by Tomas Valasek
The future of the euro may not be secure, warned the CER’s Simon Tilford in a January 2009 essay. The current economic crisis threatens to exacerbate the tensions within the eurozone, and an insolvent member-state... could default and leave the eurozone. Since January, the economic crisis has deepened further, and the eurozone’s weakest economies have come under even greater strain. This does not make their exit from the eurozone inevitable there is a strong argument in favour of keeping the eurozone together at any cost. But what if it did happen? What would leaving the eurozone mean in practice? What happens to the physical currency in circulation in the afflicted country?
There is a considerable body of precedents. Most historical currency unions have broken up. The most recent examples come from Central and Eastern Europe. Since the end of the Cold War, three countries with national currencies the Soviet Union, Yugoslavia, and Czechoslovakia have fallen apart, forcing their constituent parts to hastily adopt national currencies. To find out what the separation entailed, the CER spoke to an architect of one of those transitions: the former member of the board of the Slovak National Bank, Ján Mathes.
We asked him what a country leaving the eurozone would use instead of the euro. Several options are possible, Mathes said. Members of the eurozone have not kept a stock of national currencies in reserve so they would need to print and mint replacements. But if a country is in a hurry to leave the euro, there may not be enough time. Minting a sufficient number of new coins takes months. Producing today's high-tech, secure banknotes, from design to the printing stage, took Slovakia nearly a year. Even though eurozone members would need less time they would presumably revert to the design they used before adopting the euro printing hundreds of millions of notes still takes many months.
If a country left the eurozone abruptly, it would need to find temporary ways to separate its share of the euros from the rest. In the early 1990s, the Czech Republic and Slovakia chose to stick distinguishing stamps on their banknotes. We had thousands of people working day and night, putting tiny stamps on nearly 80 million old Czechoslovak banknotes, Mathes said. The Czechs affixed different stamps to their portion of the old notes and the currency was thus divided. Each side eventually printed its own currency, and the stamped notes were withdrawn and destroyed.
But what worked for the Czechoslovak koruna may not work for the euro. Stamps are easy to remove and the temptation to remove them would be strong. The value of the currency of the country leaving the eurozone is certain to plunge vis-à-vis the euro, so its citizens would remove stamps en masse, thus converting them to the more valuable original euros. Another physical solution, Mathes says, it to laser-engrave distinguishing marks onto the portion of the euros, which would have been allocated to the country departing the eurozone. This can be done relatively quickly and would make the currencies irreversibly different, said Mathes, adding “but I suspect that the European Central Bank will not look kindly on a state burning holes in its currency.
In many ways, the birth of the new currency would only mark the beginning of its troubles. A country would only resort to leaving the eurozone if it was in deep economic crisis but this guarantees that its currency will inspire little confidence. There is a risk that the currency’s value would slide uncontrollably. To prevent such a scenario, the new money would have to be introduced in tandem with a thorough stabilisation and recovery programme overseen and financed by the IMF or the World Bank.
But the same reforms, if introduced early, would also reduce the chances of a country dropping out of the euro in the first place. And the rest of the eurozone members will have strong interest to prevent anyone from leaving, because of the risks to the rest: a member's departure would weaken the credibility of the euro, deepening the sense of crisis and possibly forcing other countries to drop out. Self-interest may drive the rest of the eurozone to prop up the ailing country’s economy at nearly any cost. It is probably too early for ordering replacement currencies or burning holes in the euro.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
Monday, March 23, 2009
Thursday, March 19, 2009
How serious is the threat to the single market?
by Simon Tilford
There has been a lot of anguished talk about how the EU’s single market is under threat. Much of this alarm has focused on government support for struggling car firms and public bail-outs of crisis-ridden banks. An erosion of the EU’s competition rules would be every bit as debilitating as the impact of the financial crisis and the resulting recession. But how serious is the risk to the single market?
