new government would have to find a way to make clear to voters that sticking with the Nice treaty means Ireland is about to lose its automatic right to be ‘represented’ on the European Commission. Second, it would have to give more power to the Oireachtas – the Irish Houses of Parliament – to decide how EU policy is decided at home. (One idea is to include a special ‘EU auditor’ post in the Irish constitution as a watchdog on European matters.) Third, the government would probably have to secure revamped promises on old bugbears in Ireland’s relationship with the EU such as abortion and defence, as well as new ones like tax harmonisation and, possibly, the Charter of Fundamental Rights.
I have argued that all such guarantees should be consolidated into one protocol on ‘Ireland in Europe’ to make them more visible to the public. The Irish government may also propose a clause to be added to the state’s constitution that no Irish citizen may be conscripted in the army of a foreign power, to address a spurious but widely believed claim from the June campaign. These would appear as separate questions on the ballot in a second referendum. Lastly, the new coalition should bring home a promise, probably from the June 2009 European Council, that the slimming down of the European Commission (as foreseen in the Nice and Lisbon treaties) will not happen. There will be more opposition to this concession from other member-states than the Irish imagine, but the difficulty in securing it should give extra impetus to any new campaign at home.
The course of Ireland’s EU debate would depend on all these things happening at the right time. Even then, there would be no certainty of success. The current leader of the pro-European Fine Gael, Enda Kenny, seems a poor alternative to lead the government. And the more impressive leader of the Labour Party, Eamon Gilmore, has grave misgivings about voting on the same treaty a second time. If they manage to agree, the government will still have to find positive arguments to make the main text of the treaty acceptable to voters.
Ironically, the events of the past few months may help to build such a case. The Georgian war and financial crisis have shown the EU needs capable, coherent leadership more than ever. The treaty’s reforms to the presidency system – to make leadership of the EU longer-term and more stable – would go some way towards achieving this. Second, and more importantly, the crisis has underlined Ireland’s reliance on its membership of the EU and the eurozone; outside the euro, Ireland would have faced a run on its currency. Even though the country cannot be forced to leave the Union, a second referendum will inevitably raise questions over its future in the EU. On the other hand, a yes vote could presage a speedier economic recovery and a return to the good times.
Hugo Brady is a research fellow at the Centre for European Reform.
Friday, October 24, 2008
Wednesday, October 15, 2008
Another Great Depression?
by Katinka Barysh
Many observers have drawn parallels between the current economic crisis and the Great Depression of the 1930s. However, the stock market collapse of 1929 did not directly cause what turned out to be the deepest and most prolonged recession of modern times, ultimately ending in the Second World War. The blame lies with misguided macro-economic policies and protectionist reactions, such as the infamous Smoot-Hawley tariff of June 1930, which contributed to a collapse in international trade. The downturn that is now hitting the US and EU economies will fuel protectionist reflexes. But unless western countries are prepared to tear up the rulebook of the World Trade Organisation, their room for manoeuvre is in fact limited.
Trade flows will of course be affected by the current crisis: domestic demand in the US, UK and other big economies is falling, companies cannot get the credit needed to finance exports and imports, and high energy prices have been pushing up shipping costs (although pressures are abating as oil prices fall). The Economist Intelligence Unit predicts that world trade will grow by only 4-5 per cent next year. That is a lot less than the average of 8 per cent recorded in the previous five years. But it is nothing compared with the Great Depression when real world trade flows contracted by around 14 per cent.
Surveys show that support for free trade among Europeans has been in decline for a couple of years, as people have become more concerned about globalisation, and in particular the rise of China. But overall, Europeans still hold rather benign views on international trade: over 80 per cent of Germans, French, Italians, Poles and Spaniards think that growing trade ties are, on balance, good for their country. Remarkably, in the traditionally more liberal UK the share is lower, at 77 per cent, and in the US barely over half, according to a Pew Global Attitudes Survey published earlier this year.
With many EU economies descending into recession and unemployment rising, enthusiasm for foreign trade will of course diminish. People fearing for their jobs and incomes are often happy to blame outside competition. The worry is that protectionist voices are growing louder around the world at a time when the multilateral trading system is severely weakened by the collapse of the Doha trade talks in July. However, while there is little chance of Doha – or any other ambitious trade deals – being concluded before economic conditions improve, the risk of a full-scale protectionist backlash appears small.
Most European countries trade more with their EU neighbours than with the rest of the world. Intra-EU trade is governed by the strict rules of the acquis, which does not allow any tariff or non-tariff barriers. The current recession will weaken EU countries’ commitment to state-aid rules, competition policy, as well as the liberalisation of services sectors and network industries such as energy. But the economic downturn would have to become truly catastrophic for trade barriers to re-appear within the EU.
The EU’s hands are also bound when it comes to trade with the outside world. Since the Great Depression, the world’s trading powers have conducted eight rounds of multilateral trade negotiations. As a result, tariffs on almost all manufacturing imports into the EU are low. And there are strict rules governing the use of ‘safeguard’ measures (to guard against surges in imports) and anti-dumping and anti-subsidy duties (to punish overseas producers that sell at artificially low prices). The EU could of course stretch, bend or even breach these rules to give temporary reprieve to, say, car companies, steel makers or clothing manufacturers (until a WTO court ruling resolves the issue). But such actions would probably only affect EU trade at the margins.
The failure of the Doha round does not substantially alter the trade regime of developed countries. However, unlike in the EU (and the US and Japan), developing countries are applying tariffs that are a lot lower (in some cases 20-30 per cent) than what they legally agreed to in previous trade rounds. Countries such as Mexico, India, South Africa or Korea could ramp up their tariff protection without breaching WTO rules. European politicians, and the Commission, could then come under pressure to retaliate. Moreover, a heavily Democrat-controlled US Congress could be a lot more hawkish on international trade. The main risk then is not that the rich countries will abandon their WTO commitments on a grand scale. It is that angry exchanges about economics poison the political atmosphere and make it more difficult for countries to work together on other issues, such as climate change.
Katinka Barysch is deputy director of the Centre for European Reform.
Many observers have drawn parallels between the current economic crisis and the Great Depression of the 1930s. However, the stock market collapse of 1929 did not directly cause what turned out to be the deepest and most prolonged recession of modern times, ultimately ending in the Second World War. The blame lies with misguided macro-economic policies and protectionist reactions, such as the infamous Smoot-Hawley tariff of June 1930, which contributed to a collapse in international trade. The downturn that is now hitting the US and EU economies will fuel protectionist reflexes. But unless western countries are prepared to tear up the rulebook of the World Trade Organisation, their room for manoeuvre is in fact limited.
Trade flows will of course be affected by the current crisis: domestic demand in the US, UK and other big economies is falling, companies cannot get the credit needed to finance exports and imports, and high energy prices have been pushing up shipping costs (although pressures are abating as oil prices fall). The Economist Intelligence Unit predicts that world trade will grow by only 4-5 per cent next year. That is a lot less than the average of 8 per cent recorded in the previous five years. But it is nothing compared with the Great Depression when real world trade flows contracted by around 14 per cent.
Surveys show that support for free trade among Europeans has been in decline for a couple of years, as people have become more concerned about globalisation, and in particular the rise of China. But overall, Europeans still hold rather benign views on international trade: over 80 per cent of Germans, French, Italians, Poles and Spaniards think that growing trade ties are, on balance, good for their country. Remarkably, in the traditionally more liberal UK the share is lower, at 77 per cent, and in the US barely over half, according to a Pew Global Attitudes Survey published earlier this year.
With many EU economies descending into recession and unemployment rising, enthusiasm for foreign trade will of course diminish. People fearing for their jobs and incomes are often happy to blame outside competition. The worry is that protectionist voices are growing louder around the world at a time when the multilateral trading system is severely weakened by the collapse of the Doha trade talks in July. However, while there is little chance of Doha – or any other ambitious trade deals – being concluded before economic conditions improve, the risk of a full-scale protectionist backlash appears small.
Most European countries trade more with their EU neighbours than with the rest of the world. Intra-EU trade is governed by the strict rules of the acquis, which does not allow any tariff or non-tariff barriers. The current recession will weaken EU countries’ commitment to state-aid rules, competition policy, as well as the liberalisation of services sectors and network industries such as energy. But the economic downturn would have to become truly catastrophic for trade barriers to re-appear within the EU.
The EU’s hands are also bound when it comes to trade with the outside world. Since the Great Depression, the world’s trading powers have conducted eight rounds of multilateral trade negotiations. As a result, tariffs on almost all manufacturing imports into the EU are low. And there are strict rules governing the use of ‘safeguard’ measures (to guard against surges in imports) and anti-dumping and anti-subsidy duties (to punish overseas producers that sell at artificially low prices). The EU could of course stretch, bend or even breach these rules to give temporary reprieve to, say, car companies, steel makers or clothing manufacturers (until a WTO court ruling resolves the issue). But such actions would probably only affect EU trade at the margins.
The failure of the Doha round does not substantially alter the trade regime of developed countries. However, unlike in the EU (and the US and Japan), developing countries are applying tariffs that are a lot lower (in some cases 20-30 per cent) than what they legally agreed to in previous trade rounds. Countries such as Mexico, India, South Africa or Korea could ramp up their tariff protection without breaching WTO rules. European politicians, and the Commission, could then come under pressure to retaliate. Moreover, a heavily Democrat-controlled US Congress could be a lot more hawkish on international trade. The main risk then is not that the rich countries will abandon their WTO commitments on a grand scale. It is that angry exchanges about economics poison the political atmosphere and make it more difficult for countries to work together on other issues, such as climate change.
