By Hugo Brady
EU policies on policing, justice and immigration were widely expected to take a big leap forward after the ratification of the Lisbon treaty. But interested outsiders should not assume that new powers for the EU’s institutions will translate automatically into more coherent European action in security and migration matters. In fact, the EU’s governments and its institutions face serious challenges in justice and home affairs (JHA) co-operation in the years ahead.
First, JHA policy-making is becoming more fractious and politically divided under the new treaty. Sensitive issues like terrorism or organised crime are now subject to the same rules as the EU's single market, meaning that the European Parliament can amend or block such decisions for the first time. This may not sound very radical. But for the EU's conservative interior and justice ministries – as well as key partners like the US – it is a brave new world.
Take terrorism. Last February, the European Parliament shocked both EU governments and the Obama administration alike by rapidly using its new powers to vote down the so-called Swift agreement. (This arrangement allowed US intelligence services to comb European financial transactions en masse for counter-terror purposes.) The parliament has since signalled that it will also vote down a modified version of the agreement which officials had hoped might soothe concerns over data privacy. Furthermore, EU officials worry that MEPs may reject any new security-related law on principle. There is an urgent need for EU governments and the parliament to find a new modus vivendi that allows them to work together constructively on such matters.
Second, EU countries complain that it is now harder under Lisbon to project a single voice in international fora when law and order and immigration issues are discussed. Officials are currently at a loss to know who takes the lead on terrorism or corruption issues in, say, the UN or OSCE. Is it the EU's six-month rotating presidency, the European Commission or the embryonic external action service? Although the Commission would bitterly oppose such a move, it should be up to the High Representative for foreign policy to decide in future who is best placed to lead the EU's external representation in these areas.
Third, the Commission's justice and security directorate, which has drafted most JHA legislation since 1999, is set to be divided in two. The split – into separate home affairs and justice departments – is largely at the behest of Viviane Reding, the EU's firebrand justice commissioner. Reding wants to use her new directorate to re-balance the JHA policy area which she believes has been hitherto too pro-American and too security-focused.
The decision to split up the Commission's JHA directorate is probably a mistake. Part of its added value in security and migration matters was the ability to bring all the relevant policy elements – policing, justice, immigration – together under one roof. There is also a danger that the split could result in more in-fighting and a loss of shared purpose. Better checks and balances were needed in EU internal security co-operation. But these have now been provided in the guise of a more powerful parliament and the extension of the jurisdiction of the EU's Court of Justice over all JHA legislation.
Lastly, despite new powers under the treaty, there is a dearth of really strong ideas from either the governments or the institutions about how the EU's JHA agenda should develop over the next five years. EU governments have recently agreed both an 82-page list of proposals for improving JHA co-operation (known as the Stockholm programme) and a wide-ranging ‘internal security strategy’. But the fact that these largely lack substance hints that the future of European co-operation on security and migration issues will centre on consolidating existing achievements rather than launching bold new initiatives.
One priority is to safeguard the EU’s Schengen area of passport-free travel. Schengen ranks alongside the euro as one of the EU's most tangible achievements. Like the euro, each Schengen country relies largely on assurances of good faith from others in the club, in this case that the common border is being maintained properly. But not all Schengen members are trusted equally. French police are increasing their spot-checks on cars crossing the border from Spain, for example, while Finnish border guards routinely check passports of non-EU travellers en route from Greece. To make the passport-free zone work properly, EU countries must agree a more transparent system for verifying border standards. They must also ensure that Romania and Bulgaria – both chomping at the bit to join – are not allowed in prematurely until they have carried out thoroughgoing reform of their police and judiciaries.
The gap between rhetoric and reality in the Schengen area should serve as a warning against future hubris. The EU’s new powers in policing, justice and immigration will only be a success if they result in the member-states adopting policies that seriously address current security and migration challenges. We will soon know whether a vague new treaty, a divided Brussels bureaucracy and a truculent European Parliament will help or hinder that ambition.
Hugo Brady is a senior research fellow at the Centre for European Reform.
Thursday, June 24, 2010
Tuesday, June 15, 2010
The eurozone retreats into a beggar-thy-neighbour cul-de-sac
by Simon Tilford
Almost every member of the eurozone is rushing to slash public spending. While there is no doubting the scale of the fiscal challenge, the eurozone economy is not strong enough to cope with the contractionary effects of a generalised budgetary tightening. And if the eurozone falls back into recession, there will be no chance of putting public finances on a sustainable footing. Furthermore, excessive austerity in Europe will make it even harder to bring about the necessary rebalancing of the global economy, risking a protectionist backlash in the US. Unfortunately, these risks will receive scant attention when European leaders come together for this week's summit in Brussels.
Eurozone policy-makers appear to believe that fiscal policy has no impact on levels of economic activity, even when private demand is as weak as it is in Europe. Of course, some eurozone economies – Greece, Portugal and Spain, for example – have little option but to cut now. However, those member-states running big trade surpluses with the rest of the currency bloc need to hold off tightening fiscal policy until their domestic economies are growing sustainably. The German government believes it is leading by example in embarking on a severe round of budget cuts. But this is the last thing the eurozone needs at this point and demonstrates an alarming parochialism. The fiscal crisis cannot be solved without economic growth. And the eurozone will only return to decent economic growth if the bloc's surplus economies, in particular Germany, start to consume more.
The German economy is very unbalanced. The weakness of domestic demand (a reflection of an extremely high savings rate and years of eye-watering wage restraint) means the country is running a massive current account surplus with the rest of the eurozone. This surplus is a drag on the eurozone economy. Germany's austerity programme all but guarantees very weak domestic demand in the country and effectively ends any chance of narrowing its trade surplus with the rest of the currency union. But unless this surplus narrows substantially, it will be very hard to get the eurozone economy growing, and all but impossible to address the eurozone's fiscal crisis.
Germany's Chancellor Merkel argues that her government's cuts will make Germany more competitive (and hence boost its export sector). In short, Germany's economic growth strategy is predicated on a further increase in its exports relative to its imports. For a country with a huge external surplus and a relatively sound fiscal position to be cutting public spending at this point is highly irresponsible. Germany is defining its economic policy purely in national terms without consideration for the impact on the sustainability of the common currency or the outlook for the broader international economy.
After years of relying on demand generated elsewhere in Europe, Germany now needs to become a source of it. The country is sending a damaging signal to the financial markets – it does not care about economic growth. No-one should be surprised that bond spreads (the difference in government borrowing costs) within the eurozone have widened sharply since Germany announced its budget plan. Instead of some masochistic rush to see who can cut by most, the eurozone needs a co-ordinated response. Germany, whose borrowing costs have fallen to just 2.5 per cent, should be doing all it can to boost its domestic demand, not depress it further.
The Netherlands' external surplus – relative to the size of its economy – is as large as Germany's, and the Dutch rely even more than the Germans on trade with other eurozone economies. But assuming that the conservative People's Party for Freedom and Democracy (VVD) succeeds in forming a coalition government with Geert Wilders' Freedom Party (PVV) and the centre-right Christian Democratic Appeal (CDA), Holland will adopt the same beggar-thy-neighbour strategy as Germany. It is possible that fiscal austerity and further wage restraint will work for Germany and the Netherlands, on the assumption that their firms can take further market share within the eurozone. But this is a zero-sum game: it is not as if every economy can allow domestic demand to stagnate and rely on exports. One country's surplus is another's deficit. They are banking on being able to export the consequences of their austerity to others.
Nor are the Europeans giving any thought to how their austerity (and neglect of economic growth) will impact on the rest of the world. An uncoordinated and premature fiscal contraction against the backdrop of a stagnant eurozone economy will prove contractionary for the world as a whole. The weakness of economic growth will prevent a rise in eurozone interest rates, which will keep the euro weak and boost the exports of those member-states, such as Germany, that trade a lot internationally. As a result, it will throw a further obstacle in the way of the urgently needed rebalancing of the global economy away from its excessive reliance on the US consumer. This reliance can only be reduced if surplus economies in Europe and Asia consume more, not less.
With China resolutely refusing to reduce its export dependence and Europe retreating into a destructive beggar-thy-neighbour cul-de-sac, it will not be long before protectionist sentiment in the US rises. And this will be understandable, despite the inevitable condemnations by European governments.
Simon Tilford is chief economist at the Centre for European Reform.
Almost every member of the eurozone is rushing to slash public spending. While there is no doubting the scale of the fiscal challenge, the eurozone economy is not strong enough to cope with the contractionary effects of a generalised budgetary tightening. And if the eurozone falls back into recession, there will be no chance of putting public finances on a sustainable footing. Furthermore, excessive austerity in Europe will make it even harder to bring about the necessary rebalancing of the global economy, risking a protectionist backlash in the US. Unfortunately, these risks will receive scant attention when European leaders come together for this week's summit in Brussels.
Eurozone policy-makers appear to believe that fiscal policy has no impact on levels of economic activity, even when private demand is as weak as it is in Europe. Of course, some eurozone economies – Greece, Portugal and Spain, for example – have little option but to cut now. However, those member-states running big trade surpluses with the rest of the currency bloc need to hold off tightening fiscal policy until their domestic economies are growing sustainably. The German government believes it is leading by example in embarking on a severe round of budget cuts. But this is the last thing the eurozone needs at this point and demonstrates an alarming parochialism. The fiscal crisis cannot be solved without economic growth. And the eurozone will only return to decent economic growth if the bloc's surplus economies, in particular Germany, start to consume more.
The German economy is very unbalanced. The weakness of domestic demand (a reflection of an extremely high savings rate and years of eye-watering wage restraint) means the country is running a massive current account surplus with the rest of the eurozone. This surplus is a drag on the eurozone economy. Germany's austerity programme all but guarantees very weak domestic demand in the country and effectively ends any chance of narrowing its trade surplus with the rest of the currency union. But unless this surplus narrows substantially, it will be very hard to get the eurozone economy growing, and all but impossible to address the eurozone's fiscal crisis.
Germany's Chancellor Merkel argues that her government's cuts will make Germany more competitive (and hence boost its export sector). In short, Germany's economic growth strategy is predicated on a further increase in its exports relative to its imports. For a country with a huge external surplus and a relatively sound fiscal position to be cutting public spending at this point is highly irresponsible. Germany is defining its economic policy purely in national terms without consideration for the impact on the sustainability of the common currency or the outlook for the broader international economy.