On the face of it, there is plenty to worry those who see the single market as key to Europe’s future prosperity. First, any hope that the impact of the financial crisis on the ‘real economy’ would be limited has ended. In the face of huge falls in industrial output this year and the prospect of several years of very weak economic growth, many European industrial firms will go bankrupt. Wage subsidies and short-time working, and all the other strategies currently being employed to cope with the collapse of demand, can only be sustained for so long. Many of the firms that go bust will be fundamentally competitive, or at least appear so. EU governments will be under huge pressure to intervene to protect such companies. The way in which they intervene will be crucial. The Commission will have a real fight on its hands to ensure that competition is not distorted. It should be strong enough to enforce the rules. But much will depend on whether member-state governments support the Commission and on who is appointed to be the next EU commissioners for competition and the internal market.
Second, the landscape of European banking has changed fundamentally over the past year and competition policy in this sector has effectively been suspended. A number of the biggest EU banks have been nationalised in all but name and governments have moved to provide public guarantees for bank loans. The shot gun marriage of Britain’s Lloyds TSB with another high street British bank, Halifax Bank of Scotland (HBOS), has left the combined group controlling around a third of the entire UK market for consumer banking services. The German, Dutch and Belgian governments have bailed out financial institutions, while governments across the EU have recapitalised banks.
The dramatic increase in government influence over the lending process will need to be reversed if potentially serious distortions are to be avoided. There is a risk that pressure will be put on banks to maintain funding for national champions and to avoid lending to companies based in other EU states. Such politicised lending would undermine the efficient allocation of capital throughout the EU by protecting inefficient companies and reducing available funds for more competitive firms. Once the financial sector has stabilised and normal levels of financial intermediation have been restored, the Commission will have to get serious about ensuring that the EU does not retreat into such ‘capital protectionism’.
Third, a further deepening of the single market can be ruled out. Crucially, faster action to liberalise and integrate service sectors across the EU now looks out of the question. It was hard enough to gain consensus in favour of radical moves to dismantle obstacles to the integration of service sectors before the crisis, but it will be impossible in the face of the backlash against liberalisation. This is bad news. Service sectors account for around two-thirds of economic activity across the EU. Service sector productivity has been extremely weak for a number of years now, holding back economic growth. More competition at both national and European level would do much to change this, and boost economic growth.
The lack of service sector integration will be particularly damaging for the eurozone. Countries that decide to forego exchange rate flexibility as a tool of economic adjustment need to ensure that their economies can be flexible in other ways. If countries such as Spain and Italy are to recover their competitiveness within the currency union, they will have to boost their productivity. This, in turn, requires more competition in service industries. The alternative route to greater competitiveness – wage cuts – would condemn their economies to stagnation. And such wage deflation might not be possible in any case, as Germany is heading for deflation. It will be extremely difficult to cut costs relative to Germany, if German costs are falling.
The legal underpinnings of the single market appear robust. But there are real reasons for concern. The steady progress in reducing state-aid has been halted and is likely to be put into reverse. The partial renationalisation of bank lending is inimical to the emergence of a single capital market. And progress towards deepening the single market in services has ground to a halt. All this bodes ill for Europe’s growth prospects and the stability of the eurozone. All EU governments profess to be committed to upholding the single market. The next couple of years will determine the strength of that commitment. If member-states do not respect the Commission’s right to enforce those rules, the single market could indeed come under threat.
Simon Tilford is chief economist at the Centre for European Reform.
There has been a lot of anguished talk about how the EU’s single market is under threat. Much of this alarm has focused on government support for struggling car firms and public bail-outs of crisis-ridden banks. An erosion of the EU’s competition rules would be every bit as debilitating as the impact of the financial crisis and the resulting recession. But how serious is the risk to the single market?
On the face of it, there is plenty to worry those who see the single market as key to Europe’s future prosperity. First, any hope that the impact of the financial crisis on the ‘real economy’ would be limited has ended. In the face of huge falls in industrial output this year and the prospect of several years of very weak economic growth, many European industrial firms will go bankrupt. Wage subsidies and short-time working, and all the other strategies currently being employed to cope with the collapse of demand, can only be sustained for so long. Many of the firms that go bust will be fundamentally competitive, or at least appear so. EU governments will be under huge pressure to intervene to protect such companies. The way in which they intervene will be crucial. The Commission will have a real fight on its hands to ensure that competition is not distorted. It should be strong enough to enforce the rules. But much will depend on whether member-state governments support the Commission and on who is appointed to be the next EU commissioners for competition and the internal market.
