Greece’s recent fiscal travails have, slightly unexpectedly, thrown the spotlight on Germany’s current-account surplus. In mid-March, France’s finance minister, Christine Lagarde, urged Germany to do more to boost domestic demand – a call echoed by the European Commission’s president, José Manuel Barroso. The German government and media are bemused and indignant. How can it be, they ask, that corruption and profligacy in Greece has turned in to a trial of German discipline and rectitude? Anyway, what right do French politicians – and, for that matter, Anglo-Saxon commentators – have to lecture Germany? Wouldn’t they be better advised attending to their own countries’ manifold economic problems?
On one thing, everyone agrees. Germany’s current-account surplus is vast. In 2009, it amounted to $169 billion – or 5.2 per cent of German GDP. In absolute terms, this was the world’s second largest current-account surplus after China’s. Measured as a share of GDP, Germany’s surplus was even larger than China’s. A number of countries have even larger external surpluses relative to the size of their economies than either China or Germany. These include European states like Sweden and Switzerland, Asian ones like Malaysia and Singapore, and oil-producing countries like Norway and Saudi Arabia. But because the absolute size of their surpluses is larger, China and Germany have inevitably attracted the most attention.
At issue is what these current-account surpluses represent – and what, if anything, the countries that run them should do about them. Many policy-makers and commentators in Germany believe that their country’s external surplus reflects the ‘competitiveness’ of its economy. A Bundesbank official likened Germany to a country holding top spot in a football league. Pursuing the same analogy, Germany’s finance minister, Wolfgang Schäuble, said it would never occur to him to ask an opposition team to weaken its side to make life easier for the one he supports. And the FT Deutschland’s response to British commentators who expressed sympathy with Lagarde’s position was to ask what on earth Germans were being expected to import from the UK: Walkers crisps, Doc Martens boots or Marmite?
A few years back, a former chief economist of the OECD, David Henderson, coined the term “do-it-yourself (DIY) economics” to describe “firmly held intuitive economic ideas and beliefs which owe little or nothing to textbooks, treatises or the evidence of economic history.” DIY economics, Henderson believed, was ubiquitous. It was as likely to inform the world view of political figures, top civil servants, chief executives, commentators and eminent professors as that of the general public. DIY economics remains as prevalent as ever, as recent German responses to Lagarde’s intervention surely prove. These responses are permeated with assumptions and beliefs that sound plausible to the uninitiated, but are just flat wrong.
The most pernicious of all – because it is the source of so much nonsense – is the tendency to think of countries as if they were companies, and of trade balances as if they were profit and loss accounts. The German economy, on this view, can be thought of as if it is Volkswagen. And its trade surplus shows that Germany is winning the ‘battle for global market share’. But it takes only a moment’s reflection to realise why this is an absurd way of thinking about the matter. One of the world’s most productive economies, the US, runs a large external deficit, while some of the most dysfunctional and least productive, from Russia to the Democratic Republic of Congo (DRC), run surpluses. No one is surely suggesting that the US should make itself more ‘competitive’ by emulating the DRC.
Far from being signs of external strength, countries’ current-account positions can be symptoms of domestic weakness. And here’s the rub. Many of the countries that have run large current-account surpluses over the past decade have suffered from weak domestic demand. One of these countries is Germany. If it had been a closed economy, it would have been in a prolonged slump. As it was, Germany was rescued by the profligacy of foreigners. Between 1999 and 2007, 70 per cent of the growth in its GDP was accounted for by net exports. However, the foreigners that kept the German economy afloat are now mired in debt. In many countries, households and governments are over-extended and need to ‘deleverage’. The question now is whether Germany accommodates this process or resists it.
For the time being, the German government shows every sign of resisting it. It rightly urges the deficit countries to become ‘more German’. But it fails to recognise that this is an impossible task if Germany does not become ‘less German’. This does not mean, as Wolfgang Schäuble claimed, that Germany is being asked to reduce the quality of its products so that other countries can ‘compete’ (a ludicrous move that would only lower the living standards of foreigners who bought German products). It does mean that fiscal consolidation and private-sector deleveraging in previously profligate countries must, as a matter of arithmetic, be accompanied by a fall in Germany’s external surplus. The odd thing about Germany’s domestic debate is that few politicians or commentators seem to recognise this.
The notion that trade and current-account surpluses are badges of economic success is deeply pernicious – not just because it is false, but also because it damagingly portrays international trade as a zero-sum competition between countries. The world economy suffers from huge macroeconomic imbalances that need to be corrected. It should be obvious that this cannot happen if countries like Germany (but also the Netherlands and Sweden) are not prepared to allow their external surpluses to decline. Germany was not to blame for the recklessness of countries like the UK. No-one is asking it to reduce the quality of its excellent manufactures. But Germany must stop fetishising its trade surplus and accept that the chronic weakness of its domestic demand is a problem for itself and the world economy.
Philip Whyte is a senior research fellow at the CER
Friday, March 26, 2010
Tuesday, March 09, 2010
What should NATO’s new strategic concept say about Russia?
by Tomas Valasek
Since the fall of the Berlin Wall, NATO has strived to reduce mutual suspicions with Russia and to build a more co-operative relationship. So it is vexing that 20 years on, Russia continues to view NATO as a hostile alliance. Moscow competes with NATO for influence in Eastern Europe, it seeks to halt NATO’s eastward enlargement and its recent security proposals for a new European security architecture were aimed in part at weakening NATO's role in European security. Moscow’s policy worries the Central European members of NATO, who have been demanding that the alliance draft defensive plans for the unlikely, but not unthinkable, possibility of a conflict with Russia.
The alliance's new strategic concept - its key guiding document, an update of which is due in the autumn – will not fundamentally change Russia's views. But many speakers at a recent seminar which the CER co-organised with NATO's public diplomacy division concluded that the document could be instrumental in unifying the allies' views on Russia, and in clarifying NATO's intentions towards Moscow.
The document should make two important points regarding Russia, several speakers argued. The first message is one of reassurance to the Central and Eastern European members of NATO who worry about Russia, especially after the war in Georgia in 2008. Their anxieties are eroding solidarity in NATO. Some are seeking bilateral security assurances from Washington in the form of US bases on their territory - but this would leave the 'have-nots' more vulnerable than the ‘haves’. It would therefore be better if the strategic concept sent a clear message that the alliance's mutual defence clause – Article V – remains as valid as ever. NATO should also underpin this message with the minimum necessary military planning and exercises.
The second message concerns Russia itself. No NATO ally wishes a conflict with Russia – least of all those on the alliance's eastern fringes, who know they would be more secure if Russia enjoyed a co-operative relationship with NATO. The alliance has repeatedly made this point in its communiqués, to little avail. But some speakers at the CER seminar argued that NATO should try again, and that this time the allies should go for a full ‘reset’: that is, tell Moscow that NATO is open to Russian membership, should it decide to join and meet the accession criteria. This would allow the Russian military – historically focused on a possible conflict with the West but now in the midst of deep reforms – to pay greater attention to the far more real threat of terrorism on its southern border, in the North Caucasus. It would also strengthen the hand of those in the Russian government who argue for an economic and political modernisation of Russia and for a closer relationship with the West.
In essence, NATO would follow a two-pronged approach: showing strength and solidarity vis-à-vis Russia but, at the same time, sending a message of inclusiveness to Moscow. The idea is not novel; the alliance pursued a similar ‘dual track’ approach for most of the 1970s and 1980s. But would it work in this day and age? Can the twin messages of reassurance and reset be reconciled?
Several speakers at the CER seminar argued for a positive answer, though they acknowledged the difficulties. The Russian government would view any new reassurance measures such as military exercises in Central Europe as a sign of ill intent. That would weaken the effect of any positive words the strategic concept may have for Russia.
Other speakers emphasised that reassurance measures should calm the relationship. By increasing solidarity among the allies, NATO would take away the opportunities – and the incentives - for the Russian government to pit one NATO member against another, as it has been doing in recent years. Moreover, reassurance measures would make the new allies feel more secure and therefore more willing to support a bold new outreach to Russia. Reassurance, several speakers said, is a precondition for reset.
Would a message of inclusion change Russia’s view of NATO? It is a tall order: the newly released Russian military doctrine calls the enlargement of NATO the most significant danger to the country's security. The Russians seem more and more concerned about NATO; the number of those worried about a conflict with ‘a major country’ – presumably western – has increased 12 per cent year-on-year in 2010 in one respected poll (though this could also reflect rising anxiety about China).
NATO’s ability to change this mindset is limited. The alliance carries so many negative associations in Russia that its capacity to aggravate tensions far outweighs its ability to induce positive change in Russian thinking. Nor is it obvious that the current government in Moscow is unhappy with the current situation – as one speaker at the seminar suggested, it suits some Russian elites to paint NATO as an enemy: doing so stimulates nationalist sentiment that may strengthen public support for the government.
Even so, a clear offer of reset from NATO could bring long-term benefits. The economic crisis has made Russia less certain and self-assured. While the regime is too inflexible to change in the short term (as Katinka Barysch argues in her recent CER policy brief http://www.cer.org.uk/pdf/pb_eu_russia_22feb10.pdf), it also seems more introspective than at any time since the boom years of the mid to late 2000s. As Dmitri Trenin argues in his recent study http://http://www.carnegie.ru/en/pubs/briefings/engaging_russia.pdf today’s bluster often hides uncertainty about the country’s economic and political future.
To overcome the mistrust between NATO and Russia, the country’s leaders would have to rethink some of the most fundamental bases of their foreign policy. NATO by itself cannot bring about that change. But it can create space for Russia’s independent thinkers and for the more reform-minded parts of the government to entertain the possibility of a future without a hostile relationship with the West. That could be a significant benefit of NATO’s new strategic concept carrying a message of reset.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
Since the fall of the Berlin Wall, NATO has strived to reduce mutual suspicions with Russia and to build a more co-operative relationship. So it is vexing that 20 years on, Russia continues to view NATO as a hostile alliance. Moscow competes with NATO for influence in Eastern Europe, it seeks to halt NATO’s eastward enlargement and its recent security proposals for a new European security architecture were aimed in part at weakening NATO's role in European security. Moscow’s policy worries the Central European members of NATO, who have been demanding that the alliance draft defensive plans for the unlikely, but not unthinkable, possibility of a conflict with Russia.
The alliance's new strategic concept - its key guiding document, an update of which is due in the autumn – will not fundamentally change Russia's views. But many speakers at a recent seminar which the CER co-organised with NATO's public diplomacy division concluded that the document could be instrumental in unifying the allies' views on Russia, and in clarifying NATO's intentions towards Moscow.
