by Philip Whyte
On February 25th, a Commission-appointed taskforce headed by Jacques de Larosière published its much-awaited report on financial supervision in the EU. By coincidence, a parallel (but less widely reported) event took place the same day on the other side of the Channel: Lord Turner, the chairman of the UK’s Financial Services Authority (FSA), gave evidence to a parliamentary committee. What light does Lord Turner’s evidence shed on the UK’s likely reception of the Larosière report?
London’s status as a financial centre has long played an important role in Britain’s complex relationship with the EU. Although the UK has been a strong supporter of the single market, it has been suspicious of any moves that might undermine London’s position as Europe’s pre-eminent financial centre. London’s status has partly rested on the UK’s ‘light touch’ regulatory regime. And many in the UK have long worried that the survival of that regime is threatened by the encroachment of EU rules – particularly as countries such as France and Germany, which aspire to ‘repatriate’ business to Paris and Frankfurt, have never had the City of London’s best interests at heart. This explains why the City, the most cosmopolitan economic cluster anywhere in the EU, is relatively Eurosceptic. And it partly explains successive British governments’ reticence to EU integration.
However, the financial crisis is transforming some longstanding British assumptions. It is not that the crisis has reduced domestic Euro-scepticism. Domestic opposition to joining the single currency remains as strong as ever. But the crisis has called into question the merits of ‘light touch’ regulation. Popular feeling against financiers is running high. A backlash is in full swing. Bankers have fallen even lower in the public’s esteem than politicians, journalists and estate agents. Given the epic scale of the profits which have been privatised and the losses which have been socialised, the opprobrium financiers are attracting is understandable. All the main political parties are going along with the public mood. But it would be wrong to dismiss the recent furore as politicians pandering to the mob. For the change in British assumptions seems to run deeper: it is intellectual, as well as political.
Take Lord Turner’s evidence to the Treasury select committee. What did he say? In essence, he said that the era of light touch regulation was over. He promised a ‘revolution’ in financial regulation that would include tougher capital rules for banks, and capital and liquidity rules for previously large, unregulated institutions such as hedge funds. Asked about the way in which the FSA had supervised a bank which had to be bailed out in 2008 with taxpayers’ money, he said that it “was a competent execution of a philosophy of regulation that was, in retrospect, mistaken”. Lord Turner is no populist, so his testimony represents one of the strongest repudiations of the philosophy of light touch regulation to date. It would be wrong to conclude that the British have converted to the French and German view of financial markets. But the intellectual distance across the Channel has narrowed.
What of the British view on pan-European regulatory structures? The government has opposed periodic calls for the establishment of a pan-European regulator. And there is no reason to believe that the financial crisis has made it anymore keen on the idea. It will continue to oppose any blueprint that smacks of supranationalism. The question is: does the Larosière report propose institutional structures that the UK could accept? It is not yet clear. The Larosière group is not recommending that a single regulator be established. It has recognised that this would be unrealistic, given the absence of political appetite in the UK and some other member-states. So it has proposed building two separate structures: one dealing with traditional micro-prudential supervision (the oversight of individual institutions) and another with macro-prudential issues (risks to the financial system as a whole).
Micro-prudential supervision would build on existing institutional arrangements by establishing a European System of Financial Supervisors. The day-to-day supervision of institutions would be left to national regulators, and international colleges of regulators would continue to oversee cross-border banks. But there would be greater central coordination. The so-called Level 3 committees, which currently try to coordinate national regulatory approaches across the EU, would be given more powers and turned into new authorities for the banking, insurance and securities industries. Macro-prudential supervision would be carried out by a European Systemic Risk Council. This new body would be chaired by the European Central Bank (ECB), but composed of national central banks and regulators. It would collate and analyse information relating to system risk and financial stability.
Could the British government sign up to the institutional architecture proposed by the Larosière report? Although the report does not recommend the establishment of a single, pan-European regulator the British government may still find it difficult to cede new powers to EU bodies. The governing Labour Party is domestically weakened and, with only a year before the next general election, is trailing the opposition Conservative Party by a huge margin in opinion polls. The political context is important because Labour will not want to expose itself to accusations from Eurosceptic Conservatives that it has “given powers away to Brusssels”. The Channel may have narrowed, therefore. But it is far from clear that it has done so sufficiently to allow the Larosière report to be implemented. This is a shame, because there may be no other way to reconcile political constraints with the needs of the moment.
Philip Whyte is a senior research fellow at the Centre for European Reform.
Friday, February 27, 2009
Tuesday, February 24, 2009
Why enlargement is in trouble
by Katinka Barysch
It is five years since the EU admitted eight Central and East European countries, followed by another two in 2007. To celebrate this anniversary, Commissioner Olli Rehn has just released a report that explains how these countries have benefited from integrating into the EU. But any jubilant mood was dimmed by the current economic crisis in Central and Eastern Europe; and by the bleak outlook for further accessions.
There are long-standing and well-known reasons why enlargement to Turkey and the Western Balkans is proceeding so slowly: the political instability and economic backwardness of most of the current applicants; the enlargement fatigue of many West Europeans; the specific questions that Austrian, French and other politicians ask about Turkey’s European destiny.
But there is another, more specific reason why enlargement is in trouble just now: various existing EU members are holding enlargement hostage to bilateral issues they have with some applicant or other. EU governments have always thrown their specific worries or pet projects into accession negotiations. But the boldness with which some now hold up the entire process to get what they want is almost unprecedented.
The most blatant example is Slovenia’s spat with Croatia over a stretch of Mediterranean border. Croatia was hoping to wrap up its accession negotiations this year so that it can join in 2010. But while 26 EU countries (and the European Commission) wanted to open ten new ‘chapters’ in the negotiations in 2008, Slovenia vetoed all but one. Since then, the political atmosphere between Ljubljana and Zagreb has become so poisonous that the EU has called in Nobel Prize winning diplomatic Martti Ahtisaari to find a way out.
Cyprus, meanwhile, is blocking several chapters in Turkey’s accession talks, probably in the hope of gaining leverage in the peace talks that are going on in the divided island. France is also holding up the talks, but for more profound reasons: since Nicolas Sarkozy prefers a ‘privileged partnership’, he argues that Turkey need not bother with those chapters of the acquis that are only relevant for full members.
Meanwhile, the Dutch government is vetoing an EU-Serbia ‘stabilisation agreement’ (an important step on the path towards candidate status) because it wants Belgrade to first deliver Ratko Mladic to the war-crimes tribunal in The Hague. Greece is holding Macedonia’s application hostage to its long-running dispute over the country’s proper name. Although Macedonia has had official candidate status since 2005, the Council has not yet asked the Commission for an ‘opinion’ on the country’s readiness. Without this report, the negotiations cannot start. Already, Brussels-watchers speculate which EU nation could impose a veto over a possible application from Iceland, perhaps over fishing rights.
One high-level Commission official warns that bilateral issues could “suffocate the enlargement agenda”. This would be a dangerous development in what is going to be a crucial year for accession. Albania, Bosnia and Serbia are planning to hand in their formal applications for membership this year, as Montenegro already did at the end of 2008. The EU needs to stand ready to respond in an encouraging and constructive way, not with the stony silence that has met recent advances from countries in the Western Balkans.
Turkey’s accession could also be heading for trouble this year. The EU is due to review the implementation of the ‘Ankara protocol’ under which Turkey is obliged to open up its ports and airports for ships and planes from Cyprus. Turkey is unlikely to comply unless there is progress in the peace talks between northern and southern Cyprus – a faint prospect after 40 years of divisions. Some EU governments will insist that Turkey’s accession process will be put on hold. Even if there were no such demands, there are now so many bilateral vetoes on different bits of the Turkish accession talks that the EU would simply run out of chapters to negotiate with Ankara.
Only a big political push can resolve these multiple deadlocks. But most EU members are not keen on moving enlargement along. West Europeans will be even more fearful of cheap competition from eastern newcomers now that their economies are in recession and unemployment is rising everywhere. EU governments will be cautious not to take any unpopular decisions on enlargement ahead of the elections to the European Parliament in June 2009 and the second Irish referendum on the Lisbon treaty in the autumn. By then, however, irreparable damage could already have been done to the credibility of the enlargement process, especially if the accession of Croatia – by far the best prepared of the current aspirants – was foiled or delayed because of a bilateral border spat.
EU governments need some vision here. They should conclude a ‘gentlemen’s agreement’ not to veto accessions because of bilateral grievances. They need to find a way of keeping Turkey’s accession process alive even if no breakthrough is achieved in Cyprus this year. And they should allow the Commission to get going with the opinions on the Western Balkans countries. The debate on whether these countries are ready to join the EU should be conducted on the basis of these reports, not ahead of them.
Katinka Barysch is deputy director of the Centre for European Reform.
It is five years since the EU admitted eight Central and East European countries, followed by another two in 2007. To celebrate this anniversary, Commissioner Olli Rehn has just released a report that explains how these countries have benefited from integrating into the EU. But any jubilant mood was dimmed by the current economic crisis in Central and Eastern Europe; and by the bleak outlook for further accessions.
