by Katinka Barysch
The EU summit on December 10th-11th was a success in so far as EU leaders managed to agree on all major agenda items. The fact that there was a lot of bitter wrangling and a big dose of compromise was only to be expected against the backdrop of a rapidly worsening European economy. However, the longer-term consequences of these compromises are worrying.
* Lisbon treaty
The most unequivocally positive but least noticed deal of the summit concerned the future of the Lisbon treaty. Under quite a bit of pressure from their European colleagues, the Irish government eventually agreed to attempt a repeat referendum in the second half of 2009. Ireland obtained the pledge of legally binding guarantees that the Lisbon treaty would not affect their country’s tax system, neutrality and laws on abortion and gay marriage (since the other EU countries do not want to re-ratify the Lisbon treaty, these clauses will be tacked on to Croatia’s accession treaty which EU countries will need to ratify around 2010-11). EU leaders also agreed that each country would keep its ‘own’ commissioner, abandoning the unworkable and unpopular (in particular among smaller countries such as Ireland) plan to move towards a rotation system.
The outcome of a second referendum is still hard to call. Acute economic worries could turn the Irish against any initiative put forward by their unpopular government. On the other hand, pro-treaty campaigners will raise the spectre of Ireland being marginalised in, or even pushed out of, the EU in case of a second No – an uncomfortable thought at a time of extreme uncertainty.
If the Irish say Yes next year, the treaty could come into force at the start of 2010. If more evidence was needed, the war in Georgia and the struggle to find a concerted response to the financial crisis confirmed that the institutional changes contained in the Lisbon treaty are needed, in particular the streamlining of the EU’s foreign policy machinery and the abolition of the rotating presidency.
* Economic stimulus
Most media attention ahead of the summit had focused on the EU governments disagreeing about the Commission’s proposal for a €200 billion economic stimulus programme. Since the EU’s own central budget is both small and mostly tied up in farm aid and regional spending, €170 billion would have to come from the member-states. The UK and France in particular had criticised Germany for not doing enough to revive its economy, especially since years of prudence had left the country with a sound budget and big external surplus. Chancellor Angela Merkel pointed to the €12 billion worth of measures already passed by the German Bundestag (which the government expects to lead to investment of €50 billion), while her finance minister, Peer Steinbrueck, accused the UK of moving towards “crass Keynesianism” in a newspaper interview. The impression that Germany was isolated in Europe was reinforced when Gordon Brown invited Nicolas Sarkozy and Commission President Jose Manuel Barroso to an economics summit on December 8th but not Merkel.
In the end, EU leaders backed a somewhat watered down stimulus package amounting to “about” 1.5 per cent of EU GDP. However, since this so-called package consists of vastly different national efforts – some already passed, some still under discussion, and many containing spending items that had in any case been planned – it is hard to predict the impact on Europe’s contracting economy. Bruegel, a Brussels-based think-tank, has calculated that the tax cuts and additional spending announced by Europe’s 13 biggest economies for 2009 would amount to only 0.53 per cent of their GDP. The bulk of the planned measures (amounting to 1.16 per cent of GDP) consist of additional credit and spending brought forward, which will have a much more limited impact on demand.
* Climate change
The most important deal of the summit did not concern economics but the EU’s long-term commitment to fight climate change. The French presidency was determined to forge an agreement on how to implement the EU’s 20-20-20 targets from March 2007 before the Czechs – not necessarily known for their green credentials – take over the EU’s rotating presidency in January 2009. To the relief of many – and in particular the 10,000 delegates at the UN conference on climate change that was taking place at the same time in Poznan, Poland – EU leaders managed to clinch a deal, albeit at a price.
EU states kept their commitment to increase the share of renewable sources to 20 per cent and to cut total greenhouse gas emissions by 20 per cent compared with 1990 levels, both by 2020. An agreement on the (non-binding) target of achieving energy savings of 20 per cent was left to later. However, following heavy lobbying from Austria, Italy, Germany and the new member-states, a gradual move towards auctioning all emissions permits from 2013 onwards was delayed. Making energy generators and manufacturers pay for their emissions permits provides greater up-front incentives for investments in energy-savings technologies, it eliminates opportunities for windfall profits and it generates additional revenue that can be used for investments in environmental technology, such as carbon capture and storage.
Under the EU’s summit compromise, power generators in Western Europe will have to pay for all their emission rights from 2013 but those in Central and Eastern Europe will still get most of them for free until 2020. Poland in particular, which still relies on coal for more than 90 per cent of its electricity, had argued that full auctioning would at least double its power prices. Germany had led the group of those countries that had warned that saddling European producers with the cost of pollution permits would force them to relocate to countries with lax environmental standards, such as Ukraine or China. This sounds credible for energy-intensive industries, such as cement and aluminium but not for other manufacturing sectors, which could gain long-term competitiveness if forced to invest in new, energy-efficient production technologies. Now all industries that face cost increases of 5 per cent or more from being part of the emissions trading scheme will continue to get their pollution permits for free – which is more than 90 per cent of all EU industries. Equally controversial is a clause that allows EU countries to achieve a significant part of their emission reduction targets by investing in environmental projects in developing countries. Such offset projects are a lot more difficult to verify and they take the pressure off EU countries to invest in green technologies at home.
Despite an immediate outcry from Green MEPs (calling the compromise a “free for all”), the European Parliament is likely to adopt the package on December 17th. In case it does not, Sarkozy has already said he would call an emergency EU summit before year-end.
Troubling outlook
The December summit has shown that the EU can act even under very difficult circumstance. However, some of the longer-term implications are troubling. First, the fact that EU countries found it so hard to agree on what is little more than a rag-bag of national economic measures shows that the scope for economic policy co-ordination in the EU, and even within the eurozone, is limited. Given that the euro may yet come under pressure (spreads between German government bonds and those issued by Greece, Italy and Spain are still widening), the EU needs to overcome this handicap.
Second, although the EU has in principle stuck to its 20-20-20 targets – still the most ambitious in the world – its role as global leader in climate change has been weakened. The argument that the current economic downturn would make it impossible for European companies to shoulder the costs of emission rights is not convincing: the move to full auctioning would in any case not have started until 2013, a couple of years after even the most pessimistic forecasters say growth will return. By putting the interests of business lobbies first, the EU has weakened its hand in the crucial 2009 Copenhagen summit. How will the Europeans respond when China and India argue that economic development takes priority over fighting climate change?
