by Tomas Valasek
Libya has been a difficult war for NATO. It has shown the alliance divided: only eight out of 28 allies sent combat forces. Some of them ran out of ammunition and Italy withdrew its aircraft carrier in the midst of the conflict because the government needed to cut expenses. The Americans’ frustration with European performance boiled over in June, when the then-secretary of defence Robert Gates warned that NATO faced a ‘dim and dismal’ future.
Yet critics of NATO’s performance are missing a bigger story: in Libya, the Europeans have for the first time responded to Washington’s calls to assume more responsibility for their neighbourhood. In complete contrast to the Balkans in the 1990s, they have taken decisive military action. As a result, the United States could take a back seat while the Europeans have absorbed most of the risks and costs of the ultimately successful war. This should be cause for cautious optimism about NATO.
Libya is an unheralded triumph for US diplomacy. One of Washington’s consistent aims has been to convince its allies to relieve the US military burden. In Libya, the US at last did what it had long threatened to do: the Obama administration, never too keen on the intervention in the first place, turned over most operations to allies shortly after the war’s initial stage, which had been led by US forces.
The US’s policy has had the desired effect on Europe: it has energised the key allies. French and British air forces, along with other European, Canadian and Middle Eastern colleagues, have performed the majority of the bombing raids since early weeks of the six-month war. In a sense, Libya is the antithesis to Europe’s failure to act in Bosnia. When bloodshed in the Balkans broke out in the 1990s, senior politicians on the continent hailed the ‘hour of Europe’, when an economic power would become a security player. But key European capitals could not summon the political will to use force, and, embarrassingly, it fell mostly to the US to end the civil war in Bosnia. In Libya, European governments acted swiftly, and helped the rebels win the war. In the process, the allies established a new division of labour for NATO operations on Europe’s borders, which should be encouraged and developed further.
This is not to say that all is well in NATO. Germany’s refusal to support the mission is worrying; Europe’s diplomacy and military operations in Libya lacked the punch they would have had with the continent’s largest country on board. Money is also a concern. The new division of labour inside NATO can only work if European governments continue to invest in their militaries. They are failing to do this: over the past few years, European countries have cut defence budgets dramatically. The Libyan conflict has done little to change the trend: the fiscal crisis is ensnaring more governments each month, prompting deeper and deeper cuts in government expenses including defence. On present trends, the Europeans may well lose the ability to mount another Libya-style operation in the future.
However, as a recent CER essay points out, there are things that the governments in Europe can do to avoid such outcome: from getting rid of legacy Cold War equipment to buying new weapons jointly and integrating their exercise ranges, maintenance facilities and military academies. There is evidence that the Europeans are moving in the right direction – the French and the British recently agreed to share the costs of building and maintaining nuclear weapons; they also plan to buy missiles and drones together in the future. More governments are exploring other ideas for collaboration, and the Dutch and the Belgians as well as the Nordic countries have been doing so for several years. These measures will not completely offset the impact of budget cuts but they may soften the blow until the fiscal situation in Europe improves.
For their part, the American military leaders need to challenge overly negative assumptions about the alliance in the United States. The success of US efforts to delegate responsibility to Europe has gone almost completely unappreciated in Washington’s political discourse, whose focus has been on European military failings. This damages the image of NATO in the US, with potentially serious consequences. The US-European defence relationship can only work if the Americans continue to see the alliance as useful for their own security. And this should not be taken for granted: as time passes, politicians and the military in the US tend to be less and less informed by the experience of the Cold War, and less inclined to view Europe as their default partner. Undue criticism of allies’ military shortcomings only accelerates the de-Europeanisation of US foreign policy.
Encouragingly, the message from Washington has changed in recent days, with the new secretary of defence, Leon Panetta, praising NATO’s operation as an example of international cooperation. The success in Tripoli, along with the new-found will in London, Paris and other European capitals to assume greater responsibility for the security in its own neighbourhood, ought to give the Americans more reasons for optimism.
Tomas Valasek is director of foreign policy and defence at the CER.
Friday, August 26, 2011
Thursday, August 25, 2011
The US and the EU should support the Palestinian bid for UN membership
by Clara Marina O'Donnell
For months, the US and the EU have tried to discourage the Palestinians from asking the UN to recognise the state of Palestine. On both sides of the Atlantic, governments are concerned that the UN bid will exacerbate the conflict with Israel. But so far, American and European efforts have failed. Instead Washington and its EU counterparts should exploit the Palestinian initiative. If framed constructively, UN recognition could actually strengthen the prospects for peace.
Since spring, Palestinian President Mahmoud Abbas has been planning to ask the UN to recognise a state of Palestine based on the 1967 borders, and grant it UN membership in September. Abbas is portraying the initiative as part of a campaign of non-violent protests against Israel, designed to make headway towards a two-state solution at a time when peace talks have stalled.
The UN bid is very popular amongst the Palestinian population and it has gained support from numerous countries, including those in the Arab League. But the US and several EU governments worry that UN recognition would only make peace harder to achieve. Israel is already threatening to sever all assistance and contact with the Palestinian authorities out of concern that they will use recognition to pursue claims against Israel at the International Court of Justice. Furthermore, emboldened Palestinian grass roots movements and Israeli settlers might try to reclaim land from each other in the West Bank, triggering unrest and potentially violence.
The Obama administration has already publicly declared that it will oppose any UN resolution recognising a Palestinian state. This would prevent the Palestinians from obtaining the UN Security Council’s endorsement – required for UN membership. But they could still ask the General Assembly to recognise them and give Palestine the status of a UN observer state.
As a result Washington and the Europeans have been trying to re-launch peace talks in an attempt to entice the Palestinians to drop their bid for recognition. But this approach is not working. A special meeting of the Quartet (a group set up to support the peace process, made up of the US, the EU, Russia and the UN) in July failed to reach any conclusions, never mind convince Palestinians and Israelis to restart negotiations. In early August, according to some press reports, Israeli Prime Minister Benjamin Netanyahu agreed to negotiate with the Palestinians on the basis of the 1967 ceasefire lines. In light of Netanyahu’s long standing opposition to the idea, this would be a significant breakthrough. But the Palestinians have so far rejected the offer because Netanyahu – whom Palestinians suspect is still not truly committed to negotiations – would only hold such talks if they recognised Israel as a Jewish state.
Instead of opposing the UN bid, Washington and its European partners should use the Palestinian initiative to strengthen their efforts to re-launch peace talks. The US and the EU should inform the Palestinians that they will support a request for UN membership so long as the Palestinians ask the UN to recognise a state of Palestine whose borders broadly resemble those of 1967; they commit themselves to resolving outstanding disputes with Israel through negotiations (including the exact demarcation of borders); and they extend their executive control over the territory only through agreement with Israel.
Such a resolution would curtail the risks envisaged by Israel and others about UN recognition. It would reaffirm the primacy of negotiations as the way to solve the conflict. And by eliminating legal ambiguities about who controls Palestinian territory, it would reduce the scope for Palestinian and Israeli popular protests. In addition, when presented under such terms, UN recognition could help address some of the obstacles which have stalled the peace process in recent years. It would ensure that the Arab world, while undergoing a major upheaval, endorsed the concept of a two-state solution. And it would force the militant group Hamas, which is still in control of Gaza and has so far been disdainful of the UN effort, to either endorse it or lose support amongst the Palestinian people.
It is unusual for the UN to grant membership to a state with such extensive caveats. And many of the challenges which have blighted peace talks in the past are set to remain. Nevertheless Abbas’ initiative could offer the best platform to re-launch negotiations between Israelis and Palestinians. And at a time when violence is flaring up around Gaza and the Israeli-Egyptian border, the US and the EU must do their utmost to ensure that the Palestinian UN bid does not trigger further instability.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
For months, the US and the EU have tried to discourage the Palestinians from asking the UN to recognise the state of Palestine. On both sides of the Atlantic, governments are concerned that the UN bid will exacerbate the conflict with Israel. But so far, American and European efforts have failed. Instead Washington and its EU counterparts should exploit the Palestinian initiative. If framed constructively, UN recognition could actually strengthen the prospects for peace.
Since spring, Palestinian President Mahmoud Abbas has been planning to ask the UN to recognise a state of Palestine based on the 1967 borders, and grant it UN membership in September. Abbas is portraying the initiative as part of a campaign of non-violent protests against Israel, designed to make headway towards a two-state solution at a time when peace talks have stalled.
The UN bid is very popular amongst the Palestinian population and it has gained support from numerous countries, including those in the Arab League. But the US and several EU governments worry that UN recognition would only make peace harder to achieve. Israel is already threatening to sever all assistance and contact with the Palestinian authorities out of concern that they will use recognition to pursue claims against Israel at the International Court of Justice. Furthermore, emboldened Palestinian grass roots movements and Israeli settlers might try to reclaim land from each other in the West Bank, triggering unrest and potentially violence.
The Obama administration has already publicly declared that it will oppose any UN resolution recognising a Palestinian state. This would prevent the Palestinians from obtaining the UN Security Council’s endorsement – required for UN membership. But they could still ask the General Assembly to recognise them and give Palestine the status of a UN observer state.
As a result Washington and the Europeans have been trying to re-launch peace talks in an attempt to entice the Palestinians to drop their bid for recognition. But this approach is not working. A special meeting of the Quartet (a group set up to support the peace process, made up of the US, the EU, Russia and the UN) in July failed to reach any conclusions, never mind convince Palestinians and Israelis to restart negotiations. In early August, according to some press reports, Israeli Prime Minister Benjamin Netanyahu agreed to negotiate with the Palestinians on the basis of the 1967 ceasefire lines. In light of Netanyahu’s long standing opposition to the idea, this would be a significant breakthrough. But the Palestinians have so far rejected the offer because Netanyahu – whom Palestinians suspect is still not truly committed to negotiations – would only hold such talks if they recognised Israel as a Jewish state.
Instead of opposing the UN bid, Washington and its European partners should use the Palestinian initiative to strengthen their efforts to re-launch peace talks. The US and the EU should inform the Palestinians that they will support a request for UN membership so long as the Palestinians ask the UN to recognise a state of Palestine whose borders broadly resemble those of 1967; they commit themselves to resolving outstanding disputes with Israel through negotiations (including the exact demarcation of borders); and they extend their executive control over the territory only through agreement with Israel.
Such a resolution would curtail the risks envisaged by Israel and others about UN recognition. It would reaffirm the primacy of negotiations as the way to solve the conflict. And by eliminating legal ambiguities about who controls Palestinian territory, it would reduce the scope for Palestinian and Israeli popular protests. In addition, when presented under such terms, UN recognition could help address some of the obstacles which have stalled the peace process in recent years. It would ensure that the Arab world, while undergoing a major upheaval, endorsed the concept of a two-state solution. And it would force the militant group Hamas, which is still in control of Gaza and has so far been disdainful of the UN effort, to either endorse it or lose support amongst the Palestinian people.
It is unusual for the UN to grant membership to a state with such extensive caveats. And many of the challenges which have blighted peace talks in the past are set to remain. Nevertheless Abbas’ initiative could offer the best platform to re-launch negotiations between Israelis and Palestinians. And at a time when violence is flaring up around Gaza and the Israeli-Egyptian border, the US and the EU must do their utmost to ensure that the Palestinian UN bid does not trigger further instability.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
Wednesday, August 24, 2011
Race to the bottom
by Tomas Valasek
For decades, European countries cut defence budgets with little worry. The United States kept enough troops on the continent to deter all potential enemies, almost irrespective of how small European militaries became. But the US contingent has been steadily shrinking, and the pace of this downsizing now seems certain to accelerate because of the economic crisis. The Europeans should be worried – yet they will probably respond by hastening their own defence cuts.
The July 31st agreement under which US Congress increased the ceiling for national debt cuts defence spending by $350 billion over the next ten years, White House calculations say. However, the deal also calls for a joint committee of six Democrats and six Republicans to find ways to decrease the deficit by another $1.5 trillion. The lion’s share of those reductions is certain to come in the form of expenditure cuts (as opposed to tax increases). And these further cuts – even if spread across government departments – will include significant reductions in the Pentagon budget, beyond the $350 billion that it is already scheduled to lose. Military spending now consumes more than 20 per cent of the total federal budget (for comparison, in the UK the figure is 6 per cent). Assuming that the joint committee makes roughly proportional cuts among government departments, the Pentagon will lose another $250 billion; this would put total reductions in military spending at $600 billion over ten years.