Katinka Barysch is deputy director of the Centre for European Reform.
Thursday, October 02, 2008
Scapegoating the US lets others off too easily
by Simon Tilford
Huge amounts have been said about the consequences of the credit crunch for the US and UK economies. They undoubtedly face major adjustments, and several years of very weak economic growth. There has also been trenchant criticism of spendthrift ‘Anglo-Saxons’ living beyond their means, derailing the global economy in the process. The US is a convenient scapegoat for politicians confronted with economic uncertainty, but it needs to be remembered that a number of European and East Asian economies benefited enormously from the credit boom. Indeed, it could not have happened without excess savings generated by the likes of China, Germany and Japan.
The credit booms in the US and UK, as well as in other countries such Spain and Australia, were not simply the result of poor commercial practices and policies in those countries. They were also the by-product of imbalances in the global economy. The US is regularly pilloried for running a large external (current account) deficit, for playing fast and loose with its currency, and hence for destabilising the global economy. This is misleading. The US did not cause the current problems all on its own. Those governments that believe a rising current account surplus is a symbol of national economic virility and competitiveness played a major role too. Indeed, their surpluses are the underlying cause of instability.
If some countries routinely run huge current account surpluses, others must run huge deficits. German and East Asian surpluses have to be invested somewhere and they got invested in housing and other assets in the US, UK and elsewhere. Criticism of the US Federal Reserve for pursuing an excessively weak monetary policy, and hence inflating asset prices is fine as far as it goes. But low interest rates were needed to encourage enough borrowing to soak up the excess liquidity produced by rising current accounts surpluses. Those condemning the US need to ask themselves where the global economy would have been without the demand generated by the US and other big deficit countries. China would certainly have grown much less rapidly and Germany and Japan would probably still be mired in economic stagnation.
Many in Germany, Japan and China argue that their dependence on the US is declining because the US accounts for a falling share of their respective current account surpluses. What they fail to notice is that the US has still been absorbing much of the liquidity that China, Japan and Germany have generated by running external surpluses with other economies. Furthermore, US demand has stimulated trade between other countries (for example, Chinese purchases of Japanese components or German machinery).
With credit conditions now tight and employment growth very weak, there will be a progressive narrowing of the US current account deficit (along with those of the UK, Spain etc). The governments that regularly criticise the US for the destabilising impact of its imbalances might not like the implications of this process. This unwinding poses a big problem for export-dependent economies. It exposes their domestic imbalances, which are just as much of a ‘problem’ as those of the US. An external surplus suggests that there are inadequate investment opportunities in an economy.
In a European context, it is imperative that the German government takes steps to rebalance the German economy. Domestic savings need to fall and investment needs to rise. Much is made of the competitive ‘gains’ the Germans have made in recent years and how this stands their country in good stead. Improved price competitiveness could help German firms to gain market share in the downturn, but collapsing export orders demonstrate that it will provide only so much support. Steep falls in investment in machinery and equipment and in purchases of cars in most of the country’s key export markets will hit the Germany economy hard next year.
The German finance minister, Peer Steinbruck, needs to spend more time thinking about how to address the country’s exceptionally weak domestic demand. Tax cuts would be a good first step. The German government needs to get over its obsession with fiscal probity. In the long-term, of course, fiscal discipline is a necessity, but at present it risks aggravating an already serious situation. China and Japan faces different challenges, but the underlying problem is one of excessive dependence on exports.
Unfortunately, there is little sign of any rethinking of economic strategy in these three economies. If anything, the problems experienced by the US have confirmed the belief that a competitive economy is one with a big external surplus and rising international reserves. This is bad news for everyone. Unless China, Germany and Japan make a net contribution to global demand, the world really could face a slump. Instead of gloating about the US’s comeuppance they should be considering what will drive their own and others’ economic growth.
Simon Tilford is chief economist at the Centre for European Reform.
Huge amounts have been said about the consequences of the credit crunch for the US and UK economies. They undoubtedly face major adjustments, and several years of very weak economic growth. There has also been trenchant criticism of spendthrift ‘Anglo-Saxons’ living beyond their means, derailing the global economy in the process. The US is a convenient scapegoat for politicians confronted with economic uncertainty, but it needs to be remembered that a number of European and East Asian economies benefited enormously from the credit boom. Indeed, it could not have happened without excess savings generated by the likes of China, Germany and Japan.
The credit booms in the US and UK, as well as in other countries such Spain and Australia, were not simply the result of poor commercial practices and policies in those countries. They were also the by-product of imbalances in the global economy. The US is regularly pilloried for running a large external (current account) deficit, for playing fast and loose with its currency, and hence for destabilising the global economy. This is misleading. The US did not cause the current problems all on its own. Those governments that believe a rising current account surplus is a symbol of national economic virility and competitiveness played a major role too. Indeed, their surpluses are the underlying cause of instability.
If some countries routinely run huge current account surpluses, others must run huge deficits. German and East Asian surpluses have to be invested somewhere and they got invested in housing and other assets in the US, UK and elsewhere. Criticism of the US Federal Reserve for pursuing an excessively weak monetary policy, and hence inflating asset prices is fine as far as it goes. But low interest rates were needed to encourage enough borrowing to soak up the excess liquidity produced by rising current accounts surpluses. Those condemning the US need to ask themselves where the global economy would have been without the demand generated by the US and other big deficit countries. China would certainly have grown much less rapidly and Germany and Japan would probably still be mired in economic stagnation.
Many in Germany, Japan and China argue that their dependence on the US is declining because the US accounts for a falling share of their respective current account surpluses. What they fail to notice is that the US has still been absorbing much of the liquidity that China, Japan and Germany have generated by running external surpluses with other economies. Furthermore, US demand has stimulated trade between other countries (for example, Chinese purchases of Japanese components or German machinery).
With credit conditions now tight and employment growth very weak, there will be a progressive narrowing of the US current account deficit (along with those of the UK, Spain etc). The governments that regularly criticise the US for the destabilising impact of its imbalances might not like the implications of this process. This unwinding poses a big problem for export-dependent economies. It exposes their domestic imbalances, which are just as much of a ‘problem’ as those of the US. An external surplus suggests that there are inadequate investment opportunities in an economy.
In a European context, it is imperative that the German government takes steps to rebalance the German economy. Domestic savings need to fall and investment needs to rise. Much is made of the competitive ‘gains’ the Germans have made in recent years and how this stands their country in good stead. Improved price competitiveness could help German firms to gain market share in the downturn, but collapsing export orders demonstrate that it will provide only so much support. Steep falls in investment in machinery and equipment and in purchases of cars in most of the country’s key export markets will hit the Germany economy hard next year.
The German finance minister, Peer Steinbruck, needs to spend more time thinking about how to address the country’s exceptionally weak domestic demand. Tax cuts would be a good first step. The German government needs to get over its obsession with fiscal probity. In the long-term, of course, fiscal discipline is a necessity, but at present it risks aggravating an already serious situation. China and Japan faces different challenges, but the underlying problem is one of excessive dependence on exports.
Unfortunately, there is little sign of any rethinking of economic strategy in these three economies. If anything, the problems experienced by the US have confirmed the belief that a competitive economy is one with a big external surplus and rising international reserves. This is bad news for everyone. Unless China, Germany and Japan make a net contribution to global demand, the world really could face a slump. Instead of gloating about the US’s comeuppance they should be considering what will drive their own and others’ economic growth.
Simon Tilford is chief economist at the Centre for European Reform.
Monday, September 29, 2008
In defence of Anglo-Saxon capitalism
by Charles Grant
Those who never liked ‘Anglo-Saxon’ capitalism are feeling smug. Marxists, fans of ‘Rhineland’ capitalism and those who simply cannot stand American power are crowing. “The US will lose its status as the superpower of the world financial system,” says Peer Steinbruck, Germany’s finance minister. “Self-regulation is finished, laisser faire is finished, the idea of an all powerful market which is always right is finished,” says France’s president, Nicolas Sarkozy. The British academic (and sometime fan of Margaret Thatcher) John Gray proclaims that “in a change as far-reaching in its implications as the fall of the Soviet Union, an entire model of the government and the economy has collapsed.”
All this hyperbolic froth and windy rhetoric conceals a real danger for the European economy. The perceived failure of one model of capitalism, combined with growing protectionist pressure from all continents, could push EU governments to ban or discourage a whole range of ‘Anglo-Saxon’ practices and institutions. Cross-border takeovers and equity issues, the private equity and hedge fund industries, and even privatisations – all of which can help to make economies more efficient – may come under threat. Furthermore, some governments may think that because the EU’s ‘Lisbon agenda’ of economic reform is British-inspired, they can relax their efforts to carry out its painful but essential prescriptions.
Of course, the credit crisis has exposed huge weaknesses in the American and British financial systems. The so-called phantom banking industry of institutions and instruments that focused on fiendishly complex off-balance sheet financing was poorly regulated. Those in charge of many leading banks appear to have had no idea about the risks they were taking on. Their pay packages were ridiculous and unjustified, especially when those who had failed received tens of millions of dollars of ‘compensation’ for being fired. The property and credit booms in the US, the UK, Spain and Ireland were excessive. And the British decision to allow the building societies (mutuals) to turn themselves into banks – and their subsequent move into risky financial instruments and models of funding – may have been an error.