Second, the landscape of European banking has changed fundamentally over the past year and competition policy in this sector has effectively been suspended. A number of the biggest EU banks have been nationalised in all but name and governments have moved to provide public guarantees for bank loans. The shot gun marriage of Britain’s Lloyds TSB with another high street British bank, Halifax Bank of Scotland (HBOS), has left the combined group controlling around a third of the entire UK market for consumer banking services. The German, Dutch and Belgian governments have bailed out financial institutions, while governments across the EU have recapitalised banks.
The dramatic increase in government influence over the lending process will need to be reversed if potentially serious distortions are to be avoided. There is a risk that pressure will be put on banks to maintain funding for national champions and to avoid lending to companies based in other EU states. Such politicised lending would undermine the efficient allocation of capital throughout the EU by protecting inefficient companies and reducing available funds for more competitive firms. Once the financial sector has stabilised and normal levels of financial intermediation have been restored, the Commission will have to get serious about ensuring that the EU does not retreat into such ‘capital protectionism’.
Third, a further deepening of the single market can be ruled out. Crucially, faster action to liberalise and integrate service sectors across the EU now looks out of the question. It was hard enough to gain consensus in favour of radical moves to dismantle obstacles to the integration of service sectors before the crisis, but it will be impossible in the face of the backlash against liberalisation. This is bad news. Service sectors account for around two-thirds of economic activity across the EU. Service sector productivity has been extremely weak for a number of years now, holding back economic growth. More competition at both national and European level would do much to change this, and boost economic growth.
The lack of service sector integration will be particularly damaging for the eurozone. Countries that decide to forego exchange rate flexibility as a tool of economic adjustment need to ensure that their economies can be flexible in other ways. If countries such as Spain and Italy are to recover their competitiveness within the currency union, they will have to boost their productivity. This, in turn, requires more competition in service industries. The alternative route to greater competitiveness – wage cuts – would condemn their economies to stagnation. And such wage deflation might not be possible in any case, as Germany is heading for deflation. It will be extremely difficult to cut costs relative to Germany, if German costs are falling.
The legal underpinnings of the single market appear robust. But there are real reasons for concern. The steady progress in reducing state-aid has been halted and is likely to be put into reverse. The partial renationalisation of bank lending is inimical to the emergence of a single capital market. And progress towards deepening the single market in services has ground to a halt. All this bodes ill for Europe’s growth prospects and the stability of the eurozone. All EU governments profess to be committed to upholding the single market. The next couple of years will determine the strength of that commitment. If member-states do not respect the Commission’s right to enforce those rules, the single market could indeed come under threat.
Simon Tilford is chief economist at the Centre for European Reform.
Friday, March 13, 2009
The real G20 agenda
by Katinka Barysch
Finance ministers from the G20 countries are meeting in London this weekend to prepare for the global economic summit at the start of April. Expectations are high. But what will the summit be about? Judging by recent comments from European leaders, the agenda will include clamping down on tax havens, regulating hedge funds and cutting bankers’ bonuses. Most commentators agree that these questions are not the most pressing for restoring financial stability and economic growth. Martin Broughton, president of the UK employers’ federation CBI, rightly dismissed them as “red herring issues”.
World leaders must focus two things: how best to work together to prevent an even deeper global recession; and how to avoid future crises of such magnitude.
The first issue is as pressing as it is divisive. While the US administration is pushing for more fiscal spending, the Europeans are reluctant, and most emerging powers are keeping quiet. Many countries are loath to commit to more budget spending before they know whether and how their existing emergency packages are working. The second part of the agenda is longer term and fiendishly complicated. No-one should expect an unwieldy group of 25 or so (G20 has become a misnomer) heads of state to discuss the minutiae of capital adequacy ratios or cross-border supervision. The G20 is a process, not an event, and this summit is a political exercise, not a technical one.