Thirdly, the summit showed the limits of EU solidarity. EU governments – all EU governments – will put the interests of their own taxpayers and business lobbies first. What came as a surprise to many was that Germany – traditionally seen as the “good European” – is now just as willing to fight for its national interest as traditionally more assertive countries such as France and the UK.
Katinka Barysch is deputy director of the Centre for European Reform.
Tuesday, December 16, 2008
Monday, December 08, 2008
The Irish send out good vibrations on Lisbon
by Hugo Brady
Ireland’s parliament – the Oireachtas – recently published a lengthy report on where the country’s relationship with the EU stands after the country’s rejection of the Lisbon treaty by referendum. Initially, I feared the study might be heavy on clichéd pieties about Ireland’s relationship with the EU without really dealing with the difficult political situation created by voting down the treaty or suggesting concrete ways out of the mess. In fact - while it fails to completely avoid the clichés (“Ireland’s position at the heart of Europe” etc) – the analysis, compiled by the parliament’s EU committee, is impressively clear, thoughtful and, in places, prescriptive.
The report sets down some sensible parameters for the debate to come:
• Saying no to the Lisbon treaty automatically implies that some further action must be taken. Legally, the EU can continue as it is with the current treaties. In reality, if the treaty is declared dead, other member-states will find ways of working together more closely. Ireland would become increasingly isolated.
• Ireland’s rejection of the treaty is affecting its ability to “promote and defend” its national interests. This is true across a range of policy areas including the EU’s climate change package, the future allocation of money from the common agricultural policy, and responses to the economic crisis. The report also maintains that over-harsh criticism of Ireland’s moves to shore up confidence in its banks and its exclusion from recently established EU discussion bodies points to its near-pariah status amongst other member-states.
• One of the assumptions underpinning investment by multinational companies in Ireland is that the country is and will remain a full member of the EU. Foreign companies which invest in Ireland are worried about the uncertainty thrown up by the current situation but are sticking with the view that the country will ultimately resolve the issue.
The report then ruled out two options Ireland might take to move on from the Lisbon rejection. First, that the country should accept a self-imposed exile from core European policies to allow the rest of the EU to go ahead. This was the cumbersome and unsustainable option taken by Denmark in the early 1990s when the Danes opted-out of EU foreign policy, citizenship, justice co-operation and the single currency.) The other is to attempt to pass the Lisbon treaty – or even parts of it – by parliamentary ratification alone. Even if legally possible and well-intentioned, the committee rightly concluded this deliberate circumvention of a democratic decision would be ill-advised.
Hence the solution, strongly implied by the report’s analysis, is a second referendum on the treaty. The committee also points out the ways in which Ireland’s conduct of its EU policy can be improved to address public perceptions of a lack of control over law-making in Brussels. One is to give Ireland’s parliament powers to prevent the government signing up to EU legislation it disagrees with. Many national parliaments in the EU have this power. Ireland’s – surprisingly – does not. A second is to create a special EU ‘panel’ in the parliament’s upper house, the Seanad. This would be a sort of ‘wise persons’ committee, nominated on the basis of their familiarity with EU matters, to scrutinise legislation and co-ordinate with Ireland’s MEPs. What is striking about these proposed reforms is that they are both inspired by Ireland's eurosceptic neighbour, Britain, where the scrutiny reserve has existed for decades and the House of Lord’s EU affairs committee is considered an authoritative source of reasoned analysis on EU issues.
The committee also heard evidence from key players involved in the most controversial aspects of the debate last June. (The list includes defence, taxation, public services, ethical issues like abortion, and the size of the European Commission.) The committee conclusively dismissed the fear that the treaty could increase EU powers to set national tax rates. But it did agree that it would be desirable for Ireland to have a European commissioner all the time, to “offer legitimacy to the proposals made by the Commission”. It also recommended that Ireland’s already very strict rules for committing troops to peacekeeping operations be made even more explicit by requiring the approval of a two-thirds parliamentary vote.
The positive and constructive tone struck by the report is very welcome, but it should be borne in mind that almost all political parties in the Oireachtas support the Lisbon treaty. This did not prevent its rejection in June in a popular vote and will not – on its own – prevent a second rejection next year. But the report shows how the moderate centre in Ireland is trying to take back control of the debate from well organised populists of the left and right that have wreaked havoc on the country’s foreign policy and its interests abroad. That damage was neatly summed up by Catherine Day, an Irishwoman, and secretary general of the European Commission. "Ireland's image in the European Union has been tarnished by the 'no' vote”, she told the committee. “I can see every day that it has reduced our ability to shape and influence events in the European Union. Other Member States tend to view us now only through the prism of the Lisbon Treaty.”
See: http://www.oireachtas.ie
Hugo Brady is a research fellow at the Centre for European Reform.
Ireland’s parliament – the Oireachtas – recently published a lengthy report on where the country’s relationship with the EU stands after the country’s rejection of the Lisbon treaty by referendum. Initially, I feared the study might be heavy on clichéd pieties about Ireland’s relationship with the EU without really dealing with the difficult political situation created by voting down the treaty or suggesting concrete ways out of the mess. In fact - while it fails to completely avoid the clichés (“Ireland’s position at the heart of Europe” etc) – the analysis, compiled by the parliament’s EU committee, is impressively clear, thoughtful and, in places, prescriptive.
The report sets down some sensible parameters for the debate to come:
• Saying no to the Lisbon treaty automatically implies that some further action must be taken. Legally, the EU can continue as it is with the current treaties. In reality, if the treaty is declared dead, other member-states will find ways of working together more closely. Ireland would become increasingly isolated.
• Ireland’s rejection of the treaty is affecting its ability to “promote and defend” its national interests. This is true across a range of policy areas including the EU’s climate change package, the future allocation of money from the common agricultural policy, and responses to the economic crisis. The report also maintains that over-harsh criticism of Ireland’s moves to shore up confidence in its banks and its exclusion from recently established EU discussion bodies points to its near-pariah status amongst other member-states.