There are long-standing and well-known reasons why enlargement to Turkey and the Western Balkans is proceeding so slowly: the political instability and economic backwardness of most of the current applicants; the enlargement fatigue of many West Europeans; the specific questions that Austrian, French and other politicians ask about Turkey’s European destiny.
But there is another, more specific reason why enlargement is in trouble just now: various existing EU members are holding enlargement hostage to bilateral issues they have with some applicant or other. EU governments have always thrown their specific worries or pet projects into accession negotiations. But the boldness with which some now hold up the entire process to get what they want is almost unprecedented.
The most blatant example is Slovenia’s spat with Croatia over a stretch of Mediterranean border. Croatia was hoping to wrap up its accession negotiations this year so that it can join in 2010. But while 26 EU countries (and the European Commission) wanted to open ten new ‘chapters’ in the negotiations in 2008, Slovenia vetoed all but one. Since then, the political atmosphere between Ljubljana and Zagreb has become so poisonous that the EU has called in Nobel Prize winning diplomatic Martti Ahtisaari to find a way out.
Cyprus, meanwhile, is blocking several chapters in Turkey’s accession talks, probably in the hope of gaining leverage in the peace talks that are going on in the divided island. France is also holding up the talks, but for more profound reasons: since Nicolas Sarkozy prefers a ‘privileged partnership’, he argues that Turkey need not bother with those chapters of the acquis that are only relevant for full members.
Meanwhile, the Dutch government is vetoing an EU-Serbia ‘stabilisation agreement’ (an important step on the path towards candidate status) because it wants Belgrade to first deliver Ratko Mladic to the war-crimes tribunal in The Hague. Greece is holding Macedonia’s application hostage to its long-running dispute over the country’s proper name. Although Macedonia has had official candidate status since 2005, the Council has not yet asked the Commission for an ‘opinion’ on the country’s readiness. Without this report, the negotiations cannot start. Already, Brussels-watchers speculate which EU nation could impose a veto over a possible application from Iceland, perhaps over fishing rights.
One high-level Commission official warns that bilateral issues could “suffocate the enlargement agenda”. This would be a dangerous development in what is going to be a crucial year for accession. Albania, Bosnia and Serbia are planning to hand in their formal applications for membership this year, as Montenegro already did at the end of 2008. The EU needs to stand ready to respond in an encouraging and constructive way, not with the stony silence that has met recent advances from countries in the Western Balkans.
Turkey’s accession could also be heading for trouble this year. The EU is due to review the implementation of the ‘Ankara protocol’ under which Turkey is obliged to open up its ports and airports for ships and planes from Cyprus. Turkey is unlikely to comply unless there is progress in the peace talks between northern and southern Cyprus – a faint prospect after 40 years of divisions. Some EU governments will insist that Turkey’s accession process will be put on hold. Even if there were no such demands, there are now so many bilateral vetoes on different bits of the Turkish accession talks that the EU would simply run out of chapters to negotiate with Ankara.
Only a big political push can resolve these multiple deadlocks. But most EU members are not keen on moving enlargement along. West Europeans will be even more fearful of cheap competition from eastern newcomers now that their economies are in recession and unemployment is rising everywhere. EU governments will be cautious not to take any unpopular decisions on enlargement ahead of the elections to the European Parliament in June 2009 and the second Irish referendum on the Lisbon treaty in the autumn. By then, however, irreparable damage could already have been done to the credibility of the enlargement process, especially if the accession of Croatia – by far the best prepared of the current aspirants – was foiled or delayed because of a bilateral border spat.
EU governments need some vision here. They should conclude a ‘gentlemen’s agreement’ not to veto accessions because of bilateral grievances. They need to find a way of keeping Turkey’s accession process alive even if no breakthrough is achieved in Cyprus this year. And they should allow the Commission to get going with the opinions on the Western Balkans countries. The debate on whether these countries are ready to join the EU should be conducted on the basis of these reports, not ahead of them.
Katinka Barysch is deputy director of the Centre for European Reform.
Thursday, February 19, 2009
Germany: Between a rock and a hard place
by Simon Tilford
Twelve months ago it seemed inconceivable that any member of the EU could face a sovereign debt crisis. It would have been the stuff of fantasy to argue that Ireland or Austria could be among those at risk. Such an outcome is now well within the realms of possibility. If one country suffers a crisis, that will not be the end of it. It would almost certainly trigger a wave of crises, plunging the EU, and especially the eurozone, into turmoil. There is nothing inevitable about this. But a way out requires Germany to show more vision.
Some eurozone member-states – Italy and Spain – are vulnerable because they have lost so much competitiveness and investors are sceptical they will be able to regain it. Others – Austria and Belgium – have disproportionately large banking sectors and/or banks with huge exposures to crisis hit regions such as Eastern Europe. For their part, Ireland and Greece have lost competitiveness and have very exposed banking sectors.
What is the way forward? One option might be for governments to start issuing eurozone sovereign bonds, rather than their own national bonds. This would help address the problem of poor liquidity that has bedevilled many of the smaller eurozone financial markets. And it would reduce borrowing costs substantially for most eurozone countries.
There are, however, a number of obstacles. German borrowing costs would rise, as it shared its credibility with the rest of the eurozone. Such a move would arguably let profligate countries off the hook. And, it might be difficult to ensure budgetary discipline in the fiscally weaker countries. Curbing the budgetary autonomy of individual governments would require a far greater degree of political integration in the eurozone.
These concerns highlight what many economists have always believed to be the inherent contradiction in economic and monetary union: the absence of a political union. However, the German government’s objection to the pooling of bond issuance – that it would cost Germany too much money – is a parochial one. The alternatives threaten to cost Germany (and Europe) much more.
The German finance minister, Peer Steinbrück, has indicated that there may be a case for support for hard-hit members of the eurozone. But he is mistaken if he thinks a fiscal crisis in one member-state would be a cleansing experience, with the chastened country receiving a highly conditional IMF-type bail-out, and the others learning the lesson of their errant ways. First, one sovereign crisis would almost certainly lead to others. The direct costs of the bail-out could be surmountable in the case of an Ireland or a Greece, but would pose a much bigger challenge in the case of larger member-states. Second there would be indirect costs to the German economy, which is enormously dependent on exports to the rest of the eurozone. The last thing the German economy needs is a further collapse in external demand.
Nor is this the worst case scenario. If Italy or Spain defaulted on their sovereign debt – perhaps as a result of the rest of the eurozone failing to agree a bail-out or attaching excessively onerous terms to one – the repercussions for the eurozone could be dramatic. For inflexible and sizeable economies, it is far from clear that default within the currency union is more plausible than a default and a move to leave it. A member-state could decide that having defaulted (and in the process cut itself off from most sources of capital, at least for a time) it may as well devalue, which would at least help to restore competitiveness and get the economy growing again. If one country were to leave, pressure on others to follow suit would be intense.
Germany cannot afford to be sanguine about such an outcome. German companies have spent years holding down costs. The result has been improved competitiveness versus the rest of the eurozone, but at the expense of chronically weak domestic demand. If the eurozone were to unravel, Germany would experience a huge real appreciation, reversing almost overnight the competitiveness gains it has painfully ground out.
A move to issue eurozone bonds would not mean Germany sacrificing its own interests for the good of Europe. A country as export-dependent as Germany and as politically reliant on the EU cannot afford to be blasé about economic crises in neighbouring countries. Germany is going to have to show solidarity one way or another, so it should do so in a way that imposes the fewest costs on itself and maximises its political capital.
Simon Tilford is chief economist at the Centre for European Reform.
Twelve months ago it seemed inconceivable that any member of the EU could face a sovereign debt crisis. It would have been the stuff of fantasy to argue that Ireland or Austria could be among those at risk. Such an outcome is now well within the realms of possibility. If one country suffers a crisis, that will not be the end of it. It would almost certainly trigger a wave of crises, plunging the EU, and especially the eurozone, into turmoil. There is nothing inevitable about this. But a way out requires Germany to show more vision.
Some eurozone member-states – Italy and Spain – are vulnerable because they have lost so much competitiveness and investors are sceptical they will be able to regain it. Others – Austria and Belgium – have disproportionately large banking sectors and/or banks with huge exposures to crisis hit regions such as Eastern Europe. For their part, Ireland and Greece have lost competitiveness and have very exposed banking sectors.
What is the way forward? One option might be for governments to start issuing eurozone sovereign bonds, rather than their own national bonds. This would help address the problem of poor liquidity that has bedevilled many of the smaller eurozone financial markets. And it would reduce borrowing costs substantially for most eurozone countries.
There are, however, a number of obstacles. German borrowing costs would rise, as it shared its credibility with the rest of the eurozone. Such a move would arguably let profligate countries off the hook. And, it might be difficult to ensure budgetary discipline in the fiscally weaker countries. Curbing the budgetary autonomy of individual governments would require a far greater degree of political integration in the eurozone.
These concerns highlight what many economists have always believed to be the inherent contradiction in economic and monetary union: the absence of a political union. However, the German government’s objection to the pooling of bond issuance – that it would cost Germany too much money – is a parochial one. The alternatives threaten to cost Germany (and Europe) much more.