What the April meeting is really about is maintaining faith in multilateral solutions at a time when the temptation for go-it-alone and beggar-thy-neighbour policies is growing. If leaning on Liechtenstein or forcing disclosure onto hedge funds helps this cause then so be it. But in terms of confidence building two issues appear paramount: the role of the International Monetary Fund and governments’ commitment to avoid protectionism.
Since September 2008, the IMF has lent over $50 billion to countries ranging from Pakistan to Ukraine. It urgently needs more cash. The US and EU governments are supporting a doubling of the Fund’s resources to $500 billion. They appear less willing, however, to redress their own over-representation in international financial institutions. This would be a precondition for emerging powers such as China to contribute significantly to an increase in IMF resources, and – perhaps more importantly – accept its legitimacy at the heart of the global financial system.
The IMF needs enhanced legitimacy to fulfil other functions that will be equally essential for future financial stability. First, the world needs better surveillance of national macro-economic and exchange rate policies to address the kind of global imbalances that have contributed to the current crisis. The IMF already has such mechanisms in place but they need to be strengthened. Second, the Fund needs to expand its new, $100 billion short-term, conditionality-light lending facility for emerging markets that are well run. It could also encourage such countries to pool their foreign exchange reserves to make them available for emergency lending.
Without easily available emergency finance, emerging markets will conclude that the best insurance against future pain is to accumulate more reserves. They will do this by keeping their currencies down and running big external surpluses. This kind of policy, as practiced by China, has already caused lots of friction. In an environment where global trade is shrinking, it would fuel a nasty protectionist backlash in the West. That is why the G20 summit needs to produce a firm commitment to increasing the IMF’s role and resources while setting in train a thorough reform of its governance structures.
There are already some signs that protectionism is rising. World Bank economists have counted 47 new trade restrictions since late 2008. More than a third have been put in place by the G20 countries that pledged to avoid such measures at their November 2008 summit. But the real risk is not a return to a 1930s-style tariff war but what Richard Baldwin and Simon Evenett (in a recent CEPR paper) call “murky protectionism”: industrial subsidies, requests that banks lend to only local companies, or the use of environmental arguments to discriminate against foreign goods and services. Examples abound, such as the ‘buy American’ provisions in the US stimulus programme or Nicolas Sarkozy’s idea that French car companies should make cars only in France. Encouragingly, in these instances international outrage ensued and the governments in question backtracked. The risks, however, remain high.
Therefore, G20 leaders need to broaden the ‘no protectionism’ pledge from last November to cover non-tariff measures. And they need to task international organisations such as the OECD and the WTO with alerting the world to national measures that could be harmful for that country’s trading partners.
Katinka Barysch is deputy director of the Centre for European Reform.
Finance ministers from the G20 countries are meeting in London this weekend to prepare for the global economic summit at the start of April. Expectations are high. But what will the summit be about? Judging by recent comments from European leaders, the agenda will include clamping down on tax havens, regulating hedge funds and cutting bankers’ bonuses. Most commentators agree that these questions are not the most pressing for restoring financial stability and economic growth. Martin Broughton, president of the UK employers’ federation CBI, rightly dismissed them as “red herring issues”.
World leaders must focus two things: how best to work together to prevent an even deeper global recession; and how to avoid future crises of such magnitude.
The first issue is as pressing as it is divisive. While the US administration is pushing for more fiscal spending, the Europeans are reluctant, and most emerging powers are keeping quiet. Many countries are loath to commit to more budget spending before they know whether and how their existing emergency packages are working. The second part of the agenda is longer term and fiendishly complicated. No-one should expect an unwieldy group of 25 or so (G20 has become a misnomer) heads of state to discuss the minutiae of capital adequacy ratios or cross-border supervision. The G20 is a process, not an event, and this summit is a political exercise, not a technical one.
What the April meeting is really about is maintaining faith in multilateral solutions at a time when the temptation for go-it-alone and beggar-thy-neighbour policies is growing. If leaning on Liechtenstein or forcing disclosure onto hedge funds helps this cause then so be it. But in terms of confidence building two issues appear paramount: the role of the International Monetary Fund and governments’ commitment to avoid protectionism.