• One of the assumptions underpinning investment by multinational companies in Ireland is that the country is and will remain a full member of the EU. Foreign companies which invest in Ireland are worried about the uncertainty thrown up by the current situation but are sticking with the view that the country will ultimately resolve the issue.
The report then ruled out two options Ireland might take to move on from the Lisbon rejection. First, that the country should accept a self-imposed exile from core European policies to allow the rest of the EU to go ahead. This was the cumbersome and unsustainable option taken by Denmark in the early 1990s when the Danes opted-out of EU foreign policy, citizenship, justice co-operation and the single currency.) The other is to attempt to pass the Lisbon treaty – or even parts of it – by parliamentary ratification alone. Even if legally possible and well-intentioned, the committee rightly concluded this deliberate circumvention of a democratic decision would be ill-advised.
Hence the solution, strongly implied by the report’s analysis, is a second referendum on the treaty. The committee also points out the ways in which Ireland’s conduct of its EU policy can be improved to address public perceptions of a lack of control over law-making in Brussels. One is to give Ireland’s parliament powers to prevent the government signing up to EU legislation it disagrees with. Many national parliaments in the EU have this power. Ireland’s – surprisingly – does not. A second is to create a special EU ‘panel’ in the parliament’s upper house, the Seanad. This would be a sort of ‘wise persons’ committee, nominated on the basis of their familiarity with EU matters, to scrutinise legislation and co-ordinate with Ireland’s MEPs. What is striking about these proposed reforms is that they are both inspired by Ireland's eurosceptic neighbour, Britain, where the scrutiny reserve has existed for decades and the House of Lord’s EU affairs committee is considered an authoritative source of reasoned analysis on EU issues.
The committee also heard evidence from key players involved in the most controversial aspects of the debate last June. (The list includes defence, taxation, public services, ethical issues like abortion, and the size of the European Commission.) The committee conclusively dismissed the fear that the treaty could increase EU powers to set national tax rates. But it did agree that it would be desirable for Ireland to have a European commissioner all the time, to “offer legitimacy to the proposals made by the Commission”. It also recommended that Ireland’s already very strict rules for committing troops to peacekeeping operations be made even more explicit by requiring the approval of a two-thirds parliamentary vote.
The positive and constructive tone struck by the report is very welcome, but it should be borne in mind that almost all political parties in the Oireachtas support the Lisbon treaty. This did not prevent its rejection in June in a popular vote and will not – on its own – prevent a second rejection next year. But the report shows how the moderate centre in Ireland is trying to take back control of the debate from well organised populists of the left and right that have wreaked havoc on the country’s foreign policy and its interests abroad. That damage was neatly summed up by Catherine Day, an Irishwoman, and secretary general of the European Commission. "Ireland's image in the European Union has been tarnished by the 'no' vote”, she told the committee. “I can see every day that it has reduced our ability to shape and influence events in the European Union. Other Member States tend to view us now only through the prism of the Lisbon Treaty.”
See: http://www.oireachtas.ie
Hugo Brady is a research fellow at the Centre for European Reform.
Friday, November 28, 2008
The EU takes on defence procurement
by Clara Marina O'Donnell
The EU is in the middle of a little noticed – but potentially important – debate about defence markets. For the first time, the European Commission could be authorised to help reduce barriers amongst the EU’s segmented national defence markets.
European defence markets remain drawn along national lines. Defence-related goods are exempt from EU single market rules. These exclusions were designed for only the most sensitive components of weapons, material and related technology. The trouble is that governments have used the national security argument to exclude everything, from bullets to uniforms, from open competition. And often national security has been little more than a cloak for protectionism.
Moreover, it is difficult to move defence goods from one member-state to another. Each country has cumbersome administrative procedures for export controls. As a result, defence companies with plants in several member-states have to negotiate different sets of national requirements when they want to move their components from one plant to another. The Commission has estimated that, within the EU, the direct and indirect costs of such barriers to transferring military goods amount to €3.16 billion a year. Since requests to move goods within the EU are hardly ever rejected, the value of such extensive and diverging national checks is questionable.
As Europe's paltry defence budgets are barely adequate to maintain today’s spending programmes, the current system makes little sense. So the Commission has proposed two new directives. The first is designed to open a substantial amount of defence procurement to EU competition. The Commission suggests new procurement procedures, specially tailored for defence needs (while recognising that some goods, like nuclear technology and cryptology, will always have to be exempted due to national security). The second proposed law aims to simplify procedures to move goods around the EU. It would encourage member-states to use so-called general licences. (Broadly speaking, goods which benefit from a general licence can move across borders without importers having to ask for specific licences to do so.)
The two draft directives have the potential to bring about significant improvements. Defence companies would get access to previously closed markets, while ministries of defence, and European taxpayers, would benefit from cheaper defence goods. Easier transfer of goods across the EU would make life a lot easier for defence companies. And delays in importing new kit needed by national militaries would be reduced.
In practice it remains to be seen what difference the directives, if agreed, would make. Member-states are trying to maintain maximum control of the initiatives. They get to decide what military goods are considered safe for general licences, and it is likely that only the least sensitive goods will qualify at the outset. In addition the cut-off point for military goods that are considered too sensitive to be subject to open procurement procedures has been left very vague. Here, too, member-states are likely to be very conservative for the foreseeable future.
The impact of the proposals, and particularly the procurement directive, will depend on the willingness of defence companies and the European Commission to contest decisions by member-states, and take them to the European Court of Justice. It is unlikely that large high-tech defence programmes will be open to competition for many years to come. Large defence companies will probably be unwilling to contest decisions made by their biggest customers: national defence ministries. But it is not unreasonable to foresee that in the medium term the directive could have a substantial impact on less sensitive defence sectors, low-value, high-volume goods such as rifles, tanks or even military catering. Defence ministries will have stronger incentives to open up such non-sensitive sectors as a way to cut costs. In addition, such goods are produced by a multitude of smaller companies across the EU that are not always dependent on one defence ministry. Some might conclude they have less to lose and be more willing to take a ministry of defence to court.
The most important impact of the directives would be the cultural shift they would represent. By adopting the initiatives, member-states would be accepting the Commission's oversight in an area they have hitherto jealously guarded. Defence ministries would no longer have the final say in their defence procurement.