There is also the possibility that members of the committee will fail to agree, which would be even worse for the US military. Under the borrowing agreement, such a failure would lead to an automatic imposition of a $1.2 trillion cut in government spending, half of which would come straight from the Pentagon’s budget (for accounting reasons, the final amount would be slightly less than half: $534 billion). Including the $350 billion in cuts agreed last week, total loss to US defence spending over the next ten years could thus reach nearly $900 billion. The Republicans have been traditionally supportive of defence spending so in theory they have strong reasons to work with the Democrats on averting such draconian cuts to the military. But Democrats want further deficit reduction to include tax increases, which the Republicans oppose. And the ‘new’ Republican party is considerably less pro-defence than it used to be in the days of John McCain and Bob Dole; its top priority now is deficit reduction. If Democrats insist on tax raises, there is a chance that Republican members of the joint committee would rather choose an impasse, even if this led to deep defence cuts.
Whether the final amount is $600 billion or close to $900 billion, reductions of such magnitudewill have considerable impact on contractors and allies around the globe. One mitigating factor is that the cuts will be calculated on the basis of future projected spending (which was scheduled to rise) rather than current spending. Also, after 13 straight years of increases, the defence budget has reached a monumental $530 billion in fiscal year 2011 (not including another $160 billion allocated specifically for the wars in Iraq and Afghanistan). However, much of this amount is committed to manpower and benefits. Military healthcare alone consumes around $50 billion a year, and Congress is unlikely to agree to reduce it before the 2012 elections. The brunt of the newly ordered cuts will therefore fall on relatively few budget categories. Research is likely to suffer (because it can be cut with little immediately visible impact) and so is procurement (because some new weapons have incurred controversial cost overruns).
Importantly for America’s allies, many of the cuts will lead to closure of overseas bases. These have no political constituency in the United States, and thus no defenders in Congress, which will have to approve cuts. Europe is certain to suffer disproportionately in any future base closures. The continent is not high on the Defense Department’s list of priorities and it is seen as relatively free from danger. The allies have capable militaries, which, the Pentagon believes, should be able to assure security of Europe’s periphery (in places such as Libya) with little US help.
Even before the latest cuts, in April 2011, the Obama administration ordered the withdrawal of one of the four remaining US brigade combat teams (BCTs) from Europe. This was a less dramatic reduction than the one that George Bush’s government initially ordered in 2004 – then, the Pentagon decided to cut half the BCTs but subsequently put the decision on hold because they were needed in Afghanistan. In reducing the cut to just on BCT in 2011, the Pentagon cited the need to assure allies (mainly in Central Europe) that Washington remains committed to their defence. But it now seems very probable that the Defense Department, under pressure to save money, will withdraw the second BCT after all.
Many US military facilities in Western Europe are in danger. Their number has gradually dwindled as the US reduced forces from the Cold War average of 311,000 to fewer than 80,000 today. Many more will now be closed. The US military sees the smaller bases in particular as a source of relatively easy savings. While installations such as the large US military hospital in Landshut, Germany are likely to fare well, the 700-strong US Air Force base in Lajes, Portugal, will probably go. Non-essential facilities such as the George C Marshall Center in Germany (a school for military officers, mainly from Eastern Europe and Asia) are also vulnerable.
These departures are certain to be unpopular with local governments around Europe, some of which will suffer a double or triple setback. In addition to expected US base closures, NATO and national governments have also been cutting budgets and forces. Portugal, which will probably lose Lajes, had recently seen NATO decide to close its ‘Joint Force Command’ near Lisbon. Germany plans to close many of its own bases to save money; it now stands to lose some of the US ones as well. The closures will cause tensions among local and national governments but the impact on transatlantic relations will be limited – because virtually all allied capitals are reducing forces, none will be in a position to complain. But the US and European militaries will lose some of the existing opportunities to train together. And the loss of schools such as the George C Marshall Center would deprive the allies of the ability to win the hearts and minds of young officers in dangerous parts of the world such as South Caucasus and Central Asia.
With cuts to US defence budget looming, the US will also forgo its ability to pressurise the Europeans against reductions in their own spending. Apparently at the first meeting between Leon Panetta, the new Pentagon chief, and Liam Fox, the UK defence secretary, the two swapped lessons on how to cut budgets with least political pain. A year ago the US defence secretary would have sought to restrain the UK from cutting in the first place.
There is a real danger that cuts on one end of the Atlantic will encourage more cuts on the other end, thus degrading NATO’s credibility. While some of the bases that the United States is thinking of closing may well be redundant, NATO defence guarantees will lose their meaning unless the allies maintain a certain minimum number of forces and military installations. In theory, the Europeans should be responding to US force cuts by studying whether NATO is close to reaching this threshold, and whether they need to augment their forces to replace the departing US ones. But the opposite is likely to happen: without US pressure, many European governments will feel freer than ever to reduce military spending and forces. This may yet turn out to be the most significant and corrosive legacy of current US budgets cuts for allied security.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
For decades, European countries cut defence budgets with little worry. The United States kept enough troops on the continent to deter all potential enemies, almost irrespective of how small European militaries became. But the US contingent has been steadily shrinking, and the pace of this downsizing now seems certain to accelerate because of the economic crisis. The Europeans should be worried – yet they will probably respond by hastening their own defence cuts.
The July 31st agreement under which US Congress increased the ceiling for national debt cuts defence spending by $350 billion over the next ten years, White House calculations say. However, the deal also calls for a joint committee of six Democrats and six Republicans to find ways to decrease the deficit by another $1.5 trillion. The lion’s share of those reductions is certain to come in the form of expenditure cuts (as opposed to tax increases). And these further cuts – even if spread across government departments – will include significant reductions in the Pentagon budget, beyond the $350 billion that it is already scheduled to lose. Military spending now consumes more than 20 per cent of the total federal budget (for comparison, in the UK the figure is 6 per cent). Assuming that the joint committee makes roughly proportional cuts among government departments, the Pentagon will lose another $250 billion; this would put total reductions in military spending at $600 billion over ten years.
There is also the possibility that members of the committee will fail to agree, which would be even worse for the US military. Under the borrowing agreement, such a failure would lead to an automatic imposition of a $1.2 trillion cut in government spending, half of which would come straight from the Pentagon’s budget (for accounting reasons, the final amount would be slightly less than half: $534 billion). Including the $350 billion in cuts agreed last week, total loss to US defence spending over the next ten years could thus reach nearly $900 billion. The Republicans have been traditionally supportive of defence spending so in theory they have strong reasons to work with the Democrats on averting such draconian cuts to the military. But Democrats want further deficit reduction to include tax increases, which the Republicans oppose. And the ‘new’ Republican party is considerably less pro-defence than it used to be in the days of John McCain and Bob Dole; its top priority now is deficit reduction. If Democrats insist on tax raises, there is a chance that Republican members of the joint committee would rather choose an impasse, even if this led to deep defence cuts.
Whether the final amount is $600 billion or close to $900 billion, reductions of such magnitudewill have considerable impact on contractors and allies around the globe. One mitigating factor is that the cuts will be calculated on the basis of future projected spending (which was scheduled to rise) rather than current spending. Also, after 13 straight years of increases, the defence budget has reached a monumental $530 billion in fiscal year 2011 (not including another $160 billion allocated specifically for the wars in Iraq and Afghanistan). However, much of this amount is committed to manpower and benefits. Military healthcare alone consumes around $50 billion a year, and Congress is unlikely to agree to reduce it before the 2012 elections. The brunt of the newly ordered cuts will therefore fall on relatively few budget categories. Research is likely to suffer (because it can be cut with little immediately visible impact) and so is procurement (because some new weapons have incurred controversial cost overruns).
Importantly for America’s allies, many of the cuts will lead to closure of overseas bases. These have no political constituency in the United States, and thus no defenders in Congress, which will have to approve cuts. Europe is certain to suffer disproportionately in any future base closures. The continent is not high on the Defense Department’s list of priorities and it is seen as relatively free from danger. The allies have capable militaries, which, the Pentagon believes, should be able to assure security of Europe’s periphery (in places such as Libya) with little US help.
Even before the latest cuts, in April 2011, the Obama administration ordered the withdrawal of one of the four remaining US brigade combat teams (BCTs) from Europe. This was a less dramatic reduction than the one that George Bush’s government initially ordered in 2004 – then, the Pentagon decided to cut half the BCTs but subsequently put the decision on hold because they were needed in Afghanistan. In reducing the cut to just on BCT in 2011, the Pentagon cited the need to assure allies (mainly in Central Europe) that Washington remains committed to their defence. But it now seems very probable that the Defense Department, under pressure to save money, will withdraw the second BCT after all.
Many US military facilities in Western Europe are in danger. Their number has gradually dwindled as the US reduced forces from the Cold War average of 311,000 to fewer than 80,000 today. Many more will now be closed. The US military sees the smaller bases in particular as a source of relatively easy savings. While installations such as the large US military hospital in Landshut, Germany are likely to fare well, the 700-strong US Air Force base in Lajes, Portugal, will probably go. Non-essential facilities such as the George C Marshall Center in Germany (a school for military officers, mainly from Eastern Europe and Asia) are also vulnerable.
These departures are certain to be unpopular with local governments around Europe, some of which will suffer a double or triple setback. In addition to expected US base closures, NATO and national governments have also been cutting budgets and forces. Portugal, which will probably lose Lajes, had recently seen NATO decide to close its ‘Joint Force Command’ near Lisbon. Germany plans to close many of its own bases to save money; it now stands to lose some of the US ones as well. The closures will cause tensions among local and national governments but the impact on transatlantic relations will be limited – because virtually all allied capitals are reducing forces, none will be in a position to complain. But the US and European militaries will lose some of the existing opportunities to train together. And the loss of schools such as the George C Marshall Center would deprive the allies of the ability to win the hearts and minds of young officers in dangerous parts of the world such as South Caucasus and Central Asia.
With cuts to US defence budget looming, the US will also forgo its ability to pressurise the Europeans against reductions in their own spending. Apparently at the first meeting between Leon Panetta, the new Pentagon chief, and Liam Fox, the UK defence secretary, the two swapped lessons on how to cut budgets with least political pain. A year ago the US defence secretary would have sought to restrain the UK from cutting in the first place.
There is a real danger that cuts on one end of the Atlantic will encourage more cuts on the other end, thus degrading NATO’s credibility. While some of the bases that the United States is thinking of closing may well be redundant, NATO defence guarantees will lose their meaning unless the allies maintain a certain minimum number of forces and military installations. In theory, the Europeans should be responding to US force cuts by studying whether NATO is close to reaching this threshold, and whether they need to augment their forces to replace the departing US ones. But the opposite is likely to happen: without US pressure, many European governments will feel freer than ever to reduce military spending and forces. This may yet turn out to be the most significant and corrosive legacy of current US budgets cuts for allied security.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
Friday, August 05, 2011
Eurozone crisis: Can contagion to Italy be arrested?
by Philip Whyte
Ever since the EU and the IMF ‘bailed out’ Greece in May last year, the eurozone has fought a desperate rear-guard battle to stem contagion to other countries – with little success. Ireland and Portugal have since been bailed out, and Cyprus could be next. The most disquieting development, however, has been incipient contagion to larger economies like Spain and Italy. Unless this contagion is arrested, the eurozone could face a potentially terminal crisis. For the past year, the Spanish government has been battling valiantly to persuade financial markets that it will not be the next domino in the chain. But the change in sentiment towards Italy has been more recent – and is perhaps more alarming. What explains it?
