The EU has probably never faced greater challenges. Chronically slow economic growth, and a euro crisis that is dormant but far from resolved, have undermined support for the EU – helping anti-establishment parties to win 20 per cent of the seats in the European elections. A wave of europhobic sentiment may carry Britain out of the EU, while Russia is becoming a more menacing neighbour.
The EU cannot tackle such problems without a strong European Commission – the body that defines the common interest, helps to forge common policies and polices the rules. Yet many intelligent and serious pro-Europeans want the Commission’s next president to be chosen by a method that is bound to weaken it.
This is the system of Spitzenkandidaten, or designated candidates, promoted by the European Parliament and the main pan-European political parties. They argue that the recent elections gave voters a real choice – between Jean-Claude Juncker, the candidate of the centre-right European Peoples’ Party (EPP), Martin Schulz, the candidate of the Party of European Socialists, and those representing smaller groups. Advocates of this system also claim that it enables people to see a link between the way they vote and the faces running the EU. And because the EPP won the most MEPs (though many fewer than five years ago), they argue, the European Council should bow to the ‘popular will’ and anoint Juncker. However, these arguments suffer from serious flaws.
First, the two leading candidates did not offer voters a real choice. Juncker and Schulz hold similar views, supporting more powers for the EU without wanting to change much in the way that it works. In any case, electors cannot realistically choose between candidates without knowing who they are. Most of those who voted have never heard of Schulz or Juncker, which is not surprising, since they are obscure politicians to most people living outside Brussels.
Second, the idea of Spitzenkandidaten is based on the assumption that if people vote for one face rather than another, policy will shift. But in reality the appointment of Juncker rather than Schulz would make little difference to what the Commission does, even if they held significantly different views: either would be constrained by having to work with a broad coalition of 27 commissioners, from various parties, appointed by national governments. Only the most dynamic of Commission presidents, such as Jacques Delors, have been able to make much difference.
Furthermore, the Commission has little executive power, except in a few areas like competition policy. Most key decisions in the EU are taken by the Council of Ministers. And although the Commission initiates legislation, the Council and the Parliament revise and then have to pass each law. So if advocates of Spitzenkandidaten lead electors to believe that their votes will change EU policy, through determining the Commission president, the result may soon be disillusionment.
A third problem with Spitzenkandidaten is that this idea would make the Commission more party-political, at least in terms of perceptions. A President Juncker would be seen as accountable to the EPP group in the Parliament. That would have serious implications for the Commission’s credibility and legitimacy as a regulator and enforcer of rules. Suppose that the centre-right Spanish government broke eurozone budget rules, and that the Commission treated it softly; the institution would be accused of political bias. Many of the Commission’s tasks require to it remain above party politics.
The fourth and most important reason for the European Council to reject Spitzenkandidaten is that the quality of those running the EU is hugely important. Schulz’s executive experience is limited to being mayor of a small German town. Juncker has considerable political experience, having been prime minister of Luxembourg from 1995 to 2013, but he left office under a minor cloud, having mismanaged a spy scandal. As chairman of the Eurogroup, from 2008 to 2013, he can hardly be blamed for the eurozone crisis. Nevertheless he lacked the clout to stand up to the big member-states, when the eurozone made mistakes, and was out of the loop at many key moments. Jean Pisani-Ferry’s excellent new book, ‘The euro crisis and its aftermath’, reveals that from January 2010 to June 2012, US Treasury Secretary Tim Geithner called the ECB president (whether Jean-Claude Trichet or Mario Draghi) 58 times, Wolfgang Schäuble (Germany’s finance minister) 36 times, Olli Rehn (the EU economics commissioner) 11 times and Juncker just twice.
The televised debates among the presidential candidates generated little interest in most member-states, perhaps because they were between largely unknown and uninspiring figures – the exception being Alexis Tsipras, the far left’s designated candidate, who has some charisma. If the debates had featured not only Tsipras but also, say, Angela Merkel, Silvio Berlusconi, Nicolas Sarkozy and Marine Le Pen – politicians who have made an impact outside their homelands – many millions might have watched.
But the system of Spitzenkandidaten discouraged heavyweight leaders from putting their names forward. Those in office would have had to resign without any certainty of gaining the nomination or winning the presidency. Several plausible candidates for the presidency – some with fresher faces than the designated candidates – held back from seeking nomination. These include Dalia Grybauskaite, Enda Kenny, Christine Lagarde, Fredrik Reinfeldt, Helle Thorning-Schmidt and Donald Tusk, respectively the leaders of Lithuania, Ireland, the IMF, Sweden, Denmark and Poland (other serious contenders, currently out of office, include Finland’s Jyrki Katainen, France’s Pascal Lamy and Italy’s Enrico Letta).
Rather than humouring the Parliament by appointing a designated candidate, the European Council should appoint a strong president. That would strengthen the Commission as a whole. Indeed, that institution’s weakness is one cause of the EU’s travails, and thus, indirectly, of the rise of euroscepticism. The Commission has been poorly led, lacked focus and proposed too many regulations that are badly drafted. It has become too willing to pursue the Parliament’s agenda, thereby damaging its credibility in national capitals.
A strong Commission requires a dynamic and effective president – one who can shake up the institution while retaining the confidence of both the Parliament and the member-states. The Commission’s priorities should include:
* Boosting economic growth. The Commission should propose to extend the single market (especially in services and the digital economy), negotiate more trade deals with other parts of the world, support the best research in the EU and invest in crucial infrastructure like energy transmission. Some of these measures would be unpopular. The president must therefore be astute at building coalitions for change, explaining the benefits and ensuring help for those who may be disadvantaged. The Commission should be more careful not to create impediments to growth: it should improve the impact assessments that it carries out on draft laws, and resist the Parliament when it demands regulations that are unnecessary. In the long run, faster growth would undermine support for populists.
* Restoring the eurozone to health. The euro's difficulties have done much to damage the EU’s overall economic performance. Though the euro crisis has slipped out of the headlines, major problems remain: an ill-conceived focus on austerity that smothers demand; deflationary pressures in Southern Europe that the European Central Bank (ECB) has failed to tackle; barely sustainable levels of public debt in much of Southern Europe; the reluctance of some governments to commit to painful structural economic reforms; and Germany’s unwillingness to generate the domestic demand that would stimulate activity elsewhere in the eurozone. Particularly in the early years of the crisis, the Commission lacked the backbone to stand up to the ECB, Germany and other governments when they pursued harmful policies.
* Encouraging the 28 to forge a common response to a more assertive Russia. The member-states have not reacted in the same way to Russia’s meddling in Ukraine: some worry about their military security, others fear for their energy supplies; some want the EU to prioritise human rights, others believe that engagement assists moderate voices within the Russian system. Despite these disagreements, even the modest EU sanctions adopted so far have hurt market confidence in Russia. In order to maximise Europe’s leverage vis-à-vis Russia, the Commission should work with the European External Action Service and the key member-states to herd the 28 towards a coherent approach. The Commission is developing sensible ideas for improving the EU’s energy security – including boosting energy efficiency, accessing alternative energy sources, building gas and electricity connections between member-states and co-ordinating the member-states’ negotiation of gas contracts with third parties – but will need drive and determination to persuade national governments to adopt them.
* Coping with the British problem. Whichever party wins the next British election, the UK is likely to demand major reforms to the way the EU works. Some member-states will support its efforts. Others will be less enthusiastic, but after the European elections, fewer governments will be willing to say that ‘business as usual’ is acceptable. The Commission president will face a Herculean task: constructing an agenda for reform that helps to keep the UK in the EU, but at the same time is acceptable to 27 other governments. And because there is unlikely to be a new EU treaty in the next few years, EU leaders will find it hard to craft reforms within the existing treaties that look substantive. The appointment of Juncker as Commission president would decrease the chances of keeping the British in the EU, since he (like Schulz) has an antagonistic relationship with them.
The EU treaties are clear: when the European Council chooses the Commission president, it should take into account the European elections; MEPs then have to approve that choice. This means that the president probably has to come from the party – or group of parties – that can muster the largest number of MEPs. The treaties, however, say nothing about Spitzenkandidaten. European leaders should not indulge the Parliament by tolerating its attempted power-grab. The challenges facing Europe are far too serious for its leaders to risk the choice of a weak Commission president. Of the potential candidates from the centre-right, Christine Lagarde is among the strongest (though apparently François Hollande would rather not have her as president). She would bring her experience as a minister and at the IMF, her communications skills and her economic expertise to the job.
Charles Grant is director of the Centre for European Reform.
Friday, May 30, 2014
Friday, May 23, 2014
Devolution in Ukraine: Panacea or Pandora’s Box?
Russia and the West do not agree on much about Ukraine, but both say that state power there has been too centralised. They are right that people in Ukraine’s regions do not feel that the authorities speak for them; but the real cause is ineffective and corrupt government at all levels, not an over-mighty central government. Both Russian and Western prescriptions for redistributing powers could make things worse if the underlying issues are not addressed first.
For Russia, the buzzword is ‘federalisation’ – a radical reallocation of powers so that the oblasts (regions) in southern and eastern Ukraine could have their own foreign and trade policies. According to Sergei Glazyev, Russian president Vladimir Putin’s adviser on Eurasian integration, this could include the right to join the Russian-led Eurasian Customs Union. Ukraine’s interim prime minister, Arseniy Yatsenyuk, has called this “feudalisation”, designed to make Ukraine subordinate to Russia. It would certainly be impossible for Ukraine to implement a free trade agreement with the EU if part of the country was in a customs union with Russia.
On the other side, the EU supports ‘decentralisation’, a vague term which could include giving some budgetary and other powers to local authorities below the oblast level. One of the principal proponents of decentralisation, Anatoliy Tkachuk of the Civil Society Institute in Kyiv, said recently that the focus should be on “consolidating and strengthening municipalities and districts” (smaller units than oblasts). Tkachuk argued that giving more power to the oblasts would “create a layer of oligarchic activity that would continue business as usual”.
Ukraine’s immediate focus is on the presidential election, the first round of which will be held on May 25th. After that, attention will switch from who runs the country to how it is run. Decentralisation features in the ‘roadmap’ for Ukraine put forward by the Swiss Chairman-in-Office of the Organisation for Security and Co-operation in Europe (OSCE), Didier Burkhalter. At the Foreign Affairs Council (FAC) on May 12th, EU foreign ministers welcomed Ukraine’s steps to implement this. Decentralisation is likely to be a key agenda item in the series of public roundtable meetings, held under OSCE auspices, which started in Kyiv on May 14th. The roundtable is co-moderated by the former German diplomat, Wolfgang Ischinger (full disclosure: he serves on the CER’s advisory board).
The key question is whether over-centralisation of power really has been nefarious, and therefore whether either version of devolution is the right answer. While on paper Ukraine’s constitution may suggest that power is too concentrated in the hands of its central government, the events of the last six months have shown that the reality is quite different. The weakness of Ukraine’s central institutions, the influence of wealthy regional power-brokers and the interference of Russia create a risk that Ukraine may fragment. In a country as large and diverse as Ukraine, ensuring that people throughout the country have a voice at the centre is vital. But in focusing on decentralisation without strengthening national-level institutions, the OSCE and the interim government could inadvertently increase the risk of break-up.
Ukraine has amended its constitution repeatedly since gaining independence in 1991, shifting the balance of power back and forth between president and parliament at least three times. The version of the constitution currently in force is as amended in 2004, following the cancellation of amendments strengthening presidential powers that were adopted in 2010 under Yanukovych. It remains a very flawed document. Meanwhile, Ukraine has failed to build strong institutions, particularly courts and law enforcement agencies. In 2007 the Council of Europe warned of a tendency towards “legal nihilism” in Ukraine; things only got worse under Yanukovych, who appointed one of his cronies as chair of the constitutional court. The police are often corrupt and (as recent events in the east of Ukraine have shown) either incompetent or disloyal.
Since central organs of power are so impotent, oligarchs with regional power bases have been able to capture effective control of their areas, particularly in the industrial east, and to manipulate the state to their own advantage. All Ukrainian presidents have relied on these power brokers to a greater or lesser extent. The current interim government in Kyiv has had to accept that real power in the east lies with the oligarchs, appointing Ihor Kolomoyskiy, multibillionaire owner of PrivatBank, as governor of Dnipropetrovsk oblast and Serhiy Taruta, billionaire founder of the Industrial Union of Donbass, as the governor of Donetsk oblast. Ukraine’s richest oligarch and Donbass ‘boss’, Rinat Akhmetov, who seemed for some weeks to be taking a neutral position on the demands of pro-Russian protesters, has now thrown his weight behind the cause of Ukrainian unity. Steelworkers from one of Akhmetov’s plants cleared pro-Russian separatists from the south-eastern city of Mariupol after Ukrainian forces had failed to do so. This may be a good thing in the short-term, but it sends a worrying signal of private power and state feebleness.
Ukraine could probably have muddled on with weak central government and strong regional oligarchs, were it not for Russia’s intervention. The annexation of Crimea, though clearly a grave breach of international law and Russia’s commitments, was relatively unimportant in terms of the future of Ukraine as a state: Crimea was already an autonomous region; it is the only part of Ukraine where ethnic Russians are in a majority; and it contributes less than 3 per cent of Ukrainian GDP. What is happening in the south and east, however, is an existential threat: the majority in these areas, whatever language they speak, identify themselves as Ukrainians; and these regions are Ukraine’s industrial heartland, with GDP per capita above the national average.
Russia’s longer-term aims in these areas are unclear; they may extend as far as annexation on the Crimean model, or the creation of an ‘independent’ state in what Putin has called (using a Tsarist era term for the area) “Novorossiya” (New Russia); or they may be limited to ensuring, by whatever method works, that Ukraine cannot integrate with the EU or NATO. But Moscow’s short term actions seem designed to make the Donetsk and Luhansk oblasts, which contain about 15 per cent of Ukraine’s population, at least partially ungovernable. The central government and the security forces have so far failed to find an effective way to respond.