After years of relying on demand generated elsewhere in Europe, Germany now needs to become a source of it. The country is sending a damaging signal to the financial markets – it does not care about economic growth. No-one should be surprised that bond spreads (the difference in government borrowing costs) within the eurozone have widened sharply since Germany announced its budget plan. Instead of some masochistic rush to see who can cut by most, the eurozone needs a co-ordinated response. Germany, whose borrowing costs have fallen to just 2.5 per cent, should be doing all it can to boost its domestic demand, not depress it further.
The Netherlands' external surplus – relative to the size of its economy – is as large as Germany's, and the Dutch rely even more than the Germans on trade with other eurozone economies. But assuming that the conservative People's Party for Freedom and Democracy (VVD) succeeds in forming a coalition government with Geert Wilders' Freedom Party (PVV) and the centre-right Christian Democratic Appeal (CDA), Holland will adopt the same beggar-thy-neighbour strategy as Germany. It is possible that fiscal austerity and further wage restraint will work for Germany and the Netherlands, on the assumption that their firms can take further market share within the eurozone. But this is a zero-sum game: it is not as if every economy can allow domestic demand to stagnate and rely on exports. One country's surplus is another's deficit. They are banking on being able to export the consequences of their austerity to others.
Nor are the Europeans giving any thought to how their austerity (and neglect of economic growth) will impact on the rest of the world. An uncoordinated and premature fiscal contraction against the backdrop of a stagnant eurozone economy will prove contractionary for the world as a whole. The weakness of economic growth will prevent a rise in eurozone interest rates, which will keep the euro weak and boost the exports of those member-states, such as Germany, that trade a lot internationally. As a result, it will throw a further obstacle in the way of the urgently needed rebalancing of the global economy away from its excessive reliance on the US consumer. This reliance can only be reduced if surplus economies in Europe and Asia consume more, not less.
With China resolutely refusing to reduce its export dependence and Europe retreating into a destructive beggar-thy-neighbour cul-de-sac, it will not be long before protectionist sentiment in the US rises. And this will be understandable, despite the inevitable condemnations by European governments.
Simon Tilford is chief economist at the Centre for European Reform.
Friday, June 11, 2010
Shale gas and EU energy security
by Katinka Barysch
Will unconventional gas solve Europe’s energy security problem? Many EU member-states rely a lot on Russian gas; in the case of some Central and East European countries the dependence is total. What if these countries suddenly discovered that they themselves sit on huge gas reserves? They should not hold their breath. Unconventional gas will make a big difference to the EU’s energy security – but perhaps not in the way that shale gas enthusiasts expect.
Unconventional gas (UG) is gas trapped in rock formations. The technology now exists to get this gas out. It involves drilling into the rocks and then blasting in water mixed with chemicals to extract the gas. In the US, the new technology has been a ‘game changer’. US production of shale gas (one form of UG) tripled in 2004-08, allowing America to overtake Russia as the world’s biggest gas producer. The US is now self-sufficient – which has enabled it to mothball its terminals for importing liquefied natural gas (LNG, gas that is frozen to liquid form and transported by tankers).
Is something similar about to happen in Europe? Some energy experts estimate that Europe’s UG reserves could be several times bigger than its conventional gas reserves. The likes of Exxon, Chevron, Shell and ConocoPhilips have already snapped up land plots in places that look promising for UG exploration, most notably in Poland, Sweden and Germany.
Should the EU scrap expensive and complicated diversification plans, such as the proposed Nabucco pipeline to import Caspian gas, and simply wait for the UG boom to happen in Europe? At a recent energy security conference in Vienna, gas experts, geologists and industry representatives urged caution.
* Estimates of European UG reserves are based on geological surveys that were not carried out with UG in mind. Only drilling holes in the ground will show whether the geology is indeed suitable for producing and commercially exploiting UG. So far, there has been very little drilling in Europe. A couple of wells in Hungary have been abandoned as unpromising. In southern Sweden, environmental concerns may make gas extraction impossible irrespective of whether the geology proves suitable. In Poland, the country considered most promising, not a single well has been drilled so far.
* In the US, it was small, technology-savvy energy companies that made the shale gas boom possible. The giant international oil companies have only recently joined the fray by buying up smaller companies with the right technology and know-how. Europe’s energy markets are still dominated by national champions. There are few nimble, innovative players. Expertise and infrastructure for UG development is scarce. Engineers are being flown in from Texas or Pennsylvania. In the whole of Europe, there are only 67 land rigs (the structures used in drilling for UG), compared with thousands in the US.
* US legislation tends to be rather kind to oil and gas companies. For example, the law that regulates the safety of drinking water has an intentional loophole that excludes ‘fracking’, the technology used to blast water and chemicals into rocks. Only now, with the shale gas boom in full swing, are environmental concerns mounting in the US. In Europe, by contrast, exploration starts with these concerns already being widely discussed. UG production needs huge amounts of water and, more importantly, uses chemicals that seep into the ground (usually at a depth of several thousand metres but that could store up problems in later years). Some UG drillings have made the earth shake near-by.
* Big UG sites require lots of space (they consist of scores of rigs close together), as well as new roads, reservoirs and pipelines. Planning restrictions in Europe are often tight, partly because the continent is more densely populated: typically 250-400 people live on each square kilometre in EU countries compared with 80 in the US.
* In the US, whoever owns a plot of land owns the resources beneath it. In EU countries, the resources below surface usually belong to the state. There will be no ‘poor farmers to shale gas millionaires’ stories in Europe. If only big energy companies gain, UG production could be less socially acceptable. Moreover, those companies looking for UG in Europe complain that local regulators and environment ministries have no experience with awarding the necessary licenses. Progress can be frustratingly slow.
* The US shale gas boom happened at a time when gas prices were rising and most analysts predicted steadily growing gas demand for years ahead. The situation is very different now. The European market is over-supplied at the moment, prices on the 'spot' market for short-term gas contracts have fallen significantly, and the medium-term outlook is highly uncertain. “High prices allowed us to make lots of mistakes when building up the US shale gas industry,” says one gas expert. “With depressed prices and demand in Europe, we have to be profitable straight away.” Because of the smaller scale of production and the dearth of infrastructure and expertise, it will probably cost two to three times as much to produce UG in Europe than in the US. So it is not clear whether European UG will be able to compete with LNG and pipeline gas.
Whether and when Europe’s first UG projects will become profitable is still anyone’s guess. One manager who runs a UG project in Poland says that in a best case scenario his company would need around three years to drill exploratory wells, another three to determine whether resources are commercially viable and yet more time to figure out how to get supplies to customers. One person involved in the Swedish exploration says he would expect commercialisation in around ten years.
“In Europe, unconventional gas is not a game changer,” concludes one executive of a big EU gas company. UG will most likely develop in Europe, but a repeat of the US shale gas boom is doubtful. The good news is that regardless of UG developments in Europe, the shale gas boom in the US is changing the global, and European, gas market.
Scores of new LNG terminals are being constructed in the Gulf, Africa and elsewhere. But the US LNG market has disappeared almost overnight. Other than Asia, that only leaves Europe as a destination for rapidly growing amounts of LNG. Already, market prices for LNG have collapsed in Europe, which, in turn, has forced pipeline gas suppliers such as Norway’s Statoil and Russia’s Gazprom to re-negotiate contracts with their biggest European customers. LNG imports mean more competition in a market hitherto dominated by 30-year contracts with fixed volumes and prices linked to the international oil price. That system is crumbling. Gazprom and other suppliers will have to make a bigger effort to be cheap and reliable – and that before even a single molecule of unconventional gas has been produced on the European continent.
Katinka Barysch is deputy director of the Centre for European Reform
Will unconventional gas solve Europe’s energy security problem? Many EU member-states rely a lot on Russian gas; in the case of some Central and East European countries the dependence is total. What if these countries suddenly discovered that they themselves sit on huge gas reserves? They should not hold their breath. Unconventional gas will make a big difference to the EU’s energy security – but perhaps not in the way that shale gas enthusiasts expect.
Unconventional gas (UG) is gas trapped in rock formations. The technology now exists to get this gas out. It involves drilling into the rocks and then blasting in water mixed with chemicals to extract the gas. In the US, the new technology has been a ‘game changer’. US production of shale gas (one form of UG) tripled in 2004-08, allowing America to overtake Russia as the world’s biggest gas producer. The US is now self-sufficient – which has enabled it to mothball its terminals for importing liquefied natural gas (LNG, gas that is frozen to liquid form and transported by tankers).
Is something similar about to happen in Europe? Some energy experts estimate that Europe’s UG reserves could be several times bigger than its conventional gas reserves. The likes of Exxon, Chevron, Shell and ConocoPhilips have already snapped up land plots in places that look promising for UG exploration, most notably in Poland, Sweden and Germany.
Should the EU scrap expensive and complicated diversification plans, such as the proposed Nabucco pipeline to import Caspian gas, and simply wait for the UG boom to happen in Europe? At a recent energy security conference in Vienna, gas experts, geologists and industry representatives urged caution.
* Estimates of European UG reserves are based on geological surveys that were not carried out with UG in mind. Only drilling holes in the ground will show whether the geology is indeed suitable for producing and commercially exploiting UG. So far, there has been very little drilling in Europe. A couple of wells in Hungary have been abandoned as unpromising. In southern Sweden, environmental concerns may make gas extraction impossible irrespective of whether the geology proves suitable. In Poland, the country considered most promising, not a single well has been drilled so far.
* In the US, it was small, technology-savvy energy companies that made the shale gas boom possible. The giant international oil companies have only recently joined the fray by buying up smaller companies with the right technology and know-how. Europe’s energy markets are still dominated by national champions. There are few nimble, innovative players. Expertise and infrastructure for UG development is scarce. Engineers are being flown in from Texas or Pennsylvania. In the whole of Europe, there are only 67 land rigs (the structures used in drilling for UG), compared with thousands in the US.