The German finance minister, Peer Steinbrück, has indicated that there may be a case for support for hard-hit members of the eurozone. But he is mistaken if he thinks a fiscal crisis in one member-state would be a cleansing experience, with the chastened country receiving a highly conditional IMF-type bail-out, and the others learning the lesson of their errant ways. First, one sovereign crisis would almost certainly lead to others. The direct costs of the bail-out could be surmountable in the case of an Ireland or a Greece, but would pose a much bigger challenge in the case of larger member-states. Second there would be indirect costs to the German economy, which is enormously dependent on exports to the rest of the eurozone. The last thing the German economy needs is a further collapse in external demand.
Nor is this the worst case scenario. If Italy or Spain defaulted on their sovereign debt – perhaps as a result of the rest of the eurozone failing to agree a bail-out or attaching excessively onerous terms to one – the repercussions for the eurozone could be dramatic. For inflexible and sizeable economies, it is far from clear that default within the currency union is more plausible than a default and a move to leave it. A member-state could decide that having defaulted (and in the process cut itself off from most sources of capital, at least for a time) it may as well devalue, which would at least help to restore competitiveness and get the economy growing again. If one country were to leave, pressure on others to follow suit would be intense.
Germany cannot afford to be sanguine about such an outcome. German companies have spent years holding down costs. The result has been improved competitiveness versus the rest of the eurozone, but at the expense of chronically weak domestic demand. If the eurozone were to unravel, Germany would experience a huge real appreciation, reversing almost overnight the competitiveness gains it has painfully ground out.
A move to issue eurozone bonds would not mean Germany sacrificing its own interests for the good of Europe. A country as export-dependent as Germany and as politically reliant on the EU cannot afford to be blasé about economic crises in neighbouring countries. Germany is going to have to show solidarity one way or another, so it should do so in a way that imposes the fewest costs on itself and maximises its political capital.
Simon Tilford is chief economist at the Centre for European Reform.
Friday, February 13, 2009
A thaw between Russia and the West?
by Charles Grant
After several years of chilly relations between Moscow and western capitals, a little warmth is detectable. At both the Davos Word Economic Forum in January, and the Munich Security Conference in February, the Russians’ exchanges with Americans and Europeans were fairly polite. Of course, this change in the political weather may prove to be short-lived. Indeed, some commentators argue that even if the style is softer, the substance of Russian foreign policy is as hard as ever (see Quentin Peel in the Financial Times, and a forthcoming CER policy brief by my colleague Bobo Lo). Thus in recent weeks Russia has announced plans for a new naval base in Abkhazia (which is legally part of Georgia) and encouraged Kyrgyzstan to close the American airbase at Manas.
But in international politics, style matters. Russia’s leaders know that their economy is being harder hit by the economic crisis than most others in Europe. One adviser to the Russian government recently said that a GDP shrinkage of 10 per cent could not be ruled out this year. Russia’s leaders know that the modernisation of their country will require western capital and technology. So perhaps it is not surprising that they have become less inclined to display the swaggering arrogance that was so visible at certain moments last year, and again during the gas crisis in January.
Even on substance, the Russians appear to be making an effort to be nice on a few issues. Russia’s threat to put short-range missiles in Kaliningrad – in response to American plans to install missile defence systems in the Czech Republic and Poland – has been withdrawn. And Russia is offering to help the US to get civilian supplies to its forces in Afghanistan. As Sergei Ivanov, Russia’s deputy prime minister, said in Munich: “Russia is ready to improve relations on a range of issues, including talks on reductions of nuclear arms.”
Ivanov was responding to the olive branch that Vice President Joe Biden brought to Munich. “On NATO-Russia relations, it is time to press the reset button,” said Biden. “Let’s co-operate on fighting the Taliban, securing nuclear facilities, and cutting numbers of nuclear weapons…of course we’ll disagree on some issues but we should work together where our interests coincide.”
Some of this new US approach to Russia merely reflects the realism that now dominates some – though not all – policy-making circles in Washington. Russia can help on several important issues, so it should be engaged, flattered and treated like the super-power that it wishes to be seen as. Iran is particularly important in shaping US policy on Russia. President Obama sees the challenge of Iran’s nuclear programme as one of his very top priorities. His administration thinks that Russia may be able to lean on Iran. Therefore it is willing to ‘give’ Russia some of the things it wants, like a review or postponement of plans for missile defence and NATO enlargement.
The Europeans are now willing to help the US on Iran. They share the American view that the best way of preventing Iran from pursuing its nuclear programme is to offer a combination of bigger incentives and stronger penalties. The bigger incentive is American engagement: Obama has indicated that he is ready to talk. The stronger penalties are more stringent economic sanctions against Iran. Germany was reluctant to consider these but Chancellor Angela Merkel indicated in Munich that she was ready for new sanctions.
Tougher sanctions are unlikely to achieve much unless Russia and China support them. Currently they do not, but American and European diplomats believe that if Russia moved, China could well follow. “We need Russia’s help on Iran, so that sanctions are effective,” said President Nicolas Sarkozy in Munich. “We don’t have much time, the recent Iranian satellite launch [which showed Iran’s mastery of some ballistic missile technologies] is very bad news. Russia must show whether it really wants peace [in the world], and whether it is prepared to behave like a great power.”
There are two big unknowns about Russia’s relationship with Iran. First, could Russia really influence the country, if it wanted to? Would the Iranians listen to Russia’s advice, or respond to pressure from its leaders? Second, if the answer to the first question is yes, does Russia really want Iran to abandon its nuclear programme? In public, of course, Russia’s leaders say they do not want Iran to develop nuclear weapons. And that may well be the case. But one may suppose that some Russians think that the Iranian nuclear programme suits them very well. It creates huge problems for the US, Russia’s principal strategic competitor, by amplifying tensions between America’s allies and radical regimes across the broader Middle East. The activities of pro-Iranian groups in Iraq, Lebanon and Palestine help to weaken American (and European) soft power in the region. And so long as senior western policy-makers regard Iran’s nuclear programme as a major geopolitical headache, they will see Russia as a potential source of assistance, and thus treat it with respect. And that suits Russia very nicely.
Russia will probably tell the US that it will try to help with Iran. But if the answer to either of those two questions turns out to be no, President Obama will be disappointed. Of course, there are many important strands to the US-Russia relationship other than Iran. But a falling out over the Iranian nuclear programme would put a chill back into the entire relationship.
Charles Grant is director of the Centre for European Reform.
After several years of chilly relations between Moscow and western capitals, a little warmth is detectable. At both the Davos Word Economic Forum in January, and the Munich Security Conference in February, the Russians’ exchanges with Americans and Europeans were fairly polite. Of course, this change in the political weather may prove to be short-lived. Indeed, some commentators argue that even if the style is softer, the substance of Russian foreign policy is as hard as ever (see Quentin Peel in the Financial Times, and a forthcoming CER policy brief by my colleague Bobo Lo). Thus in recent weeks Russia has announced plans for a new naval base in Abkhazia (which is legally part of Georgia) and encouraged Kyrgyzstan to close the American airbase at Manas.
But in international politics, style matters. Russia’s leaders know that their economy is being harder hit by the economic crisis than most others in Europe. One adviser to the Russian government recently said that a GDP shrinkage of 10 per cent could not be ruled out this year. Russia’s leaders know that the modernisation of their country will require western capital and technology. So perhaps it is not surprising that they have become less inclined to display the swaggering arrogance that was so visible at certain moments last year, and again during the gas crisis in January.
Even on substance, the Russians appear to be making an effort to be nice on a few issues. Russia’s threat to put short-range missiles in Kaliningrad – in response to American plans to install missile defence systems in the Czech Republic and Poland – has been withdrawn. And Russia is offering to help the US to get civilian supplies to its forces in Afghanistan. As Sergei Ivanov, Russia’s deputy prime minister, said in Munich: “Russia is ready to improve relations on a range of issues, including talks on reductions of nuclear arms.”
Ivanov was responding to the olive branch that Vice President Joe Biden brought to Munich. “On NATO-Russia relations, it is time to press the reset button,” said Biden. “Let’s co-operate on fighting the Taliban, securing nuclear facilities, and cutting numbers of nuclear weapons…of course we’ll disagree on some issues but we should work together where our interests coincide.”
Some of this new US approach to Russia merely reflects the realism that now dominates some – though not all – policy-making circles in Washington. Russia can help on several important issues, so it should be engaged, flattered and treated like the super-power that it wishes to be seen as. Iran is particularly important in shaping US policy on Russia. President Obama sees the challenge of Iran’s nuclear programme as one of his very top priorities. His administration thinks that Russia may be able to lean on Iran. Therefore it is willing to ‘give’ Russia some of the things it wants, like a review or postponement of plans for missile defence and NATO enlargement.
The Europeans are now willing to help the US on Iran. They share the American view that the best way of preventing Iran from pursuing its nuclear programme is to offer a combination of bigger incentives and stronger penalties. The bigger incentive is American engagement: Obama has indicated that he is ready to talk. The stronger penalties are more stringent economic sanctions against Iran. Germany was reluctant to consider these but Chancellor Angela Merkel indicated in Munich that she was ready for new sanctions.