But politicians such as Steinbruck should not indulge in too much Schadenfreude. For the next few years, some of the core euroland economies may be lucky enough to escape some of the pain that will afflict the Anglo-Saxons. But the continental banks are certainly not immune from the crisis, as the rescue of the Dutch-Belgian Fortis shows. The capital ratios of some of the top continental banks are inferior to those of their American peers. And if a European bank involved in several members-states did head for the rocks, could the EU’s ramshackle regulatory system – with national authorities holding many of the key powers – move as quickly as Treasury Secretary Hank Paulson, Federal Reserve Governor Ben Bernanke and the Congress have done?
Many of today’s Cassandras mistakenly assume that financial crises are a uniquely Anglo-Saxon phenomenon. Very different sorts of financial system – such as those of Japan and Sweden in the early 1990s – have ended up being bailed out by governments. Financial crises are inherent in the nature of capitalism, rather than one particular brand of it.
However the current crisis turns out, many continental European governments will have to tackle serious structural flaws in their economies. They are held back by a lack of competition and restrictive practices in a host of sectors, especially services. Their universities cannot compete with the world’s best. In many of these countries, old-fashioned trade unions block reform and modernisation (look at the pitiful saga of Alitalia). Excessive state aid distorts the allocation of capital and may deter new entrants. Over the past 20 years, France, Germany and Italy have performed poorly on economic growth and job creation. Europe as a whole has a poor record on innovation and the adoption of new technologies.
Among the EU-27, the UK has not been the star of the class. In recent years the Nordic economies and the Netherlands have had the best record of combining on the one hand high employment and active labour market policies, and on the other generous welfare and high-quality public services. But the UK has many strengths (as well as notable weaknesses like infrastructure). Its liberal labour markets have helped to push the employment rate above 70 per cent of the workforce – the only other EU countries above 70 per cent are Denmark, Sweden and the Netherlands. And of the EU’s large economies Britain is the most open to foreign investment, which is one reason why it has a good record of adopting new technologies.
Moreover, the City of London remains a big British strength – despite everything that has happened. Much of what the City does is valuable not only to the UK, but also to Europe and indeed the world economy. If properly regulated, mergers and acquisitions, corporate advice, City law firms, hedge funds, private equity, the euromarkets, the fund managers, the Lloyds insurance market, the currency markets, the international equity markets, and much else, add value. The City is in for a lean few years, but it will come back – after some consolidation and regulatory reform – because the world needs a centre of expertise for international finance.
Nobody should write off the American economy. Compared to its European peers, its history of recovering rapidly from recession is impressive. Its track record on innovation and start-ups is the envy of the world. Where are the European Googles, Microsofts, Ciscos and Intels? The US has most of the world’s best universities. It consistently out-performs the EU on productivity. Despite the rise of the BRIC economies, at market exchange rates the US will remain the world’s leading economy for many decades. China’s leaders know this very well and have not resorted to the kind of hubris that we have heard from certain continental politicians.
Some European leaders may view the Lisbon agenda of economic reform as ‘Anglo-Saxon’, but they should not abandon it. Parts of the agenda are rather Anglo-Saxon, such as the emphasis on creating employment, liberalising utilities and enhancing competition. But much of the agenda has a broader scope: boosting innovation, improving R&D, reforming pensions and helping start-ups. All the European economies need the Lisbon agenda, whether they are Anglo-Saxon, Rhineland, Nordic, East European or Mediterranean. At some point the financial turmoil will settle down. Then EU leaders will need to return to two key questions: why is the trend growth rate of the EU economy about one percentage point less than that of the US, and what can Europe do to catch up?
Charles Grant is director of the Centre for European Reform.
Those who never liked ‘Anglo-Saxon’ capitalism are feeling smug. Marxists, fans of ‘Rhineland’ capitalism and those who simply cannot stand American power are crowing. “The US will lose its status as the superpower of the world financial system,” says Peer Steinbruck, Germany’s finance minister. “Self-regulation is finished, laisser faire is finished, the idea of an all powerful market which is always right is finished,” says France’s president, Nicolas Sarkozy. The British academic (and sometime fan of Margaret Thatcher) John Gray proclaims that “in a change as far-reaching in its implications as the fall of the Soviet Union, an entire model of the government and the economy has collapsed.”
All this hyperbolic froth and windy rhetoric conceals a real danger for the European economy. The perceived failure of one model of capitalism, combined with growing protectionist pressure from all continents, could push EU governments to ban or discourage a whole range of ‘Anglo-Saxon’ practices and institutions. Cross-border takeovers and equity issues, the private equity and hedge fund industries, and even privatisations – all of which can help to make economies more efficient – may come under threat. Furthermore, some governments may think that because the EU’s ‘Lisbon agenda’ of economic reform is British-inspired, they can relax their efforts to carry out its painful but essential prescriptions.
Of course, the credit crisis has exposed huge weaknesses in the American and British financial systems. The so-called phantom banking industry of institutions and instruments that focused on fiendishly complex off-balance sheet financing was poorly regulated. Those in charge of many leading banks appear to have had no idea about the risks they were taking on. Their pay packages were ridiculous and unjustified, especially when those who had failed received tens of millions of dollars of ‘compensation’ for being fired. The property and credit booms in the US, the UK, Spain and Ireland were excessive. And the British decision to allow the building societies (mutuals) to turn themselves into banks – and their subsequent move into risky financial instruments and models of funding – may have been an error.
But politicians such as Steinbruck should not indulge in too much Schadenfreude. For the next few years, some of the core euroland economies may be lucky enough to escape some of the pain that will afflict the Anglo-Saxons. But the continental banks are certainly not immune from the crisis, as the rescue of the Dutch-Belgian Fortis shows. The capital ratios of some of the top continental banks are inferior to those of their American peers. And if a European bank involved in several members-states did head for the rocks, could the EU’s ramshackle regulatory system – with national authorities holding many of the key powers – move as quickly as Treasury Secretary Hank Paulson, Federal Reserve Governor Ben Bernanke and the Congress have done?
Many of today’s Cassandras mistakenly assume that financial crises are a uniquely Anglo-Saxon phenomenon. Very different sorts of financial system – such as those of Japan and Sweden in the early 1990s – have ended up being bailed out by governments. Financial crises are inherent in the nature of capitalism, rather than one particular brand of it.
However the current crisis turns out, many continental European governments will have to tackle serious structural flaws in their economies. They are held back by a lack of competition and restrictive practices in a host of sectors, especially services. Their universities cannot compete with the world’s best. In many of these countries, old-fashioned trade unions block reform and modernisation (look at the pitiful saga of Alitalia). Excessive state aid distorts the allocation of capital and may deter new entrants. Over the past 20 years, France, Germany and Italy have performed poorly on economic growth and job creation. Europe as a whole has a poor record on innovation and the adoption of new technologies.
Among the EU-27, the UK has not been the star of the class. In recent years the Nordic economies and the Netherlands have had the best record of combining on the one hand high employment and active labour market policies, and on the other generous welfare and high-quality public services. But the UK has many strengths (as well as notable weaknesses like infrastructure). Its liberal labour markets have helped to push the employment rate above 70 per cent of the workforce – the only other EU countries above 70 per cent are Denmark, Sweden and the Netherlands. And of the EU’s large economies Britain is the most open to foreign investment, which is one reason why it has a good record of adopting new technologies.
Moreover, the City of London remains a big British strength – despite everything that has happened. Much of what the City does is valuable not only to the UK, but also to Europe and indeed the world economy. If properly regulated, mergers and acquisitions, corporate advice, City law firms, hedge funds, private equity, the euromarkets, the fund managers, the Lloyds insurance market, the currency markets, the international equity markets, and much else, add value. The City is in for a lean few years, but it will come back – after some consolidation and regulatory reform – because the world needs a centre of expertise for international finance.
Nobody should write off the American economy. Compared to its European peers, its history of recovering rapidly from recession is impressive. Its track record on innovation and start-ups is the envy of the world. Where are the European Googles, Microsofts, Ciscos and Intels? The US has most of the world’s best universities. It consistently out-performs the EU on productivity. Despite the rise of the BRIC economies, at market exchange rates the US will remain the world’s leading economy for many decades. China’s leaders know this very well and have not resorted to the kind of hubris that we have heard from certain continental politicians.
Some European leaders may view the Lisbon agenda of economic reform as ‘Anglo-Saxon’, but they should not abandon it. Parts of the agenda are rather Anglo-Saxon, such as the emphasis on creating employment, liberalising utilities and enhancing competition. But much of the agenda has a broader scope: boosting innovation, improving R&D, reforming pensions and helping start-ups. All the European economies need the Lisbon agenda, whether they are Anglo-Saxon, Rhineland, Nordic, East European or Mediterranean. At some point the financial turmoil will settle down. Then EU leaders will need to return to two key questions: why is the trend growth rate of the EU economy about one percentage point less than that of the US, and what can Europe do to catch up?
Charles Grant is director of the Centre for European Reform.
Friday, September 19, 2008
Can the next US president heal the transatlantic rift?
by Tomas Valasek
There are two schools of thought on what the election of a new US president will mean for transatlantic relations. The optimists argue that relations will improve significantly. They assume that much of the anger Europe feels towards the US is aimed at George W Bush rather than the country as a whole, and that once he leaves, US-European ties will revert to their normal, friendly terms. The pessimists disagree: they say that US and European outlooks on security are fundamentally different, that the next US president, whoever he is, will pursue a foreign policy similar to that of George W Bush, and that the relations may well worsen post-US elections as the Europeans, disappointed that president Obama or McCain does not turn out to be a multilateralist European liberal, turn their backs on the United States with a vengeance.