* US legislation tends to be rather kind to oil and gas companies. For example, the law that regulates the safety of drinking water has an intentional loophole that excludes ‘fracking’, the technology used to blast water and chemicals into rocks. Only now, with the shale gas boom in full swing, are environmental concerns mounting in the US. In Europe, by contrast, exploration starts with these concerns already being widely discussed. UG production needs huge amounts of water and, more importantly, uses chemicals that seep into the ground (usually at a depth of several thousand metres but that could store up problems in later years). Some UG drillings have made the earth shake near-by.
* Big UG sites require lots of space (they consist of scores of rigs close together), as well as new roads, reservoirs and pipelines. Planning restrictions in Europe are often tight, partly because the continent is more densely populated: typically 250-400 people live on each square kilometre in EU countries compared with 80 in the US.
* In the US, whoever owns a plot of land owns the resources beneath it. In EU countries, the resources below surface usually belong to the state. There will be no ‘poor farmers to shale gas millionaires’ stories in Europe. If only big energy companies gain, UG production could be less socially acceptable. Moreover, those companies looking for UG in Europe complain that local regulators and environment ministries have no experience with awarding the necessary licenses. Progress can be frustratingly slow.
* The US shale gas boom happened at a time when gas prices were rising and most analysts predicted steadily growing gas demand for years ahead. The situation is very different now. The European market is over-supplied at the moment, prices on the 'spot' market for short-term gas contracts have fallen significantly, and the medium-term outlook is highly uncertain. “High prices allowed us to make lots of mistakes when building up the US shale gas industry,” says one gas expert. “With depressed prices and demand in Europe, we have to be profitable straight away.” Because of the smaller scale of production and the dearth of infrastructure and expertise, it will probably cost two to three times as much to produce UG in Europe than in the US. So it is not clear whether European UG will be able to compete with LNG and pipeline gas.
Whether and when Europe’s first UG projects will become profitable is still anyone’s guess. One manager who runs a UG project in Poland says that in a best case scenario his company would need around three years to drill exploratory wells, another three to determine whether resources are commercially viable and yet more time to figure out how to get supplies to customers. One person involved in the Swedish exploration says he would expect commercialisation in around ten years.
“In Europe, unconventional gas is not a game changer,” concludes one executive of a big EU gas company. UG will most likely develop in Europe, but a repeat of the US shale gas boom is doubtful. The good news is that regardless of UG developments in Europe, the shale gas boom in the US is changing the global, and European, gas market.
Scores of new LNG terminals are being constructed in the Gulf, Africa and elsewhere. But the US LNG market has disappeared almost overnight. Other than Asia, that only leaves Europe as a destination for rapidly growing amounts of LNG. Already, market prices for LNG have collapsed in Europe, which, in turn, has forced pipeline gas suppliers such as Norway’s Statoil and Russia’s Gazprom to re-negotiate contracts with their biggest European customers. LNG imports mean more competition in a market hitherto dominated by 30-year contracts with fixed volumes and prices linked to the international oil price. That system is crumbling. Gazprom and other suppliers will have to make a bigger effort to be cheap and reliable – and that before even a single molecule of unconventional gas has been produced on the European continent.
Katinka Barysch is deputy director of the Centre for European Reform
Friday, June 04, 2010
Eurozone governance: Why the Commission is right
By Philip Whyte
The collapse of market confidence sparked by the parlous state of Greece’s public finances is forcing the EU to review how the eurozone is run. This is entirely welcome. The crisis has cruelly exposed fault-lines in the system of governance – and confidence is unlikely to be restored unless these flaws are rectified. There are profound disagreements, however, about what these flaws are. Broadly speaking, there is a narrow view and a broader one. If the eurozone is to extricate itself from its current mess, it is essential that the broader prevail.
The narrow view – advanced by Germany – holds that the eurozone’s difficulties are the result of government irresponsibility. The way to restore market confidence, then, is to force wayward governments, starting with Greece’s, to mend their ways by repairing their public finances. Errant behaviour, moreover, must be discouraged by strengthening fiscal rules and imposing tougher penalties on miscreants – for example, by withholding EU structural funds, suspending countries’ voting rights, or, in extremis, expelling rogue states from the eurozone.
Germany’s view is not totally wrong. Greece’s behaviour has been egregious and the incontinence of its government has played a key part in the country’s difficulties. The eurozone’s budgetary rules have been repeatedly flouted by member-states (including Germany). Public finances are weak and need to be strengthened over the medium term. Eurozone governments have to reassure markets that they are not profligates. In short, crafting a more credible framework for fiscal policy in the eurozone must form part of the task of reconstruction.
The problem with Germany’s position, however, is that it is one-eyed. The eurozone’s problems are not reducible to budgetary indiscipline alone. In the years leading up to the global financial crisis, Spain was running a budget surplus, not a deficit. The weakening of the country’s public finances since 2008 is not, therefore, connected to government irresponsibility before the crisis. Nor will budgetary austerity solve Spain’s underlying economic problems, which are high levels of private-sector debt and a dramatic a loss of trade competitiveness.
The Commission is therefore right to argue for a much broader reform of the way the eurozone is run. The proposals that it published on May 12th do not neglect the need for strengthening the weakened Stability and Growth Pact, or for deepening fiscal policy co-ordination. But the Commission also wants to beef up the Eurogroup’s surveillance of macroeconomic imbalances. This surely makes sense. Imbalances between members cannot simply be ignored – particularly in the absence of a fiscal union to transfer funds to depressed areas.
Nevertheless, some countries – Germany among them – are reluctant to allow the question of imbalances to get more airtime in the Eurogroup. Not coincidentally, enthusiasm for discussing imbalances is weakest among the countries that run large trade and current-account surpluses. This reticence is as easy to understand as it is impossible to justify. The countries believe their surpluses are badges of their ‘competitiveness’. As they see it, it is for deficit countries to become fitter, not for surplus countries to become flabbier.
The position of the surplus countries, however, is misguided. To start with, trade surpluses tell us nothing about economic dynamism. German politicians often liken their country to a toned athlete who is trouncing the international competition. They should think again. Yes, Germany has world class companies producing first-rate products. But productivity growth in recent years has been so weak that output per head is now below the eurozone average. The only reason German unit labour costs have fallen is that real wages have too.
The surplus countries are also incoherent. They condemn irresponsibility in the deficit countries, yet remain wedded to their own surpluses. This makes no sense. Deficits and surpluses are umbilically linked: one entails the other. Only in an Alice in Wonderland world would it be possible for the trade gap in ‘Deficit-land’ to decline without an offsetting adjustment in ‘Surplus-land’. Why do surplus countries struggle to accept this? The answer must be that they have grown reliant on the foreign irresponsibility that they like to decry.
If European policy-makers are to restore the financial markets’ flagging faith in the eurozone, they must persuade investors that the region is not heading for a prolonged economic slump. The Commission’s proposals on eurozone governance rightly identify many of the key elements that would provide such reassurance: a rebalancing of demand within the eurozone from the deficit to the surplus countries; supply-side reforms to raise the region’s long-term growth potential; and credible plans for fiscal consolidation over the medium term.
The danger, however, is that the minimalist German view will prevail, with reforms to eurozone governance focusing primarily on fiscal policy, the Commission’s proposals on macroeconomic surveillance being emasculated, and supply-side reforms being taken as seriously as they were under the Lisbon agenda (that is, not very). Should this scenario transpire, the eurozone could find itself condemned to permanent crisis, with chronically weak growth across the region as a whole, and politically destabilising debt-deflation in the south.
Friday, May 28, 2010
Can the EU help Russia modernise?
by Katinka Barysch
The EU and Russia are planning to launch a ‘partnership for modernisation’ at their next summit in Rostov on May 31st. The initiative – launched by Commission President Barroso at the last summit six months ago – is meant to breathe new life into a relationship that has become stale and tense. It is unlikely to succeed.
At first glance, an EU-Russia modernisation partnership looks like an excellent idea. It could entail joint science programmes, pilot projects in high-tech industries or student exchanges. Such projects should in theory be free of the ideological clashes that have held back EU-Russia relations in the past. They could help to restore mutual trust. They could allow the EU to acquaint Russia with European norms and values, not through lecturing but through day-to-day co-operation. In the medium term, successful modernisation could help to transform the apathetic Russian middle class into an entrepreneurial class that demands property rights and civil liberties. Last but not least, a successful modernisation partnership would generate new business opportunities for companies from the EU, which would, for example, be able to sell energy savings technologies to Russia.
Politically, the modernisation partnership looks promising. Modernisation is what Russia talks about today. President Medvedev has warned repeatedly that unless Russia radically reforms its economy, the country will face terminal decline. Russia must diversify away from exporting energy, and create jobs for the 95 per cent or so of the workforce that does not work in oil and gas. Surveys have shown that Russian policy-makers overwhelmingly believe that Russia needs outside help with modernisation. The recently leaked memo from the Russian foreign minister also called for Russia to forge ‘modernisation alliances’ with European countries. The EU has found that lecturing Russia on the need to reform does not work. So why not speak in Russia’s own interest by offering help with what has become a national priority?
Moreover, some EU policy-makers hope that since it is mainly President Medvedev who is pushing for modernisation, a re-focusing of EU-Russia relations on this topic may strengthen his hands vis-à-vis the more statist and authoritarian Putin clan.
Finally, political disagreements and tensions will remain inevitable in EU-Russia relations, whether over gas sales or the fate of Ukraine. The modernisation partnership could encourage co-operation that is independent of politics and focuses on technical, environmental or social issues. Such co-operation could help to stabilise bilateral relations and mitigate the dangerous intellectual isolation in which many Russian bureaucrats and scientists seem to operate today.
However, there are also several reasons why the partnership for modernisation may be a bad idea.
First, and most importantly, what most people in the EU mean by modernisation is very different from the notion held by the Russian leadership. Russia’s concept of modernisation is state-led and project-focused: a state-financed nanotechnology institute, state-owned banks lending to selected sectors, a brand-new ‘innovation city’ outside Moscow set up by government fiat – these are the building blocks of Medvedev’s innovation economy.