Tougher sanctions are unlikely to achieve much unless Russia and China support them. Currently they do not, but American and European diplomats believe that if Russia moved, China could well follow. “We need Russia’s help on Iran, so that sanctions are effective,” said President Nicolas Sarkozy in Munich. “We don’t have much time, the recent Iranian satellite launch [which showed Iran’s mastery of some ballistic missile technologies] is very bad news. Russia must show whether it really wants peace [in the world], and whether it is prepared to behave like a great power.”
There are two big unknowns about Russia’s relationship with Iran. First, could Russia really influence the country, if it wanted to? Would the Iranians listen to Russia’s advice, or respond to pressure from its leaders? Second, if the answer to the first question is yes, does Russia really want Iran to abandon its nuclear programme? In public, of course, Russia’s leaders say they do not want Iran to develop nuclear weapons. And that may well be the case. But one may suppose that some Russians think that the Iranian nuclear programme suits them very well. It creates huge problems for the US, Russia’s principal strategic competitor, by amplifying tensions between America’s allies and radical regimes across the broader Middle East. The activities of pro-Iranian groups in Iraq, Lebanon and Palestine help to weaken American (and European) soft power in the region. And so long as senior western policy-makers regard Iran’s nuclear programme as a major geopolitical headache, they will see Russia as a potential source of assistance, and thus treat it with respect. And that suits Russia very nicely.
Russia will probably tell the US that it will try to help with Iran. But if the answer to either of those two questions turns out to be no, President Obama will be disappointed. Of course, there are many important strands to the US-Russia relationship other than Iran. But a falling out over the Iranian nuclear programme would put a chill back into the entire relationship.
Charles Grant is director of the Centre for European Reform.
Tuesday, February 10, 2009
Britain’s Schengen dilemma
by Hugo Brady
Britain supports more EU co-operation against terrorism, crime and illegal immigration and has done so for over a decade. This is because effective justice co-operation has clearly been in the national interest (as with the speedy capture and extradition of one of the 2005 London bombers from Italy to Britain). And because it fits in with British notions of preventative or ‘intelligence-led’ policing’. As one senior police officer at the London metropolitan police put it: “Our security starts not just at our own borders, but at the Greek islands or the Finnish frontier.”
Accordingly, Britain has invested heavily in the EU’s police office, Europol, and now directs much of its international efforts against crime and terrorism through the organisation. The EU’s database of asylum-applicants’ fingerprints helps the UK send back hundreds of would-be asylum seekers each year if they already have an outstanding application in another member-state. Mike Kennedy, a British crown prosecutor, served as the first president of the EU’s fledgling prosecution unit, Eurojust, from 2002 to 2007. And it was Britain which originally introduced the idea that the EU needed to work more with migrants’ home countries, international organisations and NGOs to tackle the root causes of illegal immigration more holistically.
This track record is doubly impressive when you consider that the UK -- and Ireland, with which it shares a land border -- remain outside of the Schengen area, the EU’s zone of passport-free travel. The two countries also have the right to opt-out of EU asylum and immigration legislation they dislike, a right which will be extended to cover all justice and security co-operation if the Lisbon treaty enters into force.
But Britain’s luck may be on the wane. The political and legal problems associated with its half-in, half-out status are growing. Although the country retains its own border controls, its police officers are allowed to follow criminal suspects into the Schengen area if they are on a surveillance mission. It has also been agreed that the UK’s national police computer can connect to the Schengen-area police database. But the Schengen countries object to either Britain or Ireland having access to valuable data on who is refused entry to the Schengen area, or to having a vote on the board of the EU’s border agency since they do not share the pain of maintaining a common EU border. When Britain tried to challenge this in 2008, the European court of justice (ECJ) ruled in favour of the Schengen countries.
The EU is currently developing a range of new databases related to either border control or law enforcement (examples include a biometric version of the Schengen database, a single visa database and a new version of the asylum database). Already, Britain has had to take a new court case to the ECJ to fight its exclusion from the single visa database, which UK police officers want to be able to access. Also, Britain would probably be excluded from future efforts by Schengen members to pool the costs of acquiring and using hugely expensive biometric technology needed for modern passports and visas.
Admittedly, British officials are unlikely to get their political masters to re-consider joining Schengen anytime soon. Indeed Britain is pushing ahead with its own so-called ‘e-borders’ project. This new border system will link all of the UK’s land, air and sea borders electronically and will be able to receive personal travel data from private operators. (Ireland has had to follow suit with a similar scheme.)
However, there are a number of smaller steps Britain could attempt to improve its negotiating position in future. First, Britain should push for its nominee to the next European Commission to be given the justice and security portfolio. Although it is a political long shot for a non-Schengen national, one key advantage is that Britain already has a prime candidate for the job: Baroness Cathy Ashton. Although Ashton is the current EU trade commissioner, she has been in Brussels less than a year and has excellent experience with EU policies in this area through her time as a UK justice minister. The move could be seen as symbolic of the desire of all parties for much closer co-operation between Britain and the Schengen area.
Second, the UK should unilaterally offer to share its own border information with the Schengen countries. This will help blunt hostility to future British attempts to work more closely with the Schengen area. Lastly, Britain should continue to give intelligence and money to the EU’s border agency and aim for its ‘e-borders’ technology to be as interoperable as possible with a similar system currently being discussed for the Schengen area. Such a move would make any formal change in relations between Britain and the Schengen area more plausible in the future.
Hugo Brady is a research fellow at the Centre for European Reform.
Britain supports more EU co-operation against terrorism, crime and illegal immigration and has done so for over a decade. This is because effective justice co-operation has clearly been in the national interest (as with the speedy capture and extradition of one of the 2005 London bombers from Italy to Britain). And because it fits in with British notions of preventative or ‘intelligence-led’ policing’. As one senior police officer at the London metropolitan police put it: “Our security starts not just at our own borders, but at the Greek islands or the Finnish frontier.”
Accordingly, Britain has invested heavily in the EU’s police office, Europol, and now directs much of its international efforts against crime and terrorism through the organisation. The EU’s database of asylum-applicants’ fingerprints helps the UK send back hundreds of would-be asylum seekers each year if they already have an outstanding application in another member-state. Mike Kennedy, a British crown prosecutor, served as the first president of the EU’s fledgling prosecution unit, Eurojust, from 2002 to 2007. And it was Britain which originally introduced the idea that the EU needed to work more with migrants’ home countries, international organisations and NGOs to tackle the root causes of illegal immigration more holistically.
This track record is doubly impressive when you consider that the UK -- and Ireland, with which it shares a land border -- remain outside of the Schengen area, the EU’s zone of passport-free travel. The two countries also have the right to opt-out of EU asylum and immigration legislation they dislike, a right which will be extended to cover all justice and security co-operation if the Lisbon treaty enters into force.
But Britain’s luck may be on the wane. The political and legal problems associated with its half-in, half-out status are growing. Although the country retains its own border controls, its police officers are allowed to follow criminal suspects into the Schengen area if they are on a surveillance mission. It has also been agreed that the UK’s national police computer can connect to the Schengen-area police database. But the Schengen countries object to either Britain or Ireland having access to valuable data on who is refused entry to the Schengen area, or to having a vote on the board of the EU’s border agency since they do not share the pain of maintaining a common EU border. When Britain tried to challenge this in 2008, the European court of justice (ECJ) ruled in favour of the Schengen countries.
The EU is currently developing a range of new databases related to either border control or law enforcement (examples include a biometric version of the Schengen database, a single visa database and a new version of the asylum database). Already, Britain has had to take a new court case to the ECJ to fight its exclusion from the single visa database, which UK police officers want to be able to access. Also, Britain would probably be excluded from future efforts by Schengen members to pool the costs of acquiring and using hugely expensive biometric technology needed for modern passports and visas.
Admittedly, British officials are unlikely to get their political masters to re-consider joining Schengen anytime soon. Indeed Britain is pushing ahead with its own so-called ‘e-borders’ project. This new border system will link all of the UK’s land, air and sea borders electronically and will be able to receive personal travel data from private operators. (Ireland has had to follow suit with a similar scheme.)
However, there are a number of smaller steps Britain could attempt to improve its negotiating position in future. First, Britain should push for its nominee to the next European Commission to be given the justice and security portfolio. Although it is a political long shot for a non-Schengen national, one key advantage is that Britain already has a prime candidate for the job: Baroness Cathy Ashton. Although Ashton is the current EU trade commissioner, she has been in Brussels less than a year and has excellent experience with EU policies in this area through her time as a UK justice minister. The move could be seen as symbolic of the desire of all parties for much closer co-operation between Britain and the Schengen area.
Second, the UK should unilaterally offer to share its own border information with the Schengen countries. This will help blunt hostility to future British attempts to work more closely with the Schengen area. Lastly, Britain should continue to give intelligence and money to the EU’s border agency and aim for its ‘e-borders’ technology to be as interoperable as possible with a similar system currently being discussed for the Schengen area. Such a move would make any formal change in relations between Britain and the Schengen area more plausible in the future.
Hugo Brady is a research fellow at the Centre for European Reform.