So when the German Marshall Fund released its annual Transatlantic trends survey last week, both the optimists and pessimists poured through the numbers in search of evidence for their respective hypotheses. On balance, the results tend to slightly favour the optimists, but much depends on who the Americans elect on November 4th.
The German Marshall Fund asked the Europeans directly whether they think that relations with the US would improve after the elections. Fourty-seven per cent of Europeans said ‘yes’ assuming Obama is the president. The reverse held true for McCain: only 11 per cent thought transatlantic relations would improve with him in the White House. But this reflects Europe’s strong preference for Obama rather than a dislike of McCain. Only 13 per cent of Europeans think that relations would worsen under McCain while a significant plurality - 49 per cent - expect them to remain the same. This suggests that Europe is adopting a ‘wait-and-see’ attitude on the Republican candidate.
Another useful way of gauging the impact of elections is to compare perceptions of the United States in Europe with attitudes towards George W Bush personally. Thirty-six per cent of Europeans support US leadership role in the world but only 19 per cent approve of George W Bush’s conduct in the office. This suggests that the 'Bush' factor reduces the Europeans’ support for the US by 17 percentage points – a percentage that Obama would certainly (and McCain possibly) pick up just by getting elected.
At this point the pessimists would point out that it does not matter what the Europeans think now. A pessimist would say that the Europeans do not understand how much continuity there is in US foreign policy. And that once Europe finds out that Obama or McCain’s foreign policy is more similar to George W Bush’s foreign policy than Europe’s - which it will be - even the most hardened Euro-optimists will feel disappointed.
That is a valid point. Obama’s victory in particular would be bound to generate expectations that no president could fulfil. So after an initial spike in European support for the US, there would come an inevitable decline. (With McCain, the Transatlantic Trends suggest, there would be little excitement in Europe initially, and hence less room for disappointment later if he turns out to be similar to the current president).
But none of this rules out the possibility of a long-term improvement in relations. It all depends on how the new president conducts himself in office. Past US presidents have managed to combine the US foreign policy tradition of assertive leadership with the Europeans’ preference for multilateral solutions and diplomacy. And so, presumably, could Obama and McCain.
Here are a few supporting numbers: in 2002, 64 per cent of Europeans approved of US leadership. (That number, as pointed out earlier, has dropped to 36 per cent today.) The major change since 2002, which accounts for the chill in transatlantic relations, was the war in Iraq. But six years on, Iraq has become a lot more stable and less salient as a political issue in Europe. It could largely disappear from transatlantic debates if Obama wins the presidency: he opposed the war all along, and has promised to withdraw US forces speedily if elected.
European support for US leadership stood at 64 per cent six years ago because previous US presidents have used US military power more delicately than George W Bush, and listened to the European allies a lot more attentively than the current president. That is precisely what Obama promises to do. (McCain says he will listen to Europe more but on some issues like Russia he sounds more aggressive than George W Bush.)
US foreign policy, contrary to the pessimists’ assumptions, is not bound to remain jingoistic - in fact, it has become a lot less belligerent in the last three-four years, during which the US opened talks with North Korea and endorsed Europe's nuclear diplomacy with Iran (for which president Bush, wrongly but understandably, has received no credit in Europe).
To win the Europeans’ hearts, the new president will have to show appreciation for the EU’s new role. As McCain or Obama will find out, Europe has changed much since George W Bush came to power. It no longer instinctively turns to the US when a crisis breaks out on or near the continent. The EU now takes care of most security problems on its own (except for large-scale crises, which still require NATO involvement). This new EU is not anti-American: 67 per cent of Europeans think that Europe should seek to work with the US rather than independently, say the Transatlantic Trends. So if the next US president seeks to work with his allies in Europe, he is likely to be received positively. Support for US’s leadership role would eventually inch up. And optimists among the Europeans would feel vindicated.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
There are two schools of thought on what the election of a new US president will mean for transatlantic relations. The optimists argue that relations will improve significantly. They assume that much of the anger Europe feels towards the US is aimed at George W Bush rather than the country as a whole, and that once he leaves, US-European ties will revert to their normal, friendly terms. The pessimists disagree: they say that US and European outlooks on security are fundamentally different, that the next US president, whoever he is, will pursue a foreign policy similar to that of George W Bush, and that the relations may well worsen post-US elections as the Europeans, disappointed that president Obama or McCain does not turn out to be a multilateralist European liberal, turn their backs on the United States with a vengeance.
So when the German Marshall Fund released its annual Transatlantic trends survey last week, both the optimists and pessimists poured through the numbers in search of evidence for their respective hypotheses. On balance, the results tend to slightly favour the optimists, but much depends on who the Americans elect on November 4th.
The German Marshall Fund asked the Europeans directly whether they think that relations with the US would improve after the elections. Fourty-seven per cent of Europeans said ‘yes’ assuming Obama is the president. The reverse held true for McCain: only 11 per cent thought transatlantic relations would improve with him in the White House. But this reflects Europe’s strong preference for Obama rather than a dislike of McCain. Only 13 per cent of Europeans think that relations would worsen under McCain while a significant plurality - 49 per cent - expect them to remain the same. This suggests that Europe is adopting a ‘wait-and-see’ attitude on the Republican candidate.
Another useful way of gauging the impact of elections is to compare perceptions of the United States in Europe with attitudes towards George W Bush personally. Thirty-six per cent of Europeans support US leadership role in the world but only 19 per cent approve of George W Bush’s conduct in the office. This suggests that the 'Bush' factor reduces the Europeans’ support for the US by 17 percentage points – a percentage that Obama would certainly (and McCain possibly) pick up just by getting elected.
At this point the pessimists would point out that it does not matter what the Europeans think now. A pessimist would say that the Europeans do not understand how much continuity there is in US foreign policy. And that once Europe finds out that Obama or McCain’s foreign policy is more similar to George W Bush’s foreign policy than Europe’s - which it will be - even the most hardened Euro-optimists will feel disappointed.
That is a valid point. Obama’s victory in particular would be bound to generate expectations that no president could fulfil. So after an initial spike in European support for the US, there would come an inevitable decline. (With McCain, the Transatlantic Trends suggest, there would be little excitement in Europe initially, and hence less room for disappointment later if he turns out to be similar to the current president).
But none of this rules out the possibility of a long-term improvement in relations. It all depends on how the new president conducts himself in office. Past US presidents have managed to combine the US foreign policy tradition of assertive leadership with the Europeans’ preference for multilateral solutions and diplomacy. And so, presumably, could Obama and McCain.
Here are a few supporting numbers: in 2002, 64 per cent of Europeans approved of US leadership. (That number, as pointed out earlier, has dropped to 36 per cent today.) The major change since 2002, which accounts for the chill in transatlantic relations, was the war in Iraq. But six years on, Iraq has become a lot more stable and less salient as a political issue in Europe. It could largely disappear from transatlantic debates if Obama wins the presidency: he opposed the war all along, and has promised to withdraw US forces speedily if elected.
European support for US leadership stood at 64 per cent six years ago because previous US presidents have used US military power more delicately than George W Bush, and listened to the European allies a lot more attentively than the current president. That is precisely what Obama promises to do. (McCain says he will listen to Europe more but on some issues like Russia he sounds more aggressive than George W Bush.)
US foreign policy, contrary to the pessimists’ assumptions, is not bound to remain jingoistic - in fact, it has become a lot less belligerent in the last three-four years, during which the US opened talks with North Korea and endorsed Europe's nuclear diplomacy with Iran (for which president Bush, wrongly but understandably, has received no credit in Europe).
To win the Europeans’ hearts, the new president will have to show appreciation for the EU’s new role. As McCain or Obama will find out, Europe has changed much since George W Bush came to power. It no longer instinctively turns to the US when a crisis breaks out on or near the continent. The EU now takes care of most security problems on its own (except for large-scale crises, which still require NATO involvement). This new EU is not anti-American: 67 per cent of Europeans think that Europe should seek to work with the US rather than independently, say the Transatlantic Trends. So if the next US president seeks to work with his allies in Europe, he is likely to be received positively. Support for US’s leadership role would eventually inch up. And optimists among the Europeans would feel vindicated.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
Monday, September 15, 2008
The EU’s toolbox for Russia
by Katinka Barysch
Last week, Russia belatedly signed up to a timetable for pulling back its troops from the ‘buffer’ zone in Georgia. The EU, and its current president, Nicolas Sarkozy, deserve credit for having brokered the initial ceasefire and then pushing hard for Russia to follow the terms. The important question now is how the EU will respond in case tensions do not ease, or even grow further.
At its emergency summit on September 1st, the Europeans managed to stick together in an unprecedented condemnation of Russian aggression. To signal their willingness to act, they froze negotiations on their new Partnership Agreement with Russia. This decision did not sway Russia’s plans. But, being used to a squabbling and uncritical EU, Moscow will have taken note of the Europeans’ relatively strong reaction – relative because compared with the tough rhetoric of some US politicians the EU’s reaction looked measured. Those who criticise the EU for this miss the point. The EU cannot be a mediator in the conflict and take sides at the same time. The EU’s mediating role was all the more effective because it was backed by an angrily growling America that openly backed Saakashvili. The Americans found it easier to be firm because they could rely on the EU to do the negotiations.
The latest ceasefire agreement, of course, will not end the tensions. Already, there are new disagreements about how many Russian soldiers should remain in Abkhazia and South Ossetia, and where EU monitors will be allowed to go. Moreover, many people, and not only in Ukraine, Poland or Estonia, predict that Russian efforts to control its neighbourhood will not stop at the border of South Ossetia.