Until early July, Italy had just about convinced the financial markets that it was not the ‘next Greece’. A cynic might justifiably wonder why. The country’s structural problems, after all, are as profound as they are well-known. It has a rapidly ageing population. Its ratio of public debt to GDP is the second highest in the eurozone (after Greece). Productivity has barely risen over the past decade. Rising wages have consequently pushed up unit labour costs, eroding the country’s trade competitiveness. Governance, moreover, is notoriously weak: because of the dysfunctional nature of the political system, few eurozone countries have done less in recent years to improve the supply-side performance of their economy.
Given these longstanding weaknesses, why did sentiment towards Italy not sour earlier? Until recently, Italy was thought to have several advantages over other countries in the eurozone’s troubled geographical periphery. Unlike Ireland and Spain, it did not experience a domestic credit boom in the run-up to the global financial crisis. Private sector balance sheets are therefore stronger: households are not over-indebted, and Italian banks fared well in recent stress tests. Italy, moreover, has been running smaller budget deficits than Greece or Portugal; in 2011, it is expected to run a primary budget surplus. Unlike in Greece and Portugal, budget deficits did not seem to pose a threat to Italy’s public debt sustainability.
Since July, however, market sentiment has changed alarmingly. At the time of writing, the yield on 10-year Italian government bonds stands at 6.12% – up from 4.73% at the end of June (and from 3.73% in October 2010). The spread over German bunds, which had fallen to almost zero in 2008, has now widened to 370 basis points. As in Greece, heightened perceptions of sovereign risk are hitting sentiment towards Italian banks (which have large exposures to their home country’s sovereign debt). Even banks that fared well in the EU’s recent stress tests have not been spared: the share prices of all Italian banks have taken a pummelling. Why has sentiment towards Italy soured so dramatically over the past month?
It is tempting to pin all the blame on political infighting and paralysis. It certainly does not help that the government is hamstrung by a small majority in parliament, or that relations between the prime minister and the finance minister are poor. Nor does it help that Silvio Berlusconi seems more inclined to use the office of prime minister to advance his private interests than the public one. But it is not as if these factors became apparent only in early July. Besides, Spain, whose government has shown greater focus and determination than Italy’s over the past year, has also experienced rising borrowing costs. So a strong political commitment to reform is necessary to restore confidence in Italy. But it may not be sufficient.
To see why, consider Japan – a country that displays many of the same ills as Italy. Like Italy, Japan has a rapidly ageing population. It also suffers from political paralysis and low economic growth. Japan’s public finances, moreover, are in much worse shape than Italy’s: its ratio of public debt to GDP is almost twice as large as Italy’s, and it is set to run a bigger budget deficit in 2011. If the recent spike in Italian government bond yields was solely driven by market fears about political stasis, low growth, weak public finances and a dearth of economic reforms, one might have expected Japanese bond yields to have risen in tandem with Italy’s. Yet they have fallen: 10-year Japanese bonds now yield just 1.2%.
Why have two countries with similar problems experienced such contrasting fortunes? Beleaguered European politicians may be tempted to blame market irrationality. A more plausible explanation is that less creditworthy sovereign issuers are more fragile inside a monetary union than outside, as they issue debt in a currency over which they have little control. The emerging framework for dealing with stressed sovereigns in the eurozone has heightened perceptions of fragility. A sovereign can only remain solvent if markets are confident that a ‘credit event’ is not in prospect. That confidence has weakened in the eurozone because ‘bail outs’ are increasingly seen as a prelude to, rather than a means of avoiding, a default.
The result is that bond yields inside the eurozone have become increasingly polarised between the weak and the strong. Italy could certainly do much to restore market confidence in the long-term sustainability of its public debt by enacting reforms that raise the economy’s long-term rate of growth. But it is illusory to believe that the country’s borrowing costs can be restored to more sustainable levels by action in Italy alone. The fate of Italy – and, by extension, the eurozone – is likely to be determined as much as by decisions in Berlin and Brussels as by those in Rome. It is becoming harder to see how the polarisation of yields within the eurozone can be reversed unless European leaders adopt a common Eurobond.
Philip Whyte is a senior research fellow at the Centre for European Reform.
Ever since the EU and the IMF ‘bailed out’ Greece in May last year, the eurozone has fought a desperate rear-guard battle to stem contagion to other countries – with little success. Ireland and Portugal have since been bailed out, and Cyprus could be next. The most disquieting development, however, has been incipient contagion to larger economies like Spain and Italy. Unless this contagion is arrested, the eurozone could face a potentially terminal crisis. For the past year, the Spanish government has been battling valiantly to persuade financial markets that it will not be the next domino in the chain. But the change in sentiment towards Italy has been more recent – and is perhaps more alarming. What explains it?
Until early July, Italy had just about convinced the financial markets that it was not the ‘next Greece’. A cynic might justifiably wonder why. The country’s structural problems, after all, are as profound as they are well-known. It has a rapidly ageing population. Its ratio of public debt to GDP is the second highest in the eurozone (after Greece). Productivity has barely risen over the past decade. Rising wages have consequently pushed up unit labour costs, eroding the country’s trade competitiveness. Governance, moreover, is notoriously weak: because of the dysfunctional nature of the political system, few eurozone countries have done less in recent years to improve the supply-side performance of their economy.
Given these longstanding weaknesses, why did sentiment towards Italy not sour earlier? Until recently, Italy was thought to have several advantages over other countries in the eurozone’s troubled geographical periphery. Unlike Ireland and Spain, it did not experience a domestic credit boom in the run-up to the global financial crisis. Private sector balance sheets are therefore stronger: households are not over-indebted, and Italian banks fared well in recent stress tests. Italy, moreover, has been running smaller budget deficits than Greece or Portugal; in 2011, it is expected to run a primary budget surplus. Unlike in Greece and Portugal, budget deficits did not seem to pose a threat to Italy’s public debt sustainability.
Since July, however, market sentiment has changed alarmingly. At the time of writing, the yield on 10-year Italian government bonds stands at 6.12% – up from 4.73% at the end of June (and from 3.73% in October 2010). The spread over German bunds, which had fallen to almost zero in 2008, has now widened to 370 basis points. As in Greece, heightened perceptions of sovereign risk are hitting sentiment towards Italian banks (which have large exposures to their home country’s sovereign debt). Even banks that fared well in the EU’s recent stress tests have not been spared: the share prices of all Italian banks have taken a pummelling. Why has sentiment towards Italy soured so dramatically over the past month?
It is tempting to pin all the blame on political infighting and paralysis. It certainly does not help that the government is hamstrung by a small majority in parliament, or that relations between the prime minister and the finance minister are poor. Nor does it help that Silvio Berlusconi seems more inclined to use the office of prime minister to advance his private interests than the public one. But it is not as if these factors became apparent only in early July. Besides, Spain, whose government has shown greater focus and determination than Italy’s over the past year, has also experienced rising borrowing costs. So a strong political commitment to reform is necessary to restore confidence in Italy. But it may not be sufficient.
To see why, consider Japan – a country that displays many of the same ills as Italy. Like Italy, Japan has a rapidly ageing population. It also suffers from political paralysis and low economic growth. Japan’s public finances, moreover, are in much worse shape than Italy’s: its ratio of public debt to GDP is almost twice as large as Italy’s, and it is set to run a bigger budget deficit in 2011. If the recent spike in Italian government bond yields was solely driven by market fears about political stasis, low growth, weak public finances and a dearth of economic reforms, one might have expected Japanese bond yields to have risen in tandem with Italy’s. Yet they have fallen: 10-year Japanese bonds now yield just 1.2%.
Why have two countries with similar problems experienced such contrasting fortunes? Beleaguered European politicians may be tempted to blame market irrationality. A more plausible explanation is that less creditworthy sovereign issuers are more fragile inside a monetary union than outside, as they issue debt in a currency over which they have little control. The emerging framework for dealing with stressed sovereigns in the eurozone has heightened perceptions of fragility. A sovereign can only remain solvent if markets are confident that a ‘credit event’ is not in prospect. That confidence has weakened in the eurozone because ‘bail outs’ are increasingly seen as a prelude to, rather than a means of avoiding, a default.
The result is that bond yields inside the eurozone have become increasingly polarised between the weak and the strong. Italy could certainly do much to restore market confidence in the long-term sustainability of its public debt by enacting reforms that raise the economy’s long-term rate of growth. But it is illusory to believe that the country’s borrowing costs can be restored to more sustainable levels by action in Italy alone. The fate of Italy – and, by extension, the eurozone – is likely to be determined as much as by decisions in Berlin and Brussels as by those in Rome. It is becoming harder to see how the polarisation of yields within the eurozone can be reversed unless European leaders adopt a common Eurobond.
Philip Whyte is a senior research fellow at the Centre for European Reform.
Thursday, July 28, 2011
Why the eurozone needs debt mutualisation
by Simon Tilford
The institutional weaknesses of the eurozone have been laid bare. The attempt to run a common monetary policy without a common treasury has failed. Investors do not know what they are buying when they purchase an Italian bond – is it backstopped by Germany or not? The best credit must stand behind the rest, or bear runs, such as those that have derailed Greece, Ireland and Portugal and which threaten to do the same to Italy and Spain, are inevitable. Debt mutualisation alone will not save the euro, but without it the eurozone is unlikely to survive intact.
The eurozone’s July 21st summit was a small step forward. Leaders agreed to lower interest rates on loans made by the European Financial Stability Fund (EFSF) and they recognised that Greece’s debt burden is unsustainable. But this fell far short of what is needed to arrest the deepening crisis in the currency union. Borrowing costs remain unsustainably high for many eurozone economies, and not just those in the periphery. For example, the economic growth potential of Spain and Italy has fallen to as little as 1 per cent, but their borrowing costs exceed 6 per cent. By contrast, German sovereign yields have fallen sharply, lowering the public and private sectors’ borrowing costs. This is a recipe for further economic divergence and insolvency, not the urgently required convergence.
To prevent this, the eurozone has to have a ‘risk-free’ interest rate. The struggling economies need lower borrowing costs, or they will suffocate economically (and political support for eurozone membership will evaporate). Only the mutualisation of debt issuance will generate the low (risk-free) interest rate needed to enable them to put their public finances on a sound footing and lay the basis for a return to economic growth.
All eurozone countries should therefore finance debt by issuing bonds which would be jointly guaranteed by all member-states. The obvious problem with eurobonds is moral hazard: how to prevent fiscally irresponsible countries free-riding on the credit-worthiness of other member-states. This is the understandable fear of countries such as Germany and the Netherlands.
A possible solution to the problem of moral hazard would be for member-states to issue debt as eurobonds up to a certain level – for example, 60 per cent of GDP – but be individually responsible for any debt above it. This would give countries with high levels of public debt an incentive to consolidate their public finances. Had the eurozone introduced such a system from the outset, it could well have worked. But it is too late for that now. For a number of economies, the additional borrowing would simply be too expensive. A better solution would be for a new, independent fiscal body to establish borrowing targets for each member-state and for a European debt agency to issue eurobonds (up to a certain level) on behalf of the member-states.
How would these rules be designed? A dogmatic target of budgetary balance four years hence irrespective of a country’s position in the economic cycle would achieve little: targets are meaningless if they are impossible to implement. These fiscal rules would have to be set with reference to the cyclically-adjusted fiscal position for each member-state. The OECD already produces estimates for these. Member-states will have to be permitted to run deficits when their cyclical positions demand it. Inappropriately pro-cyclical fiscal policies and ruinous interest rates would depress economic activity and with it the investment needed to boost productivity.
Careful thought would need to be given to the composition of the new fiscal body. A board of 17 people, one from each eurozone economy, would be unwieldy, and unlikely to win the support of the eurozone’s principal creditor countries. At the same time, a board dominated by the creditor countries would be unlikely to win the backing of the debtor countries. A board of nine economists, from the big eurozone economies, the European Commission, the ECB and the OECD might form a good basis.
The eurozone, of course, has a poor record of enforcing fiscal rules. To ensure that there is no repeat of this failure, there would have to be strong penalties for non-compliance. If a country deviated from its fiscal targets, it would not be allowed to borrow the additional funds at the risk-free rate. Instead, it would have to borrow under its own rating, which in the case of the fiscally weaker countries would be more expensive. To provide additional incentives to abide by the borrowing rules, the ECB could refuse to accept debt issued under national ratings as collateral. Alternatively, a new EU financial regulator could handicap own country bonds by requiring banks holding them to set aside more capital.