This approach cannot work. In today’s dynamic global economy, picking winners is not something that governments can do. An innovative economy needs open markets, venture capital, free-thinking entrepreneurs, fast bankruptcy courts and solid protection of intellectual property. Russia’s business environment is characterised by wide-spread monopolies, ubiquitous corruption, stifling state-interferences, weak and contradictory laws, and so on. The whole idea that Russia can shift from an economy that relies on oil, gas and heavy industry to a cutting-edge, high-tech one is spurious. Russia should first try to move existing industrial sectors up the value chain by using imported technology and know-how. Large-scale indigenous innovation may come later.
A state-led approach to economic change is particularly problematic in today’s Russia because its public institutions function so badly. Sergei Guriev, a Moscow-based economist, has compared the quality of Russia’s state administration and legal system of today with that of South Korea 12 years ago, before it embarked on its impressive growth spurt. He concluded that South Korea’s institutions were quite simply in a different league and that Russia’s chances of catching up with the world’s most developed countries were slim.
The Russian leadership hardly trusts its own bureaucracy to implement a road building programme. How is it supposed to build a replica of Silicon Valley? Even if such isolated programmes were successful, their impact on the wider economy would be limited so long as competition is restricted and successful companies must fear kleptocratic officials. The risk is that the money that the Russian government is about to pump into selected sectors and high-profile projects will not only be wasted. It will create a constant, future demand on public resources that may well be better spent elsewhere.
In short, Russian modernisation does not need vertical state intervention but a horizontal improvement of the business environment. It is doubtful whether the Russian leadership has the political will to clamp down on corruption, improve competition, reform the education and science sectors and strengthen the rule of law.
The question the EU needs to ask itself is whether it should accept and support Russia’s flawed concept of modernisation, or whether it should make support conditional on Russia implementing at least some of the reforms needed to strengthen the rule of law and improve the economy. In the past, EU attempts to cajole or persuade Russia to implement reforms have had limited or no impact. The modernisation partnership is unlikely to be very different.
Katinka Barysch is deputy director at the Centre for European Reform
The EU and Russia are planning to launch a ‘partnership for modernisation’ at their next summit in Rostov on May 31st. The initiative – launched by Commission President Barroso at the last summit six months ago – is meant to breathe new life into a relationship that has become stale and tense. It is unlikely to succeed.
At first glance, an EU-Russia modernisation partnership looks like an excellent idea. It could entail joint science programmes, pilot projects in high-tech industries or student exchanges. Such projects should in theory be free of the ideological clashes that have held back EU-Russia relations in the past. They could help to restore mutual trust. They could allow the EU to acquaint Russia with European norms and values, not through lecturing but through day-to-day co-operation. In the medium term, successful modernisation could help to transform the apathetic Russian middle class into an entrepreneurial class that demands property rights and civil liberties. Last but not least, a successful modernisation partnership would generate new business opportunities for companies from the EU, which would, for example, be able to sell energy savings technologies to Russia.
Politically, the modernisation partnership looks promising. Modernisation is what Russia talks about today. President Medvedev has warned repeatedly that unless Russia radically reforms its economy, the country will face terminal decline. Russia must diversify away from exporting energy, and create jobs for the 95 per cent or so of the workforce that does not work in oil and gas. Surveys have shown that Russian policy-makers overwhelmingly believe that Russia needs outside help with modernisation. The recently leaked memo from the Russian foreign minister also called for Russia to forge ‘modernisation alliances’ with European countries. The EU has found that lecturing Russia on the need to reform does not work. So why not speak in Russia’s own interest by offering help with what has become a national priority?
Moreover, some EU policy-makers hope that since it is mainly President Medvedev who is pushing for modernisation, a re-focusing of EU-Russia relations on this topic may strengthen his hands vis-à-vis the more statist and authoritarian Putin clan.
Finally, political disagreements and tensions will remain inevitable in EU-Russia relations, whether over gas sales or the fate of Ukraine. The modernisation partnership could encourage co-operation that is independent of politics and focuses on technical, environmental or social issues. Such co-operation could help to stabilise bilateral relations and mitigate the dangerous intellectual isolation in which many Russian bureaucrats and scientists seem to operate today.
However, there are also several reasons why the partnership for modernisation may be a bad idea.
First, and most importantly, what most people in the EU mean by modernisation is very different from the notion held by the Russian leadership. Russia’s concept of modernisation is state-led and project-focused: a state-financed nanotechnology institute, state-owned banks lending to selected sectors, a brand-new ‘innovation city’ outside Moscow set up by government fiat – these are the building blocks of Medvedev’s innovation economy.
This approach cannot work. In today’s dynamic global economy, picking winners is not something that governments can do. An innovative economy needs open markets, venture capital, free-thinking entrepreneurs, fast bankruptcy courts and solid protection of intellectual property. Russia’s business environment is characterised by wide-spread monopolies, ubiquitous corruption, stifling state-interferences, weak and contradictory laws, and so on. The whole idea that Russia can shift from an economy that relies on oil, gas and heavy industry to a cutting-edge, high-tech one is spurious. Russia should first try to move existing industrial sectors up the value chain by using imported technology and know-how. Large-scale indigenous innovation may come later.
A state-led approach to economic change is particularly problematic in today’s Russia because its public institutions function so badly. Sergei Guriev, a Moscow-based economist, has compared the quality of Russia’s state administration and legal system of today with that of South Korea 12 years ago, before it embarked on its impressive growth spurt. He concluded that South Korea’s institutions were quite simply in a different league and that Russia’s chances of catching up with the world’s most developed countries were slim.
The Russian leadership hardly trusts its own bureaucracy to implement a road building programme. How is it supposed to build a replica of Silicon Valley? Even if such isolated programmes were successful, their impact on the wider economy would be limited so long as competition is restricted and successful companies must fear kleptocratic officials. The risk is that the money that the Russian government is about to pump into selected sectors and high-profile projects will not only be wasted. It will create a constant, future demand on public resources that may well be better spent elsewhere.
In short, Russian modernisation does not need vertical state intervention but a horizontal improvement of the business environment. It is doubtful whether the Russian leadership has the political will to clamp down on corruption, improve competition, reform the education and science sectors and strengthen the rule of law.
The question the EU needs to ask itself is whether it should accept and support Russia’s flawed concept of modernisation, or whether it should make support conditional on Russia implementing at least some of the reforms needed to strengthen the rule of law and improve the economy. In the past, EU attempts to cajole or persuade Russia to implement reforms have had limited or no impact. The modernisation partnership is unlikely to be very different.
Katinka Barysch is deputy director at the Centre for European Reform
Friday, May 21, 2010
Financial regulation: Will British euroscepticism collide with European populism?
by Philip Whyte
When EU finance ministers met in Brussels on 18 May, many observers expected sparks to fly. The reason? This was the first EU meeting that Britain’s newly-elected government would attend. And a leading item on the agenda was the Commission’s proposed directive to regulate managers of ‘alternative investment funds’. France and Germany have pressed hard for the directive. Britain has deep reservations about it. The fear across the EU was that a hard-line British eurosceptic government ideologically resistant to regulating financial markets would come to Brussels seeking confrontation over the directive. In the event, the bust-up never happened. What lessons should one draw about the new, Conservative-led government’s attitude to the EU and to financial regulation?
The Conservative Party is more eurosceptic than it has ever been. Many of its members would like to withdraw from the EU altogether. The party’s leader, David Cameron, is no euro-enthusiast himself. But he is above all a pragmatist, not a rigid ideologue bent on confrontation. Recall that he enraged sections of his party when he decided not to hold a referendum on the Lisbon treaty once it had been ratified by all 27 member-states; and that he has formed a coalition with the UK’s most pro-European party, the Liberal Democrats. Besides, the government that he leads has more important things to do than pick needless fights in the EU. The focus of its attention over the next five years will be on consolidating the public finances and managing the inevitable social conflicts that will result.
What of financial regulation? A common view across Europe is that the financial crisis was the result of ‘unregulated Anglo-Saxon capitalism’; that the EU’s task is to cajole the reluctant British into clamping down on the City of London; and that the Conservatives may be particularly resistant to cooperating, given their ideological commitment to free markets and historical links to the City. Much of this account is inaccurate. Many of the regulatory failings exposed by the crisis were as much in evidence outside the Anglo-Saxon world as within it. The UK has pushed through many regulatory reforms before the EU. And the Conservative Party has distanced itself from the City and is considering measures – like breaking up large banks – that go far beyond what most EU countries are contemplating.
Does this mean that Britain and the EU will work harmoniously on the reform of financial regulation? The answer is: probably not. One problem is the populist undercurrent that is driving some reforms in the EU. The sad truth is that the alternative investment fund managers’ directive has been a poor advert for EU legislation. The Commission proposed it, under pressure from France and Germany, without carrying out the detailed impact assessment that its ‘better regulation’ agenda requires. The directive targets a rag-bag of disparate entities, mostly in the UK, that had nothing to do with the crisis and that will be saddled with inappropriate rules. And it is being imposed over the objections of the country that will be most affected by it by countries that will barely be affected by it at all.
Britain’s historical attitude to the EU – its enthusiasm for the single market, allied to its hostility to institutional integration – is another problem. Why? Because it is no longer clear that this Janus-faced position is tenable. As the UK’s Turner Review acknowledged, the financial crisis exposed fault-lines in the EU’s single market for banking that can only be solved in one of two ways. The first (the ‘less Europe’ option) is to return powers to host country authorities – a move that would mark a retreat from the single market. The second (the ‘more Europe’ option) is to beef up existing EU bodies so that a common rulebook can be developed and co-ordination between national supervisory authorities can be tightened. (This option does not currently envisage the creation of a pan-European supervisory authority.)
A key task facing the EU following the financial crisis is to rescue the single market in banking. If the EU is to succeed, Britain’s Conservative-led government and its EU partners must work together constructively. Britain’s EU partners need the Cameron government’s pragmatism to trump its euroscepticism. But European politicians would help if they showed cooler heads and more measured rhetoric than they are doing at present. Tirades against hedge funds, ‘speculators’ and Anglo-Saxons may play well in some EU countries. But in Britain, they increase the suspicion that European politicians are happier looking for scapegoats than learning the real lessons of the crisis. If it goes unchecked, European populism could become an obstacle to the Cameron government’s pragmatism.