So the EU needs to continue its debate about what kind of tools it has available to ratchet up the pressure if necessary.
Most of the measures that politicians and commentators have discussed since August 8th are more likely to harm European interests without making Russia change its ways. Moreover, any panicky over-reaction would make Russia look scarier than it is, which Russian leaders may secretly enjoy.
Economic sanctions are almost a non-starter. Almost 30 per cent of the gas consumed in the EU comes from Russia, and the EU is in no position to replace these supplies in the foreseeable future. Acutely aware that this dependence is mutual, Russian leaders have been notably careful not to mention energy in their angry exchanges with the West. The EU could try to limit Russian sales of non-energy goods or Russian investments in EU countries. But in the absence of a UN mandate, such steps would violate the EU’s own rules for openness and non-discrimination. Economic sanctions risk undermining the principles on which the EU is based. And they could stunt Russia's diversification away from oil and gas, which is good for its long-term stability.
As for Russia’s WTO application, the EU is keen on getting Russia to respect international trade rules and submit to the WTO dispute settlement procedures while Moscow seems in no rush to finish the accession negotiations. Russia’s membership is in any case a long way off, because of Moscow’s erratic trade policy, the US’ refusal to repeal the Jackson-Vanik amendment and vetoes from Georgia and, possibly, Ukraine (both WTO members). The EU should not use the WTO to make a political point at a time when the organisation is already weakened by the break-down of the Doha trade talks.
Nor would it be a good idea to ban Russians from visiting or working in EU countries. If Russians cannot travel, they may be more prone to believing their government’s propaganda about a West that is hostile and hypocritical. And the EU needs to think very carefully about targeted visa sanctions. A ban on Russian leaders and top officials would signal a new world in which the Europeans no longer believe that engagement can achieve anything. We are a long way from there. The EU could make it harder for Russia’s big businessmen to holiday at the Cote d’Azur or do business in London, hoping that they would put pressure on their leaders to change their ways. But many rich Russians have acquired foreign passports and few will risk falling out with a regime that seems to enjoy a bit of oligarch bashing from time to time.
The EU’s decision to continue doing business with Russia does not mean that it will be business as usual. The EU could stop preparations for a trade agreement for nuclear fuels, something that Russia wants badly to grab a bigger share of the European market. The same applies for Russia’s participation in EU research projects.
More fundamentally, the EU’s response should not start by asking how to punish Russia or change its course. It should start within the EU, with a set of well-defined objectives. The tricky part is to figure out how to achieve these objectives in the face of Russian opposition or obstruction. After Georgia, the EU can no longer pretend that its goals do not clash with Russia’s. That is good because it forces the Europeans to have a more open and realistic debate about its ties with Russia and to set clearer priorities (a slimming down the bloated EU-Russia agenda in reaction to Georgia would help with this). The EU’s priorities should be: stability beyond the EU’s eastern borders, energy security, and international tasks that require some sort of Russian involvement, such a preventing Iran from building a nuclear bomb. Russia would have to take the Union a lot more seriously if it beefed up its neighbourhood policy, made some tangible progress towards a common energy policy and streamlined its foreign policy-making.
Katinka Barysch is deputy director at the Centre for European Reform.
Last week, Russia belatedly signed up to a timetable for pulling back its troops from the ‘buffer’ zone in Georgia. The EU, and its current president, Nicolas Sarkozy, deserve credit for having brokered the initial ceasefire and then pushing hard for Russia to follow the terms. The important question now is how the EU will respond in case tensions do not ease, or even grow further.
At its emergency summit on September 1st, the Europeans managed to stick together in an unprecedented condemnation of Russian aggression. To signal their willingness to act, they froze negotiations on their new Partnership Agreement with Russia. This decision did not sway Russia’s plans. But, being used to a squabbling and uncritical EU, Moscow will have taken note of the Europeans’ relatively strong reaction – relative because compared with the tough rhetoric of some US politicians the EU’s reaction looked measured. Those who criticise the EU for this miss the point. The EU cannot be a mediator in the conflict and take sides at the same time. The EU’s mediating role was all the more effective because it was backed by an angrily growling America that openly backed Saakashvili. The Americans found it easier to be firm because they could rely on the EU to do the negotiations.
The latest ceasefire agreement, of course, will not end the tensions. Already, there are new disagreements about how many Russian soldiers should remain in Abkhazia and South Ossetia, and where EU monitors will be allowed to go. Moreover, many people, and not only in Ukraine, Poland or Estonia, predict that Russian efforts to control its neighbourhood will not stop at the border of South Ossetia.
So the EU needs to continue its debate about what kind of tools it has available to ratchet up the pressure if necessary.
Most of the measures that politicians and commentators have discussed since August 8th are more likely to harm European interests without making Russia change its ways. Moreover, any panicky over-reaction would make Russia look scarier than it is, which Russian leaders may secretly enjoy.
Economic sanctions are almost a non-starter. Almost 30 per cent of the gas consumed in the EU comes from Russia, and the EU is in no position to replace these supplies in the foreseeable future. Acutely aware that this dependence is mutual, Russian leaders have been notably careful not to mention energy in their angry exchanges with the West. The EU could try to limit Russian sales of non-energy goods or Russian investments in EU countries. But in the absence of a UN mandate, such steps would violate the EU’s own rules for openness and non-discrimination. Economic sanctions risk undermining the principles on which the EU is based. And they could stunt Russia's diversification away from oil and gas, which is good for its long-term stability.
As for Russia’s WTO application, the EU is keen on getting Russia to respect international trade rules and submit to the WTO dispute settlement procedures while Moscow seems in no rush to finish the accession negotiations. Russia’s membership is in any case a long way off, because of Moscow’s erratic trade policy, the US’ refusal to repeal the Jackson-Vanik amendment and vetoes from Georgia and, possibly, Ukraine (both WTO members). The EU should not use the WTO to make a political point at a time when the organisation is already weakened by the break-down of the Doha trade talks.
Nor would it be a good idea to ban Russians from visiting or working in EU countries. If Russians cannot travel, they may be more prone to believing their government’s propaganda about a West that is hostile and hypocritical. And the EU needs to think very carefully about targeted visa sanctions. A ban on Russian leaders and top officials would signal a new world in which the Europeans no longer believe that engagement can achieve anything. We are a long way from there. The EU could make it harder for Russia’s big businessmen to holiday at the Cote d’Azur or do business in London, hoping that they would put pressure on their leaders to change their ways. But many rich Russians have acquired foreign passports and few will risk falling out with a regime that seems to enjoy a bit of oligarch bashing from time to time.
The EU’s decision to continue doing business with Russia does not mean that it will be business as usual. The EU could stop preparations for a trade agreement for nuclear fuels, something that Russia wants badly to grab a bigger share of the European market. The same applies for Russia’s participation in EU research projects.
More fundamentally, the EU’s response should not start by asking how to punish Russia or change its course. It should start within the EU, with a set of well-defined objectives. The tricky part is to figure out how to achieve these objectives in the face of Russian opposition or obstruction. After Georgia, the EU can no longer pretend that its goals do not clash with Russia’s. That is good because it forces the Europeans to have a more open and realistic debate about its ties with Russia and to set clearer priorities (a slimming down the bloated EU-Russia agenda in reaction to Georgia would help with this). The EU’s priorities should be: stability beyond the EU’s eastern borders, energy security, and international tasks that require some sort of Russian involvement, such a preventing Iran from building a nuclear bomb. Russia would have to take the Union a lot more seriously if it beefed up its neighbourhood policy, made some tangible progress towards a common energy policy and streamlined its foreign policy-making.
Katinka Barysch is deputy director at the Centre for European Reform.
Wednesday, September 03, 2008
The Arab-Israeli conflict: France's dashed hopes
by Clara Marina O'Donnell
During a trip to Israel in August, the only optimists I met were French diplomats. The reason for their upbeat mood? Ambitious plans by President Sarkozy for the EU to advance the Middle East peace process – including a controversial proposal that the EU should take the lead in creating an international peacekeeping force which could replace the Israeli army in the West Bank as part of a peace deal. But in the current inauspicious environment, can France, which currently holds the EU presidency, really help to move things forward and allow the EU to play a bigger role in the peace process?
Probably not. Already, it looks as if the French plans are becoming victims of circumstance. The Gymnich, an informal meeting of EU foreign ministers, that will take place on September 5th and 6th, had been flagged up as vital in developing a new EU strategy. The EU was to reflect on ways it could increase its support for the peace process, including the offer of new security guarantees to Israel. But the Georgian war has changed EU priorities, and talks on the Middle East have been seriously scaled down.
But even if the EU’s agenda had not been thrown off course, the situation in Israel and the Palestinian territories is so bad that there is little Europe can do to assist the current peace process. The prospects for the US-sponsored Annapolis peace effort, always bleak, have almost entirely faded. With just over three months to the December deadline for a deal, not only are Palestinians still divided and feuding, but Israel has also plunged into a political crisis. Prime Minister Olmert, the main force behind the peace talks, has been forced to resign over corruption allegations. In the current environment, any efforts by the EU, a minor player, are condemned to frustration.
Yet Sarkozy’s ideas are interesting. The CER has long argued that the EU should offer more security guarantees to Israel, including peacekeepers, in order to prove its credibility as a valuable partner to Israel, and to strengthen its role in the peace process (‘The EU, Israel and Hamas’, CER working paper, April 2008). So while it might not be possible to debate these ideas at the upcoming Gymnich, and still less put them into practice in the near future, the EU should still reflect on them.