Fiscal rules of the type envisaged (and a new body to enforce them) would not necessarily require a treaty change. But various creditor countries rightly fear that the adoption of eurobonds will push up their borrowing costs and constitute a transfer union. Opponents of eurobonds may eventually come around to seeing them as the least bad option. The risk is that by the time they do, it could be too late to save the euro from a partial break-up: what could work if adopted promptly could be ineffective in six months’ time.
Opponents need to be persuaded as soon as possible that this is the least costly option for them. Eurobonds would certainly be a cheaper option for core countries than the underwriting of loans to struggling member-states, which essentially involves throwing good money after bad: they will book large losses on these EFSF loans. These losses will only increase if, as seems possible, some of the countries currently in receipt of EFSF loans end up having to leave the eurozone and default on their debt.
Simon Tilford is chief economist at the Centre for European Reform.
The institutional weaknesses of the eurozone have been laid bare. The attempt to run a common monetary policy without a common treasury has failed. Investors do not know what they are buying when they purchase an Italian bond – is it backstopped by Germany or not? The best credit must stand behind the rest, or bear runs, such as those that have derailed Greece, Ireland and Portugal and which threaten to do the same to Italy and Spain, are inevitable. Debt mutualisation alone will not save the euro, but without it the eurozone is unlikely to survive intact.
The eurozone’s July 21st summit was a small step forward. Leaders agreed to lower interest rates on loans made by the European Financial Stability Fund (EFSF) and they recognised that Greece’s debt burden is unsustainable. But this fell far short of what is needed to arrest the deepening crisis in the currency union. Borrowing costs remain unsustainably high for many eurozone economies, and not just those in the periphery. For example, the economic growth potential of Spain and Italy has fallen to as little as 1 per cent, but their borrowing costs exceed 6 per cent. By contrast, German sovereign yields have fallen sharply, lowering the public and private sectors’ borrowing costs. This is a recipe for further economic divergence and insolvency, not the urgently required convergence.
To prevent this, the eurozone has to have a ‘risk-free’ interest rate. The struggling economies need lower borrowing costs, or they will suffocate economically (and political support for eurozone membership will evaporate). Only the mutualisation of debt issuance will generate the low (risk-free) interest rate needed to enable them to put their public finances on a sound footing and lay the basis for a return to economic growth.
All eurozone countries should therefore finance debt by issuing bonds which would be jointly guaranteed by all member-states. The obvious problem with eurobonds is moral hazard: how to prevent fiscally irresponsible countries free-riding on the credit-worthiness of other member-states. This is the understandable fear of countries such as Germany and the Netherlands.
A possible solution to the problem of moral hazard would be for member-states to issue debt as eurobonds up to a certain level – for example, 60 per cent of GDP – but be individually responsible for any debt above it. This would give countries with high levels of public debt an incentive to consolidate their public finances. Had the eurozone introduced such a system from the outset, it could well have worked. But it is too late for that now. For a number of economies, the additional borrowing would simply be too expensive. A better solution would be for a new, independent fiscal body to establish borrowing targets for each member-state and for a European debt agency to issue eurobonds (up to a certain level) on behalf of the member-states.
How would these rules be designed? A dogmatic target of budgetary balance four years hence irrespective of a country’s position in the economic cycle would achieve little: targets are meaningless if they are impossible to implement. These fiscal rules would have to be set with reference to the cyclically-adjusted fiscal position for each member-state. The OECD already produces estimates for these. Member-states will have to be permitted to run deficits when their cyclical positions demand it. Inappropriately pro-cyclical fiscal policies and ruinous interest rates would depress economic activity and with it the investment needed to boost productivity.
Careful thought would need to be given to the composition of the new fiscal body. A board of 17 people, one from each eurozone economy, would be unwieldy, and unlikely to win the support of the eurozone’s principal creditor countries. At the same time, a board dominated by the creditor countries would be unlikely to win the backing of the debtor countries. A board of nine economists, from the big eurozone economies, the European Commission, the ECB and the OECD might form a good basis.
The eurozone, of course, has a poor record of enforcing fiscal rules. To ensure that there is no repeat of this failure, there would have to be strong penalties for non-compliance. If a country deviated from its fiscal targets, it would not be allowed to borrow the additional funds at the risk-free rate. Instead, it would have to borrow under its own rating, which in the case of the fiscally weaker countries would be more expensive. To provide additional incentives to abide by the borrowing rules, the ECB could refuse to accept debt issued under national ratings as collateral. Alternatively, a new EU financial regulator could handicap own country bonds by requiring banks holding them to set aside more capital.
Fiscal rules of the type envisaged (and a new body to enforce them) would not necessarily require a treaty change. But various creditor countries rightly fear that the adoption of eurobonds will push up their borrowing costs and constitute a transfer union. Opponents of eurobonds may eventually come around to seeing them as the least bad option. The risk is that by the time they do, it could be too late to save the euro from a partial break-up: what could work if adopted promptly could be ineffective in six months’ time.
Opponents need to be persuaded as soon as possible that this is the least costly option for them. Eurobonds would certainly be a cheaper option for core countries than the underwriting of loans to struggling member-states, which essentially involves throwing good money after bad: they will book large losses on these EFSF loans. These losses will only increase if, as seems possible, some of the countries currently in receipt of EFSF loans end up having to leave the eurozone and default on their debt.
Simon Tilford is chief economist at the Centre for European Reform.
Wednesday, July 20, 2011
Marine Le Pen and the rise of populism
By Charles Grant
Since becoming leader of France’s Front National in January, Marine Le Pen has started to shift her party away from the far right. She has not only dropped the overt racism and Islamophobia of her father but also adopted hard-left economic policies. “Left and right don’t mean anything anymore – both left and right are for the EU, the euro, free trade and immigration,” she said when opposing me in a recent dinner debate on the future of Europe in Paris. “For 30 years, left and right have been the same; the real fracture is now between those who support globalisation and nationalists.”
The debate – organised by The KitSon, a Paris think-tank – was off-the-record. But I can repeat some of her comments, since they echoed what she had already said on-the-record elsewhere. She is a tall, strong-looking woman and an effective debater. She speaks pithily and sometimes with humour.
She presents her party as a nationalist force – in British terms, the United Kingdom Independence Party rather than the British National Party. In its hostility to the EU and to immigration, the Front National has much in common with Austria’s Freedom Party, the Danish Peoples’ Party, the True Finns, the Sweden Democrats and Geert Wilders’ Party for Freedom in the Netherlands. Populist, illiberal parties are flourishing in the most sophisticated, liberal societies of Northern Europe.
Although Le Pen is changing her party’s brand, she is no Gianfranco Fini: he led his party away from neo-fascism towards the pro-European centre of Italian politics. Le Pen’s European policies remain extreme: she urges France to leave not only the euro but also the EU. Her economic platform is one of national economic autarky: she wants to protect France from globalisation by erecting high tariff barriers. Her economic platform is in fact quite close to that of Jean-Pierre Chevènement, the veteran anti-European and former Socialist minister. Earlier this month she appealed to Chevènement to work with her – but he rebuffed her advances.
Le Pen’s line on the euro and the EU may be extreme, but given the mess that Europe is in, her views may not cost her votes among those who want to kick the Paris and Brussels elites for their (apparent) complacency, smugness and incompetence. She wants France to leave the euro so that it can devalue and become more competitive. While China and the US benefit from being able to devalue, she said, the eurozone suffers from low economic growth. “To save the euro we are asking the Greeks to make huge sacrifices through austerity, and soon we will ask the same of people elsewhere, even in France. The euro will lead to war.”
When I responded that devaluation would destroy the French people’s purchasing power, she said that only ‘BCBGs’ (short for bon chic bon genre, that is to say the fashionable middle class) would complain about devaluation; they buy the foreign goods and holidays that would cost more, whereas most poor people buy things made in France (a point that is highly debatable).
She complained about sovereignty draining away to Brussels and said that we live in a Union Soviétique Européenne. The EU represents the interests of big financial groups, she said, and encourages immigration in order to put downward pressure on salaries. She said that her country needs a French agricultural policy, rather than a Common Agricultural Policy, since the CAP was giving too much aid to Central Europeans.
“The EU has been built on Anglo-Saxon principles of everything being available to be bought or sold.” Ultra-liberals run the EU, she said, and will not let the French protect their industries. “Without protection we cannot be competitive against China, since we don’t want to work 20 hours a day.”
When I said that rather than trying to compete directly with China, France should go up market and produce goods and services that the Chinese cannot, she argued that they could now beat France in any industry – as they were doing by building high-speed trains. I responded by praising the prowess of France’s world-beating companies in areas such as luxury goods, agribusiness, energy and aerospace – so she joked that the best proponents of Sarkozyism came from Britain.
The obvious critique of her line on the EU is that France, on its own, is rather small compared to China and other emerging powers, and that it therefore needs the EU to amplify its voice in the world. But she had no truck with that argument, saying that France on its own had a big voice. “I am a gaullienne, and the general would be horrified to see the EU today…I want an association of sovereign nation-states; that would allow us to influence Russia and the wider world.” And when I suggested that the EU had the merit of constraining German power, she said Germany already dominated the EU. “When Germany has a constitutional problem, we change the EU treaty; but if France has a problem, we have to change our constitution.”
Le Pen wants France to leave NATO. When I pointed out that France would then have to raise defence spending enormously, in order to enjoy a comparable level of security to that provided by NATO today, she was unfazed. “We are not Botswana, if we want to play a big role in defence we can, and in any case defence spending is good for the economy.”
During two hours of debate she said nothing that sounded racist. The closest she came was this: “I am not against immigration, France has always accepted foreigners. But it should not lead to lower salaries. And in employment we should prioritise jobs for français de souche.” That could be translated as people of French stock.
I think Le Pen is right when she says that the main political divide in Europe is between nationalists and globalisers. But the solutions that she offers to complex problems are far too simple. Her language resonates with the common man: she is on the side of the little people against foreigners, international bureaucrats and big capitalists. And her economic nationalism goes down particularly well in France, a country that is probably more hostile to globalisation than any other European country.
But there are obvious gaps in Le Pen’s thinking. She has nothing to say about global governance, or what to do about transnational threats such as organised crime, climate change, proliferation or international terrorism. And she would be a more effective critic of globalisation if she acknowledged that in certain respects France does nicely from it. When I told her that France benefited hugely from foreign direct investment – it gets more FDI than any other country in Europe – and that French companies did very well from investing in other member-states, like Britain, she had very little to say.
Opinion polls suggest that Marine Le Pen has a good chance of getting into the second round of the May 2012 presidential election – as Jean-Marie Le Pen did when he won more votes than the Socialists’ Lionel Jospin in 2002. According to some polls, the second round would pit the Socialist candidate – almost certain to be either François Hollande or Martine Aubry – against Le Pen. Of course, she would not win the second round. As in 2002, the centre-left and the centre-right would combine to keep out a Le Pen – only reinforcing her view that Sarkozy and the Socialists are the same. But in any case, I do not think she is serious about exercising power, at least for now. If she was serious, she would have to start compromising on some of her economic and international policies, and she shows no signs of doing so.
But even without formally winning office, she – like her equivalents in Austria, Denmark, Finland, the Netherlands and Sweden – is shaping the political debate in her country. Politicians on the centre-right have toughened their line on immigration, lest the Front National steal too many of their votes. And very few French politicians on the centre-right – or the centre-left – have a good word to say about the EU.
Charles Grant is director of the Centre for European Reform
Since becoming leader of France’s Front National in January, Marine Le Pen has started to shift her party away from the far right. She has not only dropped the overt racism and Islamophobia of her father but also adopted hard-left economic policies. “Left and right don’t mean anything anymore – both left and right are for the EU, the euro, free trade and immigration,” she said when opposing me in a recent dinner debate on the future of Europe in Paris. “For 30 years, left and right have been the same; the real fracture is now between those who support globalisation and nationalists.”