The directives would be a minor but incremental step towards improving Europe's defence market. But it is far from certain that they will come into force. The timetable is tight. (The directives need to be agreed before the European Parliament’s term ends in spring 2009, otherwise the turnover of experts in the Commission and Parliament could postpone an agreement by several years.) In addition there are still serious stumbling blocks which member-states and the European Parliament need to agree on. Amongst other things some smaller member-states fear local industry might lose out from more open markets. The big defence companies are concerned about the impact on national research budgets and large-member states, in particular the UK, are trying to defend their case. Some member-states have admitted they will shed no tears if the whole package collapses. But it would be a mistake not to agree the package. With current defence budgets, Europeans cannot hope to maintain a proper defence industrial base without a new approach to their defence market. And if the EU really wants to reinforce its global role, it has no choice but to improve its military muscle.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
The EU is in the middle of a little noticed – but potentially important – debate about defence markets. For the first time, the European Commission could be authorised to help reduce barriers amongst the EU’s segmented national defence markets.
European defence markets remain drawn along national lines. Defence-related goods are exempt from EU single market rules. These exclusions were designed for only the most sensitive components of weapons, material and related technology. The trouble is that governments have used the national security argument to exclude everything, from bullets to uniforms, from open competition. And often national security has been little more than a cloak for protectionism.
Moreover, it is difficult to move defence goods from one member-state to another. Each country has cumbersome administrative procedures for export controls. As a result, defence companies with plants in several member-states have to negotiate different sets of national requirements when they want to move their components from one plant to another. The Commission has estimated that, within the EU, the direct and indirect costs of such barriers to transferring military goods amount to €3.16 billion a year. Since requests to move goods within the EU are hardly ever rejected, the value of such extensive and diverging national checks is questionable.
As Europe's paltry defence budgets are barely adequate to maintain today’s spending programmes, the current system makes little sense. So the Commission has proposed two new directives. The first is designed to open a substantial amount of defence procurement to EU competition. The Commission suggests new procurement procedures, specially tailored for defence needs (while recognising that some goods, like nuclear technology and cryptology, will always have to be exempted due to national security). The second proposed law aims to simplify procedures to move goods around the EU. It would encourage member-states to use so-called general licences. (Broadly speaking, goods which benefit from a general licence can move across borders without importers having to ask for specific licences to do so.)
The two draft directives have the potential to bring about significant improvements. Defence companies would get access to previously closed markets, while ministries of defence, and European taxpayers, would benefit from cheaper defence goods. Easier transfer of goods across the EU would make life a lot easier for defence companies. And delays in importing new kit needed by national militaries would be reduced.
In practice it remains to be seen what difference the directives, if agreed, would make. Member-states are trying to maintain maximum control of the initiatives. They get to decide what military goods are considered safe for general licences, and it is likely that only the least sensitive goods will qualify at the outset. In addition the cut-off point for military goods that are considered too sensitive to be subject to open procurement procedures has been left very vague. Here, too, member-states are likely to be very conservative for the foreseeable future.
The impact of the proposals, and particularly the procurement directive, will depend on the willingness of defence companies and the European Commission to contest decisions by member-states, and take them to the European Court of Justice. It is unlikely that large high-tech defence programmes will be open to competition for many years to come. Large defence companies will probably be unwilling to contest decisions made by their biggest customers: national defence ministries. But it is not unreasonable to foresee that in the medium term the directive could have a substantial impact on less sensitive defence sectors, low-value, high-volume goods such as rifles, tanks or even military catering. Defence ministries will have stronger incentives to open up such non-sensitive sectors as a way to cut costs. In addition, such goods are produced by a multitude of smaller companies across the EU that are not always dependent on one defence ministry. Some might conclude they have less to lose and be more willing to take a ministry of defence to court.
The most important impact of the directives would be the cultural shift they would represent. By adopting the initiatives, member-states would be accepting the Commission's oversight in an area they have hitherto jealously guarded. Defence ministries would no longer have the final say in their defence procurement.
The directives would be a minor but incremental step towards improving Europe's defence market. But it is far from certain that they will come into force. The timetable is tight. (The directives need to be agreed before the European Parliament’s term ends in spring 2009, otherwise the turnover of experts in the Commission and Parliament could postpone an agreement by several years.) In addition there are still serious stumbling blocks which member-states and the European Parliament need to agree on. Amongst other things some smaller member-states fear local industry might lose out from more open markets. The big defence companies are concerned about the impact on national research budgets and large-member states, in particular the UK, are trying to defend their case. Some member-states have admitted they will shed no tears if the whole package collapses. But it would be a mistake not to agree the package. With current defence budgets, Europeans cannot hope to maintain a proper defence industrial base without a new approach to their defence market. And if the EU really wants to reinforce its global role, it has no choice but to improve its military muscle.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
Monday, November 24, 2008
PCA? The EU needs a real Russia debate
by Katinka Barysch
Was the EU right to resume negotiations on a new partnership and co-operation agreement (PCA) with Russia despite Moscow not fully complying with the Georgia ceasefire plan? Probably not. But the real problem with the EU’s decision is that it has not been accompanied by a more strategic debate about EU-Russia relations.
The last EU-Russia summit on November 14th in Nice was remarkable not only because of the EU’s apparent U-turn with regard to the PCA talks. It was also exceptionally brief (with only two hours for discussion) and largely free of the antagonistic exchanges that have come to characterise these six-monthly meetings. In one respect, however, the summit felt familiar: it was preceded by much disagreement among the EU members. In the end it was only Lithuania that held out against a resumption of PCA talks, with the Commission and the other 26 EU governments supporting it – some more grudgingly than others. Germany, France and Italy were keen to demonstrate that the EU still considers Russia a partner. Many of the Central and East European members supported the PCA talks simply because they feared the alternative: if EU-Russia relations remained blocked, bilateral relations between Moscow and the big EU member-states would inevitably grow stronger and the interests and concerns of the smaller ones would be sidelined.