The document should make two important points regarding Russia, several speakers argued. The first message is one of reassurance to the Central and Eastern European members of NATO who worry about Russia, especially after the war in Georgia in 2008. Their anxieties are eroding solidarity in NATO. Some are seeking bilateral security assurances from Washington in the form of US bases on their territory - but this would leave the 'have-nots' more vulnerable than the ‘haves’. It would therefore be better if the strategic concept sent a clear message that the alliance's mutual defence clause – Article V – remains as valid as ever. NATO should also underpin this message with the minimum necessary military planning and exercises.
The second message concerns Russia itself. No NATO ally wishes a conflict with Russia – least of all those on the alliance's eastern fringes, who know they would be more secure if Russia enjoyed a co-operative relationship with NATO. The alliance has repeatedly made this point in its communiqués, to little avail. But some speakers at the CER seminar argued that NATO should try again, and that this time the allies should go for a full ‘reset’: that is, tell Moscow that NATO is open to Russian membership, should it decide to join and meet the accession criteria. This would allow the Russian military – historically focused on a possible conflict with the West but now in the midst of deep reforms – to pay greater attention to the far more real threat of terrorism on its southern border, in the North Caucasus. It would also strengthen the hand of those in the Russian government who argue for an economic and political modernisation of Russia and for a closer relationship with the West.
In essence, NATO would follow a two-pronged approach: showing strength and solidarity vis-à-vis Russia but, at the same time, sending a message of inclusiveness to Moscow. The idea is not novel; the alliance pursued a similar ‘dual track’ approach for most of the 1970s and 1980s. But would it work in this day and age? Can the twin messages of reassurance and reset be reconciled?
Several speakers at the CER seminar argued for a positive answer, though they acknowledged the difficulties. The Russian government would view any new reassurance measures such as military exercises in Central Europe as a sign of ill intent. That would weaken the effect of any positive words the strategic concept may have for Russia.
Other speakers emphasised that reassurance measures should calm the relationship. By increasing solidarity among the allies, NATO would take away the opportunities – and the incentives - for the Russian government to pit one NATO member against another, as it has been doing in recent years. Moreover, reassurance measures would make the new allies feel more secure and therefore more willing to support a bold new outreach to Russia. Reassurance, several speakers said, is a precondition for reset.
Would a message of inclusion change Russia’s view of NATO? It is a tall order: the newly released Russian military doctrine calls the enlargement of NATO the most significant danger to the country's security. The Russians seem more and more concerned about NATO; the number of those worried about a conflict with ‘a major country’ – presumably western – has increased 12 per cent year-on-year in 2010 in one respected poll (though this could also reflect rising anxiety about China).
NATO’s ability to change this mindset is limited. The alliance carries so many negative associations in Russia that its capacity to aggravate tensions far outweighs its ability to induce positive change in Russian thinking. Nor is it obvious that the current government in Moscow is unhappy with the current situation – as one speaker at the seminar suggested, it suits some Russian elites to paint NATO as an enemy: doing so stimulates nationalist sentiment that may strengthen public support for the government.
Even so, a clear offer of reset from NATO could bring long-term benefits. The economic crisis has made Russia less certain and self-assured. While the regime is too inflexible to change in the short term (as Katinka Barysch argues in her recent CER policy brief http://www.cer.org.uk/pdf/pb_eu_russia_22feb10.pdf), it also seems more introspective than at any time since the boom years of the mid to late 2000s. As Dmitri Trenin argues in his recent study http://http://www.carnegie.ru/en/pubs/briefings/engaging_russia.pdf today’s bluster often hides uncertainty about the country’s economic and political future.
To overcome the mistrust between NATO and Russia, the country’s leaders would have to rethink some of the most fundamental bases of their foreign policy. NATO by itself cannot bring about that change. But it can create space for Russia’s independent thinkers and for the more reform-minded parts of the government to entertain the possibility of a future without a hostile relationship with the West. That could be a significant benefit of NATO’s new strategic concept carrying a message of reset.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
Friday, February 26, 2010
It’s the economics, stupid
by Simon Tilford
There was always a risk that a one-size-fits-all monetary policy would lead to big divergences in inflation and competitiveness across the eurozone. This, in turn, would result in trade imbalances which would be difficult to reverse. Proponents of the single currency dismissed such concerns, arguing that the single currency was a political project, and that the economics would fall into place once the currency became a reality. The consequences of this line of reasoning are now clear. The eurozone faces a severe test. Greece – the member-state in the tightest spot – is far from unique. A number of other member-states could easily find themselves fighting to retain the confidence of the financial markets.
The crisis that has erupted within the eurozone has been brewing for a long time. The problems of the southern member-states – Greece, Spain and Portugal – were disguised by the credit boom, which underpinned economic growth (and tax revenues), while investors were happy to lend them money to cover their current account deficits. But when the financial crisis hit and economic growth collapsed, the underlying weakness of their public finances and trade positions were exposed.
The external deficits these countries are running with the eurozone’s surplus members – principally Germany and the Netherlands – are a huge drain on their economies, and will make it all but impossible for them to put their public finances on a sustainable footing. They need to devalue and rebalance their economies away from domestic consumption to exports. However, unlike in the case of Britain, which shares quite a few of their characteristics, they no longer have that option.
Many eurozone governments do not seem to have understood the implications of membership. When they signed up to the euro they effectively committed themselves to liberal economic policies. There is no eurozone government to transfer funds from stronger to weaker member-states. So if a country loses competitiveness it has no option but to cut its costs relative to the rest of the currency bloc. The best way of doing this is through higher productivity. The governments of the southern member-states have shown no urgency to improve their dire productivity performance. That leaves cuts in wages. To do this, countries need flexible labour markets, so real wages can fall as fell as rise. Unfortunately, they have shown similarly little enthusiasm for reforming their highly regulated labour markets.
However, the southern member-states should not shoulder all the blame for the fault lines within the eurozone. Germany is often cited as the country which understands how to flourish within a currency union. Germany has certainly shown discipline. Wage restraint has been relentless, boosting the country’s export competitiveness and producing a yawning current account surplus. Even after the crisis – which caused its exports to contract by nearly 20 per cent – Germany still has an external surplus of around 6 per cent of GDP and rising, over half of which is with the rest of the eurozone. But Germany’s strategy is hardly one that other countries can follow, because one country’s surplus is another’s deficit.
Despite the much-vaunted strengths of Germany’s exporters, the country’s economic growth performance has been poor since the introduction of the euro. And there is no sign of change. The only real impetus in the German economy comes from exports; private consumption remains chronically weak. After escaping recession earlier than most eurozone countries in 2009, Germany’s economy ground to a halt in the final quarter of 2009 and is likely to contract in the first three months of this year. Private consumption is all but certain to fall this year.
The weakness of Germany’s domestic demand will no doubt lead to renewed falls in real wages and to a further decline in Germany's trade-weighted exchange rate within the eurozone. Exports will again keep an otherwise stagnant economy afloat. But it will be all but impossible for the likes of Spain and Greece to put their public finances in order unless they can get their economies growing. For this, they must rebalance their trade with the rest of the eurozone. They need Germany to grow under its own steam.
Germany’s structural mercantilism may be little short of a beggar-thy-neighbour strategy, but the struggling member-states of the eurozone can hardly claim they were not warned, not least by Germany itself. The Germans were hardly cheerleaders for the euro, and were decidedly lukewarm about the southern Europeans joining. They were certainly not the ones holding the shot-gun at the wedding. They reluctantly accepted a broad membership, but on the condition that countries understood what they were getting themselves into.
Neither the Germans nor the other countries running big surpluses are taking steps to rebalance their economies. In order to retain the confidence of lenders the eurozone’s hard-hit governments will make big cuts in public spending. In the absence of strong exports, this will depress demand and with it economic growth, in turn undermining the attempt to strengthen public finances. Germany will agree to support a member-state which finds itself unable to tap the bond markets, in order to prevent contagion to other struggling member-states. But it will resist pressure for economic union, as this would involve the "stronger" economies transferring money to the "weaker" ones on an ongoing basis. Does this mean the eurozone is destined to unravel? No, but the future certainly looks decidedly troubled.
Simon Tilford is the chief economist at the Centre for European Reform.
There was always a risk that a one-size-fits-all monetary policy would lead to big divergences in inflation and competitiveness across the eurozone. This, in turn, would result in trade imbalances which would be difficult to reverse. Proponents of the single currency dismissed such concerns, arguing that the single currency was a political project, and that the economics would fall into place once the currency became a reality. The consequences of this line of reasoning are now clear. The eurozone faces a severe test. Greece – the member-state in the tightest spot – is far from unique. A number of other member-states could easily find themselves fighting to retain the confidence of the financial markets.
The crisis that has erupted within the eurozone has been brewing for a long time. The problems of the southern member-states – Greece, Spain and Portugal – were disguised by the credit boom, which underpinned economic growth (and tax revenues), while investors were happy to lend them money to cover their current account deficits. But when the financial crisis hit and economic growth collapsed, the underlying weakness of their public finances and trade positions were exposed.
The external deficits these countries are running with the eurozone’s surplus members – principally Germany and the Netherlands – are a huge drain on their economies, and will make it all but impossible for them to put their public finances on a sustainable footing. They need to devalue and rebalance their economies away from domestic consumption to exports. However, unlike in the case of Britain, which shares quite a few of their characteristics, they no longer have that option.
Many eurozone governments do not seem to have understood the implications of membership. When they signed up to the euro they effectively committed themselves to liberal economic policies. There is no eurozone government to transfer funds from stronger to weaker member-states. So if a country loses competitiveness it has no option but to cut its costs relative to the rest of the currency bloc. The best way of doing this is through higher productivity. The governments of the southern member-states have shown no urgency to improve their dire productivity performance. That leaves cuts in wages. To do this, countries need flexible labour markets, so real wages can fall as fell as rise. Unfortunately, they have shown similarly little enthusiasm for reforming their highly regulated labour markets.
However, the southern member-states should not shoulder all the blame for the fault lines within the eurozone. Germany is often cited as the country which understands how to flourish within a currency union. Germany has certainly shown discipline. Wage restraint has been relentless, boosting the country’s export competitiveness and producing a yawning current account surplus. Even after the crisis – which caused its exports to contract by nearly 20 per cent – Germany still has an external surplus of around 6 per cent of GDP and rising, over half of which is with the rest of the eurozone. But Germany’s strategy is hardly one that other countries can follow, because one country’s surplus is another’s deficit.
Despite the much-vaunted strengths of Germany’s exporters, the country’s economic growth performance has been poor since the introduction of the euro. And there is no sign of change. The only real impetus in the German economy comes from exports; private consumption remains chronically weak. After escaping recession earlier than most eurozone countries in 2009, Germany’s economy ground to a halt in the final quarter of 2009 and is likely to contract in the first three months of this year. Private consumption is all but certain to fall this year.