Since September 2008, the IMF has lent over $50 billion to countries ranging from Pakistan to Ukraine. It urgently needs more cash. The US and EU governments are supporting a doubling of the Fund’s resources to $500 billion. They appear less willing, however, to redress their own over-representation in international financial institutions. This would be a precondition for emerging powers such as China to contribute significantly to an increase in IMF resources, and – perhaps more importantly – accept its legitimacy at the heart of the global financial system.
The IMF needs enhanced legitimacy to fulfil other functions that will be equally essential for future financial stability. First, the world needs better surveillance of national macro-economic and exchange rate policies to address the kind of global imbalances that have contributed to the current crisis. The IMF already has such mechanisms in place but they need to be strengthened. Second, the Fund needs to expand its new, $100 billion short-term, conditionality-light lending facility for emerging markets that are well run. It could also encourage such countries to pool their foreign exchange reserves to make them available for emergency lending.
Without easily available emergency finance, emerging markets will conclude that the best insurance against future pain is to accumulate more reserves. They will do this by keeping their currencies down and running big external surpluses. This kind of policy, as practiced by China, has already caused lots of friction. In an environment where global trade is shrinking, it would fuel a nasty protectionist backlash in the West. That is why the G20 summit needs to produce a firm commitment to increasing the IMF’s role and resources while setting in train a thorough reform of its governance structures.
There are already some signs that protectionism is rising. World Bank economists have counted 47 new trade restrictions since late 2008. More than a third have been put in place by the G20 countries that pledged to avoid such measures at their November 2008 summit. But the real risk is not a return to a 1930s-style tariff war but what Richard Baldwin and Simon Evenett (in a recent CEPR paper) call “murky protectionism”: industrial subsidies, requests that banks lend to only local companies, or the use of environmental arguments to discriminate against foreign goods and services. Examples abound, such as the ‘buy American’ provisions in the US stimulus programme or Nicolas Sarkozy’s idea that French car companies should make cars only in France. Encouragingly, in these instances international outrage ensued and the governments in question backtracked. The risks, however, remain high.
Therefore, G20 leaders need to broaden the ‘no protectionism’ pledge from last November to cover non-tariff measures. And they need to task international organisations such as the OECD and the WTO with alerting the world to national measures that could be harmful for that country’s trading partners.
Katinka Barysch is deputy director of the Centre for European Reform.
Tuesday, March 10, 2009
Economic crisis and the 'eastern partnership'
by Tomas Valasek
In two months, at a summit in Prague on May 7th, the European Union will launch a new policy for Eastern Europe – an 'eastern partnership'. It will increase EU assistance to the region, open the EU’s markets to the neighbours’ goods and gradually remove visa requirements, among other things. The idea is to give the neighbouring countries stronger incentives to adopt European norms and rules, to integrate their economies with the EU's, and thus to make the region more prosperous and stable. The concept is sound – but the initiative as well as the EU’s overall policy for Eastern Europe will suffer unless the EU takes more visible steps to assist its neighbours through the economic crisis.
The crisis hit Eastern Europe hard. Ukraine’s currency, the hryvnia, lost over 50 per cent of its value, and economists warn of a possible default. Belarus, too, is in trouble. Much of the economy is driven by exports of machinery to Russia, where demand has collapsed. Armenia, another member of the eastern partnership, is in equal difficulty, and will probably need an IMF emergency loan soon.
The economic crisis poses a three-fold challenge to the EU's eastern policy. The first risk is that of rising nationalism and protectionism on both sides of the EU’s borders, which is hampering economic integration. The European Union and Ukraine are negotiating a new free trade agreement but senior EU officials say that Ukraine has become more protectionist since the crisis broke out. It insists on keeping a number of controversial tariffs, which has caused the talks to stall. The EU, too, is far less open to eastern workers and visitors these days. The member-states are unwilling to ease visa requirements for the partner states, fearing an influx of illegal workers. If the EU and its partners fail to deepen economic integration and make travel to the EU easier, the eastern partnership’s main goal – a gradual alignment of the partner states with the EU – will be in trouble.