Thursday, January 29, 2009
The French, the European Commission and the Tories
by Charles Grant
One Frenchman, Jean Monnet, invented the European Commission, and another, Jacques Delors, was its greatest president. Yet the French are increasingly hostile to this Brussels institution. Those who spent time in France during the 2005 referendum on the EU constitutional treaty will remember that the No campaign was fired up by the belief that the Commission had become too ‘Anglo-Saxon’ (ie, economically liberal). Since then anti-Commission sentiment seems to have grown in France, at least to judge from the discussion at the recent ‘Franco-British colloque’, an annual gathering of politicians, journalists and business leaders from Britain and France.
Speaking at the opening dinner at this year’s meeting, in Versailles, Prime Minister François Fillon complained that the Commission had failed to lead during the financial crisis. During the off-the-record sessions that followed, French politicians and chief executives repeatedly attacked the Commission for its alleged weakness and ‘ultra-liberal’ economic philosophy. To give an example, the chairman of one of France’s biggest manufacturing companies was asked if the EU should take on a new role in regulating banking. “Absolutely not – because if the EU applies rules, the Commission will write them,” he said. “And the Commission will write the rules that the British government tells it to write. So we should keep the Commission out of banking regulation and give the job to the European Central Bank.” That comment is not particularly logical: even if the ECB were handed responsibility for supervising banks, the rules would still be drawn up by the European Commission, Council of Ministers and Parliament. But it does reflect the mood in the French establishment.
Several factors explain this hostility. The French are right about the Commission’s economic philosophy. The top jobs – President José Manuel Barroso, Competition Commissioner Neelie Kroes, Single Market Commissioner Charlie McCreevy and (until recently) Trade Commissioner Peter Mandelson – are or have been held by liberals. The same applies to many of the key officials. Thus at a recent CER seminar in Brussels on sovereign wealth funds, the director-general for trade, David O’Sullivan (an Irishman) argued that the EU should not try to regulate these funds. Instead it should welcome sovereign wealth funds that wished to invest in the EU. On a broad range of policy issues, ranging from state aid to the liberalisation of energy markets to France’s bid to stop foreigners investing in ‘strategic industries’, Paris has been in conflict with Brussels.
The French are also right that the Commission is weaker than it was in the good old days of Jacques Delors. It was rather slow off the mark to respond to the beginnings of the financial crisis, last autumn, though of course it has no sway over monetary or fiscal policy. Barroso lacks Delors’s empire-building ambition, and he is sometimes reluctant to get into fights with big countries (because he is so willing to be reappointed, some say). But although I am an admirer of Jacques Delors, I think that if Barroso tried to behave like him he would get nowhere. The member-states are much less willing than they were 20 years ago to tolerate an ambitious, agenda-setting Commission. They have got the more modest Commission they wanted. And to be fair to Barroso and his colleagues, it is difficult to lead the EU when – as in the second half of 2008 – a man as hyper-active as President Sarkozy holds the presidency. Sarkozy’s style was to sideline EU institutions. In fact by the end of 2008 the Commission had made something of a comeback, with its plan for an EU-wide economic stimulus, endorsed by the December European Council.
When the French complain that the Commission is a) too liberal and b) too weak, they should note the risk of a contradiction. A mightier Commission that, for example, pushed through a radical reform of the Common Agricultural Policy (CAP) might not be to Paris’s taste.
A third reason why the French have turned against the Commission is, I think, wounded national pride. France used to dominate the institution. Indeed, as recently as the 1990s, French was the predominant language within it. In the current Commission, France did not get one of the top jobs. Five years ago President Chirac sent Jacques Barrot, a middleweight politician, to Brussels, and he was given the relatively unimportant job of transport (though recently he moved to more important job of justice and home affairs). The more the French believe they have lost control of EU institutions, the less they like them.
Which is why the make-up of the new Commission is so important. Normally the commissioners are appointed during the summer months, after the June European Council decides on the president. This year the appointments may be postponed until the end of the year, to give Ireland the chance to vote Yes to the Lisbon treaty in the autumn (unless the Lisbon treaty comes into effect, the number of commissioners appointed must – under existing Nice treaty rules – be less than the number of member-states).
France is, understandably, determined to have one of the top economic jobs in the Commission. So is the UK. Barroso is likely to be reappointed but the British should not assume that economic liberals will get all the top jobs. One rumour in Paris is that Michel Barnier, currently agriculture minister, will be the French appointment. In his favour, he is a convinced European and has a broad range of experience, including stints as foreign minister and commissioner for regional policy. But his critics complain about his self-important manner and point out that he defends the CAP more staunchly than many other French politicians.
In Britain, of course, many people – including some Conservative politicians – still assume that the Commission is committed to tighter regulation and interventionist or left-of-centre economic policies. Interestingly, at the colloque in Versailles, half a dozen senior Tories (both members of the shadow cabinet and policy advisers) were listening to the debates. They said very little when the French attacked the Commission. That is not surprising: they would be uncomfortable either supporting the French criticism of economic liberalism, or defending the powers of the Commission. But I hope those Conservatives listened carefully, and that they may have seen that the Commission is, on many policy issues, a potential ally for the British.
Charles Grant is director of the Centre for European Reform.
One Frenchman, Jean Monnet, invented the European Commission, and another, Jacques Delors, was its greatest president. Yet the French are increasingly hostile to this Brussels institution. Those who spent time in France during the 2005 referendum on the EU constitutional treaty will remember that the No campaign was fired up by the belief that the Commission had become too ‘Anglo-Saxon’ (ie, economically liberal). Since then anti-Commission sentiment seems to have grown in France, at least to judge from the discussion at the recent ‘Franco-British colloque’, an annual gathering of politicians, journalists and business leaders from Britain and France.
Speaking at the opening dinner at this year’s meeting, in Versailles, Prime Minister François Fillon complained that the Commission had failed to lead during the financial crisis. During the off-the-record sessions that followed, French politicians and chief executives repeatedly attacked the Commission for its alleged weakness and ‘ultra-liberal’ economic philosophy. To give an example, the chairman of one of France’s biggest manufacturing companies was asked if the EU should take on a new role in regulating banking. “Absolutely not – because if the EU applies rules, the Commission will write them,” he said. “And the Commission will write the rules that the British government tells it to write. So we should keep the Commission out of banking regulation and give the job to the European Central Bank.” That comment is not particularly logical: even if the ECB were handed responsibility for supervising banks, the rules would still be drawn up by the European Commission, Council of Ministers and Parliament. But it does reflect the mood in the French establishment.
Several factors explain this hostility. The French are right about the Commission’s economic philosophy. The top jobs – President José Manuel Barroso, Competition Commissioner Neelie Kroes, Single Market Commissioner Charlie McCreevy and (until recently) Trade Commissioner Peter Mandelson – are or have been held by liberals. The same applies to many of the key officials. Thus at a recent CER seminar in Brussels on sovereign wealth funds, the director-general for trade, David O’Sullivan (an Irishman) argued that the EU should not try to regulate these funds. Instead it should welcome sovereign wealth funds that wished to invest in the EU. On a broad range of policy issues, ranging from state aid to the liberalisation of energy markets to France’s bid to stop foreigners investing in ‘strategic industries’, Paris has been in conflict with Brussels.
The French are also right that the Commission is weaker than it was in the good old days of Jacques Delors. It was rather slow off the mark to respond to the beginnings of the financial crisis, last autumn, though of course it has no sway over monetary or fiscal policy. Barroso lacks Delors’s empire-building ambition, and he is sometimes reluctant to get into fights with big countries (because he is so willing to be reappointed, some say). But although I am an admirer of Jacques Delors, I think that if Barroso tried to behave like him he would get nowhere. The member-states are much less willing than they were 20 years ago to tolerate an ambitious, agenda-setting Commission. They have got the more modest Commission they wanted. And to be fair to Barroso and his colleagues, it is difficult to lead the EU when – as in the second half of 2008 – a man as hyper-active as President Sarkozy holds the presidency. Sarkozy’s style was to sideline EU institutions. In fact by the end of 2008 the Commission had made something of a comeback, with its plan for an EU-wide economic stimulus, endorsed by the December European Council.
When the French complain that the Commission is a) too liberal and b) too weak, they should note the risk of a contradiction. A mightier Commission that, for example, pushed through a radical reform of the Common Agricultural Policy (CAP) might not be to Paris’s taste.
A third reason why the French have turned against the Commission is, I think, wounded national pride. France used to dominate the institution. Indeed, as recently as the 1990s, French was the predominant language within it. In the current Commission, France did not get one of the top jobs. Five years ago President Chirac sent Jacques Barrot, a middleweight politician, to Brussels, and he was given the relatively unimportant job of transport (though recently he moved to more important job of justice and home affairs). The more the French believe they have lost control of EU institutions, the less they like them.
Which is why the make-up of the new Commission is so important. Normally the commissioners are appointed during the summer months, after the June European Council decides on the president. This year the appointments may be postponed until the end of the year, to give Ireland the chance to vote Yes to the Lisbon treaty in the autumn (unless the Lisbon treaty comes into effect, the number of commissioners appointed must – under existing Nice treaty rules – be less than the number of member-states).