In these circumstances, any move to devolve power before the centre can re-assert itself is likely to reinforce fissiparous tendencies in Ukraine. The assorted Russian agents, irregular Russian Cossack groups and armed local malcontents running parts of the east are highly unlikely to produce the good governance, economic reform and respect for human rights that Ukraine needs. As they have shown already, they are more likely to foment chaos and violence, with or without the Ukrainian security forces to fight. On the other hand, if the centre gives in to the temptation to hand control of eastern oblasts to the traditional regional bosses, the oligarchs are likely to go back to the corrupt and predatory behaviour which has left Ukraine as such a shocking contrast with its neighbour Poland (see Simon Tilford’s CER bulletin article ‘Poland and Ukraine: A tale of two economies’).
What Ukraine needs in order to progress, and what the EU, US and international organisations should help it to build, are effective institutions at all levels. Once a president has been elected and a government is in office, Ukraine’s first priority should be to start drafting a constitution which delineates clearly what powers belong where, so that citizens know who is accountable for what. The Council of Europe’s Venice Commission on Democracy through Law has been involved in advising Ukrainian governments on the constitution in the past, but the new government should accept its advice more wholeheartedly – including on the need for an inclusive and comprehensive drafting process. It is up to the Ukrainians themselves to discover what system will command the greatest support, but experience in post-communist countries suggests that parliamentary systems consolidate democracy and promote economic reform more effectively than presidential systems: parliaments provide a forum for compromise and coalition-building, while powerful presidencies facilitate state capture by well-connected elites.
Second, Ukraine needs a court system able to make judgements based on the constitution and the law, rather than on threats and bribes. At the FAC on May 12th, ministers tasked the European External Action Service to come up with the concept for an EU rule of law mission. The next FAC should move quickly to agree on recruitment and deployment. In 2004 to 2005, the EU mounted a successful rule of law mission, EUJUST THEMIS, to help Georgia reform its criminal justice system, including fighting corruption in it; Ukraine needs something similar but more wide-ranging, covering civil as well as criminal justice.
Third, Ukraine needs a well-trained and motivated police service which upholds the law and defends the rights of citizens. The police are often the first point of contact between the citizen and the authorities; if the interaction is positive, people are more likely to feel that the government is ‘on their side’. The UN’s ‘Brahimi Report’ of 2000 on peace operations underlined this: “The fairness and impartiality of the local police force … is crucial to maintaining a safe and secure environment, and its effectiveness is vital where intimidation and criminal networks continue to obstruct progress on the political and economic fronts” – a pretty good description of present-day eastern Ukraine. Both the EU and the OSCE have experience of training and mentoring police, particularly in the Balkans; they should agree on a sensible division of labour to tackle the enormous challenge of Ukraine.
Finally, to show the Ukrainian people that the new authorities are serious about fighting corruption, Ukraine needs more open government. Procurement needs to be transparent, so that the flow of money from the state to its suppliers can be audited by citizens. The gas transit business needs to be transparent, so that people can see how much is imported, how much is sold at what price and where the revenues go. At present only Russia knows exactly how much gas enters Ukraine; and the involvement of intermediary companies and the manipulation of prices for different classes of consumers make it hard to work out what happens to the gas inside the country. And the wealth of public officials needs to be transparent, to make it harder for the corrupt to hide illegitimate income. The interim government started well, by appointing the investigative journalist Tetyana Chornovol as its anti-corruption chief, but her efforts to establish a new system for fighting corruption seem to be stalling amid disagreements on the accountability of the planned anti-corruption service. The UK’s Department for International Development and non-governmental organisations like Transparency International could offer their expertise to help Ukraine ensure that public money is not diverted to private pockets. Ukraine is already a member of the Open Government Partnership, a group of 64 countries where government and civil society have agreed to improve government openness and accountability; it should start implementing the steps it has committed itself to.
None of these changes will be easy to implement; and Ukraine will also need economic and other forms of assistance if it is to develop. But if these reforms encourage Ukrainians, wherever they live and whatever language they speak, to feel connected to and protected by the state, they will help to underpin its foundations. Without reform, any edifice of devolved powers may prove fatally unstable.
Ian Bond is director of foreign policy at the Centre for European Reform.
For Russia, the buzzword is ‘federalisation’ – a radical reallocation of powers so that the oblasts (regions) in southern and eastern Ukraine could have their own foreign and trade policies. According to Sergei Glazyev, Russian president Vladimir Putin’s adviser on Eurasian integration, this could include the right to join the Russian-led Eurasian Customs Union. Ukraine’s interim prime minister, Arseniy Yatsenyuk, has called this “feudalisation”, designed to make Ukraine subordinate to Russia. It would certainly be impossible for Ukraine to implement a free trade agreement with the EU if part of the country was in a customs union with Russia.
On the other side, the EU supports ‘decentralisation’, a vague term which could include giving some budgetary and other powers to local authorities below the oblast level. One of the principal proponents of decentralisation, Anatoliy Tkachuk of the Civil Society Institute in Kyiv, said recently that the focus should be on “consolidating and strengthening municipalities and districts” (smaller units than oblasts). Tkachuk argued that giving more power to the oblasts would “create a layer of oligarchic activity that would continue business as usual”.
Ukraine’s immediate focus is on the presidential election, the first round of which will be held on May 25th. After that, attention will switch from who runs the country to how it is run. Decentralisation features in the ‘roadmap’ for Ukraine put forward by the Swiss Chairman-in-Office of the Organisation for Security and Co-operation in Europe (OSCE), Didier Burkhalter. At the Foreign Affairs Council (FAC) on May 12th, EU foreign ministers welcomed Ukraine’s steps to implement this. Decentralisation is likely to be a key agenda item in the series of public roundtable meetings, held under OSCE auspices, which started in Kyiv on May 14th. The roundtable is co-moderated by the former German diplomat, Wolfgang Ischinger (full disclosure: he serves on the CER’s advisory board).
The key question is whether over-centralisation of power really has been nefarious, and therefore whether either version of devolution is the right answer. While on paper Ukraine’s constitution may suggest that power is too concentrated in the hands of its central government, the events of the last six months have shown that the reality is quite different. The weakness of Ukraine’s central institutions, the influence of wealthy regional power-brokers and the interference of Russia create a risk that Ukraine may fragment. In a country as large and diverse as Ukraine, ensuring that people throughout the country have a voice at the centre is vital. But in focusing on decentralisation without strengthening national-level institutions, the OSCE and the interim government could inadvertently increase the risk of break-up.
Ukraine has amended its constitution repeatedly since gaining independence in 1991, shifting the balance of power back and forth between president and parliament at least three times. The version of the constitution currently in force is as amended in 2004, following the cancellation of amendments strengthening presidential powers that were adopted in 2010 under Yanukovych. It remains a very flawed document. Meanwhile, Ukraine has failed to build strong institutions, particularly courts and law enforcement agencies. In 2007 the Council of Europe warned of a tendency towards “legal nihilism” in Ukraine; things only got worse under Yanukovych, who appointed one of his cronies as chair of the constitutional court. The police are often corrupt and (as recent events in the east of Ukraine have shown) either incompetent or disloyal.
Since central organs of power are so impotent, oligarchs with regional power bases have been able to capture effective control of their areas, particularly in the industrial east, and to manipulate the state to their own advantage. All Ukrainian presidents have relied on these power brokers to a greater or lesser extent. The current interim government in Kyiv has had to accept that real power in the east lies with the oligarchs, appointing Ihor Kolomoyskiy, multibillionaire owner of PrivatBank, as governor of Dnipropetrovsk oblast and Serhiy Taruta, billionaire founder of the Industrial Union of Donbass, as the governor of Donetsk oblast. Ukraine’s richest oligarch and Donbass ‘boss’, Rinat Akhmetov, who seemed for some weeks to be taking a neutral position on the demands of pro-Russian protesters, has now thrown his weight behind the cause of Ukrainian unity. Steelworkers from one of Akhmetov’s plants cleared pro-Russian separatists from the south-eastern city of Mariupol after Ukrainian forces had failed to do so. This may be a good thing in the short-term, but it sends a worrying signal of private power and state feebleness.
Ukraine could probably have muddled on with weak central government and strong regional oligarchs, were it not for Russia’s intervention. The annexation of Crimea, though clearly a grave breach of international law and Russia’s commitments, was relatively unimportant in terms of the future of Ukraine as a state: Crimea was already an autonomous region; it is the only part of Ukraine where ethnic Russians are in a majority; and it contributes less than 3 per cent of Ukrainian GDP. What is happening in the south and east, however, is an existential threat: the majority in these areas, whatever language they speak, identify themselves as Ukrainians; and these regions are Ukraine’s industrial heartland, with GDP per capita above the national average.
Russia’s longer-term aims in these areas are unclear; they may extend as far as annexation on the Crimean model, or the creation of an ‘independent’ state in what Putin has called (using a Tsarist era term for the area) “Novorossiya” (New Russia); or they may be limited to ensuring, by whatever method works, that Ukraine cannot integrate with the EU or NATO. But Moscow’s short term actions seem designed to make the Donetsk and Luhansk oblasts, which contain about 15 per cent of Ukraine’s population, at least partially ungovernable. The central government and the security forces have so far failed to find an effective way to respond.
In these circumstances, any move to devolve power before the centre can re-assert itself is likely to reinforce fissiparous tendencies in Ukraine. The assorted Russian agents, irregular Russian Cossack groups and armed local malcontents running parts of the east are highly unlikely to produce the good governance, economic reform and respect for human rights that Ukraine needs. As they have shown already, they are more likely to foment chaos and violence, with or without the Ukrainian security forces to fight. On the other hand, if the centre gives in to the temptation to hand control of eastern oblasts to the traditional regional bosses, the oligarchs are likely to go back to the corrupt and predatory behaviour which has left Ukraine as such a shocking contrast with its neighbour Poland (see Simon Tilford’s CER bulletin article ‘Poland and Ukraine: A tale of two economies’).
What Ukraine needs in order to progress, and what the EU, US and international organisations should help it to build, are effective institutions at all levels. Once a president has been elected and a government is in office, Ukraine’s first priority should be to start drafting a constitution which delineates clearly what powers belong where, so that citizens know who is accountable for what. The Council of Europe’s Venice Commission on Democracy through Law has been involved in advising Ukrainian governments on the constitution in the past, but the new government should accept its advice more wholeheartedly – including on the need for an inclusive and comprehensive drafting process. It is up to the Ukrainians themselves to discover what system will command the greatest support, but experience in post-communist countries suggests that parliamentary systems consolidate democracy and promote economic reform more effectively than presidential systems: parliaments provide a forum for compromise and coalition-building, while powerful presidencies facilitate state capture by well-connected elites.
Second, Ukraine needs a court system able to make judgements based on the constitution and the law, rather than on threats and bribes. At the FAC on May 12th, ministers tasked the European External Action Service to come up with the concept for an EU rule of law mission. The next FAC should move quickly to agree on recruitment and deployment. In 2004 to 2005, the EU mounted a successful rule of law mission, EUJUST THEMIS, to help Georgia reform its criminal justice system, including fighting corruption in it; Ukraine needs something similar but more wide-ranging, covering civil as well as criminal justice.
Third, Ukraine needs a well-trained and motivated police service which upholds the law and defends the rights of citizens. The police are often the first point of contact between the citizen and the authorities; if the interaction is positive, people are more likely to feel that the government is ‘on their side’. The UN’s ‘Brahimi Report’ of 2000 on peace operations underlined this: “The fairness and impartiality of the local police force … is crucial to maintaining a safe and secure environment, and its effectiveness is vital where intimidation and criminal networks continue to obstruct progress on the political and economic fronts” – a pretty good description of present-day eastern Ukraine. Both the EU and the OSCE have experience of training and mentoring police, particularly in the Balkans; they should agree on a sensible division of labour to tackle the enormous challenge of Ukraine.
Finally, to show the Ukrainian people that the new authorities are serious about fighting corruption, Ukraine needs more open government. Procurement needs to be transparent, so that the flow of money from the state to its suppliers can be audited by citizens. The gas transit business needs to be transparent, so that people can see how much is imported, how much is sold at what price and where the revenues go. At present only Russia knows exactly how much gas enters Ukraine; and the involvement of intermediary companies and the manipulation of prices for different classes of consumers make it hard to work out what happens to the gas inside the country. And the wealth of public officials needs to be transparent, to make it harder for the corrupt to hide illegitimate income. The interim government started well, by appointing the investigative journalist Tetyana Chornovol as its anti-corruption chief, but her efforts to establish a new system for fighting corruption seem to be stalling amid disagreements on the accountability of the planned anti-corruption service. The UK’s Department for International Development and non-governmental organisations like Transparency International could offer their expertise to help Ukraine ensure that public money is not diverted to private pockets. Ukraine is already a member of the Open Government Partnership, a group of 64 countries where government and civil society have agreed to improve government openness and accountability; it should start implementing the steps it has committed itself to.
None of these changes will be easy to implement; and Ukraine will also need economic and other forms of assistance if it is to develop. But if these reforms encourage Ukrainians, wherever they live and whatever language they speak, to feel connected to and protected by the state, they will help to underpin its foundations. Without reform, any edifice of devolved powers may prove fatally unstable.
Ian Bond is director of foreign policy at the Centre for European Reform.
Thursday, May 15, 2014
Presidential candidates, European federalism and Tony Giddens
These European elections promise to be difficult for the EU. Opinion polls are predicting a surge in support for anti-EU parties of left and right. Furthermore, if past elections are a guide to the future, voter turnout will fall again. It slid steadily from 63 per cent in the first European elections, in 1979, to 43 per cent five years ago. The European Parliament – despite gaining more powers through each successive treaty change – has failed to convince a majority of voters that it is an admirable or useful institution.
But despite these ill omens, many ‘federalists’ – who may be defined as those wanting a significant transfer of powers to EU institutions – are getting excited. This is because the European elections may, for the first time, determine the choice of the president of the European Commission. Each of the main pan-European political parties has chosen a designated candidate for that job. Many federalists hope and expect that the political party which gains the most votes will see its candidate anointed president. They believe that this method of choosing the president would make the EU more democratic: voters would see a link between the way they vote and the person running the Commission.