Philip Whyte is senior research fellow at the Centre for European Reform
When EU finance ministers met in Brussels on 18 May, many observers expected sparks to fly. The reason? This was the first EU meeting that Britain’s newly-elected government would attend. And a leading item on the agenda was the Commission’s proposed directive to regulate managers of ‘alternative investment funds’. France and Germany have pressed hard for the directive. Britain has deep reservations about it. The fear across the EU was that a hard-line British eurosceptic government ideologically resistant to regulating financial markets would come to Brussels seeking confrontation over the directive. In the event, the bust-up never happened. What lessons should one draw about the new, Conservative-led government’s attitude to the EU and to financial regulation?
The Conservative Party is more eurosceptic than it has ever been. Many of its members would like to withdraw from the EU altogether. The party’s leader, David Cameron, is no euro-enthusiast himself. But he is above all a pragmatist, not a rigid ideologue bent on confrontation. Recall that he enraged sections of his party when he decided not to hold a referendum on the Lisbon treaty once it had been ratified by all 27 member-states; and that he has formed a coalition with the UK’s most pro-European party, the Liberal Democrats. Besides, the government that he leads has more important things to do than pick needless fights in the EU. The focus of its attention over the next five years will be on consolidating the public finances and managing the inevitable social conflicts that will result.
What of financial regulation? A common view across Europe is that the financial crisis was the result of ‘unregulated Anglo-Saxon capitalism’; that the EU’s task is to cajole the reluctant British into clamping down on the City of London; and that the Conservatives may be particularly resistant to cooperating, given their ideological commitment to free markets and historical links to the City. Much of this account is inaccurate. Many of the regulatory failings exposed by the crisis were as much in evidence outside the Anglo-Saxon world as within it. The UK has pushed through many regulatory reforms before the EU. And the Conservative Party has distanced itself from the City and is considering measures – like breaking up large banks – that go far beyond what most EU countries are contemplating.
Does this mean that Britain and the EU will work harmoniously on the reform of financial regulation? The answer is: probably not. One problem is the populist undercurrent that is driving some reforms in the EU. The sad truth is that the alternative investment fund managers’ directive has been a poor advert for EU legislation. The Commission proposed it, under pressure from France and Germany, without carrying out the detailed impact assessment that its ‘better regulation’ agenda requires. The directive targets a rag-bag of disparate entities, mostly in the UK, that had nothing to do with the crisis and that will be saddled with inappropriate rules. And it is being imposed over the objections of the country that will be most affected by it by countries that will barely be affected by it at all.
Britain’s historical attitude to the EU – its enthusiasm for the single market, allied to its hostility to institutional integration – is another problem. Why? Because it is no longer clear that this Janus-faced position is tenable. As the UK’s Turner Review acknowledged, the financial crisis exposed fault-lines in the EU’s single market for banking that can only be solved in one of two ways. The first (the ‘less Europe’ option) is to return powers to host country authorities – a move that would mark a retreat from the single market. The second (the ‘more Europe’ option) is to beef up existing EU bodies so that a common rulebook can be developed and co-ordination between national supervisory authorities can be tightened. (This option does not currently envisage the creation of a pan-European supervisory authority.)
A key task facing the EU following the financial crisis is to rescue the single market in banking. If the EU is to succeed, Britain’s Conservative-led government and its EU partners must work together constructively. Britain’s EU partners need the Cameron government’s pragmatism to trump its euroscepticism. But European politicians would help if they showed cooler heads and more measured rhetoric than they are doing at present. Tirades against hedge funds, ‘speculators’ and Anglo-Saxons may play well in some EU countries. But in Britain, they increase the suspicion that European politicians are happier looking for scapegoats than learning the real lessons of the crisis. If it goes unchecked, European populism could become an obstacle to the Cameron government’s pragmatism.
Philip Whyte is senior research fellow at the Centre for European Reform
Thursday, May 13, 2010
Business leaders risk discrediting markets
by Simon Tilford
Despite their battered reputation, markets remain the best way of generating economic growth. But the market economy faces a crisis of legitimacy brought about by rising inequality and a breakdown of the relationship between risk and reward. The promise of capitalism is that wages rise in line with productivity growth. But over the last 15 years a hugely disproportionate share of the rewards from economic growth has accrued to those at the top, led by boardroom executives and senior bankers. By contrast, median incomes have stagnated. As a result, governments will struggle to convince electorates of the case for markets and free enterprise, and will have a tough time slimming down bloated public sectors.
One reason for the rise in inequality is falling demand for unskilled labour. Technological change and growing trade with emerging economies means that there is little demand for poorly-skilled workers. It is no surprise that the widening of wage differentials has been most pronounced in those European countries with large numbers of poorly-skilled workers. However, the rise in inequality also reflects a surge in what economists call ‘rent-seeking’: the ability of certain groups within society to extract disproportionate rewards (or ‘rents’) for their work.
Boardroom pay has ballooned across Europe, inflating wage differentials. According to Income Data Services, the executives of the UK’s 100 biggest companies earned 84 times the average pay of a full-time worker in 2009, up from 47 times in 2000. This trend is not confined to countries that are considered to be ‘economically-liberal’ such as the UK. It is happening across Europe. The dramatic rise in boardroom pay does not reflect share performance. Nor does it result from the fact that companies are competing for global talent: the overwhelming proportion of senior executives in all European countries are recruited nationally.
Another group to have attracted outsized rewards is employed in the financial services industry. Pay in the financial sector has risen far more rapidly than across the economy as a whole. But as Andrew Haldane of the Bank of England has convincingly demonstrated, the huge rise in the sector’s profitability and the subsequent growth in remuneration was the product of leverage – increased borrowing – and not an improved return on assets. The latter requires skill, the former does not. To make matter worse, the losses incurred by the banks when their excessive leverage provoked the financial crisis were covered by the taxpayer. In short, the banks were able to privatise the rewards while socialising the losses. Their subsequent return to profitability owes much to intervention of governments.
The exaggerated remuneration of top bankers and senior executives is essentially a form of rent-seeking. In essence, it is little different from public sector unions securing pay increases in excess of productivity growth or organised special interest groups defending social rights – unfunded pension liabilities, for example – that can only be exercised at the expense of others. The popular perception of business as a vehicle for ‘rent extraction’ rather than a source of employment, wealth and tax revenue is poisonous for the political economy of reform.
Rising inequality did not matter so much when economies were growing and public finances were manageable. But it does now. European governments face mighty challenges. They have to persuade sceptical electorates of the need for more flexible labour markets; the curtailment of social rights; a greater role for the private sector in areas currently dominated by the state; and even cuts in public services. But how can governments succeed in doing this if such reforms are blamed for rising inequality and for allowing unwarranted personal enrichment? Put another way, how can governments address rent-seeking by other powerful groups in society, such as the public sector unions, in the face of rent-seeking by those in the financial sector and on company boards?
The rise in income inequality needs to be reversed and the relationship between risk and reward restored if governments are to be able to sell market-led reforms to increasingly (and understandably) cynical electorates. Governments have to be able to demonstrate how people benefit from markets. They have to be able to show that markets prevent groups within society from extracting undue rewards, not abet them in their drive to do so. For their part, the leaders of finance and business need to recognise that their remuneration is an obstacle to the kinds of market-led reforms they themselves advocate and which are needed to boost economic performance.
Simon Tilford is chief economist at the Centre for European Reform
Despite their battered reputation, markets remain the best way of generating economic growth. But the market economy faces a crisis of legitimacy brought about by rising inequality and a breakdown of the relationship between risk and reward. The promise of capitalism is that wages rise in line with productivity growth. But over the last 15 years a hugely disproportionate share of the rewards from economic growth has accrued to those at the top, led by boardroom executives and senior bankers. By contrast, median incomes have stagnated. As a result, governments will struggle to convince electorates of the case for markets and free enterprise, and will have a tough time slimming down bloated public sectors.
One reason for the rise in inequality is falling demand for unskilled labour. Technological change and growing trade with emerging economies means that there is little demand for poorly-skilled workers. It is no surprise that the widening of wage differentials has been most pronounced in those European countries with large numbers of poorly-skilled workers. However, the rise in inequality also reflects a surge in what economists call ‘rent-seeking’: the ability of certain groups within society to extract disproportionate rewards (or ‘rents’) for their work.
Boardroom pay has ballooned across Europe, inflating wage differentials. According to Income Data Services, the executives of the UK’s 100 biggest companies earned 84 times the average pay of a full-time worker in 2009, up from 47 times in 2000. This trend is not confined to countries that are considered to be ‘economically-liberal’ such as the UK. It is happening across Europe. The dramatic rise in boardroom pay does not reflect share performance. Nor does it result from the fact that companies are competing for global talent: the overwhelming proportion of senior executives in all European countries are recruited nationally.
Another group to have attracted outsized rewards is employed in the financial services industry. Pay in the financial sector has risen far more rapidly than across the economy as a whole. But as Andrew Haldane of the Bank of England has convincingly demonstrated, the huge rise in the sector’s profitability and the subsequent growth in remuneration was the product of leverage – increased borrowing – and not an improved return on assets. The latter requires skill, the former does not. To make matter worse, the losses incurred by the banks when their excessive leverage provoked the financial crisis were covered by the taxpayer. In short, the banks were able to privatise the rewards while socialising the losses. Their subsequent return to profitability owes much to intervention of governments.
The exaggerated remuneration of top bankers and senior executives is essentially a form of rent-seeking. In essence, it is little different from public sector unions securing pay increases in excess of productivity growth or organised special interest groups defending social rights – unfunded pension liabilities, for example – that can only be exercised at the expense of others. The popular perception of business as a vehicle for ‘rent extraction’ rather than a source of employment, wealth and tax revenue is poisonous for the political economy of reform.
Rising inequality did not matter so much when economies were growing and public finances were manageable. But it does now. European governments face mighty challenges. They have to persuade sceptical electorates of the need for more flexible labour markets; the curtailment of social rights; a greater role for the private sector in areas currently dominated by the state; and even cuts in public services. But how can governments succeed in doing this if such reforms are blamed for rising inequality and for allowing unwarranted personal enrichment? Put another way, how can governments address rent-seeking by other powerful groups in society, such as the public sector unions, in the face of rent-seeking by those in the financial sector and on company boards?