The weakness of Germany’s domestic demand will no doubt lead to renewed falls in real wages and to a further decline in Germany's trade-weighted exchange rate within the eurozone. Exports will again keep an otherwise stagnant economy afloat. But it will be all but impossible for the likes of Spain and Greece to put their public finances in order unless they can get their economies growing. For this, they must rebalance their trade with the rest of the eurozone. They need Germany to grow under its own steam.
Germany’s structural mercantilism may be little short of a beggar-thy-neighbour strategy, but the struggling member-states of the eurozone can hardly claim they were not warned, not least by Germany itself. The Germans were hardly cheerleaders for the euro, and were decidedly lukewarm about the southern Europeans joining. They were certainly not the ones holding the shot-gun at the wedding. They reluctantly accepted a broad membership, but on the condition that countries understood what they were getting themselves into.
Neither the Germans nor the other countries running big surpluses are taking steps to rebalance their economies. In order to retain the confidence of lenders the eurozone’s hard-hit governments will make big cuts in public spending. In the absence of strong exports, this will depress demand and with it economic growth, in turn undermining the attempt to strengthen public finances. Germany will agree to support a member-state which finds itself unable to tap the bond markets, in order to prevent contagion to other struggling member-states. But it will resist pressure for economic union, as this would involve the "stronger" economies transferring money to the "weaker" ones on an ongoing basis. Does this mean the eurozone is destined to unravel? No, but the future certainly looks decidedly troubled.
Simon Tilford is the chief economist at the Centre for European Reform.
Thursday, February 18, 2010
How to build an EU energy market
by Katinka Barysch
Unbundling the supply of energy from its transport, moving Europe towards a low-carbon energy system, and getting the Nabucco pipeline built – these were the priorities of the last energy commissioner, Andris Piebalgs. His successor, Günther Oettinger, will write his own to-do list. The EU now has a dedicated climate change commissioner, Connie Hedegard, with whom Oettinger will have to work closely. When it comes to the EU’s internal energy market and security of supply, Oettinger will also have to rethink.
Twelve years after the EU passed its first law to open up gas markets, and seven years after adopting a second package, there is still no EU-wide market for gas (electricity looks a little better). In France, Germany and other EU countries, big, vertically integrated energy companies have resisted the Commission’s successive attempts to create real competition. The last big push to break up these companies ended in a truce: the third energy package, adopted in 2009, allows gas companies to keep their pipelines, provided they run them as truly separate entities.
Oettinger and his team in the EU directorate-general for energy will have their hands full to make sure that EU countries implement the third package by the 2011 deadline. There is little appetite for re-opening the unbundling debate for now. If and when Europeans start talking about the fourth gas package, their focus will probably shift towards infrastructure and market regulations.
It has become clear that passing laws on liberalisation will not in itself deliver a European energy market. The physical links between national markets are missing. Moreover, the 2009 gas crisis illustrated that a functioning internal market is not only needed to deliver reliable, low-cost energy to European households and factories. It is also the EU’s main tool for improving security of supply. Gas links allow countries to switch suppliers in case of emergency.
The EU budget allocates only around €250 million a year to energy infrastructure (under the trans-European networks for energy, or TEN-E, programme). The EU’s economic recovery programme from last year earmarked €2.4 billion for energy projects, parts of it for the so-called interconnectors between national power grids and gas pipeline networks. Now the Commission has suggested that the EU should set up a new fund for the next EU budget period, which starts in 2014. This ‘energy security and infrastructure instrument’ could dispatch €1-2 billion a year.
Energy experts disagree whether public money is needed to build interconnectors, and if so, how much. The market alone will probably not deliver all the links needed for a Europe-wide network. But it should deliver most of it. The Clingendael Institute, a Dutch think-tank, reports that over the last decade, Europe has added a mere 1,000 kilometres to its trans-national pipeline network. In the US – where unbundling was completed by the early 1990s – private companies have built around 30,000 kilometres of new pipelines over the same period (in response to approximately the same gas demand growth).
The difference between the European and the American gas market is not only its size and the degree of liberalisation but also the way the market is regulated and run. Even if EU companies were fully unbundled, different regulations and licensing procedures in the various EU countries would still make it unnecessarily hard to build infrastructure that straddles borders. Harmonisation is needed here. Moreover, the EU may have to allow those companies that build cross-border links higher returns on their investment. To figure out which connections would make most sense for the EU as a whole, a Union-wide infrastructure plan is needed.
The EU has asked a new group of network operators (called ENTSO) to draw up a European infrastructure priority plan. And it is establishing a new ‘agency for the co-operation of energy regulators’ (ACER) in Slovenia. However, ENTSO’s plan may well be subject to the same national horse-trading that has characterised the allocation of previous EU infrastructure money. And it will not be binding on companies or governments. For economic and energy security considerations to take precedence, ACER should be given a stronger say in defining infrastructure priorities and driving harmonisation of licensing regimes forward. Only then could the EU justify setting up a new multi-billion euro energy infrastructure fund.
Katinka Barysch is deputy director of the Centre for European Reform.
Unbundling the supply of energy from its transport, moving Europe towards a low-carbon energy system, and getting the Nabucco pipeline built – these were the priorities of the last energy commissioner, Andris Piebalgs. His successor, Günther Oettinger, will write his own to-do list. The EU now has a dedicated climate change commissioner, Connie Hedegard, with whom Oettinger will have to work closely. When it comes to the EU’s internal energy market and security of supply, Oettinger will also have to rethink.
Twelve years after the EU passed its first law to open up gas markets, and seven years after adopting a second package, there is still no EU-wide market for gas (electricity looks a little better). In France, Germany and other EU countries, big, vertically integrated energy companies have resisted the Commission’s successive attempts to create real competition. The last big push to break up these companies ended in a truce: the third energy package, adopted in 2009, allows gas companies to keep their pipelines, provided they run them as truly separate entities.
Oettinger and his team in the EU directorate-general for energy will have their hands full to make sure that EU countries implement the third package by the 2011 deadline. There is little appetite for re-opening the unbundling debate for now. If and when Europeans start talking about the fourth gas package, their focus will probably shift towards infrastructure and market regulations.
It has become clear that passing laws on liberalisation will not in itself deliver a European energy market. The physical links between national markets are missing. Moreover, the 2009 gas crisis illustrated that a functioning internal market is not only needed to deliver reliable, low-cost energy to European households and factories. It is also the EU’s main tool for improving security of supply. Gas links allow countries to switch suppliers in case of emergency.
The EU budget allocates only around €250 million a year to energy infrastructure (under the trans-European networks for energy, or TEN-E, programme). The EU’s economic recovery programme from last year earmarked €2.4 billion for energy projects, parts of it for the so-called interconnectors between national power grids and gas pipeline networks. Now the Commission has suggested that the EU should set up a new fund for the next EU budget period, which starts in 2014. This ‘energy security and infrastructure instrument’ could dispatch €1-2 billion a year.
Energy experts disagree whether public money is needed to build interconnectors, and if so, how much. The market alone will probably not deliver all the links needed for a Europe-wide network. But it should deliver most of it. The Clingendael Institute, a Dutch think-tank, reports that over the last decade, Europe has added a mere 1,000 kilometres to its trans-national pipeline network. In the US – where unbundling was completed by the early 1990s – private companies have built around 30,000 kilometres of new pipelines over the same period (in response to approximately the same gas demand growth).
The difference between the European and the American gas market is not only its size and the degree of liberalisation but also the way the market is regulated and run. Even if EU companies were fully unbundled, different regulations and licensing procedures in the various EU countries would still make it unnecessarily hard to build infrastructure that straddles borders. Harmonisation is needed here. Moreover, the EU may have to allow those companies that build cross-border links higher returns on their investment. To figure out which connections would make most sense for the EU as a whole, a Union-wide infrastructure plan is needed.
The EU has asked a new group of network operators (called ENTSO) to draw up a European infrastructure priority plan. And it is establishing a new ‘agency for the co-operation of energy regulators’ (ACER) in Slovenia. However, ENTSO’s plan may well be subject to the same national horse-trading that has characterised the allocation of previous EU infrastructure money. And it will not be binding on companies or governments. For economic and energy security considerations to take precedence, ACER should be given a stronger say in defining infrastructure priorities and driving harmonisation of licensing regimes forward. Only then could the EU justify setting up a new multi-billion euro energy infrastructure fund.
Katinka Barysch is deputy director of the Centre for European Reform.
Monday, February 15, 2010
Britain explores sharing defence equipment with Europe
by Clara Marina O'Donnell
With its public finances under growing strain, Britain may soon be forced to look at saving defence costs by pooling its military assets with those of its allies. The decision will not be taken until after the next general election (which will probably be held in May 2010). In the meantime, however, the issues at stake have been set out in a report published by the ministry of defence on February 3rd.
The ministry of defence’s green paper lays out the main questions for the forthcoming strategic defence review. It is the first British government document to put such a strong emphasis on exploring the possibilities for integrating defence forces amongst allies. The proposals reflect the extent of the financial constraints on the British defence budget. Indeed, the report warns that the UK “cannot proceed with the activities and programmes [it] currently aspires to, while simultaneously supporting [its] current operations and investing in the new capabilities [it] needs.” While restating the importance of bilateral relations with the US, the paper also, unusually, highlights the possibility of pooling assets and specialising in certain equipment within the EU, in addition to NATO.
Because of smaller defence budgets, other European countries have already had to start integrating capabilities and specialising. The Czechs notably have chosen to focus on developing expertise against chemical and biological warfare. But to date Britain has been able to maintain the full spectrum of capabilities autonomously and only shares common equipment for space. (The UK is also somewhat dependent on the US for its nuclear deterrent, because it uses US technology.)
Over the last decades, the only cooperative efforts in which Britain has participated have been joint programmes to develop equipment which Britain has then owned nationally. For example, during the Cold War, the UK teamed up with France to develop the Jaguar aircraft and a series of helicopters, and it worked with Germany and Italy to develop the Tornado aircraft. Today, Britain, Germany and Spain are developing the Eurofighter and the UK is part of the European effort to build the A400M military aircraft. Britain is also a leading partner in the transatlantic initiative to build the Joint Strike Fighter aircraft. And through the EU’s European Defence Agency, the UK takes part in efforts to explore further common procurement programmes.