The second risk stems from the perception that the EU is not doing enough to help the eastern partners through the crisis. President Vladimir Voronin of Moldova recently dismissed the eastern partnership-related grants as “candy”, suggesting they were not serious enough to warrant attention. He is unfair to the EU: it is not the eastern partnership's purpose to bail out the partners' economies. It has only a modest financial component; its grants amount to a few hundred million euro, and are meant mainly to help improve governance and expand people-to-people contacts. There are other tools the EU can use to assist its eastern neighbours through the crisis, like the International Monetary Fund, which recently made a $15 billion emergency loan to Ukraine. But Voronin’s words signal a broader problem for the EU’s eastern policy: the EU is not perceived to be helping its eastern neighbours; they see the IMF but not Europe. And perceptions are important: if the EU’s eastern partners think that the EU is failing them at the time of their greatest need, most of the goals of the eastern partnership will come to nought.
The third risk relates to the economic weakness of many new EU member-states in Central Europe. It is they who, along with Sweden, have most strongly advocated greater EU engagement with its eastern neighbours. And in the EU, which has many diverse members and interests, an initiative only succeeds when a strong state or a group of states devote serious time and attention to winning EU-wide support for it. But will the new member-states push for more financial assistance for Eastern Europe? It could mean keeping less of the much-needed money for themselves, and that is a tough political decision to make. Will they have the energy to fight the political battles in Brussels with EU governments less interested in Eastern Europe? Some new member-states like Latvia are reducing diplomatic staffs across Europe, and they will find it difficult to pursue multiple foreign policy goals simultaneously. Also at risk are the myriad of small grants which the new member-states' governments give to non-governmental groups in the neighbouring countries, and the training programmes they organise for East European administrators or journalists. These programmes are just as important as the eastern partnership itself: they expand the circle of people in the Eastern Europe who have a vested interest in closer relationship with the EU. So it matters that these activities are now at risk because of recession-related budget cuts.
The economic crisis represents a crisis of sorts for the EU's eastern policy. But there are ways of minimising the damage or even turning a problem into an opportunity.
Some EU government-financed initiatives for eastern neighbours will no doubt fall victim to the economic crisis. But instead of all Central European governments cutting all their training or advisory programmes, they should pool some of the initiatives. For example, rather than recalling advisors who are helping to reform key Ukrainian ministries, the new member-states could agree to withdraw some and co-finance the remaining ones. The same should apply to training programmes in the EU for East European administrators and to the very useful conferences organised in Latvia and Estonia to raise the profile of the EU’s eastern initiatives: some will be cut but there ought to be ways to share resources to save the remaining ones.
The top priority for the EU’s eastern policy, however, must be to take steps to more visibly help its eastern neighbours through the economic crisis. It is simply not true, as president Voronin suggested, that European aid to the east is peanuts – the IMF, in which EU member-states play a strong role, gave a $15 billion loan to Ukraine, and a further $2 billion loan to Belarus. The trouble is that the EU as such is not getting the credit. And in the eyes of the Eastern Europeans, the EU’s perceived stinginess compares unfavourably with the far greater amounts which Russia is willing to spend on bailing out Eastern Europe (it set aside $7.5 billion for the task).
The situation calls for creative solutions. The EU should not compete with the IMF in providing balance-of-payment loans directly to governments: the IMF has a better capacity to raise the necessary funds and to oversee the reforms, which the recipient states undertake in order to qualify for IMF loans. But the EU could expand its €25 billion emergency fund for the new member-states to include the eastern neighbours as well. And it should use the money to co-finance IMF assistance with targeted loans or grants to soften the social impact of the economic crisis. For example, it could finance job retraining programmes in Belarus or Ukraine.