The rise in income inequality needs to be reversed and the relationship between risk and reward restored if governments are to be able to sell market-led reforms to increasingly (and understandably) cynical electorates. Governments have to be able to demonstrate how people benefit from markets. They have to be able to show that markets prevent groups within society from extracting undue rewards, not abet them in their drive to do so. For their part, the leaders of finance and business need to recognise that their remuneration is an obstacle to the kinds of market-led reforms they themselves advocate and which are needed to boost economic performance.
Simon Tilford is chief economist at the Centre for European Reform
Monday, May 10, 2010
Closing the gap between rhetoric and reality is key to the euro's survival
by Simon Tilford
Europe faces a critical choice between greater integration and disintegration. The gap between the rhetoric of a united and integrated Europe and the reality of national interests and politics has always dogged Europe. For much of the EU’s history this gap simply held Europe back and undermined the seriousness of the EU in the eyes of the outside world. However, the gap between rhetoric and reality is lethal when it comes to the euro. Unless the reality is brought into line with the rhetoric, the eurozone will unravel.
The package of financial measures announced over the weekend of May 8th-9th to stabilise the eurozone crisis provides some big headline numbers. There will be an additional €60 billion for countries experiencing balance of payment problems. The EU will establish a ‘Special Purpose Vehicle’ with funds of up €440 billion to provide loans to struggling member-states and the IMF will guarantee half as much again. In a major U-turn, the ECB has suggested it may even step in to buy government bonds directly. But the EU’s response is still a case of ‘shooting the messenger’. There is too much talk of ‘speculative attacks on the euro’, of giving a ‘clear signal to the markets’ that the euro will be defended, even talk of keeping the ‘wolves’ from the gate. The subtext is that the markets are overacting and that investors are essentially conjuring up a crisis so they can profit from it. The assumption is that the adjustment needed in Greece, Portugal and other member-states is possible if only the markets will let them make it. As such, the EU is still working on a false premise.
Even assuming the package is approved and the money found (these are big assumptions given the strength of opposition in many member-states to bail-outs) it will not satisfy the markets for long. It does not address the underlying issue: the terrible economic growth prospects of the southern eurozone economies and Ireland. Unless these economies can avoid deflation and get their economies growing, they have no future in the eurozone. In order to qualify for loans from the new Special Purpose Vehicle member-states will have to meet strict deficit reduction terms, with the decision over whether money should be made available to be decided by majority. But what if these conditions are impossible to meet? The EU has bought itself some time – struggling eurozone economies will be able to refinance their debts for the time being – but it has not solved the crisis.
Unfortunately, the eurozone fulfils few, if any, of the criteria for a successful currency union. There are varying degrees of trade integration, but the participating economies can hardly be described as fully integrated. Nor are they flexible – labour markets in many economies remain highly regulated and many sectors are sheltered from competition. Labour mobility between the participating economies is virtually non-existent. There is nothing to prevent huge trade imbalances between the members rising and nothing to address them when they do. This would all perhaps be manageable if it was offset by a large degree of political integration and a fiscal union of some form – but neither exists. Moreover, as the last three months have graphically exposed, there are no eurozone crisis management mechanisms in place. Indeed, the EU’s strategy since the beginning of the year has been tailor-made to provoke precisely the contagion it has been so anxious to avoid.
To suggest that the markets are partly to blame for the crisis or for prolonging it only serves to reinforce perception of European other-worldliness. The markets have simply called the EU’s bluff. Indeed, they should have done so earlier – that way the crisis might have been avoided. Until relatively recently, the markets treated the debt of the various eurozone member-states as largely indivisible. The Greek authorities could borrow at similar interest rates to their German counterparts. This made no sense, but it reflected investors’ belief that it was impossible for a member of the eurozone to default. The financial markets were guilty of buying into the myth of an integrated eurozone.
The markets are right to doubt the sustainability of the current membership of the eurozone. It is hard to see how the struggling member-states are going to generate economic growth. They need a big external stimulus to offset budget cuts and falls in real wages. In short, their exports need to grow much more rapidly than imports, for a lengthy period. This is highly unlikely. Their import demand will be weak, of course, reflecting the collapse in domestic demand. But they need much stronger exports. In the absence of devaluation, they are dependent on a revival of demand elsewhere in the eurozone and the ability of their companies to become more price competitive and hence build their market share within the eurozone. The former is highly unlikely to happen – if anything, the export dependence of the likes of Germany and the Netherlands is being reinforced. There is nothing to force adjustment on these surplus economies within the eurozone and scant recognition that they need to rebalance in order to give others a chance of doing so.
What of the latter? The best way of improving price competitiveness is through higher productivity. But that is a long term challenge; they do not have that amount of time. They have no choice but to try and cut costs relative to the rest of the eurozone. Can they do so? The markets are rightly sceptical. It is true that Germany and the Netherlands have successfully pursued eye-watering wage restraint within the currency bloc. The problem of course is that it’s impossible for every economy to do this simultaneously. It is one thing for a member-state to cut costs relative to the rest of the eurozone when most member-states’ costs are rising pretty rapidly. It is a whole different ball game to do so when costs elsewhere in the eurozone – especially Germany – are falling, reflecting further wage restraint. This is a zero-sum game, whose result will be slump and deflation.
If the imbalances persist, a fiscal union will be essential for the eurozone to survive – the crisis-hit states will not be able to grow unless they can close their external deficits. But the obstacles to such fiscal supranationalism are insurmountable. The crisis has exposed the lack of solidarity between the member-states. A Parisian may grumble about seeing a chunk of his tax revenues flowing to the Pas de Calais or Marseille. Similarly, a resident of Bavaria may resent transfers to Bremen or Berlin. But there is sufficient solidarity between the regions of these countries to underpin such transfers on an ongoing basis. This solidarity does not exist within the eurozone.
The eurozone is on an unsustainable path, notwithstanding the latest package of measures. That is no fault of the markets. It is the result of the gap between European rhetoric and reality. There needs to be an acknowledgement that if the euro is to work it will require greater integration. The problem is that when countries signed-up to the single currency, they were not made aware that it would require such integration. Political elites need to start explaining why it does.
Simon Tilford is chief economist at the Centre for European Reform
Europe faces a critical choice between greater integration and disintegration. The gap between the rhetoric of a united and integrated Europe and the reality of national interests and politics has always dogged Europe. For much of the EU’s history this gap simply held Europe back and undermined the seriousness of the EU in the eyes of the outside world. However, the gap between rhetoric and reality is lethal when it comes to the euro. Unless the reality is brought into line with the rhetoric, the eurozone will unravel.
The package of financial measures announced over the weekend of May 8th-9th to stabilise the eurozone crisis provides some big headline numbers. There will be an additional €60 billion for countries experiencing balance of payment problems. The EU will establish a ‘Special Purpose Vehicle’ with funds of up €440 billion to provide loans to struggling member-states and the IMF will guarantee half as much again. In a major U-turn, the ECB has suggested it may even step in to buy government bonds directly. But the EU’s response is still a case of ‘shooting the messenger’. There is too much talk of ‘speculative attacks on the euro’, of giving a ‘clear signal to the markets’ that the euro will be defended, even talk of keeping the ‘wolves’ from the gate. The subtext is that the markets are overacting and that investors are essentially conjuring up a crisis so they can profit from it. The assumption is that the adjustment needed in Greece, Portugal and other member-states is possible if only the markets will let them make it. As such, the EU is still working on a false premise.
Even assuming the package is approved and the money found (these are big assumptions given the strength of opposition in many member-states to bail-outs) it will not satisfy the markets for long. It does not address the underlying issue: the terrible economic growth prospects of the southern eurozone economies and Ireland. Unless these economies can avoid deflation and get their economies growing, they have no future in the eurozone. In order to qualify for loans from the new Special Purpose Vehicle member-states will have to meet strict deficit reduction terms, with the decision over whether money should be made available to be decided by majority. But what if these conditions are impossible to meet? The EU has bought itself some time – struggling eurozone economies will be able to refinance their debts for the time being – but it has not solved the crisis.
Unfortunately, the eurozone fulfils few, if any, of the criteria for a successful currency union. There are varying degrees of trade integration, but the participating economies can hardly be described as fully integrated. Nor are they flexible – labour markets in many economies remain highly regulated and many sectors are sheltered from competition. Labour mobility between the participating economies is virtually non-existent. There is nothing to prevent huge trade imbalances between the members rising and nothing to address them when they do. This would all perhaps be manageable if it was offset by a large degree of political integration and a fiscal union of some form – but neither exists. Moreover, as the last three months have graphically exposed, there are no eurozone crisis management mechanisms in place. Indeed, the EU’s strategy since the beginning of the year has been tailor-made to provoke precisely the contagion it has been so anxious to avoid.
To suggest that the markets are partly to blame for the crisis or for prolonging it only serves to reinforce perception of European other-worldliness. The markets have simply called the EU’s bluff. Indeed, they should have done so earlier – that way the crisis might have been avoided. Until relatively recently, the markets treated the debt of the various eurozone member-states as largely indivisible. The Greek authorities could borrow at similar interest rates to their German counterparts. This made no sense, but it reflected investors’ belief that it was impossible for a member of the eurozone to default. The financial markets were guilty of buying into the myth of an integrated eurozone.
The markets are right to doubt the sustainability of the current membership of the eurozone. It is hard to see how the struggling member-states are going to generate economic growth. They need a big external stimulus to offset budget cuts and falls in real wages. In short, their exports need to grow much more rapidly than imports, for a lengthy period. This is highly unlikely. Their import demand will be weak, of course, reflecting the collapse in domestic demand. But they need much stronger exports. In the absence of devaluation, they are dependent on a revival of demand elsewhere in the eurozone and the ability of their companies to become more price competitive and hence build their market share within the eurozone. The former is highly unlikely to happen – if anything, the export dependence of the likes of Germany and the Netherlands is being reinforced. There is nothing to force adjustment on these surplus economies within the eurozone and scant recognition that they need to rebalance in order to give others a chance of doing so.