Sarkozy’s general approach to Israel is also interesting. The EU has always found it hard to influence Israel. Two tactics have been tried, both – so far – unsuccessfully. The EU used to voice loud public criticism of Israeli actions it disapproved of, for example the expansion of settlements in the Palestinian territories. But Israel would simply ignore this, and accuse the EU of megaphone diplomacy. More recently, the EU has trodden more softly, in the hope of increasing its influence. Relations have, as a result, significantly improved – but on issues such as settlements the EU is still mostly ignored.
Sarkozy has adopted something of a middle ground approach – ‘tough love’ – with Israel. He presents himself as a true friend of Israel but he is also publicly critical about sensitive issues. His approach seems to have had some success. Despite declaring that settlement activity must stop and that Jerusalem must become a shared capital of Israel and a future Palestinian state, Sarkozy received a standing ovation when he addressed the Israeli parliament in June. And I encountered generally positive assessments of him from local and foreign officials in the region.
France may not be able to deliver the ambitious and radical ideas it was envisaging to strengthen the Middle East peace process (it would be unkind to suggest that scaling back ambitious agendas might be a recurrent theme of the current French administration). Neither has Paris found a magic solution to the EU’s conundrum of how to increase its influence with Israel (the continued growth in settlements over the last year clearly shows the limit of EU influence), but Sarkozy’s new approach does offers a potentially useful path forward for EU-Israel relations.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
During a trip to Israel in August, the only optimists I met were French diplomats. The reason for their upbeat mood? Ambitious plans by President Sarkozy for the EU to advance the Middle East peace process – including a controversial proposal that the EU should take the lead in creating an international peacekeeping force which could replace the Israeli army in the West Bank as part of a peace deal. But in the current inauspicious environment, can France, which currently holds the EU presidency, really help to move things forward and allow the EU to play a bigger role in the peace process?
Probably not. Already, it looks as if the French plans are becoming victims of circumstance. The Gymnich, an informal meeting of EU foreign ministers, that will take place on September 5th and 6th, had been flagged up as vital in developing a new EU strategy. The EU was to reflect on ways it could increase its support for the peace process, including the offer of new security guarantees to Israel. But the Georgian war has changed EU priorities, and talks on the Middle East have been seriously scaled down.
But even if the EU’s agenda had not been thrown off course, the situation in Israel and the Palestinian territories is so bad that there is little Europe can do to assist the current peace process. The prospects for the US-sponsored Annapolis peace effort, always bleak, have almost entirely faded. With just over three months to the December deadline for a deal, not only are Palestinians still divided and feuding, but Israel has also plunged into a political crisis. Prime Minister Olmert, the main force behind the peace talks, has been forced to resign over corruption allegations. In the current environment, any efforts by the EU, a minor player, are condemned to frustration.
Yet Sarkozy’s ideas are interesting. The CER has long argued that the EU should offer more security guarantees to Israel, including peacekeepers, in order to prove its credibility as a valuable partner to Israel, and to strengthen its role in the peace process (‘The EU, Israel and Hamas’, CER working paper, April 2008). So while it might not be possible to debate these ideas at the upcoming Gymnich, and still less put them into practice in the near future, the EU should still reflect on them.
Sarkozy’s general approach to Israel is also interesting. The EU has always found it hard to influence Israel. Two tactics have been tried, both – so far – unsuccessfully. The EU used to voice loud public criticism of Israeli actions it disapproved of, for example the expansion of settlements in the Palestinian territories. But Israel would simply ignore this, and accuse the EU of megaphone diplomacy. More recently, the EU has trodden more softly, in the hope of increasing its influence. Relations have, as a result, significantly improved – but on issues such as settlements the EU is still mostly ignored.
Sarkozy has adopted something of a middle ground approach – ‘tough love’ – with Israel. He presents himself as a true friend of Israel but he is also publicly critical about sensitive issues. His approach seems to have had some success. Despite declaring that settlement activity must stop and that Jerusalem must become a shared capital of Israel and a future Palestinian state, Sarkozy received a standing ovation when he addressed the Israeli parliament in June. And I encountered generally positive assessments of him from local and foreign officials in the region.
France may not be able to deliver the ambitious and radical ideas it was envisaging to strengthen the Middle East peace process (it would be unkind to suggest that scaling back ambitious agendas might be a recurrent theme of the current French administration). Neither has Paris found a magic solution to the EU’s conundrum of how to increase its influence with Israel (the continued growth in settlements over the last year clearly shows the limit of EU influence), but Sarkozy’s new approach does offers a potentially useful path forward for EU-Israel relations.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
Thursday, August 07, 2008
Farewell, Polish plumber
by Philip Whyte
When the EU expanded its membership in 2004, the UK was one of only three EU countries – Ireland and Sweden were the others – fully to open its borders to migrants from the ten new member states. The decision resulted in an unexpectedly large influx of migrants from central and eastern Europe. Ever since, the debate in the host countries has focused on the domestic impact of this wave of immigration. But it is time the debate moved on. For there is strong evidence that few of these migrants have any intention of settling permanently.
The host countries’ initial focus on migratory inflows is entirely understandable. When the EU enlarged its membership in 2004, the British government projected that the annual inflow of central and eastern Europeans to the UK would average between 5,000 and 13,000 through to 2010. It was being too modest. British statistics on migration are a mess, but most estimates suggest that official projections were out by a factor of twenty. Close to a million central and eastern Europeans are thought to have migrated to the UK since 2004.
The conservatism of the government’s initial projections was not unreasonable. By and large, Europeans are a sedentary bunch: they are disinclined to move within their own countries, let alone across national borders (with all the attendant difficulties of adapting to new languages and cultures). Previous enlargements – including the Iberian one in 1986 – had not provoked a dramatic increase in migration across national borders. So why expect the admission of the former Communist-bloc countries to produce different effects?
But the UK under-estimated the strength of the ‘push’ and ‘pull’ factors at play. Low income per heads, allied to housing shortages and high rates of joblessness (particularly among the young), encouraged many central and eastern Europeans of prime working age to seek their fortunes abroad. And by a happy coincidence, the EU countries that had thrown their borders open to them were enjoying buoyant economic growth and had numerous job vacancies to be filled. Migration was lubricated by low-cost airlines and Skype.
The scale of the influx did not go unnoticed in the host countries. Nor was it universally welcomed. Elements of the UK’s notoriously noisy press spoke of being ‘flooded’ and went out of their way to cast the new entrants as ‘benefit tourists’ – a scurrilous charge, given their exceptionally high rates of employment. Nevertheless, government policy was forced to adapt to this new context. When Bulgaria and Romania were admitted to the EU in 2007, the UK did not feel politically able fully to open its borders to nationals of these countries.
The irony, however, is that government policy has hardened at precisely the moment when the factors that drove migration to the UK in 2004-07 are going into reverse. The over-leveraged UK economy faces a nasty economic downturn and rising joblessness. Sterling has weakened markedly against most European currencies (reducing the relative wage that migrants earn in the UK). Meanwhile, unemployment in central and eastern Europe has been falling while incomes have risen. Against this backdrop, half of the 1 million central and eastern Europeans who came to the UK have returned to their home countries.
In other words, few migrants from the new member states have been escaping their home countries to settle in the wealthier EU member states. Instead, most have been using host countries as revolving doors through which they can enter and exit. Their aim is not to build a new life abroad, but a better one at home. The debate and policy response in the host countries needs to adjust to this reality – particularly as migratory flows will become more evenly distributed across the EU as restrictions on labour movement are gradually relaxed.
Philip Whyte is a senior research fellow at the Centre for European Reform.
When the EU expanded its membership in 2004, the UK was one of only three EU countries – Ireland and Sweden were the others – fully to open its borders to migrants from the ten new member states. The decision resulted in an unexpectedly large influx of migrants from central and eastern Europe. Ever since, the debate in the host countries has focused on the domestic impact of this wave of immigration. But it is time the debate moved on. For there is strong evidence that few of these migrants have any intention of settling permanently.
The host countries’ initial focus on migratory inflows is entirely understandable. When the EU enlarged its membership in 2004, the British government projected that the annual inflow of central and eastern Europeans to the UK would average between 5,000 and 13,000 through to 2010. It was being too modest. British statistics on migration are a mess, but most estimates suggest that official projections were out by a factor of twenty. Close to a million central and eastern Europeans are thought to have migrated to the UK since 2004.
The conservatism of the government’s initial projections was not unreasonable. By and large, Europeans are a sedentary bunch: they are disinclined to move within their own countries, let alone across national borders (with all the attendant difficulties of adapting to new languages and cultures). Previous enlargements – including the Iberian one in 1986 – had not provoked a dramatic increase in migration across national borders. So why expect the admission of the former Communist-bloc countries to produce different effects?
But the UK under-estimated the strength of the ‘push’ and ‘pull’ factors at play. Low income per heads, allied to housing shortages and high rates of joblessness (particularly among the young), encouraged many central and eastern Europeans of prime working age to seek their fortunes abroad. And by a happy coincidence, the EU countries that had thrown their borders open to them were enjoying buoyant economic growth and had numerous job vacancies to be filled. Migration was lubricated by low-cost airlines and Skype.
The scale of the influx did not go unnoticed in the host countries. Nor was it universally welcomed. Elements of the UK’s notoriously noisy press spoke of being ‘flooded’ and went out of their way to cast the new entrants as ‘benefit tourists’ – a scurrilous charge, given their exceptionally high rates of employment. Nevertheless, government policy was forced to adapt to this new context. When Bulgaria and Romania were admitted to the EU in 2007, the UK did not feel politically able fully to open its borders to nationals of these countries.