France is, understandably, determined to have one of the top economic jobs in the Commission. So is the UK. Barroso is likely to be reappointed but the British should not assume that economic liberals will get all the top jobs. One rumour in Paris is that Michel Barnier, currently agriculture minister, will be the French appointment. In his favour, he is a convinced European and has a broad range of experience, including stints as foreign minister and commissioner for regional policy. But his critics complain about his self-important manner and point out that he defends the CAP more staunchly than many other French politicians.
In Britain, of course, many people – including some Conservative politicians – still assume that the Commission is committed to tighter regulation and interventionist or left-of-centre economic policies. Interestingly, at the colloque in Versailles, half a dozen senior Tories (both members of the shadow cabinet and policy advisers) were listening to the debates. They said very little when the French attacked the Commission. That is not surprising: they would be uncomfortable either supporting the French criticism of economic liberalism, or defending the powers of the Commission. But I hope those Conservatives listened carefully, and that they may have seen that the Commission is, on many policy issues, a potential ally for the British.
Charles Grant is director of the Centre for European Reform.
Friday, January 23, 2009
After the gas conflict
by Katinka Barysch
On January 20th, Russian gas started flowing again through Ukraine, after a two-week shut-down that had left people in South East Europe freezing and factories idle. The relief across Europe was palpable but the confusion about what happened is still there.
First, both Russia and Ukraine said that the dispute was about money that Naftogaz, the Ukrainian gas company, owed to Russia’s monopoly Gazprom for last year’s deliveries. Then it was about the price the Ukrainians should pay in 2009 for the Russian (or Turkmen) gas that it uses domestically. Then Ukraine tore up a contract about gas transport to Europe and threw transit fees into the negotiations too. If this was not complicated enough, the dispute then centred on ‘technical’ gas that is needed to keep up volumes in Ukraine’s pipelines. When a handful of European gas companies offered to buy this technical gas in order to get things moving again, the Russians said that this wasn’t really the problem. At one point, Russia claimed that it was sending gas to Ukraine but Ukraine refused to accept it. Ukraine said the gas was coming down the wrong pipe and could only be delivered to Europe if it shut off supplies to Ukrainian factories and households. A group of observers cobbled together by the EU to find out whether gas was actually flowing from Russia to Ukraine never got down to work. The role of RosUkrEnergo, the lucrative trading company at the heart of the Russian-Ukrainian gas deliveries was, as always, unclear. Add the frosty political climate between an angry and increasingly desperate Russia and a divided and even more desperate Ukraine, and the situation is almost impossible for outsiders to understand.
Rumours and conspiracy theories proliferated. PR efforts were ramped up. Insults flew. Various ‘insiders’ offered diametrically opposed accounts of what was happening. The overall impression was that neither the Russians nor the Ukrainians wanted the EU to understand what the stand-off was about. If the parties involved prefer confusion and obscurity, any attempt at mediation – as launched by the EU, numerous European governments and the gas companies in the EU – is bound to fail.
In theory, the conflict has now been resolved. Prime Ministers Putin and Tymoshenko signed a deal on January 19th that is said to be very similar to an understanding they had already reached back in October (details of supply contracts are not usually published, not even those between Gazprom and EU energy companies). According to press reports, the new agreement runs for ten years, and therefore eliminates the haggling that has become an annual ritual since the early 1990s. As from next year, Ukraine will no longer receive subsidised gas from Russia but pay a price that is linked to the one of fuel oil, like all companies in the EU do. In turn, Gazprom will no longer get a discount on the transit fees it will pay Ukraine for shipping more than 120 billion cubic metres gas westwards every year. Under such a deal, there would be no place for shady middlemen – although RosUkrEnergo is reportedly moving into Ukraine’s domestic gas trade.
Does this mean that a repeat of the gas war is unlikely or even impossible? It is hard to say. The EU should not speculate but recount those things it knows for sure: first, both Russia and Ukraine considered it more important to fight for their narrow interests in this energy dispute than to defend their reputations as reliable supplier and transit state, respectively. This is deeply worrying. Second, Russia will not break up Gazprom. Ukraine has rejected the idea of running its pipeline system as a three-way consortium with Russian and European involvement. Monopolies have a tendency to become opaque and greedy unless properly regulated and monitored. Neither Russia nor Ukraine seem keen on doing this. An unpublished contract may or may not be enough to ensure the reliability of Gazprom and Naftogaz (and any intermediary that may yet follow RosUkrEnergo). Third, Russian gas accounts for a quarter of total EU consumption, and 80 per cent of this comes through Ukraine. For some EU countries the dependency is 100 per cent. Even if the supplier was Norway and the transit country Switzerland, this would be an uncomfortable position to be in.
To increase their energy security in the face of such uncertainty, the Europeans do not need to do anything they are not doing – or planning to do – already. The EU has already agreed targets for using more renewables and saving energy (although the latter is non-binding). A new liberalisation directive – if properly enforced – should help to build a more integrated EU energy market. The objective of constructing more interconnections between national gas markets has been there for years. A new initiative to link South East European gas markets (called NETS: new European transmission system) looks a little more concrete, and could get a boost since South East Europe was the region worst affected by the cut-off. On January 26th and 27th, the Hungarians are hosting a ‘Nabucco summit’ for consortium members and potential suppliers for this planned pipeline through Turkey and the Balkans. The project could do with a political push, as well as fresh ideas for financing it. As for its potential supplies, the EU is stepping up efforts to get a big contract with Azerbaijan. And two of the Nabucco consortium members, Austria’s OMV and Germany’s RWE, announced in December that they are dusting off plans to build a trans-Caspian pipeline to get Turkmen gas into Nabucco.
At their spring summit in March, EU leaders will discuss the Commission’s ‘strategic energy review’ (published in November, 2008). It contains useful ideas, for example a proposal to pool EU resources for securing contracts with outside suppliers such as Azerbaijan and Turkmenistan. EU leaders now need to focus on what they can do through concrete steps and investments to increase the EU’s energy security, not speculate about whether Russia and Ukraine may stick to their latest deal.
Katinka Barysch is deputy director of the Centre for European Reform.
On January 20th, Russian gas started flowing again through Ukraine, after a two-week shut-down that had left people in South East Europe freezing and factories idle. The relief across Europe was palpable but the confusion about what happened is still there.
First, both Russia and Ukraine said that the dispute was about money that Naftogaz, the Ukrainian gas company, owed to Russia’s monopoly Gazprom for last year’s deliveries. Then it was about the price the Ukrainians should pay in 2009 for the Russian (or Turkmen) gas that it uses domestically. Then Ukraine tore up a contract about gas transport to Europe and threw transit fees into the negotiations too. If this was not complicated enough, the dispute then centred on ‘technical’ gas that is needed to keep up volumes in Ukraine’s pipelines. When a handful of European gas companies offered to buy this technical gas in order to get things moving again, the Russians said that this wasn’t really the problem. At one point, Russia claimed that it was sending gas to Ukraine but Ukraine refused to accept it. Ukraine said the gas was coming down the wrong pipe and could only be delivered to Europe if it shut off supplies to Ukrainian factories and households. A group of observers cobbled together by the EU to find out whether gas was actually flowing from Russia to Ukraine never got down to work. The role of RosUkrEnergo, the lucrative trading company at the heart of the Russian-Ukrainian gas deliveries was, as always, unclear. Add the frosty political climate between an angry and increasingly desperate Russia and a divided and even more desperate Ukraine, and the situation is almost impossible for outsiders to understand.
Rumours and conspiracy theories proliferated. PR efforts were ramped up. Insults flew. Various ‘insiders’ offered diametrically opposed accounts of what was happening. The overall impression was that neither the Russians nor the Ukrainians wanted the EU to understand what the stand-off was about. If the parties involved prefer confusion and obscurity, any attempt at mediation – as launched by the EU, numerous European governments and the gas companies in the EU – is bound to fail.
In theory, the conflict has now been resolved. Prime Ministers Putin and Tymoshenko signed a deal on January 19th that is said to be very similar to an understanding they had already reached back in October (details of supply contracts are not usually published, not even those between Gazprom and EU energy companies). According to press reports, the new agreement runs for ten years, and therefore eliminates the haggling that has become an annual ritual since the early 1990s. As from next year, Ukraine will no longer receive subsidised gas from Russia but pay a price that is linked to the one of fuel oil, like all companies in the EU do. In turn, Gazprom will no longer get a discount on the transit fees it will pay Ukraine for shipping more than 120 billion cubic metres gas westwards every year. Under such a deal, there would be no place for shady middlemen – although RosUkrEnergo is reportedly moving into Ukraine’s domestic gas trade.