The designated candidates have engaged in a series of TV debates and claim to be offering voters a choice of Europes. But in fact the three most prominent candidates – the socialists’ Martin Schulz, the centre-right’s Jean-Claude Juncker and the liberals’ Guy Verhofstadt – are remarkably similar. They have spent much of their careers inside the Brussels system. Two are former Benelux prime ministers, and two are MEPs (Verhofstadt is both). Though there are minor differences among the three – such as on the degree of austerity that is desirable – they all want to shift more power to the centre. The real political argument in these elections is not between these three candidates, but between three approaches to Europe: the federalists, who want more of it; the sceptics, who want less of it (or none at all); and, in the middle, those who see the value of the EU but don’t want a lot more of it and hope that it can be reformed.
The proposal for the Commission president to be chosen through designated candidates is problematic: it would narrow the pool of talent from which the president can be drawn; risk damaging the Commission’s credibility as a regulator by making it more overtly party-political; and encourage voters to believe that the political colour of the president influences EU policy, only to disillusion them when they see this is seldom the case (these problems are explained by Heather Grabbe and Stefan Lehne in a CER policy brief).
Whatever the rights and wrongs of this method of deciding the president, the federalists who back it may end up disappointed. The EU treaties state clearly that the European Council chooses the Commission president, “taking into account” the results of the European elections. As far as many heads of government are concerned, this means that the European Council is merely obliged to choose someone from the party that wins the elections – so long as that person can muster a majority among MEPs. The European Council may end up choosing a president who is not a designated candidate – such as, on the left, Pascal Lamy, Enrico Letta or Helle Thorning-Schmidt; or, on the right, Enda Kenny or Donald Tusk.
Some federalists would then be disappointed. But they generally take a long view and, inspired by their faith, are often determined operators. Over the past 50 years, visionary federalists such as Jean Monnet and Jacques Delors have had their victories. The EU’s farm policy, trade policy, competition policy and single market are largely run on federal lines. The creation of the euro was their greatest triumph.
But from its inception the EU has been an uneasy compromise between federalists and ‘inter-governmentalists’ – those arguing that the member-states (who in practice tend to be led by the big ones) should set the agenda and take key decisions. They have ensured that matters such as foreign and defence policy, taxation and treaty change remain subject to unanimous voting, and thus under the sway of national governments.
The balance between these two schools of thought has remained fairly even over the decades. But in the past few years some authority has shifted to governments: the euro crisis has required member-states to find the money for bail-outs, which has enabled them (and Germany especially) rather than EU institutions to dominate the management of the eurozone. Meanwhile, among the EU institutions, the European Parliament has gained greater sway over some decisions, thanks to the Lisbon treaty.
Tony Giddens, one of Europe’s most eminent social scientists and a member of the House of Lords, makes a brave case for federalism in his recent book, ‘Turbulent and Mighty Continent: What Future for Europe?’ Its chapters on economic, social, climate and foreign policy include good arguments for the EU to take on a bigger role vis-à-vis the member-states. The book is weaker, however, on the EU institutions.
Giddens’ first error is to argue that neither the EU nor the euro can survive without an economic and political federation, and that a federation is feasible. Giddens calls not just for a bit more federalism, but a radical leap forward. He wants the direct election of the European Commission president, much more power for the European Parliament, and the Council of Ministers transformed into a senate.
Giddens seeks to give these ideas plausibility by citing the support of Commission President José Manuel Barroso for ‘political union’. But Barroso does not speak for the peoples or governments of Europe. Very few Europeans want federalism. Most of them do not believe that the further centralisation of power in Brussels and Strasbourg would solve their problems.
The creation of a federal system along the lines suggested by Giddens would require a new treaty to be ratified in 28 member-states. Several of them would hold referendums, including perhaps Germany. Belgium and Luxembourg would ratify a federal treaty quite easily but it is doubtful that that many other countries would. In Italy, France, Germany and Poland there are influential federalist politicians, but whether they could persuade majorities of their parliaments or electorates to vote for Giddens’ proposed federation is highly debatable.
There is not going to be a European federation. So it is lucky that Giddens’s belief that neither the EU nor the euro can survive without one is mistaken. However, he is right that in the long run a healthy euro requires some degree of ‘mutualisation’ (sharing of risk) between its members. And it is true that, in the recent negotiations over the EU’s banking union, Germany largely avoided commitments to recapitalise troubled banks in other member-states. Berlin has also ruled out the ‘eurobonds’ – collective borrowing by the eurozone – which Giddens thinks essential for the euro to hold together.
Nevertheless Germany has de facto accepted some mutualisation. The European Stability Mechanism, the eurozone bail-out fund, has €500 billion (it and other bail-out mechanisms have so far lent about €350 billion to countries in need); the European Central Bank’s Securities Markets Programme has spent more than €200 billion on government bonds; and that bank’s ‘bazooka’ (officially known as Outright Monetary Transactions) – if ever used – could spend much more on government bonds. It seems likely that, in any future eurozone crisis, Germany would accept as much mutualisation as was necessary to calm the markets.
The euro can thrive – or even flourish – without eurobonds or other major steps to an economic federation. But it will need an effective banking union, which in the long run will require a bigger resolution fund – with a larger contribution from Germany – than the €55 billion fund agreed by the EU in March 2014. A healthy euro also requires a relaxation of the austerity that Germany and the Commission have imposed on the heavily-indebted countries. It requires more structural reform in the southern countries, to improve their potential for growth and job creation. And it requires structural reform in Germany, too. Germany’s unbalanced economy, over-dependent on exports, suffers from low levels of consumption and investment. A more balanced German economy would help to fuel growth elsewhere in the eurozone. Finally, some of the public sector debts weighing down on the Southern European economies will have to be written off, or at least have their maturities stretched out into the very long term.
Giddens’ second error is to argue that, as the EU develops, ‘variable geometry’ – the idea that members can opt out of certain policies, and that smaller clubs can exist within the broader EU – will become impossible. He writes that every member-state will have to be involved in the same policy areas. If Giddens were right, the British would have no choice but to leave – for they will never join the euro or the Schengen area.
In fact the trend is in the other direction, towards variable geometry. Not every EU state takes part in defence policy, all of justice and home affairs co-operation or the euro. The treaty provisions for ‘enhanced co-operation’, allowing sub-groups to proceed without the rest of the EU on particular laws, are starting to be used. Enhanced co-operations on the European patent and on cross-border divorce now exist, while others are being mooted for the financial transactions tax and the European Public Prosecutor.
Like many federalists, Giddens assumes that most of the ten EU countries not in the euro will join it soon. Yet apart from Lithuania, none of the ten has taken even the first steps of preparing to join (such as entering the Exchange Rate Mechanism). It may be ten years or longer before Poland – which would need to change its constitution – joins the euro, and some of the others may never do so.
The debates between Juncker, Schulz and Verhofstadt, entertaining though they may be, will not determine the future of the EU. Politics in Europe remains largely national, which is why the European elections often fail to inspire and why greater accountability of the EU needs to come, at least in part, via national parliaments (see section 1.3 of the CER’s proposals on EU reform). If politicians want to build a more federal Europe around the euro, and fulfil some of Giddens’ vision, they will need to do a better job of explaining to voters how a loss of sovereignty will deliver significant benefits.
Charles Grant is director of the Centre for European Reform.
An earlier version of this article was published in the March issue of International Affairs.
But despite these ill omens, many ‘federalists’ – who may be defined as those wanting a significant transfer of powers to EU institutions – are getting excited. This is because the European elections may, for the first time, determine the choice of the president of the European Commission. Each of the main pan-European political parties has chosen a designated candidate for that job. Many federalists hope and expect that the political party which gains the most votes will see its candidate anointed president. They believe that this method of choosing the president would make the EU more democratic: voters would see a link between the way they vote and the person running the Commission.
The designated candidates have engaged in a series of TV debates and claim to be offering voters a choice of Europes. But in fact the three most prominent candidates – the socialists’ Martin Schulz, the centre-right’s Jean-Claude Juncker and the liberals’ Guy Verhofstadt – are remarkably similar. They have spent much of their careers inside the Brussels system. Two are former Benelux prime ministers, and two are MEPs (Verhofstadt is both). Though there are minor differences among the three – such as on the degree of austerity that is desirable – they all want to shift more power to the centre. The real political argument in these elections is not between these three candidates, but between three approaches to Europe: the federalists, who want more of it; the sceptics, who want less of it (or none at all); and, in the middle, those who see the value of the EU but don’t want a lot more of it and hope that it can be reformed.
The proposal for the Commission president to be chosen through designated candidates is problematic: it would narrow the pool of talent from which the president can be drawn; risk damaging the Commission’s credibility as a regulator by making it more overtly party-political; and encourage voters to believe that the political colour of the president influences EU policy, only to disillusion them when they see this is seldom the case (these problems are explained by Heather Grabbe and Stefan Lehne in a CER policy brief).
Whatever the rights and wrongs of this method of deciding the president, the federalists who back it may end up disappointed. The EU treaties state clearly that the European Council chooses the Commission president, “taking into account” the results of the European elections. As far as many heads of government are concerned, this means that the European Council is merely obliged to choose someone from the party that wins the elections – so long as that person can muster a majority among MEPs. The European Council may end up choosing a president who is not a designated candidate – such as, on the left, Pascal Lamy, Enrico Letta or Helle Thorning-Schmidt; or, on the right, Enda Kenny or Donald Tusk.
Some federalists would then be disappointed. But they generally take a long view and, inspired by their faith, are often determined operators. Over the past 50 years, visionary federalists such as Jean Monnet and Jacques Delors have had their victories. The EU’s farm policy, trade policy, competition policy and single market are largely run on federal lines. The creation of the euro was their greatest triumph.
But from its inception the EU has been an uneasy compromise between federalists and ‘inter-governmentalists’ – those arguing that the member-states (who in practice tend to be led by the big ones) should set the agenda and take key decisions. They have ensured that matters such as foreign and defence policy, taxation and treaty change remain subject to unanimous voting, and thus under the sway of national governments.
The balance between these two schools of thought has remained fairly even over the decades. But in the past few years some authority has shifted to governments: the euro crisis has required member-states to find the money for bail-outs, which has enabled them (and Germany especially) rather than EU institutions to dominate the management of the eurozone. Meanwhile, among the EU institutions, the European Parliament has gained greater sway over some decisions, thanks to the Lisbon treaty.
Tony Giddens, one of Europe’s most eminent social scientists and a member of the House of Lords, makes a brave case for federalism in his recent book, ‘Turbulent and Mighty Continent: What Future for Europe?’ Its chapters on economic, social, climate and foreign policy include good arguments for the EU to take on a bigger role vis-à-vis the member-states. The book is weaker, however, on the EU institutions.
Giddens’ first error is to argue that neither the EU nor the euro can survive without an economic and political federation, and that a federation is feasible. Giddens calls not just for a bit more federalism, but a radical leap forward. He wants the direct election of the European Commission president, much more power for the European Parliament, and the Council of Ministers transformed into a senate.
Giddens seeks to give these ideas plausibility by citing the support of Commission President José Manuel Barroso for ‘political union’. But Barroso does not speak for the peoples or governments of Europe. Very few Europeans want federalism. Most of them do not believe that the further centralisation of power in Brussels and Strasbourg would solve their problems.
The creation of a federal system along the lines suggested by Giddens would require a new treaty to be ratified in 28 member-states. Several of them would hold referendums, including perhaps Germany. Belgium and Luxembourg would ratify a federal treaty quite easily but it is doubtful that that many other countries would. In Italy, France, Germany and Poland there are influential federalist politicians, but whether they could persuade majorities of their parliaments or electorates to vote for Giddens’ proposed federation is highly debatable.
There is not going to be a European federation. So it is lucky that Giddens’s belief that neither the EU nor the euro can survive without one is mistaken. However, he is right that in the long run a healthy euro requires some degree of ‘mutualisation’ (sharing of risk) between its members. And it is true that, in the recent negotiations over the EU’s banking union, Germany largely avoided commitments to recapitalise troubled banks in other member-states. Berlin has also ruled out the ‘eurobonds’ – collective borrowing by the eurozone – which Giddens thinks essential for the euro to hold together.
Nevertheless Germany has de facto accepted some mutualisation. The European Stability Mechanism, the eurozone bail-out fund, has €500 billion (it and other bail-out mechanisms have so far lent about €350 billion to countries in need); the European Central Bank’s Securities Markets Programme has spent more than €200 billion on government bonds; and that bank’s ‘bazooka’ (officially known as Outright Monetary Transactions) – if ever used – could spend much more on government bonds. It seems likely that, in any future eurozone crisis, Germany would accept as much mutualisation as was necessary to calm the markets.
The euro can thrive – or even flourish – without eurobonds or other major steps to an economic federation. But it will need an effective banking union, which in the long run will require a bigger resolution fund – with a larger contribution from Germany – than the €55 billion fund agreed by the EU in March 2014. A healthy euro also requires a relaxation of the austerity that Germany and the Commission have imposed on the heavily-indebted countries. It requires more structural reform in the southern countries, to improve their potential for growth and job creation. And it requires structural reform in Germany, too. Germany’s unbalanced economy, over-dependent on exports, suffers from low levels of consumption and investment. A more balanced German economy would help to fuel growth elsewhere in the eurozone. Finally, some of the public sector debts weighing down on the Southern European economies will have to be written off, or at least have their maturities stretched out into the very long term.
Giddens’ second error is to argue that, as the EU develops, ‘variable geometry’ – the idea that members can opt out of certain policies, and that smaller clubs can exist within the broader EU – will become impossible. He writes that every member-state will have to be involved in the same policy areas. If Giddens were right, the British would have no choice but to leave – for they will never join the euro or the Schengen area.
In fact the trend is in the other direction, towards variable geometry. Not every EU state takes part in defence policy, all of justice and home affairs co-operation or the euro. The treaty provisions for ‘enhanced co-operation’, allowing sub-groups to proceed without the rest of the EU on particular laws, are starting to be used. Enhanced co-operations on the European patent and on cross-border divorce now exist, while others are being mooted for the financial transactions tax and the European Public Prosecutor.