The CER has long argued that Britain could increase the cost-effectiveness of its defence procurement by working more closely with its allies – be it through sharing assets or less ambitiously through more co-operation on logistics and training. For some collaborative efforts, working through NATO or the EU can be a useful umbrella (such as conducting research for a next generation of unmanned air vehicles). A large group of countries will provide larger funds and ensure more defence ministries adopt the capabilities developed. This in turn strengthens interoperability and increases the amount of capabilities across Europe. But large groups of countries also make cooperative efforts more cumbersome. So for big ticket items, like aircraft carriers, it makes more sense for Britain to explore possible synergies with only one or two likeminded countries. France is an obvious partner with whom to explore sharing assets. It is the only other country in Europe to have maintained a full spectrum of capabilities and it has a defence budget similar to the UK’s. (While the US is Britain’s closest ally, it is not under the same pressure to pool resources because of its large defence budget.)
If Britain were to pool assets or rely more on allies to provide certain capabilities, its autonomy could be affected – if Britain and France shared a fleet of carriers, France might not agree to send them on a mission to which Britain wanted to contribute. But faced with the prospect of having to abandon some capabilities completely, sharing appears less daunting. (For more on the benefits and costs of pooling assets, see Clara Marina O’Donnell, Britain must pool defence capabilities,CER bulletin October/November 2009.)
http://www.cer.org.uk/articles/68_odonnell.html
To what extent might a Labour or Conservative government explore the possibilities of deeper co-operation with various allies in the forthcoming strategic defence review. The fact that the current government has presented the green paper is an encouraging sign, and more than one defence minister has voiced interest in re-exploring collaborations with the French on aircraft carriers.
The Conservative shadow cabinet supports closer collaboration on capabilities with certain allies, in particular the US and France. Conservatives are less keen on strengthening defence co-operation within the EU. Shadow Secretary of State for defence Liam Fox still toys with the idea of withdrawing Britain from the European Defence Agency, if the Conservatives win the next elections.
It would be unfortunate if a Conservative government withdrew from closer EU defence co-operation. Britain stands to benefit from collaborative efforts under the EDA’s umbrella, not least because it can be used to encourage other European countries to develop some badly needed equipment, including for Afghanistan. In addition, France might be less keen to work bilaterally with the UK on big ticket items, if London undermines EU defence efforts in which Paris has invested much political capital over the last decade.
Britain has dared to ask itself the right questions, now it must explore the answers. The defence review will force the UK to reflect on the role it wants to play in the world and how it develops the means to play that role. The next government should explore all avenues of co-operation, from shared maintenance to pooling assets, and it should explore them with all its allies – be it bilaterally, particularly with France, or through NATO and the EU. Such co-operation might somewhat reduce Britain’s autonomy, but it might be the only option for the UK to remain a global player.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
With its public finances under growing strain, Britain may soon be forced to look at saving defence costs by pooling its military assets with those of its allies. The decision will not be taken until after the next general election (which will probably be held in May 2010). In the meantime, however, the issues at stake have been set out in a report published by the ministry of defence on February 3rd.
The ministry of defence’s green paper lays out the main questions for the forthcoming strategic defence review. It is the first British government document to put such a strong emphasis on exploring the possibilities for integrating defence forces amongst allies. The proposals reflect the extent of the financial constraints on the British defence budget. Indeed, the report warns that the UK “cannot proceed with the activities and programmes [it] currently aspires to, while simultaneously supporting [its] current operations and investing in the new capabilities [it] needs.” While restating the importance of bilateral relations with the US, the paper also, unusually, highlights the possibility of pooling assets and specialising in certain equipment within the EU, in addition to NATO.
Because of smaller defence budgets, other European countries have already had to start integrating capabilities and specialising. The Czechs notably have chosen to focus on developing expertise against chemical and biological warfare. But to date Britain has been able to maintain the full spectrum of capabilities autonomously and only shares common equipment for space. (The UK is also somewhat dependent on the US for its nuclear deterrent, because it uses US technology.)
Over the last decades, the only cooperative efforts in which Britain has participated have been joint programmes to develop equipment which Britain has then owned nationally. For example, during the Cold War, the UK teamed up with France to develop the Jaguar aircraft and a series of helicopters, and it worked with Germany and Italy to develop the Tornado aircraft. Today, Britain, Germany and Spain are developing the Eurofighter and the UK is part of the European effort to build the A400M military aircraft. Britain is also a leading partner in the transatlantic initiative to build the Joint Strike Fighter aircraft. And through the EU’s European Defence Agency, the UK takes part in efforts to explore further common procurement programmes.
The CER has long argued that Britain could increase the cost-effectiveness of its defence procurement by working more closely with its allies – be it through sharing assets or less ambitiously through more co-operation on logistics and training. For some collaborative efforts, working through NATO or the EU can be a useful umbrella (such as conducting research for a next generation of unmanned air vehicles). A large group of countries will provide larger funds and ensure more defence ministries adopt the capabilities developed. This in turn strengthens interoperability and increases the amount of capabilities across Europe. But large groups of countries also make cooperative efforts more cumbersome. So for big ticket items, like aircraft carriers, it makes more sense for Britain to explore possible synergies with only one or two likeminded countries. France is an obvious partner with whom to explore sharing assets. It is the only other country in Europe to have maintained a full spectrum of capabilities and it has a defence budget similar to the UK’s. (While the US is Britain’s closest ally, it is not under the same pressure to pool resources because of its large defence budget.)
If Britain were to pool assets or rely more on allies to provide certain capabilities, its autonomy could be affected – if Britain and France shared a fleet of carriers, France might not agree to send them on a mission to which Britain wanted to contribute. But faced with the prospect of having to abandon some capabilities completely, sharing appears less daunting. (For more on the benefits and costs of pooling assets, see Clara Marina O’Donnell, Britain must pool defence capabilities,CER bulletin October/November 2009.)
http://www.cer.org.uk/articles/68_odonnell.html
To what extent might a Labour or Conservative government explore the possibilities of deeper co-operation with various allies in the forthcoming strategic defence review. The fact that the current government has presented the green paper is an encouraging sign, and more than one defence minister has voiced interest in re-exploring collaborations with the French on aircraft carriers.
The Conservative shadow cabinet supports closer collaboration on capabilities with certain allies, in particular the US and France. Conservatives are less keen on strengthening defence co-operation within the EU. Shadow Secretary of State for defence Liam Fox still toys with the idea of withdrawing Britain from the European Defence Agency, if the Conservatives win the next elections.
It would be unfortunate if a Conservative government withdrew from closer EU defence co-operation. Britain stands to benefit from collaborative efforts under the EDA’s umbrella, not least because it can be used to encourage other European countries to develop some badly needed equipment, including for Afghanistan. In addition, France might be less keen to work bilaterally with the UK on big ticket items, if London undermines EU defence efforts in which Paris has invested much political capital over the last decade.
Britain has dared to ask itself the right questions, now it must explore the answers. The defence review will force the UK to reflect on the role it wants to play in the world and how it develops the means to play that role. The next government should explore all avenues of co-operation, from shared maintenance to pooling assets, and it should explore them with all its allies – be it bilaterally, particularly with France, or through NATO and the EU. Such co-operation might somewhat reduce Britain’s autonomy, but it might be the only option for the UK to remain a global player.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
Friday, January 29, 2010
Pipeline politics: Why Nabucco is stuck
by Katinka Barysch
Last year, plans for the Nabucco pipeline – almost a decade in the making – appeared finally to make some headway. In March, the EU earmarked €200 million for preparatory work. The European Investment Bank and the European Bank for Reconstruction and Development promised to help with financing the €10 billion cost. In July, the countries through which the 3,000 km pipeline will run (Austria, Bulgaria, Hungary, Romania and Turkey) signed a long-awaited ‘intergovernmental agreement’ on transit rules. Ratification of the IGA has been plodding along. Meanwhile, the six energy companies (from the transit states and Germany) that form the Nabucco consortium continued to look for gas to fill the pipeline. Two of them are trying to get involved in a big gas project in northern Iraq and another one in Turkmenistan. The EU started looking at the idea of aggregating European gas contracts through a ‘Caspian development corporation’ to get the likes of Turkmenistan interested in selling large volumes of gas westwards.
Now, however, Nabucco is stuck again. The reason is a dispute between Turkey and Azerbaijan. The 8 billion cubic metres of gas for the first phase of Nabucco was always expected to come from Azerbaijan’s new Shah Deniz II gas development. But Baku and Ankara cannot agree on how much Azerbaijani gas should go to Turkey, at what price and under what conditions. While the dispute continues, the companies involved in Shah Deniz II have stopped drilling.
Turkey already buys around 6 bcm of gas from the Shah Deniz I field, for a very good price. It sells half of that gas on to Greece at a much higher price. Baku insists that the old pricing formula needs to be revised. Turkey disagrees. As long as this issue is not resolved, an agreement on the Shah Deniz II gas looks unlikely. Without that gas, it is hard to see how Nabucco could get under way. Meanwhile, Azerbaijan has started shipping gas to Russia instead and promised to sell some to Iran and even China.
Although both Turkey and Azerbaijan insist that they really quarrel about energy, the fact that the two countries get on badly these days does not help. Azerbaijan became less forthcoming in the negotiations after Turkey announced a courageous plan to normalise its relationship with Armenia last year. Azerbaijan is furious about the idea that Turkey could open its border with Armenia before a solution has been found for the ‘frozen’ conflict in Nagorno-Karabakh, an area that has been occupied by Armenian troops since the early 1990s. Turkish leaders are in fact ambiguous about that, with Prime Minister Erdogan saying that the two issues are linked somehow. The Turkish parliament has not yet ratified the documents needed for the normalisation of relations with Armenia. Some now say it never will.
Although the prospects for a Nagorno-Karabakh settlement are not great, it is likely that Turkey and Azerbaijan will eventually reach a deal on energy that could restore momentum to Nabucco. Baku has a strategic interest in getting access to the European gas market. Turkey’s interest in becoming a European energy hub is just as strong. Both countries know that once gas starts flowing through Nabucco (or another pipeline that connects the EU market directly with the huge gas reserves of the Caspian), oil majors will be much more willing to explore other projects in the region.
The EU should stand ready to give Nabucco a bit of a political push once the Turkey-Azerbaijan dispute is resolved. Europeans have been too ready to dismiss Nabucco as a ‘pipe dream’. Russia, on the other hand, is taking it extremely seriously. Moscow fears that Nabucco will further erode its lucrative and politically expedient gas transport monopoly on the Eurasian landmass. It is pushing the rival South Stream pipeline and has signed agreements with a number of potential transit countries, including Turkey. It is also trying to buy up gas that could potentially feed Nabucco in Azerbaijan and Turkmenistan. A lot of that is posturing: “Any energy company that wants something from Russia at the moment has to sign up to South Stream,” says one gas expert. The memoranda of understanding on South Stream are vague and do not involve any financial obligations. But they could be just enough to put off potential financiers for Nabucco and sap what little political momentum there still is behind the project.