Does this mean that a repeat of the gas war is unlikely or even impossible? It is hard to say. The EU should not speculate but recount those things it knows for sure: first, both Russia and Ukraine considered it more important to fight for their narrow interests in this energy dispute than to defend their reputations as reliable supplier and transit state, respectively. This is deeply worrying. Second, Russia will not break up Gazprom. Ukraine has rejected the idea of running its pipeline system as a three-way consortium with Russian and European involvement. Monopolies have a tendency to become opaque and greedy unless properly regulated and monitored. Neither Russia nor Ukraine seem keen on doing this. An unpublished contract may or may not be enough to ensure the reliability of Gazprom and Naftogaz (and any intermediary that may yet follow RosUkrEnergo). Third, Russian gas accounts for a quarter of total EU consumption, and 80 per cent of this comes through Ukraine. For some EU countries the dependency is 100 per cent. Even if the supplier was Norway and the transit country Switzerland, this would be an uncomfortable position to be in.
To increase their energy security in the face of such uncertainty, the Europeans do not need to do anything they are not doing – or planning to do – already. The EU has already agreed targets for using more renewables and saving energy (although the latter is non-binding). A new liberalisation directive – if properly enforced – should help to build a more integrated EU energy market. The objective of constructing more interconnections between national gas markets has been there for years. A new initiative to link South East European gas markets (called NETS: new European transmission system) looks a little more concrete, and could get a boost since South East Europe was the region worst affected by the cut-off. On January 26th and 27th, the Hungarians are hosting a ‘Nabucco summit’ for consortium members and potential suppliers for this planned pipeline through Turkey and the Balkans. The project could do with a political push, as well as fresh ideas for financing it. As for its potential supplies, the EU is stepping up efforts to get a big contract with Azerbaijan. And two of the Nabucco consortium members, Austria’s OMV and Germany’s RWE, announced in December that they are dusting off plans to build a trans-Caspian pipeline to get Turkmen gas into Nabucco.
At their spring summit in March, EU leaders will discuss the Commission’s ‘strategic energy review’ (published in November, 2008). It contains useful ideas, for example a proposal to pool EU resources for securing contracts with outside suppliers such as Azerbaijan and Turkmenistan. EU leaders now need to focus on what they can do through concrete steps and investments to increase the EU’s energy security, not speculate about whether Russia and Ukraine may stick to their latest deal.
Katinka Barysch is deputy director of the Centre for European Reform.
Thursday, January 08, 2009
Gaza, Europe and empty gestures
by Clara Marina O'Donnell
'We're fed up with empty gestures', the Israeli prime minister told a high level delegation from the EU. Several foreign ministers and EU officials had come to the Middle East to try to help end the war raging in Gaza between Israel and Hamas, which has killed over 700 Palestinians and 10 Israelis in the twelve days since it started. The EU has been calling for a ceasefire and the reopening of Gaza’s borders.
Ehud Olmert’s chastising comments, reported by the Jerusalem Post on January 6th, summarised neatly the difficulties the EU faces in trying to help Israel ensure its security while alleviating the plight of Palestinians. Many Israeli leaders believe the EU does not have much to offer to improve their security and therefore pay little attention to the EU in times of crisis. But the EU should not be seen as irrelevant.
It will never have the leverage of the US (nor should it aspire to), but it does have stakes in the region. Among other things, the EU is Israel’s main trading partner and the largest provider of financial assistance to the Palestinians. In order to have more leverage in peace talks and mediation, the EU should play a stronger role in providing security for both sides.
So far, European countries have shied away from offering any serious commitments to improve the security between Israel and its neighbours. In recent years Europe has sent various missions to the region as part of monitoring or peacekeeping operations. The EU has a monitoring mission at the Rafah crossing (EUBAM, which has been dormant since Hamas has been in sole control of Gaza) and Europe has contributed the bulk of the troops to UNIFIL, the UN’s mission which supervises peace in South Lebanon. But both deployments have limited mandates. They focus on monitoring but avoid engagement with hostile forces.
As a result, Israel underlines the limitations of UNIFIL by pointing to Hezbollah’s rearming, which has been taking place unhindered since the end of the Israel-Lebanon war of 2006. And Israel has always been dissatisfied with EUBAM: it would like to see EU monitors intercept weapon smugglers, if necessary with the use of force. But the EU has been reluctant to take on such a role. Unsurprisingly, Israel hasn’t considered the offer to reinstate EUBAM as a deal clincher in the EU’s current efforts to promote a ceasefire in Gaza. In the midst of heavy fighting, it doesn’t seem particularly useful to offer this small scale monitoring mission (which, in addition, in order to function needs non-Hamas Palestinian officials, who all fled Gaza in June 2007).
European countries are understandably reluctant to send their troops to troublespots in this politically sensitive region. But the EU should be less risk averse and offer troops when monitoring missions are a necessary component of peace-building measures supported by local parties. The EU might not only help bring stability and give Palestinian civilians the impression that there is progress; it would also be taken more seriously by Israel, and subsequently acquire stronger leverage in the peace process.
At the time of writing, ideas were being discussed at the UN to end the conflict in Gaza. Amongst other initiatives, a French-Egyptian proposal would open the borders of Gaza and strengthen measures to combat the smuggling of weapons into the territory, including through the presence of an international force. Unknowns in the proposals still need to be addressed, not least how to secure the necessary consent of Hamas. But the EU should offer to take part in any international monitoring force, and support a strong mandate for that force. Israel will agree to end its military offensive and it will consider opening the borders to Gaza only if an international force is capable of genuinely limiting weapons smuggling. If Israel feels the force is underperforming it will only be a matter of time until Tel Aviv undertakes another military operation in Gaza.
An end to the violence and to Gaza’s economic isolation will be only two of the many difficult steps needed to reverse the deterioration of the last two years. In the long term Palestinian rockets and weapons smuggling can only be stopped if Hamas and other Palestinian factions lose the desire to fight. In order to achieve this Hamas will need to be engaged by Israel and the wider international community. But in the short term, by offering serious monitors, at least the EU can make a contribution to stabilising the conflict in Gaza, and can hope to reverse the perception of its empty gestures.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
'We're fed up with empty gestures', the Israeli prime minister told a high level delegation from the EU. Several foreign ministers and EU officials had come to the Middle East to try to help end the war raging in Gaza between Israel and Hamas, which has killed over 700 Palestinians and 10 Israelis in the twelve days since it started. The EU has been calling for a ceasefire and the reopening of Gaza’s borders.
Ehud Olmert’s chastising comments, reported by the Jerusalem Post on January 6th, summarised neatly the difficulties the EU faces in trying to help Israel ensure its security while alleviating the plight of Palestinians. Many Israeli leaders believe the EU does not have much to offer to improve their security and therefore pay little attention to the EU in times of crisis. But the EU should not be seen as irrelevant.
It will never have the leverage of the US (nor should it aspire to), but it does have stakes in the region. Among other things, the EU is Israel’s main trading partner and the largest provider of financial assistance to the Palestinians. In order to have more leverage in peace talks and mediation, the EU should play a stronger role in providing security for both sides.
So far, European countries have shied away from offering any serious commitments to improve the security between Israel and its neighbours. In recent years Europe has sent various missions to the region as part of monitoring or peacekeeping operations. The EU has a monitoring mission at the Rafah crossing (EUBAM, which has been dormant since Hamas has been in sole control of Gaza) and Europe has contributed the bulk of the troops to UNIFIL, the UN’s mission which supervises peace in South Lebanon. But both deployments have limited mandates. They focus on monitoring but avoid engagement with hostile forces.
As a result, Israel underlines the limitations of UNIFIL by pointing to Hezbollah’s rearming, which has been taking place unhindered since the end of the Israel-Lebanon war of 2006. And Israel has always been dissatisfied with EUBAM: it would like to see EU monitors intercept weapon smugglers, if necessary with the use of force. But the EU has been reluctant to take on such a role. Unsurprisingly, Israel hasn’t considered the offer to reinstate EUBAM as a deal clincher in the EU’s current efforts to promote a ceasefire in Gaza. In the midst of heavy fighting, it doesn’t seem particularly useful to offer this small scale monitoring mission (which, in addition, in order to function needs non-Hamas Palestinian officials, who all fled Gaza in June 2007).
European countries are understandably reluctant to send their troops to troublespots in this politically sensitive region. But the EU should be less risk averse and offer troops when monitoring missions are a necessary component of peace-building measures supported by local parties. The EU might not only help bring stability and give Palestinian civilians the impression that there is progress; it would also be taken more seriously by Israel, and subsequently acquire stronger leverage in the peace process.
At the time of writing, ideas were being discussed at the UN to end the conflict in Gaza. Amongst other initiatives, a French-Egyptian proposal would open the borders of Gaza and strengthen measures to combat the smuggling of weapons into the territory, including through the presence of an international force. Unknowns in the proposals still need to be addressed, not least how to secure the necessary consent of Hamas. But the EU should offer to take part in any international monitoring force, and support a strong mandate for that force. Israel will agree to end its military offensive and it will consider opening the borders to Gaza only if an international force is capable of genuinely limiting weapons smuggling. If Israel feels the force is underperforming it will only be a matter of time until Tel Aviv undertakes another military operation in Gaza.