The debate – organised by The KitSon, a Paris think-tank – was off-the-record. But I can repeat some of her comments, since they echoed what she had already said on-the-record elsewhere. She is a tall, strong-looking woman and an effective debater. She speaks pithily and sometimes with humour.
She presents her party as a nationalist force – in British terms, the United Kingdom Independence Party rather than the British National Party. In its hostility to the EU and to immigration, the Front National has much in common with Austria’s Freedom Party, the Danish Peoples’ Party, the True Finns, the Sweden Democrats and Geert Wilders’ Party for Freedom in the Netherlands. Populist, illiberal parties are flourishing in the most sophisticated, liberal societies of Northern Europe.
Although Le Pen is changing her party’s brand, she is no Gianfranco Fini: he led his party away from neo-fascism towards the pro-European centre of Italian politics. Le Pen’s European policies remain extreme: she urges France to leave not only the euro but also the EU. Her economic platform is one of national economic autarky: she wants to protect France from globalisation by erecting high tariff barriers. Her economic platform is in fact quite close to that of Jean-Pierre Chevènement, the veteran anti-European and former Socialist minister. Earlier this month she appealed to Chevènement to work with her – but he rebuffed her advances.
Le Pen’s line on the euro and the EU may be extreme, but given the mess that Europe is in, her views may not cost her votes among those who want to kick the Paris and Brussels elites for their (apparent) complacency, smugness and incompetence. She wants France to leave the euro so that it can devalue and become more competitive. While China and the US benefit from being able to devalue, she said, the eurozone suffers from low economic growth. “To save the euro we are asking the Greeks to make huge sacrifices through austerity, and soon we will ask the same of people elsewhere, even in France. The euro will lead to war.”
When I responded that devaluation would destroy the French people’s purchasing power, she said that only ‘BCBGs’ (short for bon chic bon genre, that is to say the fashionable middle class) would complain about devaluation; they buy the foreign goods and holidays that would cost more, whereas most poor people buy things made in France (a point that is highly debatable).
She complained about sovereignty draining away to Brussels and said that we live in a Union Soviétique Européenne. The EU represents the interests of big financial groups, she said, and encourages immigration in order to put downward pressure on salaries. She said that her country needs a French agricultural policy, rather than a Common Agricultural Policy, since the CAP was giving too much aid to Central Europeans.
“The EU has been built on Anglo-Saxon principles of everything being available to be bought or sold.” Ultra-liberals run the EU, she said, and will not let the French protect their industries. “Without protection we cannot be competitive against China, since we don’t want to work 20 hours a day.”
When I said that rather than trying to compete directly with China, France should go up market and produce goods and services that the Chinese cannot, she argued that they could now beat France in any industry – as they were doing by building high-speed trains. I responded by praising the prowess of France’s world-beating companies in areas such as luxury goods, agribusiness, energy and aerospace – so she joked that the best proponents of Sarkozyism came from Britain.
The obvious critique of her line on the EU is that France, on its own, is rather small compared to China and other emerging powers, and that it therefore needs the EU to amplify its voice in the world. But she had no truck with that argument, saying that France on its own had a big voice. “I am a gaullienne, and the general would be horrified to see the EU today…I want an association of sovereign nation-states; that would allow us to influence Russia and the wider world.” And when I suggested that the EU had the merit of constraining German power, she said Germany already dominated the EU. “When Germany has a constitutional problem, we change the EU treaty; but if France has a problem, we have to change our constitution.”
Le Pen wants France to leave NATO. When I pointed out that France would then have to raise defence spending enormously, in order to enjoy a comparable level of security to that provided by NATO today, she was unfazed. “We are not Botswana, if we want to play a big role in defence we can, and in any case defence spending is good for the economy.”
During two hours of debate she said nothing that sounded racist. The closest she came was this: “I am not against immigration, France has always accepted foreigners. But it should not lead to lower salaries. And in employment we should prioritise jobs for français de souche.” That could be translated as people of French stock.
I think Le Pen is right when she says that the main political divide in Europe is between nationalists and globalisers. But the solutions that she offers to complex problems are far too simple. Her language resonates with the common man: she is on the side of the little people against foreigners, international bureaucrats and big capitalists. And her economic nationalism goes down particularly well in France, a country that is probably more hostile to globalisation than any other European country.
But there are obvious gaps in Le Pen’s thinking. She has nothing to say about global governance, or what to do about transnational threats such as organised crime, climate change, proliferation or international terrorism. And she would be a more effective critic of globalisation if she acknowledged that in certain respects France does nicely from it. When I told her that France benefited hugely from foreign direct investment – it gets more FDI than any other country in Europe – and that French companies did very well from investing in other member-states, like Britain, she had very little to say.
Opinion polls suggest that Marine Le Pen has a good chance of getting into the second round of the May 2012 presidential election – as Jean-Marie Le Pen did when he won more votes than the Socialists’ Lionel Jospin in 2002. According to some polls, the second round would pit the Socialist candidate – almost certain to be either François Hollande or Martine Aubry – against Le Pen. Of course, she would not win the second round. As in 2002, the centre-left and the centre-right would combine to keep out a Le Pen – only reinforcing her view that Sarkozy and the Socialists are the same. But in any case, I do not think she is serious about exercising power, at least for now. If she was serious, she would have to start compromising on some of her economic and international policies, and she shows no signs of doing so.
But even without formally winning office, she – like her equivalents in Austria, Denmark, Finland, the Netherlands and Sweden – is shaping the political debate in her country. Politicians on the centre-right have toughened their line on immigration, lest the Front National steal too many of their votes. And very few French politicians on the centre-right – or the centre-left – have a good word to say about the EU.
Charles Grant is director of the Centre for European Reform
Monday, July 11, 2011
The new EU budget: A missed opportunity
by Stephen Tindale
The European Commission published its proposals for the 2014-2020 EU budget at the end of June. The British media were incensed about proposals for new ‘EU taxes’, a planned nominal rise in EU budget spending at a time of austerity and alleged threats to the British rebate. However, rather than focusing on the British net balance, the Cameron government should make a strong and constructive case for thorough budget reform. The Commission’s proposals are a missed opportunity.
In a joint letter from last December, the British, German, French, Dutch and Finnish governments demanded that the next ‘Multiannual Financial Framework’ (MFF) for 2014-20 should keep total EU spending at 2013 levels in real terms. The European Parliament hit back in June 2011, demanding a budget increase of at least 5 per cent. The Commission’s proposal states, somewhat lamely, that it has “sought to strike the right balance between ambition and realism” and suggests to cap spending at 1 per cent of EU GDP as in the past while moving (or keeping) some spending items outside the official budget framework. If only the ‘on budget’ spending is counted, the Commission’s proposals are in line with the five member states’ demands, but if the ‘off budget’ money is included the Commission has sided with the Parliament. At 2 per cent of total EU public spending, the EU budget is “stuck between being so small as to be economically irrelevant and big enough to harbour shock horror stories”, in the words of one former British negotiator (quotes are from a recent CER seminar on “Reworking the EU budget”).
However, it is not so much the overall size of the budget that matters but whether EU money is spent on political priorities in a way that adds value. The Commission’s proposals more or less perpetuate the budget priorities of the 2007-13 MFF. While this will please most member-states, it will hardly help the EU to address new challenges such as innovation and research, fighting climate change, dealing with the euro crisis and migration or helping the democratic and economic transition in Eastern Europe and Northern Africa.
The two biggest spending blocks in the 2014-20 MFF will remain the same: structural (or cohesion) funds for regional developments and the common agricultural policy (CAP), with both receiving around 36 per cent of total EU budget spending (although cohesion funds would for the first time be slightly bigger than the CAP).
In theory, cohesion policy is a good example of what European co-operation should be all about: redistributing income and wealth from richer parts of Europe to poorer parts. However, the structural funds are still allocated in a way that even regions in the richest member-states get money. Economists (and some Commission officials) have long advocated to focus cohesion money on the poorer member-states, perhaps those with a GDP of less than 90 per cent of the EU average. Instead, the rich countries insist that their budget contributions get ‘recycled’ via Brussels back to their own less advantaged regions. Many politicians claim that such transfers are needed for political legitimacy and fairness. Surely there are better ways to ensure that richer countries benefit from the EU budget, such as spending on innovation.
The Commission proposals are similarly timid when it comes to the CAP. Not only does spending so much EU money on farmers make little sense as the share of Europeans working the land continues to decline. But the CAP even fails on its own account: too much money now goes to the biggest land-owners. With food prices near all-time high, this EU budget would have been the perfect opportunity for radical CAP reform. “Even the Americans are reducing farm support”, explains one British food producer, “if we do not reform the CAP now, then when?”. The Commission should have proposed phasing out the ‘single farm payment’ (income support that goes to all farmers) while maintaining rural development spending. There should also be a gradual shift towards more national co-financing.
With a much-reduced CAP and re-focused cohesion funds, the EU budget could increasingly go towards issues that the EU declares a priority.
Climate change is one such priority. According to the Commission, EU expenditure for climate programmes will rise to at least 20 per cent of the total – but it gives no details on how it plans to achieve this. Rather than making aspirational statements, the Commission should have made concrete proposals.
Another area that should get more money is external affairs. Only
€100 billion are earmarked in the Commission’s proposal. Although the biggest increase is foreseen for neighbourhood policies, the money will not be enough for the EU to implement its ambitious new neighbourhood policy that it started drawing up in the wake of the Arab spring. Similarly, the €8.7 billion foreseen for dealing with migration is inadequate for a European immigration policy that would help to save the Schengen area of free movement.
The EU should also spend more on its economic priorities. Allocated amounts for R&D and innovation are supposed to rise from €55 billion in the last MFF to €80 billion in 2014-20. This is welcome but still inadequate for a continent whose future prosperity will depend on staying at the technological frontier. For the first time, the EU budget will contain a sizeable pot of money for infrastructure investments: the €40 billion of the new ‘connecting Europe facility’ are supposed to attract a multiple in public (for example from the European Investment Bank) and private investments (perhaps from pension funds) to improve European transport, energy and communications infrastructure. However, about half of the €40 billion will go to transport infrastructure – an area where waste has been a big problem in the past. The money would be better spent on information and communication technology in the EU’s less developed countries and on constructing an EU-wide energy market and preparing for the addition of large amounts of renewables to the European power sector.
Alas, the chances that the 27 EU governments will agree on radical budget reform before 2014 are slim. European budget talks are always heated but today’s political environment is particularly toxic. First, most EU nations are in the process of pushing through painful budget cuts at home and want the Commission to do the same (to its credit, the Commission suggests to cut its staff by 5 per cent but since administration accounts for only 6 per cent of total EU spending, this will be largely symbolic). Second, the Lisbon treaty has given the European Parliament new powers over the budget process, which – if recent moves are anything to go by – it will use to push for higher spending. “The European Parliament is full of spokespeople for individual policy interests whose demands will add up to more than the available budget money”, predicts one British journalist.
Third, the euro crisis has left many people in the richer EU countries opposed to any kind transfers to poorer countries. The grants earmarked for cohesion in the EU budget are peanuts compared with the loan guarantees in the rescue packages put together for Greece, Ireland and Portugal. Yet in the minds of many Europeans, these blend into one. In particular Germany, traditionally the ‘paymaster’ of Europe, will be in no mood to throw in extra billions to lubricate a compromise on the EU budget. Finally, with presidential elections due in France next year, the chances that Paris will move on CAP reform are slim. In London, meanwhile, Prime Minister Cameron will be under heavy pressure from his eurosceptic party base to retain the British rebate and keep budget spending low. A bilateral deal whereby France keeps its farm payments while Britain retains its rebates would allow for a compromise but spell the death knell for EU budget reform.
The Commission has added further fuel to the political fire by making some bold proposals for new ‘own resources’, EU jargon for money that the Union collects directly for the EU budget, for example from customs duties or sugar levies. The Commission now wants member-states to discuss whether the EU could raise money from a new VAT levy and from a financial transaction tax. A German diplomat calls the proposals simply “not acceptable” while a British one dismisses them as an “amusing distraction”. A financial transaction tax would impact heavily on the UK – disproportionately so in the view of the UK government. Since any new own resources need unanimity among the 27 governments, the chances of the Commission’s proposal making it into the new MFF are close to zero.