Like many federalists, Giddens assumes that most of the ten EU countries not in the euro will join it soon. Yet apart from Lithuania, none of the ten has taken even the first steps of preparing to join (such as entering the Exchange Rate Mechanism). It may be ten years or longer before Poland – which would need to change its constitution – joins the euro, and some of the others may never do so.
The debates between Juncker, Schulz and Verhofstadt, entertaining though they may be, will not determine the future of the EU. Politics in Europe remains largely national, which is why the European elections often fail to inspire and why greater accountability of the EU needs to come, at least in part, via national parliaments (see section 1.3 of the CER’s proposals on EU reform). If politicians want to build a more federal Europe around the euro, and fulfil some of Giddens’ vision, they will need to do a better job of explaining to voters how a loss of sovereignty will deliver significant benefits.
Charles Grant is director of the Centre for European Reform.
An earlier version of this article was published in the March issue of International Affairs.
Tuesday, May 06, 2014
What is wrong with German foreign policy?
During the euro crisis, Germany has become Europe’s unquestioned leader on economic policy-making. Both the strength of its economy and the demands of others for its money have given Germany a pre-eminent role. In foreign and security policy, Britain and France have generally set the EU agenda. The Ukraine crisis, however, may allow Germany to lead in this field, too. Germany has a special relationship with Russia, geographical proximity to Ukraine and strong economic ties with both. Meanwhile France is busy with two wars in Africa, and Britain is constrained by its europhobic domestic debate, as well as its post-Afghanistan, post-Iraq fear of foreign entanglements.
Nevertheless Germany will not emerge as a leader of EU foreign policy unless it overcomes some of the weaknesses that hold it back. President Joachim Gauck (pictured) identified two specific problems in an important speech to the Munich Security Conference on January 30th: Germany has tended to evade some of the responsibilities that other Western powers have borne; and it suffers from a dearth of strategic thinking. Gauck did not refer directly to a third problem: in Germany, foreign policy is more commercially-driven than in some EU countries.
The horrors of World War Two left Germany understandably more interested in an economic than a strategic approach to foreign policy; and unwilling to intervene militarily in other parts of the world. Although those traits have shown remarkable longevity, the various post-war chancellors have had their own priorities. Gerhard Schröder, chancellor from 1998 to 2005, tried – with the help of Joschka Fischer, his foreign minister – to make Germany more ‘normal’ in the way it handled security crises. Thus German forces took part in NATO’s bombing of Serbia and Kosovo in 1999, joined the NATO mission in Afghanistan and acted as peacekeepers in many parts of the world.
But under Angela Merkel foreign policy became more cautious, particularly from 2009-13, when the anti-interventionist Guido Westerwelle was foreign minister. This shift may have reflected the public’s lack of enthusiasm for both the Schröder-Fischer activism and the US-led invasion of Iraq. Thus during the Libya crisis of 2011 Germany lined up with Russia and China in abstaining on a UN Security Council resolution (backed by the US, Britain and France) that authorised the use of force.
Gauck’s Munich speech – supported by later interventions from Foreign Minister Frank-Walter Steinmeier and Defence Minister Ursula Von der Leyen – argued that Germany’s foreign policy should be more like that of other countries. The president said that when others regarded Germany as a shirker, they had a point. He urged the Germans to be ready to do more to guarantee the security that others had provided it for decades. He pointed out that Germany had benefited greatly from the open global order, and warned that “the consequences of inaction could be just as serious, if not worse, than the consequences of taking action”. He said that Germany should be prepared to spend money, and as a last resort, to send in troops. He noted that “there are also people who use Germany’s guilt for its past as a shield for laziness or a desire to disengage from the world”. He said the Germans should not make special rules for themselves.
To many foreign observers, Gauck was stating the obvious. Germany contributes less to European security than Britain or France: in 2013 it spent 1.4 per cent of GDP on defence, while France spent 1.9 per cent and Britain 2.3 per cent. Nor does Germany compensate by spending more on softer sorts of security: it spent 0.37 per cent of GDP on development aid in 2012, while France spent 0.45 per cent and the UK 0.56 per cent.
Germany has provided large numbers of peacekeepers and trainers for NATO and EU missions in places such as Afghanistan, Bosnia, Kosovo and Mali, but the caveats applying to them have often impaired their utility. In Afghanistan, for example, German troops and aircraft stationed in the north could neither undertake offensive operations nor assist NATO allies fighting in the more troubled south. France and Britain are usually more willing to send their soldiers into harm’s way (although 54 German troops died in Afghanistan).
Alongside a reluctance to use force, German foreign policy is characterised by the strongly-held principle that any problem can be solved through negotiation. Though an admirable starting point in foreign affairs, negotiation without a credible threat of sanctions or force cannot always be the solution. Negotiation tout court is a ‘post-modern’ concept that generally works well within the EU, but is less effective in dealing with the very ‘modern’ (that is to say, realist) powers in other parts of the world.
The recent history of the Germans’ dealings with Russia shows how much they believe in engagement. From Vladimir Putin’s ascent to power until very recently, they believed in Wandel durch Annäherung, change through rapprochement. They wanted the EU and its member-states to negotiate ‘modernisation partnerships’ with Russia, based on the assumption that its leaders could be persuaded to strengthen the rule of law and reform the economy.
That was probably a reasonable strategy for the EU, at least for a while. Barack Obama’s ‘reset’ with Russia produced real results on Iran, Afghanistan and arms control, when Dmitri Medvedev was president (in 2008 Putin became prime minister when the two men swapped jobs). Medvedev seemed keen to modernise Russia.
However, dark forces of atavism, nationalism and militarism were building inside Russia. Rather few Germans noticed. Merkel focused her efforts on cultivating Medvedev; like many Germans (and Obama), she over-estimated his chances of pushing aside Putin. With hindsight, some of the Germans’ faith in engaging Russia was over-optimistic or even naïve.
Since Putin returned to the presidency in 2012, anti-Western paranoia has increased its grip on Russian foreign policy. His behaviour since the autumn of 2013, when he started putting pressure on Ukraine (and other countries) to shun the EU’s Eastern Partnership, has been an unexpected and disagreeable cold shower for many Germans. Some of them now recognise that there has been too much wishful thinking in Germany about Russia.
German attitudes to Russia in particular or foreign policy in general will not change rapidly. Visiting Berlin in April 2014, I found that a number of senior thinkers and officials were making excuses for Russian conduct in Crimea. They more-or-less blamed not only NATO enlargement but also the EU for some of Russia’s actions, arguing that Brussels should have tried harder to consult Moscow over the Eastern Partnership (in fact, EU officials made repeated efforts to discuss the partnership with Russia, which showed no interest in the matter until the spring of 2013).
Since Germany is a profoundly democratic country, its politicians cannot ignore public opinion. Many Germans do not want to see their soldiers deployed anywhere – and are happy that they cannot be without a parliamentary vote. The Social-Democratic Party (SPD) has always contained pacifist elements and, ever since the Ostpolitik that it led in the 1970s, has tended to favour a soft approach towards Russia. German hostility to military intervention sometimes blends with strains of anti-Americanism – perhaps because the US has several times supported interventions that proved disastrous. The recent scandal over the National Security Agency’s spying on Europeans has strengthened America’s critics across the continent, and especially in Germany, where people care deeply about civil liberties.
Gauck’s Munich speech highlighted a second problem that contributes to an over-reliance on soft power in foreign policy: insufficient strategic thinking in Germany. In this context I take strategic to mean the ability of a country to define its interests in ways that are not exclusively commercial and economic; and to set out its long-term objectives and the means by which it hopes to achieve them (even if the means involve short-term costs or commitments to deploy force).
Compared to some countries, Germany’s universities, think-tanks and ministries are weak in strategic thinking. Berlin has some fine foreign policy think-tanks, but lacks the equivalent of London’s International Institute for Strategic Studies or Paris’s Fondation pour la Recherche Stratégique. As Gauck noted, “A security conference in Munich once a year….is not enough”.
A third constraint on German foreign policy is its economic orientation. Every European country tries to balance commercial objectives with concerns over human rights and broader strategic goals. But they do not all strike the same balance. Germany’s industrial and commercial interests sometimes drive its foreign policy more strongly than is the case in Britain or France.
During the Ukraine crisis, Brussels officials have complained about pressure from Berlin to “de-escalate” the EU’s relationship with Russia. That pressure is not surprising: German companies have invested more than €20 billion in Russia, which also provides about 30 per cent of Germany’s gas (however, only 3 per cent of German exports go to Russia). The Committee on Eastern European Economic Relations, a body that represents German industry, has lobbied the German government against EU sanctions on Russia throughout the Ukraine crisis. British firms involved in Russia have similarly lobbied their government, but arguably with less impact.
Berlin has often been reluctant to criticise Russia and China on human rights. Over the past few years, German policy on Russia has evolved, at least at the level of rhetoric, to become more critical, but the same cannot be said of its China policy. Germany’s commercial priorities were evident in the summer of 2013, when Merkel received Chinese leaders in Berlin and then visited them in Beijing. German solar-panel manufacturers had complained to the European Commission about Chinese panels being dumped on EU markets. The Commission had investigated and was threatening China with penalties. China then warned the EU about possible retaliation against exports of polysilicon (a material for solar panels) and luxury cars, which would have hit Germany. The German government criticised the Commission and undermined it by leaning on other member-states to oppose a tough response to the alleged dumping. As a result the Commission backed down.
Germany’s emphasis on commerce can therefore make its policies appear ‘anti-EU’. Many Brussels officials believe that, since Germany accounts for about 45 per cent of EU exports to China, it would rather have a strong bilateral relationship than a united European policy towards the country. German officials sometimes appear to think that, because most member-states do not have much manufacturing industry, the EU cannot be trusted to speak for German companies in countries like China. Similarly, Berlin has generally opposed a greater role for the Commission in managing the EU’s external energy relations, worrying that it might disregard the interests of German energy companies, many of which are active in Russia.
But is Germany any worse than its partners? When David Cameron, the British prime minister, went to Beijing in December 2013, he said proudly that he would be China’s advocate in Europe. He also said nothing (in public) about either human rights or tensions in the East China Sea – though US Vice President Joe Biden, in Beijing at the same time, spoke out on both issues. Does that not prove that all European leaders are commercially-driven? Not quite. Cameron was widely criticised in Britain for his handling of the Beijing visit, including (in private) by the Foreign Office. Britain’s response to the poisoning of Alexander Litvinenko, in 2006, is a counter-example. When the Russian authorities refused to co-operate with the British investigation, Prime Minister Gordon Brown reacted strongly. He imposed visa restrictions on government officials and cut off intelligence co-operation – despite the potential threat to BP’s and Shell’s massive investments in Russia.
At the time of his Munich speech, Gauck seemed to be setting out some long-term objectives for his country. But soon afterwards the Ukraine crisis escalated, presenting some immediate tests for Germany.
Though Gauck did not say so directly, he implied that in order to lead, Germany needed to be able to act – and sometimes against its own immediate economic interests. Germany would then have the credibility to win the respect of its fellow EU member-states.
In Berlin, senior officials and politicians understand that Germany cannot lead its partners on Russia policy if it is on one side of the spectrum of EU opinion on how to handle Moscow – the soft side. Rhetorically, Merkel’s tough words on Russia in recent months have positioned Germany close to the middle. As for a possible shift on substance, it is too early to tell where Germany will end up. The pressures on Germany to remain Russia’s special friend in Europe – from business, sections of the SPD (as well as some Christian Democrats) and much of public opinion – are immense. But Germany’s partners, in the US as well as in Europe, hope that the Gauck speech marks the start of a new era in Germany foreign policy – one that is less commercially-driven, more favourable to common EU policies and more willing to take on greater responsibility for European security.
Charles Grant is director of the Centre for European Reform.
Nevertheless Germany will not emerge as a leader of EU foreign policy unless it overcomes some of the weaknesses that hold it back. President Joachim Gauck (pictured) identified two specific problems in an important speech to the Munich Security Conference on January 30th: Germany has tended to evade some of the responsibilities that other Western powers have borne; and it suffers from a dearth of strategic thinking. Gauck did not refer directly to a third problem: in Germany, foreign policy is more commercially-driven than in some EU countries.
The horrors of World War Two left Germany understandably more interested in an economic than a strategic approach to foreign policy; and unwilling to intervene militarily in other parts of the world. Although those traits have shown remarkable longevity, the various post-war chancellors have had their own priorities. Gerhard Schröder, chancellor from 1998 to 2005, tried – with the help of Joschka Fischer, his foreign minister – to make Germany more ‘normal’ in the way it handled security crises. Thus German forces took part in NATO’s bombing of Serbia and Kosovo in 1999, joined the NATO mission in Afghanistan and acted as peacekeepers in many parts of the world.
But under Angela Merkel foreign policy became more cautious, particularly from 2009-13, when the anti-interventionist Guido Westerwelle was foreign minister. This shift may have reflected the public’s lack of enthusiasm for both the Schröder-Fischer activism and the US-led invasion of Iraq. Thus during the Libya crisis of 2011 Germany lined up with Russia and China in abstaining on a UN Security Council resolution (backed by the US, Britain and France) that authorised the use of force.
Gauck’s Munich speech – supported by later interventions from Foreign Minister Frank-Walter Steinmeier and Defence Minister Ursula Von der Leyen – argued that Germany’s foreign policy should be more like that of other countries. The president said that when others regarded Germany as a shirker, they had a point. He urged the Germans to be ready to do more to guarantee the security that others had provided it for decades. He pointed out that Germany had benefited greatly from the open global order, and warned that “the consequences of inaction could be just as serious, if not worse, than the consequences of taking action”. He said that Germany should be prepared to spend money, and as a last resort, to send in troops. He noted that “there are also people who use Germany’s guilt for its past as a shield for laziness or a desire to disengage from the world”. He said the Germans should not make special rules for themselves.