What of the latter? The best way of improving price competitiveness is through higher productivity. But that is a long term challenge; they do not have that amount of time. They have no choice but to try and cut costs relative to the rest of the eurozone. Can they do so? The markets are rightly sceptical. It is true that Germany and the Netherlands have successfully pursued eye-watering wage restraint within the currency bloc. The problem of course is that it’s impossible for every economy to do this simultaneously. It is one thing for a member-state to cut costs relative to the rest of the eurozone when most member-states’ costs are rising pretty rapidly. It is a whole different ball game to do so when costs elsewhere in the eurozone – especially Germany – are falling, reflecting further wage restraint. This is a zero-sum game, whose result will be slump and deflation.
If the imbalances persist, a fiscal union will be essential for the eurozone to survive – the crisis-hit states will not be able to grow unless they can close their external deficits. But the obstacles to such fiscal supranationalism are insurmountable. The crisis has exposed the lack of solidarity between the member-states. A Parisian may grumble about seeing a chunk of his tax revenues flowing to the Pas de Calais or Marseille. Similarly, a resident of Bavaria may resent transfers to Bremen or Berlin. But there is sufficient solidarity between the regions of these countries to underpin such transfers on an ongoing basis. This solidarity does not exist within the eurozone.
The eurozone is on an unsustainable path, notwithstanding the latest package of measures. That is no fault of the markets. It is the result of the gap between European rhetoric and reality. There needs to be an acknowledgement that if the euro is to work it will require greater integration. The problem is that when countries signed-up to the single currency, they were not made aware that it would require such integration. Political elites need to start explaining why it does.
Simon Tilford is chief economist at the Centre for European Reform
Friday, May 07, 2010
The dangers of a disgruntled Germany
By Katinka Barysch
Germany has finally agreed to help bail out Greece. The negotiations were acrimonious and took months. Angela Merkel’s hesitation and prevarication have increased the cost of the bail-out and unsettled financial markets. Politicians and commentators across the EU have accused Germany of being selfish and lacking solidarity with its EU partners. Germany feels isolated and misunderstood. The rift – if badly handled – could make Germany’s stance towards the EU more hard-nosed and inward-looking. Such a shift would change the way the EU works more than the Lisbon treaty ever could.
Berlin today is bristling with defiance. Germans are convinced that Angela Merkel’s strict conditions for the Greek bail-out will not only save German taxpayers’ money but are needed to prevent the eurozone from imploding. What is more, although Berlin’s PR policy has been wanting, German policy-makers and pundits are aggrieved that no-one in the other EU countries has made an effort to understand the domestic political realities that have shaped Merkel’s decisions.
The German press coverage about the bail-out has ranged from the doubtful to the visceral. Day after day, Bild Zeitung, the biggest tabloid, ran stories about Greeks retiring at 50 and dodging their taxes. The money that Germany will make available (€8.7 billion in the first year and up to €23 billion by 2012) is portrayed as a transfer not a loan. It will force the government to shelve promised tax cuts and curb social benefits, according to the media. A big majority of Germans are against any EU money for Greece, even if the country goes bust. The fact that there has been so little political leadership on the Greek crisis has allowed the media to dominate the public debate. Neither politicians nor the media have made much of an effort to remind Germans how much their country has benefited from the EU and the euro.
The public backlash against the bail-out came at a time when Germany was preparing for a pivotal election in the state of North Rhine-Westphalia on May 9th. If Merkel’s CDU and the FDP lose their majority there, their already strained coalition at the national level risks becoming dysfunctional. What’s more, the CDU / FDP coalition would lose their majority in the Bundesrat, the second chamber of parliament, which would force it to seek compromises with the opposition on all important pieces of legislation going forward. Hence Merkel’s desperate attempt to delay any decisions about Greece until after the election.
In April, three economists and a law professor announced that they would challenge any bail-out in the constitutional court. They claim that giving money to Greece violates both the no bail-out clause in the EU treaty and the 1993 verdict of the court that makes Germany’s participation in the euro conditional on stability being maintained in the eurozone. They want an injunction to stop the loan being disbursed while the court deliberates on its legality. The outcome of such a case is uncertain. But Germans have consistently rated their constitutional court the most highly respected institution in the land. No government could dare to do something that is in open contravention of a previous court ruling. That is why the government has worked so hard to make the bail-out watertight.
Merkel felt that her hands were tied by very real and immediate constraints. But her cautious and delayed reaction is also in line with a deeper shift in Germany’s European policies. In a European Union of 27, Germans no longer automatically assume that their national interest coincides with that of the Union. Since saving the Lisbon treaty in 2007, Merkel has shown no vision in her EU policies. For the generation of Helmut Kohl, the EU was a matter of war and peace, for Merkel it is one of costs and benefits. Her European policies are all about pragmatism and problem solving. But the absence of obvious allies makes finding European solutions harder: Merkel is disappointed by Commission President Jose Manuel Barroso and distrustful of French President Nicolas Sarkozy. There is also a clash in political style that accentuates disagreements between Germany and its partners. At home, Merkel’s tactic of tip-toeing towards feasible solutions has made her consistently popular. At the EU level, it clashes with Sarkozy and British Premier Gordon Brown, both prone to over-promise and under-deliver.
Many argue that Germany is becoming a ‘normal’ country in the EU and that is just fine. But it was exactly because Germany did not always behave like the UK and France that European integration moved forward and European solutions were possible. The country’s political elite is still wedded to the European project even though Germany is no longer willing to pay over the odds to make European compromises possible. The risk is that the Greek crisis brings a latent sense of frustration and disillusionment with the EU to the boil. It is hard to see how the EU could make progress on anything – whether it is services market liberalisation or a common energy policy – with a reluctant, grumpy and inward-looking Germany at its heart.
It is time for some damage limitation. Germany’s partners are right to point out the costs of Germany’s tardy response. But they need to show at least some understanding of Merkel’s domestic conundrum and acknowledge her efforts that have now made the bail-out possible. There were several EU countries that wanted tough conditions for Greece just as badly. They need to stop hiding behind Berlin. Others need to acknowledge that European solidarity also requires responsibility on the part of all EU member-states.
Berlin, in turn, needs to finally show some leadership now by pushing for sustainable solutions to the eurozone malaise. These do not only include tougher surveillance of, and sanctions against, eurozone countries that spend too much. The eurozone also needs a mechanism to deal with similar fiscal crises in the future. And it needs an open debate about the imbalances that threaten to undermine the euro and why Germany does not buy as much from its European partners as it sells to them.
Katinka Barysch is deputy director at the CER
Germany has finally agreed to help bail out Greece. The negotiations were acrimonious and took months. Angela Merkel’s hesitation and prevarication have increased the cost of the bail-out and unsettled financial markets. Politicians and commentators across the EU have accused Germany of being selfish and lacking solidarity with its EU partners. Germany feels isolated and misunderstood. The rift – if badly handled – could make Germany’s stance towards the EU more hard-nosed and inward-looking. Such a shift would change the way the EU works more than the Lisbon treaty ever could.
Berlin today is bristling with defiance. Germans are convinced that Angela Merkel’s strict conditions for the Greek bail-out will not only save German taxpayers’ money but are needed to prevent the eurozone from imploding. What is more, although Berlin’s PR policy has been wanting, German policy-makers and pundits are aggrieved that no-one in the other EU countries has made an effort to understand the domestic political realities that have shaped Merkel’s decisions.
The German press coverage about the bail-out has ranged from the doubtful to the visceral. Day after day, Bild Zeitung, the biggest tabloid, ran stories about Greeks retiring at 50 and dodging their taxes. The money that Germany will make available (€8.7 billion in the first year and up to €23 billion by 2012) is portrayed as a transfer not a loan. It will force the government to shelve promised tax cuts and curb social benefits, according to the media. A big majority of Germans are against any EU money for Greece, even if the country goes bust. The fact that there has been so little political leadership on the Greek crisis has allowed the media to dominate the public debate. Neither politicians nor the media have made much of an effort to remind Germans how much their country has benefited from the EU and the euro.
The public backlash against the bail-out came at a time when Germany was preparing for a pivotal election in the state of North Rhine-Westphalia on May 9th. If Merkel’s CDU and the FDP lose their majority there, their already strained coalition at the national level risks becoming dysfunctional. What’s more, the CDU / FDP coalition would lose their majority in the Bundesrat, the second chamber of parliament, which would force it to seek compromises with the opposition on all important pieces of legislation going forward. Hence Merkel’s desperate attempt to delay any decisions about Greece until after the election.
In April, three economists and a law professor announced that they would challenge any bail-out in the constitutional court. They claim that giving money to Greece violates both the no bail-out clause in the EU treaty and the 1993 verdict of the court that makes Germany’s participation in the euro conditional on stability being maintained in the eurozone. They want an injunction to stop the loan being disbursed while the court deliberates on its legality. The outcome of such a case is uncertain. But Germans have consistently rated their constitutional court the most highly respected institution in the land. No government could dare to do something that is in open contravention of a previous court ruling. That is why the government has worked so hard to make the bail-out watertight.
Merkel felt that her hands were tied by very real and immediate constraints. But her cautious and delayed reaction is also in line with a deeper shift in Germany’s European policies. In a European Union of 27, Germans no longer automatically assume that their national interest coincides with that of the Union. Since saving the Lisbon treaty in 2007, Merkel has shown no vision in her EU policies. For the generation of Helmut Kohl, the EU was a matter of war and peace, for Merkel it is one of costs and benefits. Her European policies are all about pragmatism and problem solving. But the absence of obvious allies makes finding European solutions harder: Merkel is disappointed by Commission President Jose Manuel Barroso and distrustful of French President Nicolas Sarkozy. There is also a clash in political style that accentuates disagreements between Germany and its partners. At home, Merkel’s tactic of tip-toeing towards feasible solutions has made her consistently popular. At the EU level, it clashes with Sarkozy and British Premier Gordon Brown, both prone to over-promise and under-deliver.
Many argue that Germany is becoming a ‘normal’ country in the EU and that is just fine. But it was exactly because Germany did not always behave like the UK and France that European integration moved forward and European solutions were possible. The country’s political elite is still wedded to the European project even though Germany is no longer willing to pay over the odds to make European compromises possible. The risk is that the Greek crisis brings a latent sense of frustration and disillusionment with the EU to the boil. It is hard to see how the EU could make progress on anything – whether it is services market liberalisation or a common energy policy – with a reluctant, grumpy and inward-looking Germany at its heart.