South Stream looks expensive, technologically complicated and unnecessary. Nabucco appears relatively realistic and it is further advanced in the planning process. The EU should call the Russians’ bluff by asking Gazprom to use Nabucco to ship gas into South and Central Europe.
The EU also needs to work harder to create more coherence between its energy policy and the political relationships it is building with potential supplier countries. In the past, the energy and foreign relations departments of the Commission, the European Council's high representative and the member-states have not always acted in unison.
The Lisbon treaty (which streamlines the EU’s foreign policy machinery) should help. But the EU’s nascent energy diplomacy can only make progress if the EU governments allow this to happen. Many European leaders and officials (in particular in Germany) remain convinced that the task of securing oil and gas supplies must be left to private companies and that the EU has no role to play in talking to energy producing countries about gas contracts and pipelines. The current highly politicised dispute over Nabucco should help to convince them of the contrary.
Katinka Barysch is deputy director of the Centre for European Reform.
Last year, plans for the Nabucco pipeline – almost a decade in the making – appeared finally to make some headway. In March, the EU earmarked €200 million for preparatory work. The European Investment Bank and the European Bank for Reconstruction and Development promised to help with financing the €10 billion cost. In July, the countries through which the 3,000 km pipeline will run (Austria, Bulgaria, Hungary, Romania and Turkey) signed a long-awaited ‘intergovernmental agreement’ on transit rules. Ratification of the IGA has been plodding along. Meanwhile, the six energy companies (from the transit states and Germany) that form the Nabucco consortium continued to look for gas to fill the pipeline. Two of them are trying to get involved in a big gas project in northern Iraq and another one in Turkmenistan. The EU started looking at the idea of aggregating European gas contracts through a ‘Caspian development corporation’ to get the likes of Turkmenistan interested in selling large volumes of gas westwards.
Now, however, Nabucco is stuck again. The reason is a dispute between Turkey and Azerbaijan. The 8 billion cubic metres of gas for the first phase of Nabucco was always expected to come from Azerbaijan’s new Shah Deniz II gas development. But Baku and Ankara cannot agree on how much Azerbaijani gas should go to Turkey, at what price and under what conditions. While the dispute continues, the companies involved in Shah Deniz II have stopped drilling.
Turkey already buys around 6 bcm of gas from the Shah Deniz I field, for a very good price. It sells half of that gas on to Greece at a much higher price. Baku insists that the old pricing formula needs to be revised. Turkey disagrees. As long as this issue is not resolved, an agreement on the Shah Deniz II gas looks unlikely. Without that gas, it is hard to see how Nabucco could get under way. Meanwhile, Azerbaijan has started shipping gas to Russia instead and promised to sell some to Iran and even China.
Although both Turkey and Azerbaijan insist that they really quarrel about energy, the fact that the two countries get on badly these days does not help. Azerbaijan became less forthcoming in the negotiations after Turkey announced a courageous plan to normalise its relationship with Armenia last year. Azerbaijan is furious about the idea that Turkey could open its border with Armenia before a solution has been found for the ‘frozen’ conflict in Nagorno-Karabakh, an area that has been occupied by Armenian troops since the early 1990s. Turkish leaders are in fact ambiguous about that, with Prime Minister Erdogan saying that the two issues are linked somehow. The Turkish parliament has not yet ratified the documents needed for the normalisation of relations with Armenia. Some now say it never will.
Although the prospects for a Nagorno-Karabakh settlement are not great, it is likely that Turkey and Azerbaijan will eventually reach a deal on energy that could restore momentum to Nabucco. Baku has a strategic interest in getting access to the European gas market. Turkey’s interest in becoming a European energy hub is just as strong. Both countries know that once gas starts flowing through Nabucco (or another pipeline that connects the EU market directly with the huge gas reserves of the Caspian), oil majors will be much more willing to explore other projects in the region.
The EU should stand ready to give Nabucco a bit of a political push once the Turkey-Azerbaijan dispute is resolved. Europeans have been too ready to dismiss Nabucco as a ‘pipe dream’. Russia, on the other hand, is taking it extremely seriously. Moscow fears that Nabucco will further erode its lucrative and politically expedient gas transport monopoly on the Eurasian landmass. It is pushing the rival South Stream pipeline and has signed agreements with a number of potential transit countries, including Turkey. It is also trying to buy up gas that could potentially feed Nabucco in Azerbaijan and Turkmenistan. A lot of that is posturing: “Any energy company that wants something from Russia at the moment has to sign up to South Stream,” says one gas expert. The memoranda of understanding on South Stream are vague and do not involve any financial obligations. But they could be just enough to put off potential financiers for Nabucco and sap what little political momentum there still is behind the project.
South Stream looks expensive, technologically complicated and unnecessary. Nabucco appears relatively realistic and it is further advanced in the planning process. The EU should call the Russians’ bluff by asking Gazprom to use Nabucco to ship gas into South and Central Europe.
The EU also needs to work harder to create more coherence between its energy policy and the political relationships it is building with potential supplier countries. In the past, the energy and foreign relations departments of the Commission, the European Council's high representative and the member-states have not always acted in unison.
The Lisbon treaty (which streamlines the EU’s foreign policy machinery) should help. But the EU’s nascent energy diplomacy can only make progress if the EU governments allow this to happen. Many European leaders and officials (in particular in Germany) remain convinced that the task of securing oil and gas supplies must be left to private companies and that the EU has no role to play in talking to energy producing countries about gas contracts and pipelines. The current highly politicised dispute over Nabucco should help to convince them of the contrary.
Katinka Barysch is deputy director of the Centre for European Reform.
Friday, January 22, 2010
China’s peaceful rise turns prickly
by Charles Grant
Have western attitudes to the rise of China been based on wishful thinking? China’s increasingly tough approach to diplomacy is leading governments in the US and in Europe to rethink their policies towards China. Western leaders are starting to question some of the optimistic assumptions on which those policies have been based.
Until very recently, many western bankers, business people and politicians were broadly optimistic about the rise of China. They assumed that as China became more developed it would become more western. As it integrated into the global economy its society would open up, it would play a constructive role in multilateral institutions, and it would help western governments sort out key foreign policy challenges. China’s leaders seemed to understand that their top priority – the economic development of their country – required friendly relations with other major powers, notably the US.
There has also been a pessimistic view of China’s rise, held by people in the US defence establishment, some right-wing think-tanks and the human rights lobbies. They have argued that as China develops it is becoming more assertive, less willing to compromise with the West, less welcoming to foreign investors and more repressive politically. Like other rising powers throughout history, the pessimists have thought, China would disrupt the international system. They have pointed to China’s soaring defence budget as support for their case.
Of course, both views have been based on truth. China is not a monolithic entity. Within the leadership, many institutions and personal and ideological factions compete for power. But until recently the optimists dominated western views of China. I was an optimist when, two years ago, I wrote (with Katinka Barysch) ‘Can Europe and China shape a new world order?’ (http://www.cer.org.uk/pdf/p_837.pdf). Our report argued that China was evolving into the “responsible global stakeholder” that Robert Zoellick had urged it to become when he was US deputy secretary of state.
Over the past year the optimists have found it increasingly difficult to sustain their view. There are still examples of China being helpful – for example, it has sent ships to catch pirates in the Indian Ocean, and engaged in G20 discussions – but overall it has become a much pricklier partner.
China’s foreign policy has become more assertive. Its claims to the Indian state of Arunachal Pradesh have become more vociferous. It is being less helpful to the West over the Iranian nuclear problem – and has become more hostile than Russia to further sanctions on Iran. Its treatment of the EU is sometimes contemptuous – it cancelled one summit and regularly punishes countries whose leaders meet the Dalai Lama in an official setting. Western governments have suffered increasingly powerful cyber-attacks that have been traced to mainland China.
China’s political system has become more repressive. Moves to introduce greater democracy into local government and the Communist Party have faltered. Dissidents are facing a tougher time. In December Liu Xiaobo was sentenced to 11 years in prison for organising a pro-democracy petition.
China’s economic policies have become more nationalist. Many foreign investors in China complain about exclusion from key markets and unofficial forms of discrimination. China’s manipulation of its currency downwards, driven by a mercantilist desire to boost exports and foreign currency reserves, exacerbates the problem of global economic imbalances and is fuelling protectionist sentiment in other countries.
Recent events have brought home to public opinion in the West how China is changing. At the Copenhagen climate change conference in December, China worked hard behind the scenes to scupper the kind of deal that western countries and many poor nations wanted (at one point it sent a deputy foreign minister to negotiate with Barack Obama). And this month Google has said that it may leave China because of cyber attacks on its business and increasingly stringent internet censorship.
If one talks to people in China about the troubled state of relations between China and the West, many of them are baffled. They know little of the incidents that have caused problems, which are unreported in the Chinese media. They say that most Chinese people are focused on domestic issues – such as jobs, pollution and soaring house prices – rather than foreign policy.
So the source of China’s tougher line seems to be the leadership, rather than pressure from the people. Three factors may explain why hard-liners are winning more arguments within the leadership.
• China’s economy has performed impressively during the global recession, growing by 9 per cent in 2009. Meanwhile the western economic model is viewed as discredited. China’s leaders would not be human if they did not feel a bit cocky – especially since they have been on the receiving end of patronising lectures from western leaders about the superiority of western capitalism. The emerging super-power feels it has the right to assert its own interests more forcefully.
• Yet China’s leaders feel insecure. The unrest in Tibet (in 2008) and Xinjiang (in 2009) caught them by surprise. Rapid economic growth and urbanisation are creating huge social tensions. Endemic corruption makes local party bureaucrats unpopular. The booming housing market – fuelled by the government selling land to property speculators – means that many young middle class people cannot afford to buy flats. Few Chinese people want western-style democracy, but the leaders know their legitimacy is built on thin foundations. Hence their reluctance to allow a more open society.
• The current leadership, led by Hu Jintao and Wen Xiabao, is due to hand over to the ‘fifth generation’ of leaders in 2012. There is much manoeuvring for position. The machinations within Zhongnanhai, where the top communists live and work, are impossible to decipher. But some key figures seem to be pushing a nationalist line in order to boost their support among party cadres. In China, as in most countries, nationalist policies can be popular.
American attitudes to China are palpably hardening. At some point this year the US may declare China to be a currency manipulator and then apply protectionist measures. The EU finds it very difficult to get tough with anyone. But European leaders are increasingly critical of China, at least in private. China’s leaders should not assume that European markets will remain open to them indefinitely.