The irony, however, is that government policy has hardened at precisely the moment when the factors that drove migration to the UK in 2004-07 are going into reverse. The over-leveraged UK economy faces a nasty economic downturn and rising joblessness. Sterling has weakened markedly against most European currencies (reducing the relative wage that migrants earn in the UK). Meanwhile, unemployment in central and eastern Europe has been falling while incomes have risen. Against this backdrop, half of the 1 million central and eastern Europeans who came to the UK have returned to their home countries.
In other words, few migrants from the new member states have been escaping their home countries to settle in the wealthier EU member states. Instead, most have been using host countries as revolving doors through which they can enter and exit. Their aim is not to build a new life abroad, but a better one at home. The debate and policy response in the host countries needs to adjust to this reality – particularly as migratory flows will become more evenly distributed across the EU as restrictions on labour movement are gradually relaxed.
Philip Whyte is a senior research fellow at the Centre for European Reform.
Wednesday, July 30, 2008
Should Europeans care about Doha?
by Katinka Barysch
Are the Doha trade talks finally dead? Following the failure of the latest ministerial meeting in Geneva on July 29th, there will be little appetite for another big push to resolve disputes over farm subsidies and manufacturing tariffs. But unless the 150-odd WTO members agree on the outline of a deal in 2008, the new US administration (and the new EU Commission) would pretty much start from scratch in 2009. A final deal could then take another five years or more. Perhaps it would be better to give up on Doha?
Europeans do not seem to care very much. They worry more about the impact of the global downturn on their mortgage, job and pension. Many EU governments have also appeared distinctly unenthusiastic about trade liberalisation lately. French President Sarkozy blamed the Irish No to the Lisbon treaty on the ‘overly liberal’ trade policies of Trade Commissioner Peter Mandelson. During the Geneva talks, eight other EU countries lined up behind France (including Italy, Greece, Poland and Hungary). They argued that Mandelson’s first responsibility was to protect European jobs and incomes – in particular in the farm sector – not to finish a round of trade talks of dubious economic value.
Would the failure of Doha be a disaster for Europe? Not on the face of it. Calculations of the direct economic benefits from finishing the round have gradually been reduced (and most estimates are now well below 1 per cent of global GDP). With many of its biggest trading partners – China, Russia, ASEAN, the EFTA countries – the EU has special agreements on trade and investment, or is in the process of negotiating them (albeit with limited success). And many poorer countries may be more willing to grant the EU better access to their markets on a bilateral basis – without having to extend the same privileges to China.
So should the EU just let Doha die? Is reviving the round worth the risk of internal EU divisions and grumpy European farmers? Yes, because the costs of its failure could be huge. Here are just four of the issues to take into account.
* While Sarkozy and Berlusconi are wrong to claim that Mandelson is ‘selling out’ European farmers, the EU’s offer on agriculture is not negligible. It includes a complete abolition of export subsidies and a considerable reduction in both domestic farm support and import tariffs. Many development experts say the offer does not go far enough. But at least it would lock in some progress on CAP reform. That matters since the EU is conducting its own ‘health check’ on the CAP this year. And the issue of farm-sector reform will come up again by 2012, when EU countries will haggle about the EU’s new long-term budget. Accelerated CAP reform would free up billions of euros that would be better spent on innovation, climate protection or development. To keep CAP reform going is particularly important now that some EU politicians use the global food crisis as a phoney argument for more, not less, farm support.
* It is true that Doha would not result in drastic new tariff cuts for manufactured goods. But business in Europe and elsewhere is wrong to conclude that the current trade round doesn’t matter for them. As Patrick Messerlin, a French trade economist, has convincingly argued, the Doha round is hugely important for locking in the progress that has been made over the last 15 years. Most countries around the world now apply tariffs that are much lower than the ceilings fixed in the Uruguay round in 1993 (so-called bound tariffs). They could push them up to their bound levels without penalty at any time. Some emerging markets, such as Brazil, have already responded to slowing growth by nudging up their tariff protection. Binding manufacturing tariffs nearer their currently applied levels would reduce that risk, and give companies the certainty that they need to trade and invest abroad.
* If Doha fails, the WTO could lose much of its credibility, and the trend towards bilateral and regional trade agreements would accelerate further (200 of those are already in place, another 200 are being negotiated or planned). Economists disagree over whether this bilateralism is a good thing (a push for market opening while global talks remain stuck) or a bad thing (leading to a dangerous and costly fragmentation of the international economy). It certainly weakens the multilateral trading system. With only half of all Americans now believing that international trade is good for them, protectionist sentiment rising in Europe, and many emerging economies becoming more assertive in their trade policy, the world needs stronger global trade rules and dispute settlement mechanisms, not weaker ones.
* Finally, as Charles Grant and I have argued in our recent report ‘Can Europe and China shape a new world order?’, this is a critical time for persuading emerging powers that multilateralism actually works for them. They should work through international rules and organisations, not follow narrow-minded power politics. The WTO (and its predecessor, the GATT) is one of the cornerstones of the post-war multilateral system and the one that arguably matters most for China, India, Brazil and other rising economies. If the WTO does not deliver, how can we persuade these countries that the UN, the World Bank or the Kyoto regime on climate change matter for them?
Katinka Barysch is deputy director of the Centre for European Reform.
Are the Doha trade talks finally dead? Following the failure of the latest ministerial meeting in Geneva on July 29th, there will be little appetite for another big push to resolve disputes over farm subsidies and manufacturing tariffs. But unless the 150-odd WTO members agree on the outline of a deal in 2008, the new US administration (and the new EU Commission) would pretty much start from scratch in 2009. A final deal could then take another five years or more. Perhaps it would be better to give up on Doha?
Europeans do not seem to care very much. They worry more about the impact of the global downturn on their mortgage, job and pension. Many EU governments have also appeared distinctly unenthusiastic about trade liberalisation lately. French President Sarkozy blamed the Irish No to the Lisbon treaty on the ‘overly liberal’ trade policies of Trade Commissioner Peter Mandelson. During the Geneva talks, eight other EU countries lined up behind France (including Italy, Greece, Poland and Hungary). They argued that Mandelson’s first responsibility was to protect European jobs and incomes – in particular in the farm sector – not to finish a round of trade talks of dubious economic value.
Would the failure of Doha be a disaster for Europe? Not on the face of it. Calculations of the direct economic benefits from finishing the round have gradually been reduced (and most estimates are now well below 1 per cent of global GDP). With many of its biggest trading partners – China, Russia, ASEAN, the EFTA countries – the EU has special agreements on trade and investment, or is in the process of negotiating them (albeit with limited success). And many poorer countries may be more willing to grant the EU better access to their markets on a bilateral basis – without having to extend the same privileges to China.
So should the EU just let Doha die? Is reviving the round worth the risk of internal EU divisions and grumpy European farmers? Yes, because the costs of its failure could be huge. Here are just four of the issues to take into account.
* While Sarkozy and Berlusconi are wrong to claim that Mandelson is ‘selling out’ European farmers, the EU’s offer on agriculture is not negligible. It includes a complete abolition of export subsidies and a considerable reduction in both domestic farm support and import tariffs. Many development experts say the offer does not go far enough. But at least it would lock in some progress on CAP reform. That matters since the EU is conducting its own ‘health check’ on the CAP this year. And the issue of farm-sector reform will come up again by 2012, when EU countries will haggle about the EU’s new long-term budget. Accelerated CAP reform would free up billions of euros that would be better spent on innovation, climate protection or development. To keep CAP reform going is particularly important now that some EU politicians use the global food crisis as a phoney argument for more, not less, farm support.
* It is true that Doha would not result in drastic new tariff cuts for manufactured goods. But business in Europe and elsewhere is wrong to conclude that the current trade round doesn’t matter for them. As Patrick Messerlin, a French trade economist, has convincingly argued, the Doha round is hugely important for locking in the progress that has been made over the last 15 years. Most countries around the world now apply tariffs that are much lower than the ceilings fixed in the Uruguay round in 1993 (so-called bound tariffs). They could push them up to their bound levels without penalty at any time. Some emerging markets, such as Brazil, have already responded to slowing growth by nudging up their tariff protection. Binding manufacturing tariffs nearer their currently applied levels would reduce that risk, and give companies the certainty that they need to trade and invest abroad.
* If Doha fails, the WTO could lose much of its credibility, and the trend towards bilateral and regional trade agreements would accelerate further (200 of those are already in place, another 200 are being negotiated or planned). Economists disagree over whether this bilateralism is a good thing (a push for market opening while global talks remain stuck) or a bad thing (leading to a dangerous and costly fragmentation of the international economy). It certainly weakens the multilateral trading system. With only half of all Americans now believing that international trade is good for them, protectionist sentiment rising in Europe, and many emerging economies becoming more assertive in their trade policy, the world needs stronger global trade rules and dispute settlement mechanisms, not weaker ones.
* Finally, as Charles Grant and I have argued in our recent report ‘Can Europe and China shape a new world order?’, this is a critical time for persuading emerging powers that multilateralism actually works for them. They should work through international rules and organisations, not follow narrow-minded power politics. The WTO (and its predecessor, the GATT) is one of the cornerstones of the post-war multilateral system and the one that arguably matters most for China, India, Brazil and other rising economies. If the WTO does not deliver, how can we persuade these countries that the UN, the World Bank or the Kyoto regime on climate change matter for them?
Katinka Barysch is deputy director of the Centre for European Reform.