When European leaders decided to “postpone” the PCA talks at their emergency summit on September 1st, they said they would only revisit that decision if and when Russia complied with the six-point ceasefire plan that Nicolas Sarkozy had brokered in the midst of the Georgia war. Russia has pulled troops out of Georgia proper, it has allowed EU monitors to work in Georgia (albeit not in Abkhazia and South Ossetia) and it has embarked on multilateral peace talks with the Georgians in Geneva, all as promised. What Russia has not done is withdraw all its troops to the positions they held before August 7th, another condition of the six-point plan. Observers think that Russia has three times as many troops in South Ossetia and Abkhazia as before the war and that it is building up military installations there. President Medvedev says that Russia’s recognition of South Ossetia and Abkhazia is “irreversible”, so troop strengths are a matter of negotiations between Moscow and the “sovereign governments” there.
The Europeans know that holding up PCA talks – the conclusion of which is in any case several years away – will not make Russia compromise on something that it considers so close to its national interest. But they already knew that the suspension was of predominantly symbolic value when they decided on it on September 1st (while rejecting other possible sanctions). They could at least have asked Russia to do something symbolic in return, for example expressing a commitment to strengthening the arms control regime in Europe.
The signal the EU has sent now is that it is prepared to accept new realities in the Caucasus and return to business as usual. In fact, the EU did so long before the November 14th summit. After a lull in September, EU-Russia co-operation restarted in October, with several EU-Russia ministerial councils (on energy, foreign affairs and justice and home affairs) and various technical working groups getting together that month. It makes little sense for the EU to continue co-operation at all levels, from expert meetings to summits, while keeping the PCA talks on hold. So unfreezing the talks was consistent, if not exactly brave.
EU politicians do have a point when they say that the Europeans need to continue to engage with Russia in areas ranging from energy security to preventing Iran’s nuclear bomb. What is troubling, however, is that the decision on the PCA was not accompanied by a more thorough debate on the future of the EU’s Russia policy. EU leaders did ask the Commission to conduct an “audit” of the different policy areas that matter for the EU and Russia, such as energy, trade, foreign policy, research and visas. The result is an anodyne, technical document that does little more than illustrate the fact that the EU and Russia depend on each other in many ways. The implicit conclusion is: let’s continue working together. But the document does not answer the question why. Is co-operation a means to an end (it was once seen as a way towards a “strategic partnership” and “common values”)? Is it meant to further the EU’s interests? If so, which ones and how? Or does the EU proceed with the dozens of co-operation and support programmes simply because it cannot agree on an alternative?
The Europeans need a more political, strategic debate about what they want and need from Russia. This will take time. The Georgia war has not narrowed the gap between the different national positions as much as many people had initially predicted. But this gap makes a political debate on Russia all the more urgent. By next year the Europeans will have to forge a coherent response to Medvedev’s proposal for a new European security architecture. Sarkozy told Medvedev at the Nice summit that the idea would be discussed within the framework of the OSCE in 2009. But Sarkozy did not necessarily speak on behalf of his EU colleagues, many of whom suspect strongly that Russia simply wants to split the Europeans and drive a wedge between Europe and the US. Nor did all EU governments welcome Sarkozy’s idea of a ‘deal’ on missiles under which the US would suspend the deployment of missile defences in Poland and the Czech Republic while Russia would withdraw the threat of putting Iskander missiles into Kaliningrad.
The PCA negotiations – which will be conducted mainly by the European Commission – will not provide the answer to such questions.
Katinka Barysch is deputy director of the Centre for European Reform.
Was the EU right to resume negotiations on a new partnership and co-operation agreement (PCA) with Russia despite Moscow not fully complying with the Georgia ceasefire plan? Probably not. But the real problem with the EU’s decision is that it has not been accompanied by a more strategic debate about EU-Russia relations.
The last EU-Russia summit on November 14th in Nice was remarkable not only because of the EU’s apparent U-turn with regard to the PCA talks. It was also exceptionally brief (with only two hours for discussion) and largely free of the antagonistic exchanges that have come to characterise these six-monthly meetings. In one respect, however, the summit felt familiar: it was preceded by much disagreement among the EU members. In the end it was only Lithuania that held out against a resumption of PCA talks, with the Commission and the other 26 EU governments supporting it – some more grudgingly than others. Germany, France and Italy were keen to demonstrate that the EU still considers Russia a partner. Many of the Central and East European members supported the PCA talks simply because they feared the alternative: if EU-Russia relations remained blocked, bilateral relations between Moscow and the big EU member-states would inevitably grow stronger and the interests and concerns of the smaller ones would be sidelined.
When European leaders decided to “postpone” the PCA talks at their emergency summit on September 1st, they said they would only revisit that decision if and when Russia complied with the six-point ceasefire plan that Nicolas Sarkozy had brokered in the midst of the Georgia war. Russia has pulled troops out of Georgia proper, it has allowed EU monitors to work in Georgia (albeit not in Abkhazia and South Ossetia) and it has embarked on multilateral peace talks with the Georgians in Geneva, all as promised. What Russia has not done is withdraw all its troops to the positions they held before August 7th, another condition of the six-point plan. Observers think that Russia has three times as many troops in South Ossetia and Abkhazia as before the war and that it is building up military installations there. President Medvedev says that Russia’s recognition of South Ossetia and Abkhazia is “irreversible”, so troop strengths are a matter of negotiations between Moscow and the “sovereign governments” there.
The Europeans know that holding up PCA talks – the conclusion of which is in any case several years away – will not make Russia compromise on something that it considers so close to its national interest. But they already knew that the suspension was of predominantly symbolic value when they decided on it on September 1st (while rejecting other possible sanctions). They could at least have asked Russia to do something symbolic in return, for example expressing a commitment to strengthening the arms control regime in Europe.
The signal the EU has sent now is that it is prepared to accept new realities in the Caucasus and return to business as usual. In fact, the EU did so long before the November 14th summit. After a lull in September, EU-Russia co-operation restarted in October, with several EU-Russia ministerial councils (on energy, foreign affairs and justice and home affairs) and various technical working groups getting together that month. It makes little sense for the EU to continue co-operation at all levels, from expert meetings to summits, while keeping the PCA talks on hold. So unfreezing the talks was consistent, if not exactly brave.