The Commission’s proposals succeed in trying to please as many political masters as possible. The price that Brussels has paid for this is an unambitious, backward looking budget package. A European Union that must deal with a public finance crisis, an unstable neighbourhood, diminishing legitimacy and declining global competitiveness must do better. And David Cameron should provide the leadership. France has a presidential election in 2012, and Germany a federal election in 2013, so President Sarkozy and Chancellor Merkel are boxed in by the demands of electioneering. UK foreign secretary William Hague – no fan of Brussels – has said that the EU should do more to control climate change. So the British government should argue that significantly more should be spent on climate control, and significantly less on the CAP, and that if genuine budget reform is on the table, the UK rebate is up for re-negotiation.
Stephen Tindale is an associate fellow at the Centre for European Reform.
The European Commission published its proposals for the 2014-2020 EU budget at the end of June. The British media were incensed about proposals for new ‘EU taxes’, a planned nominal rise in EU budget spending at a time of austerity and alleged threats to the British rebate. However, rather than focusing on the British net balance, the Cameron government should make a strong and constructive case for thorough budget reform. The Commission’s proposals are a missed opportunity.
In a joint letter from last December, the British, German, French, Dutch and Finnish governments demanded that the next ‘Multiannual Financial Framework’ (MFF) for 2014-20 should keep total EU spending at 2013 levels in real terms. The European Parliament hit back in June 2011, demanding a budget increase of at least 5 per cent. The Commission’s proposal states, somewhat lamely, that it has “sought to strike the right balance between ambition and realism” and suggests to cap spending at 1 per cent of EU GDP as in the past while moving (or keeping) some spending items outside the official budget framework. If only the ‘on budget’ spending is counted, the Commission’s proposals are in line with the five member states’ demands, but if the ‘off budget’ money is included the Commission has sided with the Parliament. At 2 per cent of total EU public spending, the EU budget is “stuck between being so small as to be economically irrelevant and big enough to harbour shock horror stories”, in the words of one former British negotiator (quotes are from a recent CER seminar on “Reworking the EU budget”).
However, it is not so much the overall size of the budget that matters but whether EU money is spent on political priorities in a way that adds value. The Commission’s proposals more or less perpetuate the budget priorities of the 2007-13 MFF. While this will please most member-states, it will hardly help the EU to address new challenges such as innovation and research, fighting climate change, dealing with the euro crisis and migration or helping the democratic and economic transition in Eastern Europe and Northern Africa.
The two biggest spending blocks in the 2014-20 MFF will remain the same: structural (or cohesion) funds for regional developments and the common agricultural policy (CAP), with both receiving around 36 per cent of total EU budget spending (although cohesion funds would for the first time be slightly bigger than the CAP).
In theory, cohesion policy is a good example of what European co-operation should be all about: redistributing income and wealth from richer parts of Europe to poorer parts. However, the structural funds are still allocated in a way that even regions in the richest member-states get money. Economists (and some Commission officials) have long advocated to focus cohesion money on the poorer member-states, perhaps those with a GDP of less than 90 per cent of the EU average. Instead, the rich countries insist that their budget contributions get ‘recycled’ via Brussels back to their own less advantaged regions. Many politicians claim that such transfers are needed for political legitimacy and fairness. Surely there are better ways to ensure that richer countries benefit from the EU budget, such as spending on innovation.
The Commission proposals are similarly timid when it comes to the CAP. Not only does spending so much EU money on farmers make little sense as the share of Europeans working the land continues to decline. But the CAP even fails on its own account: too much money now goes to the biggest land-owners. With food prices near all-time high, this EU budget would have been the perfect opportunity for radical CAP reform. “Even the Americans are reducing farm support”, explains one British food producer, “if we do not reform the CAP now, then when?”. The Commission should have proposed phasing out the ‘single farm payment’ (income support that goes to all farmers) while maintaining rural development spending. There should also be a gradual shift towards more national co-financing.
With a much-reduced CAP and re-focused cohesion funds, the EU budget could increasingly go towards issues that the EU declares a priority.
Climate change is one such priority. According to the Commission, EU expenditure for climate programmes will rise to at least 20 per cent of the total – but it gives no details on how it plans to achieve this. Rather than making aspirational statements, the Commission should have made concrete proposals.
Another area that should get more money is external affairs. Only
€100 billion are earmarked in the Commission’s proposal. Although the biggest increase is foreseen for neighbourhood policies, the money will not be enough for the EU to implement its ambitious new neighbourhood policy that it started drawing up in the wake of the Arab spring. Similarly, the €8.7 billion foreseen for dealing with migration is inadequate for a European immigration policy that would help to save the Schengen area of free movement.
The EU should also spend more on its economic priorities. Allocated amounts for R&D and innovation are supposed to rise from €55 billion in the last MFF to €80 billion in 2014-20. This is welcome but still inadequate for a continent whose future prosperity will depend on staying at the technological frontier. For the first time, the EU budget will contain a sizeable pot of money for infrastructure investments: the €40 billion of the new ‘connecting Europe facility’ are supposed to attract a multiple in public (for example from the European Investment Bank) and private investments (perhaps from pension funds) to improve European transport, energy and communications infrastructure. However, about half of the €40 billion will go to transport infrastructure – an area where waste has been a big problem in the past. The money would be better spent on information and communication technology in the EU’s less developed countries and on constructing an EU-wide energy market and preparing for the addition of large amounts of renewables to the European power sector.
Alas, the chances that the 27 EU governments will agree on radical budget reform before 2014 are slim. European budget talks are always heated but today’s political environment is particularly toxic. First, most EU nations are in the process of pushing through painful budget cuts at home and want the Commission to do the same (to its credit, the Commission suggests to cut its staff by 5 per cent but since administration accounts for only 6 per cent of total EU spending, this will be largely symbolic). Second, the Lisbon treaty has given the European Parliament new powers over the budget process, which – if recent moves are anything to go by – it will use to push for higher spending. “The European Parliament is full of spokespeople for individual policy interests whose demands will add up to more than the available budget money”, predicts one British journalist.
Third, the euro crisis has left many people in the richer EU countries opposed to any kind transfers to poorer countries. The grants earmarked for cohesion in the EU budget are peanuts compared with the loan guarantees in the rescue packages put together for Greece, Ireland and Portugal. Yet in the minds of many Europeans, these blend into one. In particular Germany, traditionally the ‘paymaster’ of Europe, will be in no mood to throw in extra billions to lubricate a compromise on the EU budget. Finally, with presidential elections due in France next year, the chances that Paris will move on CAP reform are slim. In London, meanwhile, Prime Minister Cameron will be under heavy pressure from his eurosceptic party base to retain the British rebate and keep budget spending low. A bilateral deal whereby France keeps its farm payments while Britain retains its rebates would allow for a compromise but spell the death knell for EU budget reform.
The Commission has added further fuel to the political fire by making some bold proposals for new ‘own resources’, EU jargon for money that the Union collects directly for the EU budget, for example from customs duties or sugar levies. The Commission now wants member-states to discuss whether the EU could raise money from a new VAT levy and from a financial transaction tax. A German diplomat calls the proposals simply “not acceptable” while a British one dismisses them as an “amusing distraction”. A financial transaction tax would impact heavily on the UK – disproportionately so in the view of the UK government. Since any new own resources need unanimity among the 27 governments, the chances of the Commission’s proposal making it into the new MFF are close to zero.
The Commission’s proposals succeed in trying to please as many political masters as possible. The price that Brussels has paid for this is an unambitious, backward looking budget package. A European Union that must deal with a public finance crisis, an unstable neighbourhood, diminishing legitimacy and declining global competitiveness must do better. And David Cameron should provide the leadership. France has a presidential election in 2012, and Germany a federal election in 2013, so President Sarkozy and Chancellor Merkel are boxed in by the demands of electioneering. UK foreign secretary William Hague – no fan of Brussels – has said that the EU should do more to control climate change. So the British government should argue that significantly more should be spent on climate control, and significantly less on the CAP, and that if genuine budget reform is on the table, the UK rebate is up for re-negotiation.
Stephen Tindale is an associate fellow at the Centre for European Reform.
Monday, June 20, 2011
Financial regulation: Britain the perennial outlier?
by Philip Whyte
Back in 2007, when the Labour government had abolished the business cycle and the City of London was booming, British policy-makers liked to vaunt the merits of ‘light touch’ regulation. Given the scale of British hubris in the run-up to the worst financial crisis since the Great Depression, the country’s EU partners can be forgiven for feeling a certain amount of Schadenfreude. Less justifiable, however, is the sense of vindication that has often accompanied it. Many European politicians have liked to give the impression that the financial crisis would not have happened if ‘Anglo-Saxons’ had regulated and supervised financial markets as strictly as Europeans; and that the task following the crisis is for Europeans to make sure that recalcitrant Anglo-Saxons are finally made to do so.
There are at least two reasons why this narrative is misplaced. The first is that Europe was not an innocent spectator in the run-up to the financial crisis, but an active participant in its genesis. Many European banks were as highly leveraged as Anglo-American ones (and vastly more so than hedge funds). Their lending standards deteriorated every bit as dramatically. And many enthusiastically underwrote or invested in exotic asset-backed securities like collateralised debt obligations (CDOs). (European banks’ voracious appetite for high-yielding securities with AAA-ratings was one factor that drove the growth in the market for CDOs). It does not necessarily follow, then, that the crisis would have been averted if regulatory and supervisory regimes in the Anglo-American world had been ‘more European’.
The second reason is that it ignores just how far the climate in Britain has changed since the crisis. Britain has not had to be bullied into abandoning its ‘light touch’ regime; it has done so of its own will. Changes to its regulatory and supervisory regime have been so wide-ranging that the UK is now at the strict end of the EU spectrum. For example, senior policy-makers, from the governor of the Bank of England to the chairman of the Financial Services Authority, have argued that EU rules on bank capital should be stronger, not weaker, than the Basel III accords. And the government has recently said that it will follow the recommendations of the Vickers Commission and ring-fence retail banking operations from investment banking ones – a move no other EU country is contemplating.
What does it matter if European politicians believe that the post-crisis task is to whip Anglo-Saxons into shape? Isn’t the belief harmless? Indeed, if it helps to rectify the problems that the crisis exposed, doesn’t it do more good than harm? Not necessarily. To start with, it risks creating needless friction between Britain and its EU partners. As host to Europe’s largest financial centre, the UK is disproportionately affected by some of the measures that the EU adopts – the recent Alternative Investment Fund Managers (AIFM) directive being a case in point. As other measures wind their way through the EU’s legislative pipeline and the recently-established European Supervisory Authorities bed down, it is in no one’s interest for EU initiatives to be seen in Britain as gratuitous attacks on the City of London.
Just as seriously, the popular European pass-time of bashing Anglo-Saxons diverts attention away from problems elsewhere in the EU. Consider Germany. In 2009, the country’s chancellor, Angela Merkel, told members of her party that they would no longer be dictated to by the City of London. Since then, her government has shown a striking reluctance to come clean about the weakened state of Germany’s own banks. This is why Germany played an active part in watering down stress tests for EU banks in 2010, and why it fought a rear-guard action to try and dilute the new Basel accords on capital adequacy. Seen from outside, Germany has appeared strangely reluctant to accept one of the central lessons of the financial crisis: that banks should hold more and better quality capital.
However absurd British paeans to light touch regulation seem now, there was more in common between Britain and the rest of Europe in the run-up to the financial crisis than is often recognised. Politicians, however, rarely find it easy to own up to failings at home. There was a brief moment in 2008 when the British government tried to pin all the blame for the financial crisis on events in the US – a claim that was hard to sustain given the carbon-copy, debt-fuelled boom that the UK went through. Unlike Britain, Germany never experienced a domestic credit-fuelled boom. This may explain why German politicians have found it easier to claim (and perhaps even believe) that they were the victims of shortcomings abroad, and why they have been slow to confront the problems at German banks.