Friday, July 25, 2008
The EU will want more from Serbia than arrests
by Tomas Valasek
On July 21st, Serbian security agents hauled Radovan Karadzic off a bus in Belgrade and took him into custody. The long-wanted wartime leader of the Bosnian Serbs now awaits extradition to the International War Crimes Tribunal (ICTY) in The Hague, where he stands accused of crimes against humanity for his role in the 1992-95 Bosnia war. My conversations with analysts, journalists and diplomats in Belgrade this week suggest that his arrest could signal the beginning of Serbia’s full reconciliation with its role in the Yugoslav wars. It also opens the door to improved relations with the EU. However, Serbia’s application for EU membership will remain on hold until Belgrade and Brussels can agree on a better way of co-operating over Kosovo.
Karadzic had been hiding in Serbia for much of his 13-year run from the law. There are two schools of thought among local and Western observers in Belgrade on why the Serbian security forces moved to arrest Karadzic. Both assume that Serbia has known for a while that Karadzic had been hiding on its territory, rather than in Bosnia, where he committed his crimes. And both acknowledge that Serbia’s co-operation with the Hague Tribunal has been half-hearted of late.
Belgrade did arrest some accused war criminals, most notably Serbia’s former leader, Slobodan Milosevic. But shortly after Milosevic’s arrest – and largely because of it – elements in the security forces assassinated the then-prime minister Zoran Djindjic. Subsequent governments have been far more cautious. Belgrade would occasionally arrest smaller fish, usually right before important EU summits. This allowed Serbian governments to claim compliance with The Hague’s demands, without really dealing with Serbia’s role in the Yugoslav wars. All along, security forces loyal to the Milosevic regime were allowed to protect the most wanted criminals, like Karadzic and General Ratko Mladic, the wartime commander of the Bosnian Serb military.
So when the news of Karadzic’s arrest broke, some in Belgrade and Brussels – the first school of thought – saw it as a half-hearted attempt to improve Serbia’s image and win kudos with the European Union, which Serbia would like to join as soon as possible. But this time, things may be different. The second school of thought, to which I subscribe, argues that domestic politics played a crucial role in the arrest.
Karadzic’s arrest comes shortly after Serbia voted in what is arguably the most pro-EU government since Djindjic’s assassination. All recent Serbian governments had combined openly pro-Western parties with more nationalist voices, and so does the current coalition. But in this government the roles have been reversed. President Boris Tadic’s party ousted the nationalist prime minister, Vojislav Kostunica, who had been seen in Belgrade as the main obstacle to arrests of Karadzic and Mladic. Pro-EU parties now dominate, and they have gained a tighter control over the security apparatus. Right after forming a government, Tadic removed the head of secret service, who had helped protect indicted war criminals. The arrest of Karadzic came just two days later. People close to Tadic believe that the other remaining ‘big fish’, like Ratko Mladic, will be arrested soon as well.
Tadic won the election on a platform of bringing Serbia into the EU and attracting Western investment, both of which should improve Serbs’ poor living standards. But the EU wanted (and still wants) to see more arrests of war criminals before it moves Serbia’s application forward. No arrests, no EU integration, no foreign investment, no economic recovery. So Tadic decided that there were strong domestic reasons to move forward on the war crimes issue. The arrest of Karadzic, Serbian analysts say, has also helped boost Tadic’s image – he had a reputation for vacillating but this bold step has made him look like a leader. And he seems to have rightly calculated that the Serbian public would support him. There were precious few demonstrators in the streets of Belgrade after Karadzic’s arrest. This, in turn, made the nationalist opposition look out of touch.
On balance, Tadic’s pursuit of war criminals seems genuine. It strengthens his domestic political position, and it improves Serbia’s standing in the eyes of the EU. But Kosovo will continue to plague the Brussels-Belgrade relationship. Serbia is a candidate for EU membership, and it recently signed a new partnership agreement with the EU, the ‘stability and association agreement’, or SAA. But the EU has held up the agreement’s entry into force, in order to pressure Belgrade to apprehend war criminals. The EU also has a second reason for being reluctant to speed up Serbia’s integration process: it wants co-operation from Serbia on Kosovo. And there has been very little progress on the latter point.
Most EU states have recognised an independent Kosovo. But Serbia, even under its current government, remains categorically opposed. Instead, it has effectively divided Kosovo by taking administrative control of the country’s north where much of the population are ethnic Serbs. Belgrade now finances health workers and policemen serving local Serbs in Kosovo. It is also preventing the EU rule of law mission, EULEX, from fully deploying. Tadic has hinted at wanting to improve co-operation with the EU – for example, he is sending back Serbian ambassadors to those EU countries that have recognised Kosovo (Kostunica had recalled them). But more needs to be done; Serbia needs to allow the EU police to operate in all of Kosovo. Until then, its ties with the EU, even after Karadzic’s arrest, will remain strained.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform
On July 21st, Serbian security agents hauled Radovan Karadzic off a bus in Belgrade and took him into custody. The long-wanted wartime leader of the Bosnian Serbs now awaits extradition to the International War Crimes Tribunal (ICTY) in The Hague, where he stands accused of crimes against humanity for his role in the 1992-95 Bosnia war. My conversations with analysts, journalists and diplomats in Belgrade this week suggest that his arrest could signal the beginning of Serbia’s full reconciliation with its role in the Yugoslav wars. It also opens the door to improved relations with the EU. However, Serbia’s application for EU membership will remain on hold until Belgrade and Brussels can agree on a better way of co-operating over Kosovo.
Karadzic had been hiding in Serbia for much of his 13-year run from the law. There are two schools of thought among local and Western observers in Belgrade on why the Serbian security forces moved to arrest Karadzic. Both assume that Serbia has known for a while that Karadzic had been hiding on its territory, rather than in Bosnia, where he committed his crimes. And both acknowledge that Serbia’s co-operation with the Hague Tribunal has been half-hearted of late.
Belgrade did arrest some accused war criminals, most notably Serbia’s former leader, Slobodan Milosevic. But shortly after Milosevic’s arrest – and largely because of it – elements in the security forces assassinated the then-prime minister Zoran Djindjic. Subsequent governments have been far more cautious. Belgrade would occasionally arrest smaller fish, usually right before important EU summits. This allowed Serbian governments to claim compliance with The Hague’s demands, without really dealing with Serbia’s role in the Yugoslav wars. All along, security forces loyal to the Milosevic regime were allowed to protect the most wanted criminals, like Karadzic and General Ratko Mladic, the wartime commander of the Bosnian Serb military.
So when the news of Karadzic’s arrest broke, some in Belgrade and Brussels – the first school of thought – saw it as a half-hearted attempt to improve Serbia’s image and win kudos with the European Union, which Serbia would like to join as soon as possible. But this time, things may be different. The second school of thought, to which I subscribe, argues that domestic politics played a crucial role in the arrest.
Karadzic’s arrest comes shortly after Serbia voted in what is arguably the most pro-EU government since Djindjic’s assassination. All recent Serbian governments had combined openly pro-Western parties with more nationalist voices, and so does the current coalition. But in this government the roles have been reversed. President Boris Tadic’s party ousted the nationalist prime minister, Vojislav Kostunica, who had been seen in Belgrade as the main obstacle to arrests of Karadzic and Mladic. Pro-EU parties now dominate, and they have gained a tighter control over the security apparatus. Right after forming a government, Tadic removed the head of secret service, who had helped protect indicted war criminals. The arrest of Karadzic came just two days later. People close to Tadic believe that the other remaining ‘big fish’, like Ratko Mladic, will be arrested soon as well.
Tadic won the election on a platform of bringing Serbia into the EU and attracting Western investment, both of which should improve Serbs’ poor living standards. But the EU wanted (and still wants) to see more arrests of war criminals before it moves Serbia’s application forward. No arrests, no EU integration, no foreign investment, no economic recovery. So Tadic decided that there were strong domestic reasons to move forward on the war crimes issue. The arrest of Karadzic, Serbian analysts say, has also helped boost Tadic’s image – he had a reputation for vacillating but this bold step has made him look like a leader. And he seems to have rightly calculated that the Serbian public would support him. There were precious few demonstrators in the streets of Belgrade after Karadzic’s arrest. This, in turn, made the nationalist opposition look out of touch.
On balance, Tadic’s pursuit of war criminals seems genuine. It strengthens his domestic political position, and it improves Serbia’s standing in the eyes of the EU. But Kosovo will continue to plague the Brussels-Belgrade relationship. Serbia is a candidate for EU membership, and it recently signed a new partnership agreement with the EU, the ‘stability and association agreement’, or SAA. But the EU has held up the agreement’s entry into force, in order to pressure Belgrade to apprehend war criminals. The EU also has a second reason for being reluctant to speed up Serbia’s integration process: it wants co-operation from Serbia on Kosovo. And there has been very little progress on the latter point.
Most EU states have recognised an independent Kosovo. But Serbia, even under its current government, remains categorically opposed. Instead, it has effectively divided Kosovo by taking administrative control of the country’s north where much of the population are ethnic Serbs. Belgrade now finances health workers and policemen serving local Serbs in Kosovo. It is also preventing the EU rule of law mission, EULEX, from fully deploying. Tadic has hinted at wanting to improve co-operation with the EU – for example, he is sending back Serbian ambassadors to those EU countries that have recognised Kosovo (Kostunica had recalled them). But more needs to be done; Serbia needs to allow the EU police to operate in all of Kosovo. Until then, its ties with the EU, even after Karadzic’s arrest, will remain strained.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform
Subscribe to:
Posts (Atom)