It is time for some damage limitation. Germany’s partners are right to point out the costs of Germany’s tardy response. But they need to show at least some understanding of Merkel’s domestic conundrum and acknowledge her efforts that have now made the bail-out possible. There were several EU countries that wanted tough conditions for Greece just as badly. They need to stop hiding behind Berlin. Others need to acknowledge that European solidarity also requires responsibility on the part of all EU member-states.
Berlin, in turn, needs to finally show some leadership now by pushing for sustainable solutions to the eurozone malaise. These do not only include tougher surveillance of, and sanctions against, eurozone countries that spend too much. The eurozone also needs a mechanism to deal with similar fiscal crises in the future. And it needs an open debate about the imbalances that threaten to undermine the euro and why Germany does not buy as much from its European partners as it sells to them.
Katinka Barysch is deputy director at the CER
Human rights cannot be a luxury in Afghanistan
by Joanna Buckley
The Afghans with whom I worked in Bamyan province, Afghanistan, often asked me why foreigners were so concerned about the destruction of historical monuments yet seemingly so indifferent to the human suffering that occurred. They were referring to the international outcry which followed the demolition of the ancient statues of Buddha, carved into the side of the Bamyan valley and destroyed by the Taliban in March 2001. To this day, foreigners in Afghanistan travel to Bamyan to visit the gaping holes that once housed the giant sandstone statues. To most Hazaras, the ethnic minority that lives in Bamyan, these empty niches represent more than the wanton destruction of their cultural heritage: they are also a reminder of killings that took place around the same time. In the most notorious incident, in January 2001, Taliban forces were accused of the massacre of hundreds of civilians in Yakawlang district, north of the province’s capital. This is just one example of the many atrocities that occurred during almost three decades of conflict in Afghanistan. But in the rush to end the war and leave Afghanistan there is the risk that the international community will fail to address violations of human rights and past war crimes.
That would be a mistake. The western strategy for Afghanistan is based on convincing the Afghan population that the government of President Hamid Karzai is worth supporting - and eventually leaving the country in his hands. But the Kabul administration lacks credibility, particularly following the elections of August 2009 which were marred by widespread fraud; and because it has left violations of human rights unpunished, fostering a culture of impunity. In December 2009 the government published the 'national reconciliation, general amnesty and national stability law', which effectively granted a blanket amnesty to all those involved in the many years of conflict in Afghanistan.
Western governments seem intent on ignoring this situation. In a January 2010 talk in London the former British ambassador and newly appointed ‘senior civilian representative’ for NATO, Mark Sedwill, said that peace will require dealing with “some pretty unsavoury characters”. Diplomats attending a major international conference on Afghanistan in London in early 2010 confirmed that, despite official government rhetoric to the contrary, Sedwill echoes the prevailing sentiment - that there is no room at the moment for taking human rights into consideration. Human rights have become a luxury - a potential added bonus. Instead, politicians and diplomats working in Kabul are focusing on ways to end the conflict through a political settlement. This would involve measures to provide alternative opportunities for insurgents involved in the current fighting (reintegration), most probably coupled with some kind of high-level political deal with the Taliban (reconciliation).
The governments involved in Afghanistan’s reconstruction are right to look for ways to persuade insurgents to lay down arms. And Ambassador Sedwill correctly argued that it would be hypocritical to impose stringent moral standards on insurgents while many members of the government are implicated in serious crimes. Others suggest that attempts to marginalise Afghan warlords now by holding them to account for past abuses will result in further insecurity, possibly leading to civil war. But this does not need to be an either or situation: there are ways of building human rights considerations into a future political settlement and in fact utilising these to strengthen any deal reached, providing a mechanism of leverage.
Insurgents and members of the Afghan government implicated in human rights abuses should agree to draw a line under the past. But those involved in future violations should be held to account. In these cases evidence of past crimes would be considered. If required, violators of human rights should be referred to the International Criminal Court (ICC) - Afghanistan has ratified the Rome Statute that created the ICC and is bound by its provisions. The United Nations, which has a more neutral reputation in Afghanistan than NATO or the US and UK governments, should monitor compliance with the human rights provisions of a peace agreement. Other international organisations should offer the UN full political and financial support in its role - in particular the European Union, which has been a vocal defender of human rights and the rule of law in Afghanistan. They should also support a more holistic process for transitional justice, including initiatives to recognise, investigate and document past crimes.
The foreign governments, which promised that their military intervention would result in justice for all Afghans, have a responsibility and an opportunity to help implement such an agreement. The US and UK governments have rightly stressed that any future reconciliation process has to be Afghan-led. But common sense dictates that talks between the Kabul government and those insurgents open to negotiations will at some point require the services of a foreign neutral broker. The experience of the civil war in Afghanistan in the 1990s illustrates that maintaining a peace deal once it has been reached is a treacherous affair. The presence of an outside guarantor and the inclusion of human rights conditions would make any deal reached more enduring.Implementation will require the international community to show a concerted political will and a co-ordinated approach. This is not an easy thing to achieve; the various institutions and governments involved assign differing priorities to protecting human rights. But most would like to leave Afghanistan soon. They need to understand that foreign troops will not be able to leave until the Kabul government asserts its authority over the country, and the Afghan government will never be able to gain the trust of its people unless it can guarantee their rights.
Joanna Buckley is a former political adviser, Office of the Special Representative of the EU for Afghanistan, and former information analyst, United Nations Assistance Mission in Afghanistan. She is also the author of “Can the EU be more effective in Afghanistan?”, a new report published by the Centre for European Reform.
The Afghans with whom I worked in Bamyan province, Afghanistan, often asked me why foreigners were so concerned about the destruction of historical monuments yet seemingly so indifferent to the human suffering that occurred. They were referring to the international outcry which followed the demolition of the ancient statues of Buddha, carved into the side of the Bamyan valley and destroyed by the Taliban in March 2001. To this day, foreigners in Afghanistan travel to Bamyan to visit the gaping holes that once housed the giant sandstone statues. To most Hazaras, the ethnic minority that lives in Bamyan, these empty niches represent more than the wanton destruction of their cultural heritage: they are also a reminder of killings that took place around the same time. In the most notorious incident, in January 2001, Taliban forces were accused of the massacre of hundreds of civilians in Yakawlang district, north of the province’s capital. This is just one example of the many atrocities that occurred during almost three decades of conflict in Afghanistan. But in the rush to end the war and leave Afghanistan there is the risk that the international community will fail to address violations of human rights and past war crimes.
That would be a mistake. The western strategy for Afghanistan is based on convincing the Afghan population that the government of President Hamid Karzai is worth supporting - and eventually leaving the country in his hands. But the Kabul administration lacks credibility, particularly following the elections of August 2009 which were marred by widespread fraud; and because it has left violations of human rights unpunished, fostering a culture of impunity. In December 2009 the government published the 'national reconciliation, general amnesty and national stability law', which effectively granted a blanket amnesty to all those involved in the many years of conflict in Afghanistan.
Western governments seem intent on ignoring this situation. In a January 2010 talk in London the former British ambassador and newly appointed ‘senior civilian representative’ for NATO, Mark Sedwill, said that peace will require dealing with “some pretty unsavoury characters”. Diplomats attending a major international conference on Afghanistan in London in early 2010 confirmed that, despite official government rhetoric to the contrary, Sedwill echoes the prevailing sentiment - that there is no room at the moment for taking human rights into consideration. Human rights have become a luxury - a potential added bonus. Instead, politicians and diplomats working in Kabul are focusing on ways to end the conflict through a political settlement. This would involve measures to provide alternative opportunities for insurgents involved in the current fighting (reintegration), most probably coupled with some kind of high-level political deal with the Taliban (reconciliation).
The governments involved in Afghanistan’s reconstruction are right to look for ways to persuade insurgents to lay down arms. And Ambassador Sedwill correctly argued that it would be hypocritical to impose stringent moral standards on insurgents while many members of the government are implicated in serious crimes. Others suggest that attempts to marginalise Afghan warlords now by holding them to account for past abuses will result in further insecurity, possibly leading to civil war. But this does not need to be an either or situation: there are ways of building human rights considerations into a future political settlement and in fact utilising these to strengthen any deal reached, providing a mechanism of leverage.
Insurgents and members of the Afghan government implicated in human rights abuses should agree to draw a line under the past. But those involved in future violations should be held to account. In these cases evidence of past crimes would be considered. If required, violators of human rights should be referred to the International Criminal Court (ICC) - Afghanistan has ratified the Rome Statute that created the ICC and is bound by its provisions. The United Nations, which has a more neutral reputation in Afghanistan than NATO or the US and UK governments, should monitor compliance with the human rights provisions of a peace agreement. Other international organisations should offer the UN full political and financial support in its role - in particular the European Union, which has been a vocal defender of human rights and the rule of law in Afghanistan. They should also support a more holistic process for transitional justice, including initiatives to recognise, investigate and document past crimes.
The foreign governments, which promised that their military intervention would result in justice for all Afghans, have a responsibility and an opportunity to help implement such an agreement. The US and UK governments have rightly stressed that any future reconciliation process has to be Afghan-led. But common sense dictates that talks between the Kabul government and those insurgents open to negotiations will at some point require the services of a foreign neutral broker. The experience of the civil war in Afghanistan in the 1990s illustrates that maintaining a peace deal once it has been reached is a treacherous affair. The presence of an outside guarantor and the inclusion of human rights conditions would make any deal reached more enduring.Implementation will require the international community to show a concerted political will and a co-ordinated approach. This is not an easy thing to achieve; the various institutions and governments involved assign differing priorities to protecting human rights. But most would like to leave Afghanistan soon. They need to understand that foreign troops will not be able to leave until the Kabul government asserts its authority over the country, and the Afghan government will never be able to gain the trust of its people unless it can guarantee their rights.
Joanna Buckley is a former political adviser, Office of the Special Representative of the EU for Afghanistan, and former information analyst, United Nations Assistance Mission in Afghanistan. She is also the author of “Can the EU be more effective in Afghanistan?”, a new report published by the Centre for European Reform.
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