EU politicians do have a point when they say that the Europeans need to continue to engage with Russia in areas ranging from energy security to preventing Iran’s nuclear bomb. What is troubling, however, is that the decision on the PCA was not accompanied by a more thorough debate on the future of the EU’s Russia policy. EU leaders did ask the Commission to conduct an “audit” of the different policy areas that matter for the EU and Russia, such as energy, trade, foreign policy, research and visas. The result is an anodyne, technical document that does little more than illustrate the fact that the EU and Russia depend on each other in many ways. The implicit conclusion is: let’s continue working together. But the document does not answer the question why. Is co-operation a means to an end (it was once seen as a way towards a “strategic partnership” and “common values”)? Is it meant to further the EU’s interests? If so, which ones and how? Or does the EU proceed with the dozens of co-operation and support programmes simply because it cannot agree on an alternative?
The Europeans need a more political, strategic debate about what they want and need from Russia. This will take time. The Georgia war has not narrowed the gap between the different national positions as much as many people had initially predicted. But this gap makes a political debate on Russia all the more urgent. By next year the Europeans will have to forge a coherent response to Medvedev’s proposal for a new European security architecture. Sarkozy told Medvedev at the Nice summit that the idea would be discussed within the framework of the OSCE in 2009. But Sarkozy did not necessarily speak on behalf of his EU colleagues, many of whom suspect strongly that Russia simply wants to split the Europeans and drive a wedge between Europe and the US. Nor did all EU governments welcome Sarkozy’s idea of a ‘deal’ on missiles under which the US would suspend the deployment of missile defences in Poland and the Czech Republic while Russia would withdraw the threat of putting Iskander missiles into Kaliningrad.
The PCA negotiations – which will be conducted mainly by the European Commission – will not provide the answer to such questions.
Katinka Barysch is deputy director of the Centre for European Reform.
Monday, November 10, 2008
What 'Obama effect' for transatlantic relations?
by Tomas Valasek
Europe got the president it wanted on November 4th. Obama will have Europe's goodwill and with it, a window of opportunity to restore transatlantic co-operation on key security issues. The list of common challenges includes, but is not limited to, Afghanistan, Iran and Russia.
Whether Obama succeeds or not depends in part on how willing he will be to try out new approaches. Europe will expect the next president to change the substance of US foreign policy as much as its style. On some issues like Iran and Afghanistan, Obama plans changes; on other like Russia he offered few new ideas during the campaign. He will have to think creatively on all fronts.
Afghanistan will be on top of the US priorities for Europe. Obama will put more troops in the country and expect Europe to do the same. And even though all European governments are short on troops and money, many will respond in kind.
But while a 'surge' worked in Iraq, more troops will not automatically be the right approach to Afghanistan. Western soldiers act like a magnet for terrorists from across the region, mainly Pakistan. Obama will need a Pakistan strategy more than an Afghanistan surge. In fact, he should consider talking to some of the current enemies from among the Taliban in Afghanistan, to build local alliances against the most radical insurgents coming from Pakistan.
On Iran, Obama said he was willing to speak directly to the Tehran government. This would be a much welcome change. The EU has been talking to Iran since 2003 but senior EU diplomats involved in negotiations say the talks cannot succeed without the US joining in. They may not succeed anyway; Iran may be far too determined to acquire nuclear weapons. But even so, a US participation in the talks would help build transatlantic consensus on further steps like a tighter embargo.
It is important that Obama does not just talk to Iran without getting something back - he is the last card the West has to play. Talking to Ahmadinejad now could also strenghten him in presidential elections, which is not in the US or European interest. So Obama should show he is willing to talk, but only at the right moment and under the right conditions.
On Russia, Obama will have a delicate task on his hands. Moscow appears determined to divide the EU member-states. It also wants to drive a wedge between the more Moscow-friendly European capitals and the United States. Obama's victory does not appear to have changed Russian policy: on the day US election results were announced the Russian president Dmitry Medvedev gave a speech criticising US 'aggression' and 'unilateralism'.
Obama's immediate priority should be to help to strengthen the EU consensus on Russia, and to bring Europe's and America's policies closer to one another. This requires two things. First, Obama will need to convince Berlin, Paris, Rome and other capitals that Washington will not gratuitously provoke Moscow. So the US should stop pushing for a Membership Action Plan (MAP) for Ukraine and Georgia. Instead of MAP, which has become a red flag to not only Moscow but also to Berlin and Paris, NATO should use its special Ukraine and Georgia councils to expand security assistance to the two countries, and to give them a clear set of criteria for future membership.
At the same time, Obama needs to re-assure NATO allies on Russian borders that Washington would not abandon them in case of a Russian aggression. To that end, Obama should work with other allies to organise 'table top' military exercises assessing NATO's readiness to defend the Baltic states against a military attack.
Bosnia is on neither Obama's nor Europe's list of priorities but it should be. Years of 'hands-off' Western policy allowed nationalists to once again flourish there. The US and Europe must urgently re-engage. The office of high representative (HR, usually a senior European diplomat) will close soon, under Russian pressure. Instead, EU governments and the US should use the full power of traditional diplomatic tools like the prospect of EU membership, and the implied threat of military intervention, to keep nationalist politicians from tearing the country apart. Above all, Obama and the EU need to pay more attention to Bosnia; the country is vulnerable and could collapse.
There are other areas, where Europe and the US will need to re-think their policies. For example, Turkey's relations with the US and Europe are at their lowest point in decades. The ideas put forth above are therefore not meant to be read as an exhaustive list but rather as a sample.
President Obama will find that dealing with Europe is not easy. Eight years of the George Bush government left Europe distrustful of the US. But Obama is surrounded by an excellent team of advisors, who understand Europe and are well positioned to guide Obama through European sensitivities. Most importantly, candidate Obama has shown tremendous empathy and intellectual curiosity on the campaign trail. And he has a first-rate mind. He seems well aware of the need for course correction in places like Iran. This bodes well for the transatlantic relationship.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
Europe got the president it wanted on November 4th. Obama will have Europe's goodwill and with it, a window of opportunity to restore transatlantic co-operation on key security issues. The list of common challenges includes, but is not limited to, Afghanistan, Iran and Russia.
Whether Obama succeeds or not depends in part on how willing he will be to try out new approaches. Europe will expect the next president to change the substance of US foreign policy as much as its style. On some issues like Iran and Afghanistan, Obama plans changes; on other like Russia he offered few new ideas during the campaign. He will have to think creatively on all fronts.