Europe’s landscape, in short, has changed since the financial crisis. Britain is increasingly nervous about the huge contingent liabilities to which the country’s large financial sector exposes domestic taxpayers. It does not want to become Reykjavik-on-Thames. It is calling for tougher rules than even longstanding critics of light touch regulation are prepared to contemplate. The future of the City of London, it follows, will be influenced as much by the new climate in London as by the old one in Brussels (more hedge funds have left London in response to changes in the British tax system than because of the adoption of the EU’s AIFM directive). Critics will argue that Britain is as unilateralist as ever – and hence remains a European outlier. But if it is, it is in a very different sense from in 2007.
Philip Whyte is a senior research fellow at the Centre for European Reform.
Back in 2007, when the Labour government had abolished the business cycle and the City of London was booming, British policy-makers liked to vaunt the merits of ‘light touch’ regulation. Given the scale of British hubris in the run-up to the worst financial crisis since the Great Depression, the country’s EU partners can be forgiven for feeling a certain amount of Schadenfreude. Less justifiable, however, is the sense of vindication that has often accompanied it. Many European politicians have liked to give the impression that the financial crisis would not have happened if ‘Anglo-Saxons’ had regulated and supervised financial markets as strictly as Europeans; and that the task following the crisis is for Europeans to make sure that recalcitrant Anglo-Saxons are finally made to do so.
There are at least two reasons why this narrative is misplaced. The first is that Europe was not an innocent spectator in the run-up to the financial crisis, but an active participant in its genesis. Many European banks were as highly leveraged as Anglo-American ones (and vastly more so than hedge funds). Their lending standards deteriorated every bit as dramatically. And many enthusiastically underwrote or invested in exotic asset-backed securities like collateralised debt obligations (CDOs). (European banks’ voracious appetite for high-yielding securities with AAA-ratings was one factor that drove the growth in the market for CDOs). It does not necessarily follow, then, that the crisis would have been averted if regulatory and supervisory regimes in the Anglo-American world had been ‘more European’.
The second reason is that it ignores just how far the climate in Britain has changed since the crisis. Britain has not had to be bullied into abandoning its ‘light touch’ regime; it has done so of its own will. Changes to its regulatory and supervisory regime have been so wide-ranging that the UK is now at the strict end of the EU spectrum. For example, senior policy-makers, from the governor of the Bank of England to the chairman of the Financial Services Authority, have argued that EU rules on bank capital should be stronger, not weaker, than the Basel III accords. And the government has recently said that it will follow the recommendations of the Vickers Commission and ring-fence retail banking operations from investment banking ones – a move no other EU country is contemplating.
What does it matter if European politicians believe that the post-crisis task is to whip Anglo-Saxons into shape? Isn’t the belief harmless? Indeed, if it helps to rectify the problems that the crisis exposed, doesn’t it do more good than harm? Not necessarily. To start with, it risks creating needless friction between Britain and its EU partners. As host to Europe’s largest financial centre, the UK is disproportionately affected by some of the measures that the EU adopts – the recent Alternative Investment Fund Managers (AIFM) directive being a case in point. As other measures wind their way through the EU’s legislative pipeline and the recently-established European Supervisory Authorities bed down, it is in no one’s interest for EU initiatives to be seen in Britain as gratuitous attacks on the City of London.
Just as seriously, the popular European pass-time of bashing Anglo-Saxons diverts attention away from problems elsewhere in the EU. Consider Germany. In 2009, the country’s chancellor, Angela Merkel, told members of her party that they would no longer be dictated to by the City of London. Since then, her government has shown a striking reluctance to come clean about the weakened state of Germany’s own banks. This is why Germany played an active part in watering down stress tests for EU banks in 2010, and why it fought a rear-guard action to try and dilute the new Basel accords on capital adequacy. Seen from outside, Germany has appeared strangely reluctant to accept one of the central lessons of the financial crisis: that banks should hold more and better quality capital.
However absurd British paeans to light touch regulation seem now, there was more in common between Britain and the rest of Europe in the run-up to the financial crisis than is often recognised. Politicians, however, rarely find it easy to own up to failings at home. There was a brief moment in 2008 when the British government tried to pin all the blame for the financial crisis on events in the US – a claim that was hard to sustain given the carbon-copy, debt-fuelled boom that the UK went through. Unlike Britain, Germany never experienced a domestic credit-fuelled boom. This may explain why German politicians have found it easier to claim (and perhaps even believe) that they were the victims of shortcomings abroad, and why they have been slow to confront the problems at German banks.
Europe’s landscape, in short, has changed since the financial crisis. Britain is increasingly nervous about the huge contingent liabilities to which the country’s large financial sector exposes domestic taxpayers. It does not want to become Reykjavik-on-Thames. It is calling for tougher rules than even longstanding critics of light touch regulation are prepared to contemplate. The future of the City of London, it follows, will be influenced as much by the new climate in London as by the old one in Brussels (more hedge funds have left London in response to changes in the British tax system than because of the adoption of the EU’s AIFM directive). Critics will argue that Britain is as unilateralist as ever – and hence remains a European outlier. But if it is, it is in a very different sense from in 2007.
Philip Whyte is a senior research fellow at the Centre for European Reform.
Wednesday, June 01, 2011
EU ministers tackle defence austerity
by Tomas Valasek
How do you do more with less? The EU defence ministers agreed last week that the way to limit the impact of the economic crisis on their defence budgets lies in more co-operation. In a joint statement, they called for more military 'pooling and sharing': joint development and procurement of weapons, and partial integration of European militaries. EU member-states have trialled such ideas before but with limited success. Deep co-operation remains highly sensitive: governments are reluctant to build joint units because this may require them to share decisions on how and when to use them. The ministers' conclusions are correspondingly cautious: they call for a “structured” and “long-term” approach while offering few specific guidelines. It need not be this way: past pooling and sharing attempts offer plenty of lessons on what makes military collaboration successful.
In a recent CER report,['Surviving austerity: The case for a new approach to EU military collaboration', May 2011, http://www.cer.org.uk/pdf/rp_981.pdf]. I suggested ways for European countries to avoid past mistakes. Partial military integration works best when participating countries have similar strategic cultures, a high level of mutual trust, comparable attitudes to defence industry, and relatively low corruption in defence procurement. It also helps if countries are roughly similar in size, and serious about defence matters: that is, they are willing to use their armed forces and keen to maintain their ability to fight for future contingencies.
Several conclusions for EU defence ministers flow from these observations. Since many factors have to align for pooling and sharing to succeed, future defence integration will remain an exception rather than the rule. The conditions listed above only occur in some – and not necessarily geographically connected – parts of Europe. Hence, the idea that EU defence could begin around a single core group, the emergence of which would encourage others to join in a ‘snowballing’ effect, seems unrealistic. Future events may well prod European militaries to create a single, coherent military force. But no such outcome is foreseeable currently given widely varying levels of threat perception, political interest and military cultures across the Union.
The report also recommends that rather than pursuing ‘permanent structured co-operation’, the focus of EU countries and institutions should be on encouraging the formation of several “islands of co-operation” along regional lines, where members partly integrate their militaries. Some of these islands are already well established. The Benelux countries have had much success with pooling and sharing forces. The Nordic states are moving in this direction, as are France and the UK, which have recently concluded a bilateral treaty on defence co-operation. The recent EU defence ministers' communiqué makes a nod to the islands of co-operation idea by stating that multinational co-operation should also take place on a regional basis.
The EU's ability to nudge member-states towards such co-operation will be limited: the capitals will want a final say on with whom to partner, and to what end and depth. But this is not so say that there is nothing that the EU can do; in fact, European institutions have already been helpful. Their key role lies in spreading lessons learned in one region to the rest of Europe. The European Defence Agency, which EU countries set up to facilitate collaboration, has been collecting data on past and current examples of pooling and sharing; it should also catalogue why some have succeeded better than others. The EU military staff, which advises the EU high representative, has conducted a similar but forward-looking exercise: it collected information on what military skills or facilities the member-states are willing to pool and share. It should now use the data to highlight opportunities for collaboration.
The EU can also give member-states incentives to enter into permanent collaboration. Its best tool is the EU 'battlegroups': multinational, 1,500-strong units that are prepared, on a six-month basis, to deploy rapidly in and around Europe. While their primary raison d’être has been to give the EU the ability to quickly respond to crises, it was also hoped that the battlegroups would encourage governments to build permanent joint units. But on this last count, the experiment has disappointed: countries come together for six months, but then go their own separate ways. The EU should adopt recent Polish proposals that the battlegroups should always be composed of the same states, and that they should be on rotation on a predictable schedule, for example every three years. This would give the member-states reasons to maintain close long-term co-operation with partners in the battlegroup, and possibly to pool their units on a permanent basis, not just for the duration of the rotation.
Pooling and sharing will never compensate for inadequate defence budgets: when average spending in Europe, as percentage of GDP, drops by half – as it has over the past two decades – militaries will inevitably suffer. The EU member-states will almost certainly do 'less with less' rather than 'more with less'. However, properly applied, pooling and sharing can partly offset the impact of lower budgets. So while EU countries will still lose some of their military power to budget cuts, they will be better off with pooling and sharing than without.
Tomas Valsek is director of foreign policy and defence at the Centre for European Reform.
How do you do more with less? The EU defence ministers agreed last week that the way to limit the impact of the economic crisis on their defence budgets lies in more co-operation. In a joint statement, they called for more military 'pooling and sharing': joint development and procurement of weapons, and partial integration of European militaries. EU member-states have trialled such ideas before but with limited success. Deep co-operation remains highly sensitive: governments are reluctant to build joint units because this may require them to share decisions on how and when to use them. The ministers' conclusions are correspondingly cautious: they call for a “structured” and “long-term” approach while offering few specific guidelines. It need not be this way: past pooling and sharing attempts offer plenty of lessons on what makes military collaboration successful.
In a recent CER report,['Surviving austerity: The case for a new approach to EU military collaboration', May 2011, http://www.cer.org.uk/pdf/rp_981.pdf]. I suggested ways for European countries to avoid past mistakes. Partial military integration works best when participating countries have similar strategic cultures, a high level of mutual trust, comparable attitudes to defence industry, and relatively low corruption in defence procurement. It also helps if countries are roughly similar in size, and serious about defence matters: that is, they are willing to use their armed forces and keen to maintain their ability to fight for future contingencies.
Several conclusions for EU defence ministers flow from these observations. Since many factors have to align for pooling and sharing to succeed, future defence integration will remain an exception rather than the rule. The conditions listed above only occur in some – and not necessarily geographically connected – parts of Europe. Hence, the idea that EU defence could begin around a single core group, the emergence of which would encourage others to join in a ‘snowballing’ effect, seems unrealistic. Future events may well prod European militaries to create a single, coherent military force. But no such outcome is foreseeable currently given widely varying levels of threat perception, political interest and military cultures across the Union.
The report also recommends that rather than pursuing ‘permanent structured co-operation’, the focus of EU countries and institutions should be on encouraging the formation of several “islands of co-operation” along regional lines, where members partly integrate their militaries. Some of these islands are already well established. The Benelux countries have had much success with pooling and sharing forces. The Nordic states are moving in this direction, as are France and the UK, which have recently concluded a bilateral treaty on defence co-operation. The recent EU defence ministers' communiqué makes a nod to the islands of co-operation idea by stating that multinational co-operation should also take place on a regional basis.
The EU's ability to nudge member-states towards such co-operation will be limited: the capitals will want a final say on with whom to partner, and to what end and depth. But this is not so say that there is nothing that the EU can do; in fact, European institutions have already been helpful. Their key role lies in spreading lessons learned in one region to the rest of Europe. The European Defence Agency, which EU countries set up to facilitate collaboration, has been collecting data on past and current examples of pooling and sharing; it should also catalogue why some have succeeded better than others. The EU military staff, which advises the EU high representative, has conducted a similar but forward-looking exercise: it collected information on what military skills or facilities the member-states are willing to pool and share. It should now use the data to highlight opportunities for collaboration.