To many foreign observers, Gauck was stating the obvious. Germany contributes less to European security than Britain or France: in 2013 it spent 1.4 per cent of GDP on defence, while France spent 1.9 per cent and Britain 2.3 per cent. Nor does Germany compensate by spending more on softer sorts of security: it spent 0.37 per cent of GDP on development aid in 2012, while France spent 0.45 per cent and the UK 0.56 per cent.
Germany has provided large numbers of peacekeepers and trainers for NATO and EU missions in places such as Afghanistan, Bosnia, Kosovo and Mali, but the caveats applying to them have often impaired their utility. In Afghanistan, for example, German troops and aircraft stationed in the north could neither undertake offensive operations nor assist NATO allies fighting in the more troubled south. France and Britain are usually more willing to send their soldiers into harm’s way (although 54 German troops died in Afghanistan).
Alongside a reluctance to use force, German foreign policy is characterised by the strongly-held principle that any problem can be solved through negotiation. Though an admirable starting point in foreign affairs, negotiation without a credible threat of sanctions or force cannot always be the solution. Negotiation tout court is a ‘post-modern’ concept that generally works well within the EU, but is less effective in dealing with the very ‘modern’ (that is to say, realist) powers in other parts of the world.
The recent history of the Germans’ dealings with Russia shows how much they believe in engagement. From Vladimir Putin’s ascent to power until very recently, they believed in Wandel durch Annäherung, change through rapprochement. They wanted the EU and its member-states to negotiate ‘modernisation partnerships’ with Russia, based on the assumption that its leaders could be persuaded to strengthen the rule of law and reform the economy.
That was probably a reasonable strategy for the EU, at least for a while. Barack Obama’s ‘reset’ with Russia produced real results on Iran, Afghanistan and arms control, when Dmitri Medvedev was president (in 2008 Putin became prime minister when the two men swapped jobs). Medvedev seemed keen to modernise Russia.
However, dark forces of atavism, nationalism and militarism were building inside Russia. Rather few Germans noticed. Merkel focused her efforts on cultivating Medvedev; like many Germans (and Obama), she over-estimated his chances of pushing aside Putin. With hindsight, some of the Germans’ faith in engaging Russia was over-optimistic or even naïve.
Since Putin returned to the presidency in 2012, anti-Western paranoia has increased its grip on Russian foreign policy. His behaviour since the autumn of 2013, when he started putting pressure on Ukraine (and other countries) to shun the EU’s Eastern Partnership, has been an unexpected and disagreeable cold shower for many Germans. Some of them now recognise that there has been too much wishful thinking in Germany about Russia.
German attitudes to Russia in particular or foreign policy in general will not change rapidly. Visiting Berlin in April 2014, I found that a number of senior thinkers and officials were making excuses for Russian conduct in Crimea. They more-or-less blamed not only NATO enlargement but also the EU for some of Russia’s actions, arguing that Brussels should have tried harder to consult Moscow over the Eastern Partnership (in fact, EU officials made repeated efforts to discuss the partnership with Russia, which showed no interest in the matter until the spring of 2013).
Since Germany is a profoundly democratic country, its politicians cannot ignore public opinion. Many Germans do not want to see their soldiers deployed anywhere – and are happy that they cannot be without a parliamentary vote. The Social-Democratic Party (SPD) has always contained pacifist elements and, ever since the Ostpolitik that it led in the 1970s, has tended to favour a soft approach towards Russia. German hostility to military intervention sometimes blends with strains of anti-Americanism – perhaps because the US has several times supported interventions that proved disastrous. The recent scandal over the National Security Agency’s spying on Europeans has strengthened America’s critics across the continent, and especially in Germany, where people care deeply about civil liberties.
Gauck’s Munich speech highlighted a second problem that contributes to an over-reliance on soft power in foreign policy: insufficient strategic thinking in Germany. In this context I take strategic to mean the ability of a country to define its interests in ways that are not exclusively commercial and economic; and to set out its long-term objectives and the means by which it hopes to achieve them (even if the means involve short-term costs or commitments to deploy force).
Compared to some countries, Germany’s universities, think-tanks and ministries are weak in strategic thinking. Berlin has some fine foreign policy think-tanks, but lacks the equivalent of London’s International Institute for Strategic Studies or Paris’s Fondation pour la Recherche Stratégique. As Gauck noted, “A security conference in Munich once a year….is not enough”.
A third constraint on German foreign policy is its economic orientation. Every European country tries to balance commercial objectives with concerns over human rights and broader strategic goals. But they do not all strike the same balance. Germany’s industrial and commercial interests sometimes drive its foreign policy more strongly than is the case in Britain or France.
During the Ukraine crisis, Brussels officials have complained about pressure from Berlin to “de-escalate” the EU’s relationship with Russia. That pressure is not surprising: German companies have invested more than €20 billion in Russia, which also provides about 30 per cent of Germany’s gas (however, only 3 per cent of German exports go to Russia). The Committee on Eastern European Economic Relations, a body that represents German industry, has lobbied the German government against EU sanctions on Russia throughout the Ukraine crisis. British firms involved in Russia have similarly lobbied their government, but arguably with less impact.
Berlin has often been reluctant to criticise Russia and China on human rights. Over the past few years, German policy on Russia has evolved, at least at the level of rhetoric, to become more critical, but the same cannot be said of its China policy. Germany’s commercial priorities were evident in the summer of 2013, when Merkel received Chinese leaders in Berlin and then visited them in Beijing. German solar-panel manufacturers had complained to the European Commission about Chinese panels being dumped on EU markets. The Commission had investigated and was threatening China with penalties. China then warned the EU about possible retaliation against exports of polysilicon (a material for solar panels) and luxury cars, which would have hit Germany. The German government criticised the Commission and undermined it by leaning on other member-states to oppose a tough response to the alleged dumping. As a result the Commission backed down.
Germany’s emphasis on commerce can therefore make its policies appear ‘anti-EU’. Many Brussels officials believe that, since Germany accounts for about 45 per cent of EU exports to China, it would rather have a strong bilateral relationship than a united European policy towards the country. German officials sometimes appear to think that, because most member-states do not have much manufacturing industry, the EU cannot be trusted to speak for German companies in countries like China. Similarly, Berlin has generally opposed a greater role for the Commission in managing the EU’s external energy relations, worrying that it might disregard the interests of German energy companies, many of which are active in Russia.
But is Germany any worse than its partners? When David Cameron, the British prime minister, went to Beijing in December 2013, he said proudly that he would be China’s advocate in Europe. He also said nothing (in public) about either human rights or tensions in the East China Sea – though US Vice President Joe Biden, in Beijing at the same time, spoke out on both issues. Does that not prove that all European leaders are commercially-driven? Not quite. Cameron was widely criticised in Britain for his handling of the Beijing visit, including (in private) by the Foreign Office. Britain’s response to the poisoning of Alexander Litvinenko, in 2006, is a counter-example. When the Russian authorities refused to co-operate with the British investigation, Prime Minister Gordon Brown reacted strongly. He imposed visa restrictions on government officials and cut off intelligence co-operation – despite the potential threat to BP’s and Shell’s massive investments in Russia.
At the time of his Munich speech, Gauck seemed to be setting out some long-term objectives for his country. But soon afterwards the Ukraine crisis escalated, presenting some immediate tests for Germany.
Though Gauck did not say so directly, he implied that in order to lead, Germany needed to be able to act – and sometimes against its own immediate economic interests. Germany would then have the credibility to win the respect of its fellow EU member-states.
In Berlin, senior officials and politicians understand that Germany cannot lead its partners on Russia policy if it is on one side of the spectrum of EU opinion on how to handle Moscow – the soft side. Rhetorically, Merkel’s tough words on Russia in recent months have positioned Germany close to the middle. As for a possible shift on substance, it is too early to tell where Germany will end up. The pressures on Germany to remain Russia’s special friend in Europe – from business, sections of the SPD (as well as some Christian Democrats) and much of public opinion – are immense. But Germany’s partners, in the US as well as in Europe, hope that the Gauck speech marks the start of a new era in Germany foreign policy – one that is less commercially-driven, more favourable to common EU policies and more willing to take on greater responsibility for European security.
Charles Grant is director of the Centre for European Reform.
Monday, April 28, 2014
Quantitative easing alone will not do the trick
Very low inflation poses a mounting threat to the economic stability of the eurozone. The rate of consumer price inflation has been below 1 per cent since October, and hence far below the European Central Bank’s (ECB) target of just below 2 per cent. This highlights the degree of weakness in the eurozone economy – and reinforces it – notwithstanding the optimism generated by a return to modest growth. And it further increases doubts over debt sustainability across the currency union: without a healthy dose of inflation, it is much harder for households, firms and governments to reduce their debt burdens. To make things worse, in the most indebted countries, such as Greece, Portugal, Spain and Italy, inflation is even lower than the eurozone average. In response, many observers argue that the ECB should employ unconventional tools like quantitative easing (QE) to boost inflation. The problem is that QE alone is unlikely to be effective without a significant change in the ECB’s approach to monetary policy. The ECB needs to manage people’s expectations about the future path of demand, income and inflation more forcefully if it is to generate a proper economic recovery across the Eurozone.
According to one view of monetary policy, central banks set short-term interest rates to keep the economy close to full employment and inflation at the target level. In exceptional cases, this interest rate can fall to zero, but not below. In such circumstances, the central bank has to find other ways to stimulate the economy. One approach is QE: buying long-term assets like government bonds in order to drive up their price and bring down their ‘yield’, or interest rate (the price and yield of a bond are inversely related). Buying these bonds also tends to drive up the prices of other long-term assets like corporate bonds, equities and even property. QE thus lowers long-term interest rates, increases the value of firms and real estate, and drives up the wealth of households. Ideally, this induces firms and households to invest and consume more, and help the central bank reach its target on inflation.
A different view of monetary policy claims that interest rate setting or bond buying are just tools to keep firms’ and households’ expectations about the future path of income, demand and inflation on a reasonably stable and appropriately optimistic path. Such stable and optimistic expectations are a precondition for the investment and consumption decisions that keep an economy close to full employment, and inflation close to target. Of course, effective tools are necessary so that people believe that the central bank can steer the economy and, hence, so that the central bank can influence people’s expectations. But without properly managing economic expectations, the tools alone will be ineffective, according to this second view. Tools and expectations are thus complementary.
With these two approaches in mind, the ‘tools view’ and the ‘expectations view’, it is worth assessing the potential for QE to revive the eurozone economy, and hence, inflation. Starting with the tools view, there are several channels of transmission of QE.
* Lower long-term market interest rates could boost (larger) firms’ investment. But European firms raise finance predominantly from banks, not capital markets where the impact of QE would be directly felt. QE will therefore affect firms’ financing costs less than in the US, where capital markets are more important and where QE has effectively reduced long-term rates for firms. Given that banks are currently reluctant to lend in the most troubled southern European economies, the impact of QE on firms’ investment decisions in these countries is therefore likely to be low – just as in core countries like Germany where rates are already very low. If the ECB were able to buy bundles of bank loans to firms, QE would be more effective in lowering borrowing costs; but the current eurozone market for bundles of such loans is small.
* For households and investors, lower interest rates would make buying property more attractive. A rise in property prices usually stimulates the economy via construction and real estate services; the UK knows a thing or two about that. In the eurozone, however, a property-led boost to the economy is unlikely to be large. Spain and Ireland just came out of property bubbles and are healing only slowly; others, including core countries like the Netherlands, are struggling with falling prices whereas prices in France are already at very high levels and bound to fall. A slight boost in these countries means softening the hit, not driving a recovery. In Germany, the effect could be stronger but rising prices (and hence rents) would depress the consumption of the more than 50 per cent of Germans who rent. The effects of QE on the property market are therefore likely to be weaker in the eurozone than in the US or the UK.
* Property and other assets are also part of households’ wealth: QE would push up the prices of such assets, and households could thus consume more and save less (the so-called 'wealth effect'). However, the evidence on the size of this effect is mixed. According to an ECB paper, housing wealth does not seem to have much of an impact on consumption in the eurozone at all; financial wealth has a larger impact but it is still lower than in the US where households often own stocks and property for their pensions. Banks, as large owners of assets, are likely to benefit from QE. In current circumstances, where banks have insufficient capital and the ECB is likely to require many of them to raise more, higher asset prices help banks to repair their balance sheets and raise capital if need be. How much that would impact the overall economy is debatable: a pretty impressive recovery in asset values has already taken place without QE; banks’ ability to raise equity in markets is currently not in doubt; and banks’ lack of capital is only one of several reasons that prevent them from increasing lending to firms and households.
* By reducing long-term interest rates, QE would make the euro less attractive to investors, lowering its value, all else being equal. The fall in the value of the Japanese yen in the past 15 months, after the Bank of Japan’s (BoJ) aggressive QE programme, can attest to that. A lower euro would in turn support world demand for European exports, especially from southern Europe. Herein lies possibly the strongest channel through which QE can boost the eurozone economy directly.
* Finally, QE would help the treasuries of troubled countries such as Italy or Spain. By lowering the yield on their sovereign bonds – real yields are still high – QE would lower the cost of government borrowing. This lowers the pressure on governments to implement (mostly self-defeating) budget cuts in times of recession or weak growth, which would help the economy. It takes time for this effect to play out, however, as the costs of servicing existing debt are unaffected.
Overall, these direct channels are weaker in the eurozone than they are in the US or the UK. This is one reason to be sceptical about the likely impact of QE on the eurozone economy.
The second approach to thinking about monetary policy, the expectations view, induces further pessimism: firms' and households' expectations would be unlikely to change much for the better if the ECB simply implemented QE. And without such a change in expectations, the direct channels discussed above would do little to change firms' and households' behaviour.