Afghanistan will be on top of the US priorities for Europe. Obama will put more troops in the country and expect Europe to do the same. And even though all European governments are short on troops and money, many will respond in kind.
But while a 'surge' worked in Iraq, more troops will not automatically be the right approach to Afghanistan. Western soldiers act like a magnet for terrorists from across the region, mainly Pakistan. Obama will need a Pakistan strategy more than an Afghanistan surge. In fact, he should consider talking to some of the current enemies from among the Taliban in Afghanistan, to build local alliances against the most radical insurgents coming from Pakistan.
On Iran, Obama said he was willing to speak directly to the Tehran government. This would be a much welcome change. The EU has been talking to Iran since 2003 but senior EU diplomats involved in negotiations say the talks cannot succeed without the US joining in. They may not succeed anyway; Iran may be far too determined to acquire nuclear weapons. But even so, a US participation in the talks would help build transatlantic consensus on further steps like a tighter embargo.
It is important that Obama does not just talk to Iran without getting something back - he is the last card the West has to play. Talking to Ahmadinejad now could also strenghten him in presidential elections, which is not in the US or European interest. So Obama should show he is willing to talk, but only at the right moment and under the right conditions.
On Russia, Obama will have a delicate task on his hands. Moscow appears determined to divide the EU member-states. It also wants to drive a wedge between the more Moscow-friendly European capitals and the United States. Obama's victory does not appear to have changed Russian policy: on the day US election results were announced the Russian president Dmitry Medvedev gave a speech criticising US 'aggression' and 'unilateralism'.
Obama's immediate priority should be to help to strengthen the EU consensus on Russia, and to bring Europe's and America's policies closer to one another. This requires two things. First, Obama will need to convince Berlin, Paris, Rome and other capitals that Washington will not gratuitously provoke Moscow. So the US should stop pushing for a Membership Action Plan (MAP) for Ukraine and Georgia. Instead of MAP, which has become a red flag to not only Moscow but also to Berlin and Paris, NATO should use its special Ukraine and Georgia councils to expand security assistance to the two countries, and to give them a clear set of criteria for future membership.
At the same time, Obama needs to re-assure NATO allies on Russian borders that Washington would not abandon them in case of a Russian aggression. To that end, Obama should work with other allies to organise 'table top' military exercises assessing NATO's readiness to defend the Baltic states against a military attack.
Bosnia is on neither Obama's nor Europe's list of priorities but it should be. Years of 'hands-off' Western policy allowed nationalists to once again flourish there. The US and Europe must urgently re-engage. The office of high representative (HR, usually a senior European diplomat) will close soon, under Russian pressure. Instead, EU governments and the US should use the full power of traditional diplomatic tools like the prospect of EU membership, and the implied threat of military intervention, to keep nationalist politicians from tearing the country apart. Above all, Obama and the EU need to pay more attention to Bosnia; the country is vulnerable and could collapse.
There are other areas, where Europe and the US will need to re-think their policies. For example, Turkey's relations with the US and Europe are at their lowest point in decades. The ideas put forth above are therefore not meant to be read as an exhaustive list but rather as a sample.
President Obama will find that dealing with Europe is not easy. Eight years of the George Bush government left Europe distrustful of the US. But Obama is surrounded by an excellent team of advisors, who understand Europe and are well positioned to guide Obama through European sensitivities. Most importantly, candidate Obama has shown tremendous empathy and intellectual curiosity on the campaign trail. And he has a first-rate mind. He seems well aware of the need for course correction in places like Iran. This bodes well for the transatlantic relationship.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
Friday, November 07, 2008
The Commission’s economic forecasts are still too complacent
By Simon Tilford
On the face of it, it appears churlish to accuse the Commission of complacency when it is forecasting no growth in the eurozone economy in 2009 and a deep recession in the UK. But the Commission has a tendency to be slow to downgrade its forecasts and its latest forecasting round is no exception. The Commission’s forecasts of economic stagnation next year – 0.2 per cent in the EU and 0.1 per cent in eurozone – already looks out of date. It is hard to conceive how either the EU or the eurozone will escape deep recessions in 2009. The indications of an unprecedented slump in economic activity are multiplying all the time.
Of the EU-15 economies, the Commission is probably right to be most pessimistic about Britain and Ireland, forecasting economic contractions of 1 per cent and 0.9 per cent respectively in 2009. There is no doubt that these two economies will be among the hardest hit within the EU. Both are experiencing huge falls in house prices, and their credit markets have effectively seized up. British consumers are easily the most indebted in the EU. The UK’s household savings rate was actually negative in the first half of 2008. If it were to rise back to its long-term average of 8 per cent over the next three years, the British economy would experience a deep slump.
But it is the Commission’s forecasts for a number of other member-states that stand out. Its forecasts for Germany and Spain look least credible, at zero and -0.2 in 2009 respectively. Germany’s economic strategy in recent years has been based almost entirely on export success combined with high domestic savings rates and low consumption. This leaves it hugely vulnerable to the unfolding economic crisis. The IMF expects world trade volumes to rise by just 2.1 per cent in 2009 and trade between the advanced economies to decline by 0.1 per cent. After appearing to hold up relatively well over the early part of 2009, German industrial orders are now in free-fall (falling 8 per cent in October), as most of the country’s key export markets are either in recession, or growing much less rapidly. Business expectations have fallen to their lowest levels since 1992. Germany’s specialisation in capital goods, chemicals and premium cars stood the country in good stead during the cyclical upturn in 2004-06, but with demand for all three in reverse, Germany has become very vulnerable.
Nor will the domestic economy come to the rescue. Germany has avoided the house price boom entirely and German households are not that indebted. But a recovery in domestic consumption has proved elusive. After falling steadily for over two years, unemployment is about to start rising, which will no doubt prompt Germany’s risk-averse households to further increase the proportion of their incomes that they save.
The EU’s forecast for Spain is also too sanguine. Spanish unemployment is rising very rapidly, industrial production is falling (by 8.8% in October), the pace of decline in house prices is accelerating and demand for Spanish exports is under severe pressure. The collapse in construction sector activity will impose a severe drag on the Spanish economy next year. In the circumstances, it is hard to see how the decline in output could be held down to as little as 0.2 per cent.