The EU can also give member-states incentives to enter into permanent collaboration. Its best tool is the EU 'battlegroups': multinational, 1,500-strong units that are prepared, on a six-month basis, to deploy rapidly in and around Europe. While their primary raison d’être has been to give the EU the ability to quickly respond to crises, it was also hoped that the battlegroups would encourage governments to build permanent joint units. But on this last count, the experiment has disappointed: countries come together for six months, but then go their own separate ways. The EU should adopt recent Polish proposals that the battlegroups should always be composed of the same states, and that they should be on rotation on a predictable schedule, for example every three years. This would give the member-states reasons to maintain close long-term co-operation with partners in the battlegroup, and possibly to pool their units on a permanent basis, not just for the duration of the rotation.
Pooling and sharing will never compensate for inadequate defence budgets: when average spending in Europe, as percentage of GDP, drops by half – as it has over the past two decades – militaries will inevitably suffer. The EU member-states will almost certainly do 'less with less' rather than 'more with less'. However, properly applied, pooling and sharing can partly offset the impact of lower budgets. So while EU countries will still lose some of their military power to budget cuts, they will be better off with pooling and sharing than without.
Tomas Valsek is director of foreign policy and defence at the Centre for European Reform.
Monday, May 16, 2011
Press freedom – the new accession criterion?
by Katinka Barysch
Countries that want to join the EU need to show that their democracies work well. However, press freedom – a key ingredient of any pluralist democracy – is under threat in most of the countries that are now queuing for accession. Independent newspapers and broadcasters are being squeezed out of the market. Critical journalists are being sacked, beaten or locked up. Without curious and courageous journalists, crime and cronyism flourish, public debate is stunted and politicians feel unaccountable. The EU could do more to protect media freedom in the Western Balkans and Turkey.
The erosion of press freedom has been most striking in Turkey recently. A shocking 50-60 journalists are now in jail (depending on who does the counting), mostly accused of plotting to overthrow the government or split the country. Some 10,000 lawsuits are pending against writers and broadcasters. Many journalists suspect that their phones are tapped and their e-mails read. Fear and suspicion pervade the media. In the press freedom ranking of Reporters without Borders, a Paris-based NGO, Turkey has dropped to 138th place, behind Iraq and only just ahead of Russia.
The situation in the Western Balkan countries is similarly worrying. Scores of journalists have been beaten up or intimidated. A couple have lost their lives, with their killers usually going unpunished. Some of Serbia's and Croatia's best-known journalists now live with constant police protection. Many of their colleagues prefer self-censorship to a life in fear or unemployment.
The problems that the region's newspapers, radio stations and TV broadcasters grapple with are complex. Direct state censorship is arguably the least of their problems. Pressure is indirect and comes from various sides. Money is a huge constraint, especially in the small, fragmented Balkan media markets. The economic crisis that started in 2008 has led to painful losses of advertising revenue. Media companies have sacked staff and dumbed down their coverage. Investigative journalism is becoming a luxury.
Some media bosses would not want their journalists to snoop around too much anyway. Conflicts of interests are rife: although ownership structures are often obscure, it is clear that many newspapers and TV stations form part of bigger business empires. Owners fear that they will lose lucrative public contracts or other favours from politicians if their journalists write about government corruption or crime. Others are using their media outlets blatantly to promote their own interests. Albania, with fewer inhabitants than Berlin, has 25 daily newspapers. Most of them are controlled by local mini-tycoons wrestling for influence. In such an environment, journalists are little more than PR writers.
West Europeans can usually rely on well-funded public service broadcasters for information. But trying to build a local version of the BBC is not the solution for South East Europe. In most Balkan countries, public TV stations function more like "ministries for propaganda", says Remzi Lani of the Albanian Media Institute. Their coverage is neither independent nor balanced. In the Western Balkans, a legacy of ethnic hatred and fervent nationalism makes for a toxic media landscape. In Turkey, the press mirrors the political schism between the mildly Islamist AK government and its Kemalist opponents.
"Governments need to stop seeing the media as their private property", warns Dunja Mijatovic, the OSCE’s Media Freedom Representative. Some observers hope that internet bloggers and other forms of 'citizen journalism' could fill the gap between self-serving commercial media and politicised public ones. However, most web publications do not generate income to pay for investigative journalism. And governments are clamping down on the internet as well. The Turkish government has blocked an estimated 12,000 websites to date. It is now planning to make 'filters' compulsory to prevent Turks from viewing websites that contain pornography. Access to sites containing one or more of 138 'prohibited' words (including puzzling items such as skirt, homemade and Haydar) would be blocked automatically.
The European Commission, in charge of monitoring accession countries' compliance with civil liberties and democratic standards, is getting seriously worried. It has repeatedly flagged up the deteriorating media environment in its annual assessments of accession preparations. Yet the situation keeps getting worse. To help it figure out what to do, the Commission gathered over 450 journalists and activists from the Western Balkans and Turkey in Brussels on May 6th. Many of them were seething with frustration: "The Europeans are hypocrites. They say they worry about journalism in our countries. But they still support our governments", said one editor.
The EU has been shy to put pressure on accession country governments. First, the EU's own record on media freedom is not flawless, with Hungary's new restrictive media law and Silvio Berlusconi's grip on Italy’s television the most frequently cited examples. Second, the EU has only a limited role in the media sector. There is, for example, a directive telling member-states not to discriminate against media outlets from other EU countries. But on the whole, the acquis in this area is thin and rules are made by national governments or by self-regulatory bodies.
To its credit, the Commission is becoming more outspoken, in particular in response to the most recent arrests of journalists in Turkey. Enlargement Commissioner Stefan Fule is also thinking about singling out press freedom as a more explicit benchmark for accession. At the moment, it is just one of the many items assessed under the criterion of a 'functioning democracy' (the other accession criteria concern market economics and the implementation of EU law).
The Commission could also do more to monitor the broader environment in which journalists in Turkey and the Western Balkans operate. While the accession countries usually have nice-sounding laws on media freedom, these are often not implemented properly. Other laws, covering defamation, anti-terrorism, taxation or public procurement, have been used to prosecute journalists and bankrupt or disadvantage their employers. The Commission has a remit to push accession countries to reform their judiciaries and improve the wider business environment for media outlets. It should use it forcefully.
In addition, the Commission should ask accession countries to make media ownership more transparent and clamp down on conflicts of interest. It should work out benchmarks against which the region's fledgling self-regulatory bodies can be measured. It could join other donors in funding training for investigative journalists or support for independent news websites.
Most importantly, the EU and its member-states have to become more vocal about their concerns. Past attempts to put pressure on the governments of Turkey and some Balkan countries through silent diplomacy have not worked. "Our politicians are liars", says Saso Ordanoski, an editor from Macedonia. "They will promise anything unless they are exposed to public scrutiny."
Katinka Barysch is deputy director of the Centre for European Reform.
Countries that want to join the EU need to show that their democracies work well. However, press freedom – a key ingredient of any pluralist democracy – is under threat in most of the countries that are now queuing for accession. Independent newspapers and broadcasters are being squeezed out of the market. Critical journalists are being sacked, beaten or locked up. Without curious and courageous journalists, crime and cronyism flourish, public debate is stunted and politicians feel unaccountable. The EU could do more to protect media freedom in the Western Balkans and Turkey.
The erosion of press freedom has been most striking in Turkey recently. A shocking 50-60 journalists are now in jail (depending on who does the counting), mostly accused of plotting to overthrow the government or split the country. Some 10,000 lawsuits are pending against writers and broadcasters. Many journalists suspect that their phones are tapped and their e-mails read. Fear and suspicion pervade the media. In the press freedom ranking of Reporters without Borders, a Paris-based NGO, Turkey has dropped to 138th place, behind Iraq and only just ahead of Russia.
The situation in the Western Balkan countries is similarly worrying. Scores of journalists have been beaten up or intimidated. A couple have lost their lives, with their killers usually going unpunished. Some of Serbia's and Croatia's best-known journalists now live with constant police protection. Many of their colleagues prefer self-censorship to a life in fear or unemployment.
The problems that the region's newspapers, radio stations and TV broadcasters grapple with are complex. Direct state censorship is arguably the least of their problems. Pressure is indirect and comes from various sides. Money is a huge constraint, especially in the small, fragmented Balkan media markets. The economic crisis that started in 2008 has led to painful losses of advertising revenue. Media companies have sacked staff and dumbed down their coverage. Investigative journalism is becoming a luxury.
Some media bosses would not want their journalists to snoop around too much anyway. Conflicts of interests are rife: although ownership structures are often obscure, it is clear that many newspapers and TV stations form part of bigger business empires. Owners fear that they will lose lucrative public contracts or other favours from politicians if their journalists write about government corruption or crime. Others are using their media outlets blatantly to promote their own interests. Albania, with fewer inhabitants than Berlin, has 25 daily newspapers. Most of them are controlled by local mini-tycoons wrestling for influence. In such an environment, journalists are little more than PR writers.
West Europeans can usually rely on well-funded public service broadcasters for information. But trying to build a local version of the BBC is not the solution for South East Europe. In most Balkan countries, public TV stations function more like "ministries for propaganda", says Remzi Lani of the Albanian Media Institute. Their coverage is neither independent nor balanced. In the Western Balkans, a legacy of ethnic hatred and fervent nationalism makes for a toxic media landscape. In Turkey, the press mirrors the political schism between the mildly Islamist AK government and its Kemalist opponents.
"Governments need to stop seeing the media as their private property", warns Dunja Mijatovic, the OSCE’s Media Freedom Representative. Some observers hope that internet bloggers and other forms of 'citizen journalism' could fill the gap between self-serving commercial media and politicised public ones. However, most web publications do not generate income to pay for investigative journalism. And governments are clamping down on the internet as well. The Turkish government has blocked an estimated 12,000 websites to date. It is now planning to make 'filters' compulsory to prevent Turks from viewing websites that contain pornography. Access to sites containing one or more of 138 'prohibited' words (including puzzling items such as skirt, homemade and Haydar) would be blocked automatically.
The European Commission, in charge of monitoring accession countries' compliance with civil liberties and democratic standards, is getting seriously worried. It has repeatedly flagged up the deteriorating media environment in its annual assessments of accession preparations. Yet the situation keeps getting worse. To help it figure out what to do, the Commission gathered over 450 journalists and activists from the Western Balkans and Turkey in Brussels on May 6th. Many of them were seething with frustration: "The Europeans are hypocrites. They say they worry about journalism in our countries. But they still support our governments", said one editor.
The EU has been shy to put pressure on accession country governments. First, the EU's own record on media freedom is not flawless, with Hungary's new restrictive media law and Silvio Berlusconi's grip on Italy’s television the most frequently cited examples. Second, the EU has only a limited role in the media sector. There is, for example, a directive telling member-states not to discriminate against media outlets from other EU countries. But on the whole, the acquis in this area is thin and rules are made by national governments or by self-regulatory bodies.
To its credit, the Commission is becoming more outspoken, in particular in response to the most recent arrests of journalists in Turkey. Enlargement Commissioner Stefan Fule is also thinking about singling out press freedom as a more explicit benchmark for accession. At the moment, it is just one of the many items assessed under the criterion of a 'functioning democracy' (the other accession criteria concern market economics and the implementation of EU law).
The Commission could also do more to monitor the broader environment in which journalists in Turkey and the Western Balkans operate. While the accession countries usually have nice-sounding laws on media freedom, these are often not implemented properly. Other laws, covering defamation, anti-terrorism, taxation or public procurement, have been used to prosecute journalists and bankrupt or disadvantage their employers. The Commission has a remit to push accession countries to reform their judiciaries and improve the wider business environment for media outlets. It should use it forcefully.
In addition, the Commission should ask accession countries to make media ownership more transparent and clamp down on conflicts of interest. It should work out benchmarks against which the region's fledgling self-regulatory bodies can be measured. It could join other donors in funding training for investigative journalists or support for independent news websites.
Most importantly, the EU and its member-states have to become more vocal about their concerns. Past attempts to put pressure on the governments of Turkey and some Balkan countries through silent diplomacy have not worked. "Our politicians are liars", says Saso Ordanoski, an editor from Macedonia. "They will promise anything unless they are exposed to public scrutiny."
Katinka Barysch is deputy director of the Centre for European Reform.
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