China’s attitude to international relations is ultra-realist. It will take what it can get, while respecting power and facts. But China’s leaders may have miscalculated by underestimating the impact of their harder line on Washington and European capitals. How well-informed are the people in Jonghnanhai? Do they receive objective reports on how Chinese words and actions impact on western political systems? And do they care what western leaders think?
Undoubtedly, there are Chinese leaders who stand by the premise of the ‘peaceful rise’ slogan – that China’s economic development requires some modesty in international affairs and good relations with the West. When the most senior leaders see that their current approach may spur several powerful countries to work together to contain China, they may wish to modify their course. But if they maintain the hard line for a prolonged period, China’s relations with the West will become very tense. Free trade and the world economy may well suffer.
Charles Grant is director of the Centre for European Reform.
Have western attitudes to the rise of China been based on wishful thinking? China’s increasingly tough approach to diplomacy is leading governments in the US and in Europe to rethink their policies towards China. Western leaders are starting to question some of the optimistic assumptions on which those policies have been based.
Until very recently, many western bankers, business people and politicians were broadly optimistic about the rise of China. They assumed that as China became more developed it would become more western. As it integrated into the global economy its society would open up, it would play a constructive role in multilateral institutions, and it would help western governments sort out key foreign policy challenges. China’s leaders seemed to understand that their top priority – the economic development of their country – required friendly relations with other major powers, notably the US.
There has also been a pessimistic view of China’s rise, held by people in the US defence establishment, some right-wing think-tanks and the human rights lobbies. They have argued that as China develops it is becoming more assertive, less willing to compromise with the West, less welcoming to foreign investors and more repressive politically. Like other rising powers throughout history, the pessimists have thought, China would disrupt the international system. They have pointed to China’s soaring defence budget as support for their case.
Of course, both views have been based on truth. China is not a monolithic entity. Within the leadership, many institutions and personal and ideological factions compete for power. But until recently the optimists dominated western views of China. I was an optimist when, two years ago, I wrote (with Katinka Barysch) ‘Can Europe and China shape a new world order?’ (http://www.cer.org.uk/pdf/p_837.pdf). Our report argued that China was evolving into the “responsible global stakeholder” that Robert Zoellick had urged it to become when he was US deputy secretary of state.
Over the past year the optimists have found it increasingly difficult to sustain their view. There are still examples of China being helpful – for example, it has sent ships to catch pirates in the Indian Ocean, and engaged in G20 discussions – but overall it has become a much pricklier partner.
China’s foreign policy has become more assertive. Its claims to the Indian state of Arunachal Pradesh have become more vociferous. It is being less helpful to the West over the Iranian nuclear problem – and has become more hostile than Russia to further sanctions on Iran. Its treatment of the EU is sometimes contemptuous – it cancelled one summit and regularly punishes countries whose leaders meet the Dalai Lama in an official setting. Western governments have suffered increasingly powerful cyber-attacks that have been traced to mainland China.
China’s political system has become more repressive. Moves to introduce greater democracy into local government and the Communist Party have faltered. Dissidents are facing a tougher time. In December Liu Xiaobo was sentenced to 11 years in prison for organising a pro-democracy petition.
China’s economic policies have become more nationalist. Many foreign investors in China complain about exclusion from key markets and unofficial forms of discrimination. China’s manipulation of its currency downwards, driven by a mercantilist desire to boost exports and foreign currency reserves, exacerbates the problem of global economic imbalances and is fuelling protectionist sentiment in other countries.
Recent events have brought home to public opinion in the West how China is changing. At the Copenhagen climate change conference in December, China worked hard behind the scenes to scupper the kind of deal that western countries and many poor nations wanted (at one point it sent a deputy foreign minister to negotiate with Barack Obama). And this month Google has said that it may leave China because of cyber attacks on its business and increasingly stringent internet censorship.
If one talks to people in China about the troubled state of relations between China and the West, many of them are baffled. They know little of the incidents that have caused problems, which are unreported in the Chinese media. They say that most Chinese people are focused on domestic issues – such as jobs, pollution and soaring house prices – rather than foreign policy.
So the source of China’s tougher line seems to be the leadership, rather than pressure from the people. Three factors may explain why hard-liners are winning more arguments within the leadership.
• China’s economy has performed impressively during the global recession, growing by 9 per cent in 2009. Meanwhile the western economic model is viewed as discredited. China’s leaders would not be human if they did not feel a bit cocky – especially since they have been on the receiving end of patronising lectures from western leaders about the superiority of western capitalism. The emerging super-power feels it has the right to assert its own interests more forcefully.
• Yet China’s leaders feel insecure. The unrest in Tibet (in 2008) and Xinjiang (in 2009) caught them by surprise. Rapid economic growth and urbanisation are creating huge social tensions. Endemic corruption makes local party bureaucrats unpopular. The booming housing market – fuelled by the government selling land to property speculators – means that many young middle class people cannot afford to buy flats. Few Chinese people want western-style democracy, but the leaders know their legitimacy is built on thin foundations. Hence their reluctance to allow a more open society.
• The current leadership, led by Hu Jintao and Wen Xiabao, is due to hand over to the ‘fifth generation’ of leaders in 2012. There is much manoeuvring for position. The machinations within Zhongnanhai, where the top communists live and work, are impossible to decipher. But some key figures seem to be pushing a nationalist line in order to boost their support among party cadres. In China, as in most countries, nationalist policies can be popular.
American attitudes to China are palpably hardening. At some point this year the US may declare China to be a currency manipulator and then apply protectionist measures. The EU finds it very difficult to get tough with anyone. But European leaders are increasingly critical of China, at least in private. China’s leaders should not assume that European markets will remain open to them indefinitely.
China’s attitude to international relations is ultra-realist. It will take what it can get, while respecting power and facts. But China’s leaders may have miscalculated by underestimating the impact of their harder line on Washington and European capitals. How well-informed are the people in Jonghnanhai? Do they receive objective reports on how Chinese words and actions impact on western political systems? And do they care what western leaders think?
Undoubtedly, there are Chinese leaders who stand by the premise of the ‘peaceful rise’ slogan – that China’s economic development requires some modesty in international affairs and good relations with the West. When the most senior leaders see that their current approach may spur several powerful countries to work together to contain China, they may wish to modify their course. But if they maintain the hard line for a prolonged period, China’s relations with the West will become very tense. Free trade and the world economy may well suffer.
Charles Grant is director of the Centre for European Reform.
Wednesday, December 23, 2009
The EU must learn from its mistakes over the past decade
by Hugo Brady
The EU needs new thinking. After eight years of stop-start negotiations, the Union finally has a new rulebook, the Lisbon treaty, which entered into force earlier this month. The member-states are waiting for a new European Commission and a new European Council president to take office early next year. But, despite Europeans’ shared anxieties about economic growth, government debt, the stability of the euro, immigration and the environment, there is not yet a clear sense of what the EU’s priorities for the next five years should or will be.
Given the global recession, many assume that the EU’s next ‘big idea’ will have an economic focus. Mario Monti, a former competition commissioner, has already proposed that EU countries should quicken their recovery from the crisis by opening up trade in services in exchange for a deal on harmonising tax bases. Others expect a new initiative on climate change – like a European carbon bank – or tighter rules on deficit spending to prevent the risk of default in the euro area.
But those thinking seriously about the EU’s future would do better to use the dying days of the decade to consider carefully the Union's mistakes and failures over the last ten years – before they chart ambitious new courses. The EU was neither sclerotic nor paralysed during the years 2000-09. It successfully rolled out a single currency, expanded to 27 members, established the world’s first functioning carbon trading scheme, deployed its first military missions and agreed a common arrest warrant to tackle cross-border crime. Nonetheless, the member-states would be wise to acknowledge several key failures from the same period:
• The EU spent most of the decade following the will o' the wisp of a grand constitution, to the detriment of its reputation both within the Union and in the outside world. That the Union repeated the exercise of treaty-writing so soon after a similarly troubling experience with the Treaty of Nice reveals a weakness for introspection which should be resisted in future. Let us hope that the innovations to EU business brought in by the Lisbon treaty will justify the time and effort spent on it.
• The premature accession of Bulgaria and Romania to the Union in 2007 damaged the credibility of EU enlargement, due to persistent problems with corruption and organised crime in these countries. Now that they are full EU members, reform of public administration and the judiciary has slowed.
• The EU made a similar error in allowing the accession of Cyprus in 2004. In doing so, the member-states removed probably the only international leverage that could have helped to push the island's territorial conflict to resolution. Since then the Cypriot government has unabashedly used its EU veto to complicate the Union’s ties with Turkey and NATO. Both of those relationships are critical for the Union's geopolitical standing.
• The EU spent most of the decade trying to convince key global players like the US or China that it is an emerging actor in a multipolar world. Yet it has been unable to overcome internal divisions over its relations with Russia, energy policy and reform of European representation in international organisations. Even the Union's jealously guarded image as a global leader on climate change is exaggerated (the final deal at the Copenhagen climate change summit was crafted in the absence of the EU). Unless the member-states find a way of summoning the political will to forge common positions on sensitive issues like, for example, how to handle meeting the Dalai Lama, the Europeans will continue to play ping pong while the rest of the world plays chess.
• The EU was wrong to lump together its external policies towards non-EU countries in the Mediterranean and Eastern Europe in the so-called European neighbourhood policy. Within a few years that policy error had to be tacitly acknowledged with the decision to create both a 'Union for the Mediterranean' and an 'Eastern Partnership'. But both these initiatives still suffer from a lack of substance.
• The EU's agreement on a lacklustre 'services directive' in 2005 was a missed opportunity to boost intra-European trade in services and thus help complete the single market. If the EU had been able to agree on something like the original ‘Bolkestein directive’ – before member-states and the European Parliament watered it down – the ability of the eurozone to withstand economic shocks like the current recession would have been greatly strengthened.
• In 2005, the member-states failed to find the political courage to reform the EU's budget and have so far reneged on a commitment to engage in a serious review of how the Union's annual expenditure of €120 billion should best be allocated. This is despite the Sapir report, commissioned by the European Commission, which described the EU's budget as “an historical relic”, in which “expenditures, revenues and procedures are all inconsistent with the present and future state of EU integration.”
• The EU's Court of Auditors declined to sign off its accounts at any point throughout the decade, mostly due to irregularities in how funds are dispersed within the member-states. This, plus a number of scandals over expenses paid to MEPs, have damaged the EU's credibility with taxpayers. Any future increase in the size of the EU's budget would be politically untenable without demonstrable reform.