The reason is that the ECB has failed to convince households and firms that it is doing all it can to lift the economy out of recession. It raised rates in mid-2011 at the height of the eurozone crisis when more stimulus would have been warranted and the bout of inflation was clearly temporary. Then it was slow to cut rates, even though the underlying price dynamic signalled clearly the future low inflation which has now shown up in headline figures. And the ECB has been reluctant to use unconventional tools at a time when high unemployment and a weak economy would have called for more aggressive measures than incremental cuts in interest rates – not least because inflationary dangers were non-existent. Starting QE now, after inflation has undershot the ECB's own forecasts repeatedly – essentially being dragged to the QE altar – is unlikely to convince anyone. The conservative approach of the ECB towards the economy and inflation, its hawkishness, is now firmly entrenched.
To make QE a success, the ECB needs to accompany it with the sort of strong commitments the BoJ in Japan or the Fed in the US have made: the BoJ said that it intends to continue a policy of QE and low rates until it has reached the new inflation target of 2 per cent (up from a de facto target of zero); the Fed has tied the duration of its unlimited QE programme to reaching certain targets on economic activity and unemployment. Both approaches led firms and households to change their expectations about the economy – about demand for their products or their income and future inflation – which in turn shaped their consumption and investment decisions.
A higher inflation target is, of course, out of the question for the ECB. With a mandate that is strictly focused on price stability and not much else (contrary to that of the Fed), it is also difficult for the ECB to tie QE to unemployment or economic growth – though reasonable people disagree on this.
However, the ECB does have the power to make a commitment that is purely focused on inflation (and hence firmly in line with its mandate). The ECB should announce that it aims to reach 2 per cent inflation on average over the next five years (an approach called ‘price-level targeting’). It might sound innocuous, but the word 'average' makes all the difference: since inflation is currently low and likely to remain low for a while, the ECB would commit to overshooting on inflation in the future. In other words, such a target would require the ECB to tolerate a mild boom in the eurozone to get the 3 per cent inflation necessary to reach a 2 per cent average over five years. Anticipating this, firms and consumers, financial markets and banks would increase consumption and investment.
If the ECB were to combine unlimited QE with a temporary price-level target – 2 per cent on average for five years – it could stimulate the economy and inflation, while remaining true to its mandate of price stability close to 2 per cent. Such a temporary price-level target would be new territory for the ECB, as would QE. But after years of misjudging the state of the economy and inflation, it is time for the ECB to be bold and innovative. The 19 million unemployed in the eurozone certainly deserve that the ECB makes every attempt at spurring a recovery worthy of the name.
Christian Odendahl is chief economist at the Centre for European Reform.
According to one view of monetary policy, central banks set short-term interest rates to keep the economy close to full employment and inflation at the target level. In exceptional cases, this interest rate can fall to zero, but not below. In such circumstances, the central bank has to find other ways to stimulate the economy. One approach is QE: buying long-term assets like government bonds in order to drive up their price and bring down their ‘yield’, or interest rate (the price and yield of a bond are inversely related). Buying these bonds also tends to drive up the prices of other long-term assets like corporate bonds, equities and even property. QE thus lowers long-term interest rates, increases the value of firms and real estate, and drives up the wealth of households. Ideally, this induces firms and households to invest and consume more, and help the central bank reach its target on inflation.
A different view of monetary policy claims that interest rate setting or bond buying are just tools to keep firms’ and households’ expectations about the future path of income, demand and inflation on a reasonably stable and appropriately optimistic path. Such stable and optimistic expectations are a precondition for the investment and consumption decisions that keep an economy close to full employment, and inflation close to target. Of course, effective tools are necessary so that people believe that the central bank can steer the economy and, hence, so that the central bank can influence people’s expectations. But without properly managing economic expectations, the tools alone will be ineffective, according to this second view. Tools and expectations are thus complementary.
With these two approaches in mind, the ‘tools view’ and the ‘expectations view’, it is worth assessing the potential for QE to revive the eurozone economy, and hence, inflation. Starting with the tools view, there are several channels of transmission of QE.
* Lower long-term market interest rates could boost (larger) firms’ investment. But European firms raise finance predominantly from banks, not capital markets where the impact of QE would be directly felt. QE will therefore affect firms’ financing costs less than in the US, where capital markets are more important and where QE has effectively reduced long-term rates for firms. Given that banks are currently reluctant to lend in the most troubled southern European economies, the impact of QE on firms’ investment decisions in these countries is therefore likely to be low – just as in core countries like Germany where rates are already very low. If the ECB were able to buy bundles of bank loans to firms, QE would be more effective in lowering borrowing costs; but the current eurozone market for bundles of such loans is small.
* For households and investors, lower interest rates would make buying property more attractive. A rise in property prices usually stimulates the economy via construction and real estate services; the UK knows a thing or two about that. In the eurozone, however, a property-led boost to the economy is unlikely to be large. Spain and Ireland just came out of property bubbles and are healing only slowly; others, including core countries like the Netherlands, are struggling with falling prices whereas prices in France are already at very high levels and bound to fall. A slight boost in these countries means softening the hit, not driving a recovery. In Germany, the effect could be stronger but rising prices (and hence rents) would depress the consumption of the more than 50 per cent of Germans who rent. The effects of QE on the property market are therefore likely to be weaker in the eurozone than in the US or the UK.
* Property and other assets are also part of households’ wealth: QE would push up the prices of such assets, and households could thus consume more and save less (the so-called 'wealth effect'). However, the evidence on the size of this effect is mixed. According to an ECB paper, housing wealth does not seem to have much of an impact on consumption in the eurozone at all; financial wealth has a larger impact but it is still lower than in the US where households often own stocks and property for their pensions. Banks, as large owners of assets, are likely to benefit from QE. In current circumstances, where banks have insufficient capital and the ECB is likely to require many of them to raise more, higher asset prices help banks to repair their balance sheets and raise capital if need be. How much that would impact the overall economy is debatable: a pretty impressive recovery in asset values has already taken place without QE; banks’ ability to raise equity in markets is currently not in doubt; and banks’ lack of capital is only one of several reasons that prevent them from increasing lending to firms and households.
* By reducing long-term interest rates, QE would make the euro less attractive to investors, lowering its value, all else being equal. The fall in the value of the Japanese yen in the past 15 months, after the Bank of Japan’s (BoJ) aggressive QE programme, can attest to that. A lower euro would in turn support world demand for European exports, especially from southern Europe. Herein lies possibly the strongest channel through which QE can boost the eurozone economy directly.
* Finally, QE would help the treasuries of troubled countries such as Italy or Spain. By lowering the yield on their sovereign bonds – real yields are still high – QE would lower the cost of government borrowing. This lowers the pressure on governments to implement (mostly self-defeating) budget cuts in times of recession or weak growth, which would help the economy. It takes time for this effect to play out, however, as the costs of servicing existing debt are unaffected.
Overall, these direct channels are weaker in the eurozone than they are in the US or the UK. This is one reason to be sceptical about the likely impact of QE on the eurozone economy.
The second approach to thinking about monetary policy, the expectations view, induces further pessimism: firms' and households' expectations would be unlikely to change much for the better if the ECB simply implemented QE. And without such a change in expectations, the direct channels discussed above would do little to change firms' and households' behaviour.
The reason is that the ECB has failed to convince households and firms that it is doing all it can to lift the economy out of recession. It raised rates in mid-2011 at the height of the eurozone crisis when more stimulus would have been warranted and the bout of inflation was clearly temporary. Then it was slow to cut rates, even though the underlying price dynamic signalled clearly the future low inflation which has now shown up in headline figures. And the ECB has been reluctant to use unconventional tools at a time when high unemployment and a weak economy would have called for more aggressive measures than incremental cuts in interest rates – not least because inflationary dangers were non-existent. Starting QE now, after inflation has undershot the ECB's own forecasts repeatedly – essentially being dragged to the QE altar – is unlikely to convince anyone. The conservative approach of the ECB towards the economy and inflation, its hawkishness, is now firmly entrenched.
To make QE a success, the ECB needs to accompany it with the sort of strong commitments the BoJ in Japan or the Fed in the US have made: the BoJ said that it intends to continue a policy of QE and low rates until it has reached the new inflation target of 2 per cent (up from a de facto target of zero); the Fed has tied the duration of its unlimited QE programme to reaching certain targets on economic activity and unemployment. Both approaches led firms and households to change their expectations about the economy – about demand for their products or their income and future inflation – which in turn shaped their consumption and investment decisions.
A higher inflation target is, of course, out of the question for the ECB. With a mandate that is strictly focused on price stability and not much else (contrary to that of the Fed), it is also difficult for the ECB to tie QE to unemployment or economic growth – though reasonable people disagree on this.
However, the ECB does have the power to make a commitment that is purely focused on inflation (and hence firmly in line with its mandate). The ECB should announce that it aims to reach 2 per cent inflation on average over the next five years (an approach called ‘price-level targeting’). It might sound innocuous, but the word 'average' makes all the difference: since inflation is currently low and likely to remain low for a while, the ECB would commit to overshooting on inflation in the future. In other words, such a target would require the ECB to tolerate a mild boom in the eurozone to get the 3 per cent inflation necessary to reach a 2 per cent average over five years. Anticipating this, firms and consumers, financial markets and banks would increase consumption and investment.
If the ECB were to combine unlimited QE with a temporary price-level target – 2 per cent on average for five years – it could stimulate the economy and inflation, while remaining true to its mandate of price stability close to 2 per cent. Such a temporary price-level target would be new territory for the ECB, as would QE. But after years of misjudging the state of the economy and inflation, it is time for the ECB to be bold and innovative. The 19 million unemployed in the eurozone certainly deserve that the ECB makes every attempt at spurring a recovery worthy of the name.
Christian Odendahl is chief economist at the Centre for European Reform.
Thursday, April 17, 2014
Why a British exit is not inevitable
As someone who wants Britain to remain in the EU, I have long been sceptical of my side’s ability to win a referendum on that question. The two televised debates between Nick Clegg and Nigel Farage, on March 26th and April 2nd, only reinforced the gloom of pro-Europeans: opinion polls found that a clear majority of those watching thought the UKIP leader had out-performed the deputy prime minister. However, having read the latest polling from Lord Ashcroft, based on an unusually large sample of 20,000 people, and having taken part in a panel discussion with a representative sample of British voters that he had brought together, I now think that a referendum is winnable (the polling was carried out before the Clegg-Farage debates).
I see three reasons for optimism. First, as the audience made clear during the panel discussion, a lot of people want to know more about the EU. They know that some of the media cannot be relied upon to give the facts, that the issues concerning membership are very complicated and that they would like to be better informed.
If and when a British referendum comes, I hope that those involved will agree to copy an idea from the last Irish referendum on the Lisbon treaty, in 2009. An independent Referendum Commission, which took responsibility for providing both sides of the argument, and the key facts about the Lisbon treaty, won the respect of both sides of the campaign.
I am glad to see that a new body, Full Fact, has recently been established in Britain. Its mission is to ensure that British politicians’ statements are accurate – on the EU and every other subject. Full Fact, which has no view on whether Britain should remain in the EU, monitored and commented on the Clegg-Farage debates in real time.
Second, several of those who spoke from the floor during the panel discussion were concerned that very few people in the UK are making the case for the EU. Though the British people are in some respects eurosceptic, many of them have noticed that the country’s European debate has been lop-sided. On the anti-EU side there are a lot of outspoken politicians in UKIP and the Conservative Party, most of the tabloid newspapers and some well-funded lobbies. On the other side are a small number of newspapers, the Liberal Democrat Party, a few ageing Conservatives and business lobbies such as the Confederation of British Industry.
I recall ministers telling me during the time that Labour was in power (1997-2010) that they were pro-European but had been advised not to make the case for the EU because many voters were either hostile or indifferent to that subject. My own conversations with Conservative MPs have led me to believe that more of them than one might imagine are sympathetic to the EU, but for obvious reasons they hide views that are heretical in their party. To some extent, the pro-Europeans have lost the argument by default. In a referendum campaign politicians would, one hopes, say what they really thought. But they should not postpone speaking frankly until the campaign itself, by which time it may be too late to shift opinion. More of them need to find the courage to try and shape the current debate.
Third, Lord Ashcroft’s polling reveals that the key group of voters in any referendum campaign will be those he describes as ‘discontented sceptics’, who make up 27 per cent of the electorate. Most of them want to leave the Union, but their priority is jobs and the state of the economy, and they accept that the EU delivers some benefits. They do not like the EU because of the migration that stems from membership, the loss of sovereignty, the regulations and the cost of Britain’s contribution to the EU budget. They also think that the other EU members tend to club together against British interests. But this group is open to argument, and if significant numbers can be persuaded that the EU is good for jobs – or that the problems may be less acute than they had imagined – the referendum is winnable. That means that those in favour of membership need to be more effective at getting across the best facts and arguments.
If I was advising the Yes campaign on the arguments to use in a referendum, I would make five points. The first three are economic. One, if Britain leaves the EU it will lose foreign direct investment. In recent months companies such as Airbus, Ford, Goldman Sachs, Hitachi, Nissan and Siemens have all said that they are keen for the country to stay in the EU. Some of them add that they would review their investments if Britain were to leave.
Second, membership of the EU provides access to the world’s biggest single market, in terms of value. Quitters have yet to explain a viable alternative for the British economy. Norway and Switzerland have access to parts of the market but have to accept the EU regulations that govern it, without having a vote on them. Although neither of those countries is a member of the EU, they have to pay into its budget: Norway’s per capita net contribution is 83 per cent that of Britain, whereas Switzerland’s is 40 per cent (according to the House of Commons library). They must put up with the principle of free movement (the Swiss recently voted in a referendum to limit the right of EU migrants to work in Switzerland; as a result the Swiss will lose some of their privileged access to EU markets). Switzerland has never had access to EU services markets, which are of particular importance to the British economy.
Third, the EU is forging trade-liberalising deals with many other parts of the world. For example, British exports to South Korea have doubled since the EU-South Korean free trade agreement came into force in 2011. Deals are in the pipeline with Canada, India, Japan, Thailand and – because the UK and Germany pushed to get talks started – the United States. Of course, small countries that are on their own can also negotiate trade deals, but only a big trading bloc like the EU gives Britain the leverage to extract significant concessions from trading giants like the US or China. The Scotch Whisky Association, for instance, argues that its distilleries need the EU to open up protected markets (the European Commission has recently negotiated the opening of Canadian, Colombian and Peruvian markets to exports of Scotch, and hopes to do the same for India).