The EU should also speed up the payment of its eastern partnership grants. They are small compared to the amounts disbursed through loans but if targeted well, could have real impact. The EU should direct them towards helping the most vulnerable parts of East European societies and towards regions hardest hit by the crisis. There is a real risk that some of the money could be misdirected or stolen – the ability of East European government to properly ‘absorb’ EU aid is in question. But EU officials have worked with the eastern neighbours for many years now; they have a good idea which parts of their administrations are competent and which are corrupt, and can reduce the risk of theft by targeting the aid carefully.
Building EU-wide support for these proposals will not be easy. All EU governments, including the most prosperous ones, are going to run up massive debt in the coming years. Money will be in very short supply, so the member-states will be reluctant to expand assistance to Eastern Europe. Also, the EU is getting fed up with Ukraine in particular, because the leadership is so weak and divided – the IMF even halted the disbursement of its loan because the government in Kyiv failed to agree the necessary reforms. And because Ukraine has been at the heart of the eastern partnership, its woes undermine support among EU member-states for the whole region.
But the EU has no choice but work with Ukraine; it is the largest and most important country in the eastern partnership. And while the economic crisis will consume most European effort and attention; the EU must be able to pursue different objectives simultaneously. The economic crisis creates an opportunity for the EU's eastern policy. Ukraine and other neighbours will be looking for help to stave off the crisis and lessen the social tensions it will create. The EU should become 'the friend in need', and built lasting loyalties.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
In two months, at a summit in Prague on May 7th, the European Union will launch a new policy for Eastern Europe – an 'eastern partnership'. It will increase EU assistance to the region, open the EU’s markets to the neighbours’ goods and gradually remove visa requirements, among other things. The idea is to give the neighbouring countries stronger incentives to adopt European norms and rules, to integrate their economies with the EU's, and thus to make the region more prosperous and stable. The concept is sound – but the initiative as well as the EU’s overall policy for Eastern Europe will suffer unless the EU takes more visible steps to assist its neighbours through the economic crisis.
The crisis hit Eastern Europe hard. Ukraine’s currency, the hryvnia, lost over 50 per cent of its value, and economists warn of a possible default. Belarus, too, is in trouble. Much of the economy is driven by exports of machinery to Russia, where demand has collapsed. Armenia, another member of the eastern partnership, is in equal difficulty, and will probably need an IMF emergency loan soon.
The economic crisis poses a three-fold challenge to the EU's eastern policy. The first risk is that of rising nationalism and protectionism on both sides of the EU’s borders, which is hampering economic integration. The European Union and Ukraine are negotiating a new free trade agreement but senior EU officials say that Ukraine has become more protectionist since the crisis broke out. It insists on keeping a number of controversial tariffs, which has caused the talks to stall. The EU, too, is far less open to eastern workers and visitors these days. The member-states are unwilling to ease visa requirements for the partner states, fearing an influx of illegal workers. If the EU and its partners fail to deepen economic integration and make travel to the EU easier, the eastern partnership’s main goal – a gradual alignment of the partner states with the EU – will be in trouble.
The second risk stems from the perception that the EU is not doing enough to help the eastern partners through the crisis. President Vladimir Voronin of Moldova recently dismissed the eastern partnership-related grants as “candy”, suggesting they were not serious enough to warrant attention. He is unfair to the EU: it is not the eastern partnership's purpose to bail out the partners' economies. It has only a modest financial component; its grants amount to a few hundred million euro, and are meant mainly to help improve governance and expand people-to-people contacts. There are other tools the EU can use to assist its eastern neighbours through the crisis, like the International Monetary Fund, which recently made a $15 billion emergency loan to Ukraine. But Voronin’s words signal a broader problem for the EU’s eastern policy: the EU is not perceived to be helping its eastern neighbours; they see the IMF but not Europe. And perceptions are important: if the EU’s eastern partners think that the EU is failing them at the time of their greatest need, most of the goals of the eastern partnership will come to nought.