An end to the violence and to Gaza’s economic isolation will be only two of the many difficult steps needed to reverse the deterioration of the last two years. In the long term Palestinian rockets and weapons smuggling can only be stopped if Hamas and other Palestinian factions lose the desire to fight. In order to achieve this Hamas will need to be engaged by Israel and the wider international community. But in the short term, by offering serious monitors, at least the EU can make a contribution to stabilising the conflict in Gaza, and can hope to reverse the perception of its empty gestures.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
Wednesday, January 07, 2009
Just another gas crisis?
by Katinka Barysch
Russia has cut off the gas flowing to and through Ukraine – again. Like in January 2006, Moscow and Kyiv are blaming each other, while a convoluted mix of political intrigues, shady middlemen and broken contracts makes it almost impossible for outsiders to ascertain which side is at fault. But the current interruption in gas supplies to Europe is different in many ways from that three years ago.
First, the interruption is more severe but some EU countries appear to be better prepared. In January 2006, when Gazprom first turned off the tap over a pricing dispute with Kyiv, the volumes affected were much smaller. On January 7th 2009, Russian gas supplies through Ukraine (which account for over 80 per cent of all Russian gas sales to Europe) stopped altogether. The bigger EU countries, such as Germany, Italy and France, have plenty of gas in storage and they can use more Norwegian or Algerian or domestic gas instead. However, some of the newer member-states are not so lucky. Bulgaria, Slovakia, Hungary and Poland, with little storage or access to alternative suppliers will have to ration gas. A spike in energy prices is the last thing Europe’s struggling industries need at the moment. Calls for European ‘energy solidarity’ will suddenly acquire a new meaning.
Second, the political dynamics are very different. In 2006, when memories of the orange revolution were still rather fresh, many Europeans were quick to blame Russia for using energy to punish pro-western Ukraine. Now Ukraine’s squabbling, self-serving leaders attract little sympathy. The fact that Ukraine does not have a functioning government mattered less as long as its economy was doing well. But now it has become one of the main obstacles to resolving the crisis.
Russia has considerably beefed up its PR efforts, having warned of potential supply cuts weeks ago (and blaming the Ukrainians in advance). But the fact that some smart people speculate whether Russia has deliberately caused the gas crisis to destabilise Ukrainian politics or to push up global energy prices shows just how little credibility the country has, especially after the Georgia war. Both Moscow and Kyiv had reassured the Europeans numerous times that gas transit to the EU would not be affected. Now half of Europe is living of its own gas storage or switching to fuel oil. Gazprom’s mantra that it, really is, a reliable supplier sounds hollow. But so does Ukraine’s claim to be the innocent victim of neo-imperialist policies.
Third, the stakes for both Ukraine and Russia are a lot higher. In 2006, Ukraine’s economy grew by more than 7 per cent despite higher gas prices, as exports of steel and chemicals boomed. At the end of 2008, Ukraine’s economy was in meltdown, with industrial production down 30 per cent year on year in November. The Ukrainian currency has plummeted 40 per cent against the dollar since September. So paying for imports – including energy – would be a lot harder even if gas prices stayed the same. The IMF, which has pledged $16 billion to shore up the Ukrainian economy, will demand that the government phase out energy subsidies to keep the budget deficit under control. That means that more of any gas price increase will have to be passed on to households. With inflation already running at 20 per cent and presidential elections coming up next year, Ukraine simply cannot afford a rise to $450 per 1,000 cubic metres, as requested by Gazprom after the negotiations broke down.
Russia is also in a very different position. Its external surplus and reserves are dwindling. Gazprom, like most Russian companies, is seriously short of cash. Ukraine buys more than 40 billion cubic metres of gas from Russia a year, which makes it one of Gazprom’s bigger customers. So the price of these sales does matter for Russia. However, the costs of a sustained interruption of gas flows would be immeasurably higher. Not only because Gazprom could face an avalanche of law suits from European companies if supply contracts were breached, but also because Gazprom could lose its standing in its biggest and most lucrative market. That is already happening.
The final, and perhaps most important, difference between the 2006 and today is that Europe is more likely to draw the right conclusions. After the 2006 cut-off, the Europeans panicked – and then the EU proceeded to lecture Russia on how to run its energy sector and export business while individual EU countries rushed to sign long-term bilateral agreements with Gazprom to secure their own supplies. This did not work. Today, the Europeans will (hopefully) focus on what they can do together to increase their energy security: build a functioning internal gas market, invest more in gas storage and focus on alternative sources of gas, for example from the Caspian via Nabucco and in the form of LNG from Northern Africa and the Middle East. They also need to reinforce their efforts to achieve their 20 per cent energy savings target and explore alternative sources of power, namely renewables and nuclear. If the gas standoff reminds the Europeans of the importance of such measures, Russia and Ukraine will have done the EU a favour.
Download the CER’s book ‘Pipelines, politics and power: The future of EU-Russia energy relations’ for free http://www.cer.org.uk/pdf/rp_851.pdf
Katinka Barysch is deputy director of the Centre for European Reform.
Russia has cut off the gas flowing to and through Ukraine – again. Like in January 2006, Moscow and Kyiv are blaming each other, while a convoluted mix of political intrigues, shady middlemen and broken contracts makes it almost impossible for outsiders to ascertain which side is at fault. But the current interruption in gas supplies to Europe is different in many ways from that three years ago.
First, the interruption is more severe but some EU countries appear to be better prepared. In January 2006, when Gazprom first turned off the tap over a pricing dispute with Kyiv, the volumes affected were much smaller. On January 7th 2009, Russian gas supplies through Ukraine (which account for over 80 per cent of all Russian gas sales to Europe) stopped altogether. The bigger EU countries, such as Germany, Italy and France, have plenty of gas in storage and they can use more Norwegian or Algerian or domestic gas instead. However, some of the newer member-states are not so lucky. Bulgaria, Slovakia, Hungary and Poland, with little storage or access to alternative suppliers will have to ration gas. A spike in energy prices is the last thing Europe’s struggling industries need at the moment. Calls for European ‘energy solidarity’ will suddenly acquire a new meaning.
Second, the political dynamics are very different. In 2006, when memories of the orange revolution were still rather fresh, many Europeans were quick to blame Russia for using energy to punish pro-western Ukraine. Now Ukraine’s squabbling, self-serving leaders attract little sympathy. The fact that Ukraine does not have a functioning government mattered less as long as its economy was doing well. But now it has become one of the main obstacles to resolving the crisis.
Russia has considerably beefed up its PR efforts, having warned of potential supply cuts weeks ago (and blaming the Ukrainians in advance). But the fact that some smart people speculate whether Russia has deliberately caused the gas crisis to destabilise Ukrainian politics or to push up global energy prices shows just how little credibility the country has, especially after the Georgia war. Both Moscow and Kyiv had reassured the Europeans numerous times that gas transit to the EU would not be affected. Now half of Europe is living of its own gas storage or switching to fuel oil. Gazprom’s mantra that it, really is, a reliable supplier sounds hollow. But so does Ukraine’s claim to be the innocent victim of neo-imperialist policies.
Third, the stakes for both Ukraine and Russia are a lot higher. In 2006, Ukraine’s economy grew by more than 7 per cent despite higher gas prices, as exports of steel and chemicals boomed. At the end of 2008, Ukraine’s economy was in meltdown, with industrial production down 30 per cent year on year in November. The Ukrainian currency has plummeted 40 per cent against the dollar since September. So paying for imports – including energy – would be a lot harder even if gas prices stayed the same. The IMF, which has pledged $16 billion to shore up the Ukrainian economy, will demand that the government phase out energy subsidies to keep the budget deficit under control. That means that more of any gas price increase will have to be passed on to households. With inflation already running at 20 per cent and presidential elections coming up next year, Ukraine simply cannot afford a rise to $450 per 1,000 cubic metres, as requested by Gazprom after the negotiations broke down.
Russia is also in a very different position. Its external surplus and reserves are dwindling. Gazprom, like most Russian companies, is seriously short of cash. Ukraine buys more than 40 billion cubic metres of gas from Russia a year, which makes it one of Gazprom’s bigger customers. So the price of these sales does matter for Russia. However, the costs of a sustained interruption of gas flows would be immeasurably higher. Not only because Gazprom could face an avalanche of law suits from European companies if supply contracts were breached, but also because Gazprom could lose its standing in its biggest and most lucrative market. That is already happening.
The final, and perhaps most important, difference between the 2006 and today is that Europe is more likely to draw the right conclusions. After the 2006 cut-off, the Europeans panicked – and then the EU proceeded to lecture Russia on how to run its energy sector and export business while individual EU countries rushed to sign long-term bilateral agreements with Gazprom to secure their own supplies. This did not work. Today, the Europeans will (hopefully) focus on what they can do together to increase their energy security: build a functioning internal gas market, invest more in gas storage and focus on alternative sources of gas, for example from the Caspian via Nabucco and in the form of LNG from Northern Africa and the Middle East. They also need to reinforce their efforts to achieve their 20 per cent energy savings target and explore alternative sources of power, namely renewables and nuclear. If the gas standoff reminds the Europeans of the importance of such measures, Russia and Ukraine will have done the EU a favour.
Download the CER’s book ‘Pipelines, politics and power: The future of EU-Russia energy relations’ for free http://www.cer.org.uk/pdf/rp_851.pdf
Katinka Barysch is deputy director of the Centre for European Reform.
Tuesday, December 16, 2008
What the summit says about the EU
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.
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.
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