The Commission expects zero growth in both Italy and France. Italy and France have not experienced house price booms of the scale seen in Spain or the UK, but in both countries industrial production is under huge pressure, as a result of collapse in consumer sentiment and a big fall in export orders. Consumer and business surveys point clearly to recessions next year, rather than economic stagnation.
The IMF’s forecasts look more realistic than those of the Commission. It is forecasting a decline in EU output of 0.2 per cent and 0.5 per cent for the eurozone. This means recessions in Germany (0.8 per cent), Spain (0.7 per cent) and France and Italy (0.5 per cent and 0.6 per cent respectively.) The IMF was heavily criticised earlier in the year for allegedly being too pessimistic about Europe’s economy’s outlook, but it has been vindicated as the European economy slowed dramatically even before the intensification of the financial crisis in September.
The aggressive cuts in interest rates by the ECB and the Bank of England (BoE) over the last six weeks have come too late to have that much impact on next year’s economic growth. Interest rate reductions normally work with a lag of about 18 months. Some governments are at the limits of their borrowing capacity and can do little to directly stimulate economic activity by cutting taxes or boosting expenditure. But others have scope to offset the severity of the downturn. The EU urgently needs member-states that have run-up huge current account surpluses and which have strong fiscal positions to boost demand. Germany and the Netherlands are the obvious candidates. Their current account surpluses are not sustainable in the present climate, and they need to rebalance their economies. Germany, in particular, requires a far more significant stimulus package than the one put together by the German government, which will have a marginal impact. If the governments of big surplus countries fail to take concerted action, their surplus savings will condemn themselves and Europe as a whole to an even deeper recession.
Simon Tilford is chief economist at the Centre for European Reform
On the face of it, it appears churlish to accuse the Commission of complacency when it is forecasting no growth in the eurozone economy in 2009 and a deep recession in the UK. But the Commission has a tendency to be slow to downgrade its forecasts and its latest forecasting round is no exception. The Commission’s forecasts of economic stagnation next year – 0.2 per cent in the EU and 0.1 per cent in eurozone – already looks out of date. It is hard to conceive how either the EU or the eurozone will escape deep recessions in 2009. The indications of an unprecedented slump in economic activity are multiplying all the time.
Of the EU-15 economies, the Commission is probably right to be most pessimistic about Britain and Ireland, forecasting economic contractions of 1 per cent and 0.9 per cent respectively in 2009. There is no doubt that these two economies will be among the hardest hit within the EU. Both are experiencing huge falls in house prices, and their credit markets have effectively seized up. British consumers are easily the most indebted in the EU. The UK’s household savings rate was actually negative in the first half of 2008. If it were to rise back to its long-term average of 8 per cent over the next three years, the British economy would experience a deep slump.
But it is the Commission’s forecasts for a number of other member-states that stand out. Its forecasts for Germany and Spain look least credible, at zero and -0.2 in 2009 respectively. Germany’s economic strategy in recent years has been based almost entirely on export success combined with high domestic savings rates and low consumption. This leaves it hugely vulnerable to the unfolding economic crisis. The IMF expects world trade volumes to rise by just 2.1 per cent in 2009 and trade between the advanced economies to decline by 0.1 per cent. After appearing to hold up relatively well over the early part of 2009, German industrial orders are now in free-fall (falling 8 per cent in October), as most of the country’s key export markets are either in recession, or growing much less rapidly. Business expectations have fallen to their lowest levels since 1992. Germany’s specialisation in capital goods, chemicals and premium cars stood the country in good stead during the cyclical upturn in 2004-06, but with demand for all three in reverse, Germany has become very vulnerable.
Nor will the domestic economy come to the rescue. Germany has avoided the house price boom entirely and German households are not that indebted. But a recovery in domestic consumption has proved elusive. After falling steadily for over two years, unemployment is about to start rising, which will no doubt prompt Germany’s risk-averse households to further increase the proportion of their incomes that they save.
The EU’s forecast for Spain is also too sanguine. Spanish unemployment is rising very rapidly, industrial production is falling (by 8.8% in October), the pace of decline in house prices is accelerating and demand for Spanish exports is under severe pressure. The collapse in construction sector activity will impose a severe drag on the Spanish economy next year. In the circumstances, it is hard to see how the decline in output could be held down to as little as 0.2 per cent.
The Commission expects zero growth in both Italy and France. Italy and France have not experienced house price booms of the scale seen in Spain or the UK, but in both countries industrial production is under huge pressure, as a result of collapse in consumer sentiment and a big fall in export orders. Consumer and business surveys point clearly to recessions next year, rather than economic stagnation.
The IMF’s forecasts look more realistic than those of the Commission. It is forecasting a decline in EU output of 0.2 per cent and 0.5 per cent for the eurozone. This means recessions in Germany (0.8 per cent), Spain (0.7 per cent) and France and Italy (0.5 per cent and 0.6 per cent respectively.) The IMF was heavily criticised earlier in the year for allegedly being too pessimistic about Europe’s economy’s outlook, but it has been vindicated as the European economy slowed dramatically even before the intensification of the financial crisis in September.
The aggressive cuts in interest rates by the ECB and the Bank of England (BoE) over the last six weeks have come too late to have that much impact on next year’s economic growth. Interest rate reductions normally work with a lag of about 18 months. Some governments are at the limits of their borrowing capacity and can do little to directly stimulate economic activity by cutting taxes or boosting expenditure. But others have scope to offset the severity of the downturn. The EU urgently needs member-states that have run-up huge current account surpluses and which have strong fiscal positions to boost demand. Germany and the Netherlands are the obvious candidates. Their current account surpluses are not sustainable in the present climate, and they need to rebalance their economies. Germany, in particular, requires a far more significant stimulus package than the one put together by the German government, which will have a marginal impact. If the governments of big surplus countries fail to take concerted action, their surplus savings will condemn themselves and Europe as a whole to an even deeper recession.
Simon Tilford is chief economist at the Centre for European Reform
Friday, October 24, 2008
How a new Irish government might save Lisbon
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.
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.
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.
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