The final two points are political. The West no longer dominates the world. China, Russia, India, Brazil and many other powers have a lot of influence, which is natural as their economies become larger. The US, these emerging powers and the EU are the key players in shaping global rules, on trade, financial regulation, climate change and security. If a medium-sized European country like Britain wants to be able to influence the emerging global order, it needs to be a leading member of the EU. On its own it does not have a great deal of clout.
It makes sense for the British to work with the other European countries because, despite our differences, we share not only many interests but also – and this is the fifth point – values. Just about everybody in the EU is committed to democracy, the rule of law and a free press. When Russia starts using force to change international borders, as it has done recently, the EU states do not react in an identical way. But they have shown that they can respond by taking a series of steps, together, that help to defend the principles they believe in. The European states are more likely to influence Russia when they concert their efforts. The bottom line is, we are stronger when working with our partners.
Charles Grant is director of the Centre for European Reform.
I see three reasons for optimism. First, as the audience made clear during the panel discussion, a lot of people want to know more about the EU. They know that some of the media cannot be relied upon to give the facts, that the issues concerning membership are very complicated and that they would like to be better informed.
If and when a British referendum comes, I hope that those involved will agree to copy an idea from the last Irish referendum on the Lisbon treaty, in 2009. An independent Referendum Commission, which took responsibility for providing both sides of the argument, and the key facts about the Lisbon treaty, won the respect of both sides of the campaign.
I am glad to see that a new body, Full Fact, has recently been established in Britain. Its mission is to ensure that British politicians’ statements are accurate – on the EU and every other subject. Full Fact, which has no view on whether Britain should remain in the EU, monitored and commented on the Clegg-Farage debates in real time.
Second, several of those who spoke from the floor during the panel discussion were concerned that very few people in the UK are making the case for the EU. Though the British people are in some respects eurosceptic, many of them have noticed that the country’s European debate has been lop-sided. On the anti-EU side there are a lot of outspoken politicians in UKIP and the Conservative Party, most of the tabloid newspapers and some well-funded lobbies. On the other side are a small number of newspapers, the Liberal Democrat Party, a few ageing Conservatives and business lobbies such as the Confederation of British Industry.
I recall ministers telling me during the time that Labour was in power (1997-2010) that they were pro-European but had been advised not to make the case for the EU because many voters were either hostile or indifferent to that subject. My own conversations with Conservative MPs have led me to believe that more of them than one might imagine are sympathetic to the EU, but for obvious reasons they hide views that are heretical in their party. To some extent, the pro-Europeans have lost the argument by default. In a referendum campaign politicians would, one hopes, say what they really thought. But they should not postpone speaking frankly until the campaign itself, by which time it may be too late to shift opinion. More of them need to find the courage to try and shape the current debate.
Third, Lord Ashcroft’s polling reveals that the key group of voters in any referendum campaign will be those he describes as ‘discontented sceptics’, who make up 27 per cent of the electorate. Most of them want to leave the Union, but their priority is jobs and the state of the economy, and they accept that the EU delivers some benefits. They do not like the EU because of the migration that stems from membership, the loss of sovereignty, the regulations and the cost of Britain’s contribution to the EU budget. They also think that the other EU members tend to club together against British interests. But this group is open to argument, and if significant numbers can be persuaded that the EU is good for jobs – or that the problems may be less acute than they had imagined – the referendum is winnable. That means that those in favour of membership need to be more effective at getting across the best facts and arguments.
If I was advising the Yes campaign on the arguments to use in a referendum, I would make five points. The first three are economic. One, if Britain leaves the EU it will lose foreign direct investment. In recent months companies such as Airbus, Ford, Goldman Sachs, Hitachi, Nissan and Siemens have all said that they are keen for the country to stay in the EU. Some of them add that they would review their investments if Britain were to leave.
Second, membership of the EU provides access to the world’s biggest single market, in terms of value. Quitters have yet to explain a viable alternative for the British economy. Norway and Switzerland have access to parts of the market but have to accept the EU regulations that govern it, without having a vote on them. Although neither of those countries is a member of the EU, they have to pay into its budget: Norway’s per capita net contribution is 83 per cent that of Britain, whereas Switzerland’s is 40 per cent (according to the House of Commons library). They must put up with the principle of free movement (the Swiss recently voted in a referendum to limit the right of EU migrants to work in Switzerland; as a result the Swiss will lose some of their privileged access to EU markets). Switzerland has never had access to EU services markets, which are of particular importance to the British economy.
Third, the EU is forging trade-liberalising deals with many other parts of the world. For example, British exports to South Korea have doubled since the EU-South Korean free trade agreement came into force in 2011. Deals are in the pipeline with Canada, India, Japan, Thailand and – because the UK and Germany pushed to get talks started – the United States. Of course, small countries that are on their own can also negotiate trade deals, but only a big trading bloc like the EU gives Britain the leverage to extract significant concessions from trading giants like the US or China. The Scotch Whisky Association, for instance, argues that its distilleries need the EU to open up protected markets (the European Commission has recently negotiated the opening of Canadian, Colombian and Peruvian markets to exports of Scotch, and hopes to do the same for India).
The final two points are political. The West no longer dominates the world. China, Russia, India, Brazil and many other powers have a lot of influence, which is natural as their economies become larger. The US, these emerging powers and the EU are the key players in shaping global rules, on trade, financial regulation, climate change and security. If a medium-sized European country like Britain wants to be able to influence the emerging global order, it needs to be a leading member of the EU. On its own it does not have a great deal of clout.
It makes sense for the British to work with the other European countries because, despite our differences, we share not only many interests but also – and this is the fifth point – values. Just about everybody in the EU is committed to democracy, the rule of law and a free press. When Russia starts using force to change international borders, as it has done recently, the EU states do not react in an identical way. But they have shown that they can respond by taking a series of steps, together, that help to defend the principles they believe in. The European states are more likely to influence Russia when they concert their efforts. The bottom line is, we are stronger when working with our partners.
Charles Grant is director of the Centre for European Reform.
Monday, April 07, 2014
How to reduce dependence on Russian gas
At the European Summit on March 20th and 21st, government leaders were supposed to agree climate and energy targets for 2030. Instead, they discussed Crimea, Ukraine and Russia. Leaders were right to postpone discussion of the targets, but wrong to postpone action on reducing Europe’s dependence on Russian gas.
Russia supplies around a third of the EU’s gas. So the Union is to an extent dependent on Moscow – as it discovered when the Russians turned off the gas flow though Ukraine in 2009. But the Kremlin is, to a greater extent, dependent on revenue from oil, gas and coal exports – above all to the EU. Indeed, over half of the Russian government’s revenue comes from the sale of fossil fuels: 19 per cent each from gas and oil and 14 per cent from coal. The EU summit conclusions did refer to the need to diversify sources of gas, and asked the European Commission to prepare a report on this. That approach lacks the urgency which the situation in Ukraine demands. If EU leaders want to impose sanctions on Russia which may change its behaviour, rather than simply slapping Putin’s wrist, they should reduce purchases of Russian energy as far and fast as possible. To do that, they must develop alternative energy sources. That would cost money, but deliver major energy security, foreign policy and climate benefits.
The Swedish and Danish foreign ministers, Carl Bildt and Martin Lidegaard, have emphasised the importance of energy in responding to Russia’s invasion of Crimea. In March they wrote in European Voice that the EU must improve its energy efficiency, develop infrastructure to import fossil fuels from countries other than Russia, and increase alternative energy sources such as renewables. Swedish and Danish ministers are well placed to make these points: Sweden gets more of its energy from renewables than any other member-state, while Denmark is the only country to have set out plans to become 100 per cent reliant on renewables (by 2050). Poland buys nearly 90 per cent of its imported gas from Russia. So Polish Foreign Minister Radek Sikorski has shown courage in leading the calls for reducing energy dependence on Moscow (though Poland uses coal for most of its energy needs).
Europe’s post-Crimea energy strategy should focus on five strands:
* energy efficiency;
* alternative sources of gas;
* renewable energy;
* coal and gas with carbon capture and storage (CCS);
* nuclear power.
Greater energy efficiency is the goal that could be achieved most quickly. A rapid and ambitious programme of retrofitting double glazing and insulation to existing buildings, Europe-wide, could reduce energy demand for heating. It would also create thousands of new jobs. Less rapid but equally effective would be a major programme to upgrade and expand district heating: networks which transport heat from power stations or other combustion plants to homes and commercial buildings. District heating is widespread in Central and Eastern Europe, but most of it is old and inefficient, losing up to half of the heat during transport. (District heating networks in Scandinavia, by contrast, lose less than 10 per cent of the heat.) On alternative sources of gas, the quickest measure would be to expand the EU’s capacity to import liquefied natural gas (LNG). The Commission should stress, in all its contacts with the US government, the strategic advantages of the US exporting LNG. But increased imports of LNG are not dependent solely on successful trade negotiations with the USA; such gas is available from other non-Russian sources, notably Qatar. Greater use of LNG will require new infrastructure and any state that has a coast can develop LNG facilities. The Commission should give priority to less wealthy member-states that are highly dependent on Russian gas: the Baltic states, Bulgaria and Poland. This would not improve Europe’s overall energy security, but would help those countries highly dependent on Russian gas: the five countries mentioned above plus the Czech Republic, Finland, Hungary and Slovakia.
To improve EU energy security overall, EU institutions should do all they can to ensure that new pipelines are constructed to transport non-Russian gas from the Caspian Sea to Europe. Contracts have been signed for a Trans-Anatolian pipeline from Azerbaijan to the Mediterranean coast of Turkey, and a Trans-Adriatic pipeline from there to Italy. But construction has yet to begin. This pipeline would reduce EU dependence on Moscow, unlike Gazprom’s South Stream, which would simply be an alternative way of transporting Russian gas to the EU (while avoiding Ukraine).
Indigenous shale gas is another source of non-Russian gas. Governments which have banned fracking, either formally (France and Bulgaria) or informally (Germany) should now reverse this position. Renewable gas, which can be created from food and farm waste, manure and sewage, should also be expanded as much and as fast as possible. This is already widely used in Germany and Austria. Using these wastes to produce renewable gas would improve water quality, because the residue can be used as fertiliser rather than being discharged into rivers or seas. Greater use of renewable gas would help achieve climate policy objectives, as well as greater energy security. Renewable electricity must also be expanded. This would reduce the need to use gas for electricity generation, and also for heating (since heat can be provided in domestic and commercial buildings by electricity rather than by gas). The Commission could co-ordinate national subsidy schemes for renewables more closely, as this would cut administration costs for developers and reduce regulatory risk, so cutting the cost of capital. And all European institutions must work together to expand and improve the electricity grid, with a focus on the Baltic, Mediterranean and North Seas, and around the Pyrenees.
What role should coal play in future energy policy? Here the need for energy security conflicts with the need for climate protection. A quarter of the coal which the EU imports comes from Russia. The EU could survive easily without Russian coal, by mining more within its own borders and by importing more from other countries. However, coal is extremely polluting. Burning coal can cause high levels of toxic air pollution, damaging human health and harming the environment. EU rules have been effective in reducing toxic pollution from coal combustion. Coal generation also emits high levels of greenhouse gases – about twice as much pollution per unit of electricity as gas combustion does. Yet technology exists to cut greenhouse gases from coal combustion. CCS has been demonstrated at small scale, but not yet at large scale. The EU is falling behind Australia, Canada, China and USA in its attempt to roll it out.
CCS is not popular with the German public. But it is less unpopular than nuclear power. Before the 2011 Fukushima accident in Japan, Chancellor Angela Merkel said that low-carbon bridge technologies were necessary, to protect the climate while the world moves from fossil fuels to renewables. She was right. The transition to renewables will take at least half a century – probably longer. Gas is less bad for the climate than coal is, but not low-carbon enough to prevent dangerous climate change unless combined with CCS. Merkel’s post-Fukushima energy policy sets out an end point – total reliance on renewables – but pays no attention to what happens during the transition. The result – as statistics from Germany demonstrate – is increased greenhouse gas emissions.
Even the German desire for energy security and reduced dependence on Russian gas seems unlikely to persuade most Germans to reconsider nuclear power. There is more chance that they will reconsider CCS. But the most likely outcome is that Germany will become even more willing to burn coal without CCS. This would seriously compromise EU climate action. To avoid this outcome, EU institutions should set an emissions performance standard to regulate the maximum amount of greenhouse gas that can be emitted per unit of electricity generated. This would ban coal without CCS. However, demonstration and deployment of CCS will require subsidy. Renewables and nuclear power will also require some form of financial support. All these technologies are needed for climate protection. They could also help make Europe’s response to Russia’s annexation of Crimea more credible.
Reduced reliance on Russian energy sources, and increase in resilience in the event of a supply cut off, should be central elements in a long-term re-orientation of EU energy policy. European institutions and member-states should implement the five-strand strategy outlined above: use energy much more efficiently; develop all alternative gas sources; maximise renewable energy; demonstrate and deploy CCS; and build new nuclear power stations. This strategy will not be cheap. But the economic, security and climate action advantages will justify the cost. IMF managing director Christine Lagarde is right to say that climate change is “by far the greatest economic threat of the 21st century”.
Stephen Tindale is an associate fellow at the Centre for European Reform.
Russia supplies around a third of the EU’s gas. So the Union is to an extent dependent on Moscow – as it discovered when the Russians turned off the gas flow though Ukraine in 2009. But the Kremlin is, to a greater extent, dependent on revenue from oil, gas and coal exports – above all to the EU. Indeed, over half of the Russian government’s revenue comes from the sale of fossil fuels: 19 per cent each from gas and oil and 14 per cent from coal. The EU summit conclusions did refer to the need to diversify sources of gas, and asked the European Commission to prepare a report on this. That approach lacks the urgency which the situation in Ukraine demands. If EU leaders want to impose sanctions on Russia which may change its behaviour, rather than simply slapping Putin’s wrist, they should reduce purchases of Russian energy as far and fast as possible. To do that, they must develop alternative energy sources. That would cost money, but deliver major energy security, foreign policy and climate benefits.