The third risk relates to the economic weakness of many new EU member-states in Central Europe. It is they who, along with Sweden, have most strongly advocated greater EU engagement with its eastern neighbours. And in the EU, which has many diverse members and interests, an initiative only succeeds when a strong state or a group of states devote serious time and attention to winning EU-wide support for it. But will the new member-states push for more financial assistance for Eastern Europe? It could mean keeping less of the much-needed money for themselves, and that is a tough political decision to make. Will they have the energy to fight the political battles in Brussels with EU governments less interested in Eastern Europe? Some new member-states like Latvia are reducing diplomatic staffs across Europe, and they will find it difficult to pursue multiple foreign policy goals simultaneously. Also at risk are the myriad of small grants which the new member-states' governments give to non-governmental groups in the neighbouring countries, and the training programmes they organise for East European administrators or journalists. These programmes are just as important as the eastern partnership itself: they expand the circle of people in the Eastern Europe who have a vested interest in closer relationship with the EU. So it matters that these activities are now at risk because of recession-related budget cuts.
The economic crisis represents a crisis of sorts for the EU's eastern policy. But there are ways of minimising the damage or even turning a problem into an opportunity.
Some EU government-financed initiatives for eastern neighbours will no doubt fall victim to the economic crisis. But instead of all Central European governments cutting all their training or advisory programmes, they should pool some of the initiatives. For example, rather than recalling advisors who are helping to reform key Ukrainian ministries, the new member-states could agree to withdraw some and co-finance the remaining ones. The same should apply to training programmes in the EU for East European administrators and to the very useful conferences organised in Latvia and Estonia to raise the profile of the EU’s eastern initiatives: some will be cut but there ought to be ways to share resources to save the remaining ones.
The top priority for the EU’s eastern policy, however, must be to take steps to more visibly help its eastern neighbours through the economic crisis. It is simply not true, as president Voronin suggested, that European aid to the east is peanuts – the IMF, in which EU member-states play a strong role, gave a $15 billion loan to Ukraine, and a further $2 billion loan to Belarus. The trouble is that the EU as such is not getting the credit. And in the eyes of the Eastern Europeans, the EU’s perceived stinginess compares unfavourably with the far greater amounts which Russia is willing to spend on bailing out Eastern Europe (it set aside $7.5 billion for the task).
The situation calls for creative solutions. The EU should not compete with the IMF in providing balance-of-payment loans directly to governments: the IMF has a better capacity to raise the necessary funds and to oversee the reforms, which the recipient states undertake in order to qualify for IMF loans. But the EU could expand its €25 billion emergency fund for the new member-states to include the eastern neighbours as well. And it should use the money to co-finance IMF assistance with targeted loans or grants to soften the social impact of the economic crisis. For example, it could finance job retraining programmes in Belarus or Ukraine.
The EU should also speed up the payment of its eastern partnership grants. They are small compared to the amounts disbursed through loans but if targeted well, could have real impact. The EU should direct them towards helping the most vulnerable parts of East European societies and towards regions hardest hit by the crisis. There is a real risk that some of the money could be misdirected or stolen – the ability of East European government to properly ‘absorb’ EU aid is in question. But EU officials have worked with the eastern neighbours for many years now; they have a good idea which parts of their administrations are competent and which are corrupt, and can reduce the risk of theft by targeting the aid carefully.
Building EU-wide support for these proposals will not be easy. All EU governments, including the most prosperous ones, are going to run up massive debt in the coming years. Money will be in very short supply, so the member-states will be reluctant to expand assistance to Eastern Europe. Also, the EU is getting fed up with Ukraine in particular, because the leadership is so weak and divided – the IMF even halted the disbursement of its loan because the government in Kyiv failed to agree the necessary reforms. And because Ukraine has been at the heart of the eastern partnership, its woes undermine support among EU member-states for the whole region.
But the EU has no choice but work with Ukraine; it is the largest and most important country in the eastern partnership. And while the economic crisis will consume most European effort and attention; the EU must be able to pursue different objectives simultaneously. The economic crisis creates an opportunity for the EU's eastern policy. Ukraine and other neighbours will be looking for help to stave off the crisis and lessen the social tensions it will create. The EU should become 'the friend in need', and built lasting loyalties.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
Friday, February 27, 2009
Financial regulation: Is the Channel narrowing?
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.
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.
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.
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