The Irish historian and former diplomat, Conor Cruise O'Brien, famously said of the UN that the institution was prized by its member governments because of its “proven capacity to fail, and to be seen to fail.” To avoid a similar fate – that of a powerless body towards which its member-states push intractable problems – the EU must use the period 2010-15 to demonstrate that it can learn from the failures outlined above, correct them where possible, and avoid their repeat at all costs.
Governments and EU officials looking to the future should also reflect on the wisdom of reflections by Ralf Dahrendorf, a German-born British peer, who died earlier this year after a unique life committed to bringing Europeans closer together:
“All too often, today’s European Union forces its supporters to apologise for its strange ways: towards democrats for its bureaucratic opaqueness, towards free traders for its protectionism, towards applicants for membership for its apparent lack of a sense of urgency, and towards trading partners elsewhere, notably in the poorer parts of the world, for its crude and at times destructive pursuit of self interest. If such apologies continue to be necessary, support will wane and eventually vanish. European reform is imperative if the European Union is to survive.” *
A fine mission for the EU in the years ahead would be to ensure that these words – written in 1996 – do not ring true in 2015.
Hugo Brady is a senior research fellow at the Centre for European Reform.
* Why Europe Matters: A personal view, Ralf Dahrendorf, CER essay, 1996.
See: www.cer.org.uk/pdf/p009_dahrendorf.pdf"
Hugo Brady is a senior research fellow at the Centre for European Reform.
The EU needs new thinking. After eight years of stop-start negotiations, the Union finally has a new rulebook, the Lisbon treaty, which entered into force earlier this month. The member-states are waiting for a new European Commission and a new European Council president to take office early next year. But, despite Europeans’ shared anxieties about economic growth, government debt, the stability of the euro, immigration and the environment, there is not yet a clear sense of what the EU’s priorities for the next five years should or will be.
Given the global recession, many assume that the EU’s next ‘big idea’ will have an economic focus. Mario Monti, a former competition commissioner, has already proposed that EU countries should quicken their recovery from the crisis by opening up trade in services in exchange for a deal on harmonising tax bases. Others expect a new initiative on climate change – like a European carbon bank – or tighter rules on deficit spending to prevent the risk of default in the euro area.
But those thinking seriously about the EU’s future would do better to use the dying days of the decade to consider carefully the Union's mistakes and failures over the last ten years – before they chart ambitious new courses. The EU was neither sclerotic nor paralysed during the years 2000-09. It successfully rolled out a single currency, expanded to 27 members, established the world’s first functioning carbon trading scheme, deployed its first military missions and agreed a common arrest warrant to tackle cross-border crime. Nonetheless, the member-states would be wise to acknowledge several key failures from the same period:
• The EU spent most of the decade following the will o' the wisp of a grand constitution, to the detriment of its reputation both within the Union and in the outside world. That the Union repeated the exercise of treaty-writing so soon after a similarly troubling experience with the Treaty of Nice reveals a weakness for introspection which should be resisted in future. Let us hope that the innovations to EU business brought in by the Lisbon treaty will justify the time and effort spent on it.
• The premature accession of Bulgaria and Romania to the Union in 2007 damaged the credibility of EU enlargement, due to persistent problems with corruption and organised crime in these countries. Now that they are full EU members, reform of public administration and the judiciary has slowed.
• The EU made a similar error in allowing the accession of Cyprus in 2004. In doing so, the member-states removed probably the only international leverage that could have helped to push the island's territorial conflict to resolution. Since then the Cypriot government has unabashedly used its EU veto to complicate the Union’s ties with Turkey and NATO. Both of those relationships are critical for the Union's geopolitical standing.
• The EU spent most of the decade trying to convince key global players like the US or China that it is an emerging actor in a multipolar world. Yet it has been unable to overcome internal divisions over its relations with Russia, energy policy and reform of European representation in international organisations. Even the Union's jealously guarded image as a global leader on climate change is exaggerated (the final deal at the Copenhagen climate change summit was crafted in the absence of the EU). Unless the member-states find a way of summoning the political will to forge common positions on sensitive issues like, for example, how to handle meeting the Dalai Lama, the Europeans will continue to play ping pong while the rest of the world plays chess.
• The EU was wrong to lump together its external policies towards non-EU countries in the Mediterranean and Eastern Europe in the so-called European neighbourhood policy. Within a few years that policy error had to be tacitly acknowledged with the decision to create both a 'Union for the Mediterranean' and an 'Eastern Partnership'. But both these initiatives still suffer from a lack of substance.
• The EU's agreement on a lacklustre 'services directive' in 2005 was a missed opportunity to boost intra-European trade in services and thus help complete the single market. If the EU had been able to agree on something like the original ‘Bolkestein directive’ – before member-states and the European Parliament watered it down – the ability of the eurozone to withstand economic shocks like the current recession would have been greatly strengthened.
• In 2005, the member-states failed to find the political courage to reform the EU's budget and have so far reneged on a commitment to engage in a serious review of how the Union's annual expenditure of €120 billion should best be allocated. This is despite the Sapir report, commissioned by the European Commission, which described the EU's budget as “an historical relic”, in which “expenditures, revenues and procedures are all inconsistent with the present and future state of EU integration.”
• The EU's Court of Auditors declined to sign off its accounts at any point throughout the decade, mostly due to irregularities in how funds are dispersed within the member-states. This, plus a number of scandals over expenses paid to MEPs, have damaged the EU's credibility with taxpayers. Any future increase in the size of the EU's budget would be politically untenable without demonstrable reform.
The Irish historian and former diplomat, Conor Cruise O'Brien, famously said of the UN that the institution was prized by its member governments because of its “proven capacity to fail, and to be seen to fail.” To avoid a similar fate – that of a powerless body towards which its member-states push intractable problems – the EU must use the period 2010-15 to demonstrate that it can learn from the failures outlined above, correct them where possible, and avoid their repeat at all costs.
Governments and EU officials looking to the future should also reflect on the wisdom of reflections by Ralf Dahrendorf, a German-born British peer, who died earlier this year after a unique life committed to bringing Europeans closer together:
“All too often, today’s European Union forces its supporters to apologise for its strange ways: towards democrats for its bureaucratic opaqueness, towards free traders for its protectionism, towards applicants for membership for its apparent lack of a sense of urgency, and towards trading partners elsewhere, notably in the poorer parts of the world, for its crude and at times destructive pursuit of self interest. If such apologies continue to be necessary, support will wane and eventually vanish. European reform is imperative if the European Union is to survive.” *
A fine mission for the EU in the years ahead would be to ensure that these words – written in 1996 – do not ring true in 2015.
Hugo Brady is a senior research fellow at the Centre for European Reform.
* Why Europe Matters: A personal view, Ralf Dahrendorf, CER essay, 1996.
See: www.cer.org.uk/pdf/p009_dahrendorf.pdf"
Hugo Brady is a senior research fellow at the Centre for European Reform.
Friday, December 18, 2009
Gazprom’s uncertain outlook
by Katinka Barysch
Many people in the EU tend to see Gazprom as a mighty giant that uses energy as a political tool on behalf of the Kremlin. They say that Russia has leverage because it controls 40 per cent of the EU’s gas imports. They fear that Gazprom may again cut gas flows to Ukraine this winter. They should think again. Realities on the international gas market have changed. Gazprom faces almost unprecedented uncertainty. It should therefore be keener on stable energy relations and co-operative customers. There may be an opening for a revived EU-Russia energy dialogue.
Gazprom’s energy strategy, and its political swagger, were predicated on the assumption that gas demand in the EU – by far the company’s most lucrative market – would continue growing. But in 2009, European gas demand fell for the first time ever. In the short term, this may even have suited Gazprom. Many analysts had warned that Russia may be unable to fulfil its export obligations from 2011 onwards because it does not invest enough in developing new gas fields in Yamal and Shtokman. Russia’s ability to supply is now more in line with gas demand.
In the medium term, however, the outlook for the gas market is foggy. For a company that must ponder multi-billion dollar investments to prevent an impending output decline, sits on a $40 billion debt pile and faces tougher competition, this is an uncomfortable position to be in.
The sluggish global economy will cap energy demand at a time when technology has opened up entirely new possibilities for producers. In 2009, output of so-called unconventional gas (gas coming from rock formations) in the US has risen so fast that the US has mothballed its LNG terminals. LNG tankers from Qatar started sailing to Europe instead. The additional supplies have depressed prices in the ‘spot’ market for short-term gas contracts. Spot gas became very cheap compared with piped gas from Russia or Algeria, which is tied to the oil price with a lag. European companies bought more supplies on the spot market and Gazprom lost out.
If the price gap persists, the big European companies, such as E.On, Gaz de France or ENI, will want to renegotiate their long-term ‘take or pay’ contracts with Gazprom. Russia, so far, wants none of it. If the Europeans buy less than the minimum amount fixed in these agreements, Gazprom can charge them a fine. But if spot prices are sufficiently low, that may still make business sense.
It is not only slow global growth and new technology that are causing uncertainty for Gazprom. So are the EU’s climate change targets and its emerging diversification strategy.
The gas industry argues, somewhat optimistically, that tougher CO2 targets will play in its favour as EU countries are forced to shut down polluting coal plants. Energy experts are not so sure. If the EU is to achieve both its target to increase energy efficiency (by 20 per cent by 2020) and boost the share of renewables to 20 per cent, the role of gas in the energy mix will have to shrink. At the same time, the Europeans are debating how to diversify their gas supplies away from Russia, to minimise the risk of further gas crises like the ones in 2006 and 2009. Many in Europe ridicule the EU-backed Nabucco pipeline as a pipe dream. But Gazprom has taken it sufficiently seriously to move ahead with its €20 billion South Stream pipeline that would compete with Nabucco for both Caspian gas reserves and South East Europe’s fast-growing energy markets. Austria is the latest country that appears to have switched sides from Nabucco to South Stream.
Pipeline competition, disputes over long-term contracts and uncertainty over both supply and demand make for an antagonistic energy relationship. Neither the EU nor Russia can want this.
The EU’s energy majors will want to wiggle out of their inflexible 30-year agreements but without endangering their working relationship with Gazprom. Some of them have upstream interests in the exploitation of Russian oil and gas fields. Some are involved in multi-billion euro joint pipeline projects with Russia. Long-term contracts will remain important for EU-Russia energy ties, but perhaps without the outdated practice of linking gas prices to those of oil.
Pipeline competition is souring the political climate in Europe. The EU and Russia should discuss whether Nabucco and South Stream might be merged. Russia will need western capital and know-how to develop difficult new gas fields. The EU wants Russia to sign up to joint principles on energy sector investment and transit, especially after Moscow recently withdrew its signature from the Energy Charter Treaty. Russia seeks European help to make its hugely wasteful industrial and power sectors more energy efficient. The EU wants Moscow to adopt greener policies.
These issues, and plenty more, could fill a reinvigorated EU-Russia energy dialogue with substance. Gazprom’s weakened position may bring Moscow to the negotiating table in a more compromising and constructive mood. Progress on energy co-operation could help dissolve the gridlock in EU-Russia relations.
Katinka Barysch is deputy director of the Centre for European Reform.
Many people in the EU tend to see Gazprom as a mighty giant that uses energy as a political tool on behalf of the Kremlin. They say that Russia has leverage because it controls 40 per cent of the EU’s gas imports. They fear that Gazprom may again cut gas flows to Ukraine this winter. They should think again. Realities on the international gas market have changed. Gazprom faces almost unprecedented uncertainty. It should therefore be keener on stable energy relations and co-operative customers. There may be an opening for a revived EU-Russia energy dialogue.
Gazprom’s energy strategy, and its political swagger, were predicated on the assumption that gas demand in the EU – by far the company’s most lucrative market – would continue growing. But in 2009, European gas demand fell for the first time ever. In the short term, this may even have suited Gazprom. Many analysts had warned that Russia may be unable to fulfil its export obligations from 2011 onwards because it does not invest enough in developing new gas fields in Yamal and Shtokman. Russia’s ability to supply is now more in line with gas demand.
In the medium term, however, the outlook for the gas market is foggy. For a company that must ponder multi-billion dollar investments to prevent an impending output decline, sits on a $40 billion debt pile and faces tougher competition, this is an uncomfortable position to be in.
The sluggish global economy will cap energy demand at a time when technology has opened up entirely new possibilities for producers. In 2009, output of so-called unconventional gas (gas coming from rock formations) in the US has risen so fast that the US has mothballed its LNG terminals. LNG tankers from Qatar started sailing to Europe instead. The additional supplies have depressed prices in the ‘spot’ market for short-term gas contracts. Spot gas became very cheap compared with piped gas from Russia or Algeria, which is tied to the oil price with a lag. European companies bought more supplies on the spot market and Gazprom lost out.
If the price gap persists, the big European companies, such as E.On, Gaz de France or ENI, will want to renegotiate their long-term ‘take or pay’ contracts with Gazprom. Russia, so far, wants none of it. If the Europeans buy less than the minimum amount fixed in these agreements, Gazprom can charge them a fine. But if spot prices are sufficiently low, that may still make business sense.
It is not only slow global growth and new technology that are causing uncertainty for Gazprom. So are the EU’s climate change targets and its emerging diversification strategy.
The gas industry argues, somewhat optimistically, that tougher CO2 targets will play in its favour as EU countries are forced to shut down polluting coal plants. Energy experts are not so sure. If the EU is to achieve both its target to increase energy efficiency (by 20 per cent by 2020) and boost the share of renewables to 20 per cent, the role of gas in the energy mix will have to shrink. At the same time, the Europeans are debating how to diversify their gas supplies away from Russia, to minimise the risk of further gas crises like the ones in 2006 and 2009. Many in Europe ridicule the EU-backed Nabucco pipeline as a pipe dream. But Gazprom has taken it sufficiently seriously to move ahead with its €20 billion South Stream pipeline that would compete with Nabucco for both Caspian gas reserves and South East Europe’s fast-growing energy markets. Austria is the latest country that appears to have switched sides from Nabucco to South Stream.
Pipeline competition, disputes over long-term contracts and uncertainty over both supply and demand make for an antagonistic energy relationship. Neither the EU nor Russia can want this.
The EU’s energy majors will want to wiggle out of their inflexible 30-year agreements but without endangering their working relationship with Gazprom. Some of them have upstream interests in the exploitation of Russian oil and gas fields. Some are involved in multi-billion euro joint pipeline projects with Russia. Long-term contracts will remain important for EU-Russia energy ties, but perhaps without the outdated practice of linking gas prices to those of oil.
Pipeline competition is souring the political climate in Europe. The EU and Russia should discuss whether Nabucco and South Stream might be merged. Russia will need western capital and know-how to develop difficult new gas fields. The EU wants Russia to sign up to joint principles on energy sector investment and transit, especially after Moscow recently withdrew its signature from the Energy Charter Treaty. Russia seeks European help to make its hugely wasteful industrial and power sectors more energy efficient. The EU wants Moscow to adopt greener policies.
These issues, and plenty more, could fill a reinvigorated EU-Russia energy dialogue with substance. Gazprom’s weakened position may bring Moscow to the negotiating table in a more compromising and constructive mood. Progress on energy co-operation could help dissolve the gridlock in EU-Russia relations.
Katinka Barysch is deputy director of the Centre for European Reform.
Monday, December 14, 2009
Rocky road back to growth
by Simon Tilford
There is no doubt that governments had to take exceptional steps in response to the financial crisis. Without such unprecedented action, many economies would have slipped into slump and probably deflation. With both public and private debt levels so high, deflation would have been crippling. But the point is approaching where stimulus and other monetary measures could become counter-productive. New asset price bubbles are inflating and there are signs of a return to excessive risk-taking in the financial markets. Fiscal positions are now terribly weak in many European countries. Deficit spending on this scale risks depressing rather than simulating economies, if investors lose faith in the sustainability of countries' fiscal positions and borrowing costs rise.
However, although there is no option but to start exiting soon, no-one should be under any illusions about the economic outlook. The short to medium-term looks bleak. Banking crises are typically followed by deep downturns and sluggish recoveries. This is no exception. Investment risks being held back by enfeebled banks. It is imperative that losses are disclosed and banks recapitalised. This is happening too slowly. Household borrowing is already high in many member-states and this will inevitably constrain private consumption. Cuts in public spending will soon be a drag on economic growth across most of Europe. Nor will external demand come to the rescue, not least because the euro looks set for a period of serious overvaluation.
Over the medium to long-term, the only way of bringing about sustainable economic expansion in Europe will be by boosting productivity growth and increasing employment rates. This demands markets that combine high skills and flexibility. Some European countries have one or the other; some neither; very few both. It demands an improved climate for innovation. A genuinely single market for high-tech products and pan-European capital markets would help high-tech firms to expand. Governments also need to increase public support of both pure and applied research as well as product development. Europe needs to learn from the US, where public procurement of one sort of another has made to the fostering of new technologies. Europe needs more, not less, competition. Without it, resources will be slow to move from underperforming or declining sectors to faster-growing, higher-tech ones. Finally, the financial system needs to allocate capital to those that can employ it most productively. The last few years suggest that financial markets are a long way from being perfect at doing this. But they are surely still better than governments.
However, governments will find it hard to implement many of these measures. One of the most striking trends of recent years has been rising inequality. Falling demand for unskilled labour is one reason for this. However, there is more to it. The rewards of economic growth have been accruing disproportionately to the rich rather than to skilled labour in general. Board-room pay is still rising rapidly across Europe, inflating wage differentials. This is not just a trend specific to the financial sector problem and it is certainly not confined to member-states that are considered to be 'economically-liberal'. Moreover, to a greater or lesser extent, governments have also had to step-in to bail-out the financial sector, and hence in the process some of the most highly rewarded people in Europe.
These developments threaten to be poisonous for the political economy of reform. Governments will have to do a number of things if they are to succeed in restoring order to public finances and in pushing through further reforms of labour and product markets. They will have to ensure that the burden of public spending cuts and tax increases is borne equitably. They must do a much better job of demonstrating how greater EU integration and reform benefits the average worker. And they will have to address the issue of excessive pay, both in public and private sectors. If they fail to address these problems, they will have a hard time cutting spending and pushing through tax increases. And they will struggle to pass anything that looks like a 'supply-side reform'.
Simon Tilford is chief economist at the Centre for European Reform.
There is no doubt that governments had to take exceptional steps in response to the financial crisis. Without such unprecedented action, many economies would have slipped into slump and probably deflation. With both public and private debt levels so high, deflation would have been crippling. But the point is approaching where stimulus and other monetary measures could become counter-productive. New asset price bubbles are inflating and there are signs of a return to excessive risk-taking in the financial markets. Fiscal positions are now terribly weak in many European countries. Deficit spending on this scale risks depressing rather than simulating economies, if investors lose faith in the sustainability of countries' fiscal positions and borrowing costs rise.
However, although there is no option but to start exiting soon, no-one should be under any illusions about the economic outlook. The short to medium-term looks bleak. Banking crises are typically followed by deep downturns and sluggish recoveries. This is no exception. Investment risks being held back by enfeebled banks. It is imperative that losses are disclosed and banks recapitalised. This is happening too slowly. Household borrowing is already high in many member-states and this will inevitably constrain private consumption. Cuts in public spending will soon be a drag on economic growth across most of Europe. Nor will external demand come to the rescue, not least because the euro looks set for a period of serious overvaluation.
Over the medium to long-term, the only way of bringing about sustainable economic expansion in Europe will be by boosting productivity growth and increasing employment rates. This demands markets that combine high skills and flexibility. Some European countries have one or the other; some neither; very few both. It demands an improved climate for innovation. A genuinely single market for high-tech products and pan-European capital markets would help high-tech firms to expand. Governments also need to increase public support of both pure and applied research as well as product development. Europe needs to learn from the US, where public procurement of one sort of another has made to the fostering of new technologies. Europe needs more, not less, competition. Without it, resources will be slow to move from underperforming or declining sectors to faster-growing, higher-tech ones. Finally, the financial system needs to allocate capital to those that can employ it most productively. The last few years suggest that financial markets are a long way from being perfect at doing this. But they are surely still better than governments.
However, governments will find it hard to implement many of these measures. One of the most striking trends of recent years has been rising inequality. Falling demand for unskilled labour is one reason for this. However, there is more to it. The rewards of economic growth have been accruing disproportionately to the rich rather than to skilled labour in general. Board-room pay is still rising rapidly across Europe, inflating wage differentials. This is not just a trend specific to the financial sector problem and it is certainly not confined to member-states that are considered to be 'economically-liberal'. Moreover, to a greater or lesser extent, governments have also had to step-in to bail-out the financial sector, and hence in the process some of the most highly rewarded people in Europe.
These developments threaten to be poisonous for the political economy of reform. Governments will have to do a number of things if they are to succeed in restoring order to public finances and in pushing through further reforms of labour and product markets. They will have to ensure that the burden of public spending cuts and tax increases is borne equitably. They must do a much better job of demonstrating how greater EU integration and reform benefits the average worker. And they will have to address the issue of excessive pay, both in public and private sectors. If they fail to address these problems, they will have a hard time cutting spending and pushing through tax increases. And they will struggle to pass anything that looks like a 'supply-side reform'.
Simon Tilford is chief economist at the Centre for European Reform.
Subscribe to:
Posts (Atom)