The Swedish and Danish foreign ministers, Carl Bildt and Martin Lidegaard, have emphasised the importance of energy in responding to Russia’s invasion of Crimea. In March they wrote in European Voice that the EU must improve its energy efficiency, develop infrastructure to import fossil fuels from countries other than Russia, and increase alternative energy sources such as renewables. Swedish and Danish ministers are well placed to make these points: Sweden gets more of its energy from renewables than any other member-state, while Denmark is the only country to have set out plans to become 100 per cent reliant on renewables (by 2050). Poland buys nearly 90 per cent of its imported gas from Russia. So Polish Foreign Minister Radek Sikorski has shown courage in leading the calls for reducing energy dependence on Moscow (though Poland uses coal for most of its energy needs).
Europe’s post-Crimea energy strategy should focus on five strands:
* energy efficiency;
* alternative sources of gas;
* renewable energy;
* coal and gas with carbon capture and storage (CCS);
* nuclear power.
Greater energy efficiency is the goal that could be achieved most quickly. A rapid and ambitious programme of retrofitting double glazing and insulation to existing buildings, Europe-wide, could reduce energy demand for heating. It would also create thousands of new jobs. Less rapid but equally effective would be a major programme to upgrade and expand district heating: networks which transport heat from power stations or other combustion plants to homes and commercial buildings. District heating is widespread in Central and Eastern Europe, but most of it is old and inefficient, losing up to half of the heat during transport. (District heating networks in Scandinavia, by contrast, lose less than 10 per cent of the heat.) On alternative sources of gas, the quickest measure would be to expand the EU’s capacity to import liquefied natural gas (LNG). The Commission should stress, in all its contacts with the US government, the strategic advantages of the US exporting LNG. But increased imports of LNG are not dependent solely on successful trade negotiations with the USA; such gas is available from other non-Russian sources, notably Qatar. Greater use of LNG will require new infrastructure and any state that has a coast can develop LNG facilities. The Commission should give priority to less wealthy member-states that are highly dependent on Russian gas: the Baltic states, Bulgaria and Poland. This would not improve Europe’s overall energy security, but would help those countries highly dependent on Russian gas: the five countries mentioned above plus the Czech Republic, Finland, Hungary and Slovakia.
To improve EU energy security overall, EU institutions should do all they can to ensure that new pipelines are constructed to transport non-Russian gas from the Caspian Sea to Europe. Contracts have been signed for a Trans-Anatolian pipeline from Azerbaijan to the Mediterranean coast of Turkey, and a Trans-Adriatic pipeline from there to Italy. But construction has yet to begin. This pipeline would reduce EU dependence on Moscow, unlike Gazprom’s South Stream, which would simply be an alternative way of transporting Russian gas to the EU (while avoiding Ukraine).
Indigenous shale gas is another source of non-Russian gas. Governments which have banned fracking, either formally (France and Bulgaria) or informally (Germany) should now reverse this position. Renewable gas, which can be created from food and farm waste, manure and sewage, should also be expanded as much and as fast as possible. This is already widely used in Germany and Austria. Using these wastes to produce renewable gas would improve water quality, because the residue can be used as fertiliser rather than being discharged into rivers or seas. Greater use of renewable gas would help achieve climate policy objectives, as well as greater energy security. Renewable electricity must also be expanded. This would reduce the need to use gas for electricity generation, and also for heating (since heat can be provided in domestic and commercial buildings by electricity rather than by gas). The Commission could co-ordinate national subsidy schemes for renewables more closely, as this would cut administration costs for developers and reduce regulatory risk, so cutting the cost of capital. And all European institutions must work together to expand and improve the electricity grid, with a focus on the Baltic, Mediterranean and North Seas, and around the Pyrenees.
What role should coal play in future energy policy? Here the need for energy security conflicts with the need for climate protection. A quarter of the coal which the EU imports comes from Russia. The EU could survive easily without Russian coal, by mining more within its own borders and by importing more from other countries. However, coal is extremely polluting. Burning coal can cause high levels of toxic air pollution, damaging human health and harming the environment. EU rules have been effective in reducing toxic pollution from coal combustion. Coal generation also emits high levels of greenhouse gases – about twice as much pollution per unit of electricity as gas combustion does. Yet technology exists to cut greenhouse gases from coal combustion. CCS has been demonstrated at small scale, but not yet at large scale. The EU is falling behind Australia, Canada, China and USA in its attempt to roll it out.
CCS is not popular with the German public. But it is less unpopular than nuclear power. Before the 2011 Fukushima accident in Japan, Chancellor Angela Merkel said that low-carbon bridge technologies were necessary, to protect the climate while the world moves from fossil fuels to renewables. She was right. The transition to renewables will take at least half a century – probably longer. Gas is less bad for the climate than coal is, but not low-carbon enough to prevent dangerous climate change unless combined with CCS. Merkel’s post-Fukushima energy policy sets out an end point – total reliance on renewables – but pays no attention to what happens during the transition. The result – as statistics from Germany demonstrate – is increased greenhouse gas emissions.
Even the German desire for energy security and reduced dependence on Russian gas seems unlikely to persuade most Germans to reconsider nuclear power. There is more chance that they will reconsider CCS. But the most likely outcome is that Germany will become even more willing to burn coal without CCS. This would seriously compromise EU climate action. To avoid this outcome, EU institutions should set an emissions performance standard to regulate the maximum amount of greenhouse gas that can be emitted per unit of electricity generated. This would ban coal without CCS. However, demonstration and deployment of CCS will require subsidy. Renewables and nuclear power will also require some form of financial support. All these technologies are needed for climate protection. They could also help make Europe’s response to Russia’s annexation of Crimea more credible.
Reduced reliance on Russian energy sources, and increase in resilience in the event of a supply cut off, should be central elements in a long-term re-orientation of EU energy policy. European institutions and member-states should implement the five-strand strategy outlined above: use energy much more efficiently; develop all alternative gas sources; maximise renewable energy; demonstrate and deploy CCS; and build new nuclear power stations. This strategy will not be cheap. But the economic, security and climate action advantages will justify the cost. IMF managing director Christine Lagarde is right to say that climate change is “by far the greatest economic threat of the 21st century”.
Stephen Tindale is an associate fellow at the Centre for European Reform.
Thursday, April 03, 2014
Can the EU help Belarus to guard its independence?
Belarus is the forgotten member of the EU’s Eastern Partnership. The EU has negotiated ‘action plans’ with the other five members – Armenia, Azerbaijan, Georgia, Moldova and Ukraine. These involve the EU promising benefits in return for commitments to reform. And of those five, all but Armenia and Azerbaijan have signed or will sign association agreements with the EU. Belarus has been excluded because of its human rights record. However, following Russia’s annexation of Crimea, both Minsk and Brussels are thinking seriously about a closer relationship.
Events in Ukraine have worried the regime of Alexander Lukashenko, Belarus’s president since 1994. His government, of course, dislikes popular revolutions of the sort that overthrew Viktor Yanukovych in Kyiv. But it also opposes the dismembering of a country like Ukraine. On a recent visit to Belarus, I noticed that officials became visibly nervous when asked about the new ‘Putin doctrine’ – the assertion of Russia’s right to intervene in neighbouring states to protect the interests of Russians or Russian-speakers (ethnic Russians make up 8 per cent of the population of Belarus; everyone speaks Russian but 15-20 per cent also speak Belarusian regularly).
Belarus’s response to the Ukraine crisis has therefore been ambiguous. It has condemned the disorder of the Maidan protests, blaming the fall of Yanukovych on Ukraine’s economic mismanagement and corruption (Belarus is indeed richer and less corrupt than Ukraine). But in the early phases of the crisis, Lukashenko and his ministers spoke out in favour of Ukraine’s territorial integrity and against its ‘Yugoslavisation’. But then – presumably because of growing pressure from Moscow – Minsk stopped repeating this implied criticism of Russia. Lukashenko’s most recent public comment was to say that Crimea was now part of Russia and that, if forced to choose “Belarus will always be with Russia”. But he added that the annexation “sets a bad precedent”.
One thing that some government officials and opposition leaders agree on is that in the long term, there is a danger of the country losing its independence. Belarusians both for and against the government muse openly on whether, post-Lukashenko, there will be anyone strong enough to stand up to Russia. The self-styled ‘father of the nation’ has long played a clever game with Russia, extracting economic benefits to allow Belarusians to maintain a reasonable standard of living, in return for making promises that he often wriggles out of (per capita GDP is about 50 per cent higher than in Ukraine, and almost as high as in Russia). Around 10-15 per cent of the country’s GDP derives from Russian subsidies, mainly in the form of cheap oil and gas. Recent Russian credits were tied to the privatisation of state-owned industries, so that Russian industrial groups would be able to buy them, but the privatisations never happened.
Though Lukashenko’s slippery behaviour has infuriated Russia’s leaders, they have tolerated it since they see him – as Franklin Roosevelt supposedly said of Nicaragua’s President Somoza – as ‘our son-of-a-bitch’. Russia and Belarus share a common travel area and an air-defence system; recently Russia sent a squadron of fighter jets to a Belarusian airbase.
But although almost all Belarusians want their country to be independent, they are divided on where its future lies. Opinion pollsters and political analysts say that support for the EU has grown in recent years. Some of them reckon that about a third of the people want Belarus to be democratic and closer to the EU, a third want to stay close to Russia and a third do not care. But these analysts reckon that the crisis in Ukraine has boosted support for Lukashenko: he is seen as a bulwark against the instability and chaos of their southern neighbour. The state media, of course, reinforce this message.
The main reason to worry about Belarus losing its independence is the dire state of its economy. Unemployment is negligible, thanks in part to at least 70 per cent of the workforce being employed by the state. But economic growth has almost come to a halt and the factories are full of unsold goods. Apart from a respectable IT sector, Belarus has little modern industry. It sells refined oil products to the EU, and tractors, lorries and heavy vehicles to Russia. Sales to Russia have slumped, not only because of Russia’s own economic slow-down, but also because of Moscow’s entry into the WTO; Belarus’s goods now face stiff competition from emerging economies in the Russian market. They are not competitive because productivity growth in Belarus’s state-owned industries has been minimal. Another problem is that earnings from the staple export of potash have slumped: last year a Russian potash firm pulled out of its cartel with a Belarusian partner, leading to a sharp fall in the global price.
All these problems led to Belarus’s current account deficit ballooning from 3 per cent of GDP in 2012 to 10 per cent last year – that is $7.3 billion. Although the Belarusian rouble has depreciated by 15 per cent since 2011, when there was a sudden devaluation of 36 per cent, this deficit is likely to worsen in 2014. The central bank only has $6 billion of reserves, which means that the country is going to have to borrow a lot of money. It is hard to see Western governments or institutions lending substantial sums. Which leaves only Russia, and the regional bodies it controls. But Moscow will set tough conditions on any loans, and given the weakness of the Belarusian economy, Lukashenko may be less able to resist the conditionality than in the past.
Russia’s first demand is for supportive statements on Crimea, which Belarus has more-or-less complied with (in 2008, after Russia invaded Georgia, Belarus was less compliant: it refused to recognise the independence of Abkhazia and South Ossetia). The second demand is for the privatisation of state-owned industrial assets. The third demand is that Belarus agree to the Customs Union between Russia, Belarus and Kazakhstan being transformed into a stronger ‘Eurasian Economic Community’ (EEC).
That last demand is already the subject of tense negotiations between Moscow, Minsk and Astana. The Eurasian Economic Community is a pet project of President Vladimir Putin, who says that its rationale is economic but seems to see it as a geopolitical counterweight to the EU.
The Customs Union, up and running since 2010, has many holes in it. About a third of all goods and two-thirds of all services are excluded from its rules, so that the three members can protect cherished industries. Belarus and Kazakhstan have to accept the high external tariffs that Russia has insisted on, to protect sectors such as car manufacturing. Independent economists in Belarus say that it does not benefit much, since it had free trade with Russia before the Customs Union started – with one important proviso. Russia bought Belarus’s support for the Customs Union by offering it cheaper energy prices than those available to other export customers. Officials in Minsk are more positive about the economic benefits of the Customs Union, but still worry that its institutions – notably the Commission (in theory, modelled on the European Commission) that is based in Moscow – are dominated by Russians.
The plan is for Presidents Putin, Lukashenko and Nursultan Nazarbayev of Kazakhstan to sign an agreement on the Eurasian Economic Community in May. Armenia (which last September decided not to sign the EU association agreement that it had negotiated) and Kyrgyzstan have expressed an interest in joining but are several years away from doing so. The EEC is supposed to cover the ‘four freedoms’, meaning free movement of goods, services, capital and labour. However, the rules are still being haggled over. Belarusian officials say proudly that they and the Kazakhs have blocked Russian plans for the EEC to become a political organisation; they insist that they will thwart Russia’s desire to re-establish parts of the USSR via the Eurasian Economic Community. They are also reluctant to accept free movement of capital, since that would enable Russian oligarchs to start buying up Belarus.
Many Belarusian economists think that the Eurasian Economic Community would not bring much in the way of economic benefits. However, as with the Customs Union, there is an important qualification. Every year Belarus has to transfer about $4 billion to Russia, from the export duties paid on refined products made with Russian oil. Belarus is desperate to hold on to that money, and Russia may agree – in return for the EEC treaty being signed.
Lukashenko and his ministers are keen not to become too dependent on Russia, and have therefore renewed their on-off flirtation with the EU. Foreign Minister Vladimir Makei attended the EU’s Eastern Partnership summit in Vilnius last November, since Belarus is allowed to take part in the partnership’s multilateral discussions. That visit led to the EU and Belarus starting talks on ‘visa facilitation’ (a softer visa regime) and a readmission agreement (whereby Minsk would agree to take back those who enter the EU illegally from Belarus). They are also talking about talks on what the EU might do to help the Belarusian economy.
However, EU sanctions on Belarus, imposed because of its human rights record, remain in place. There are visa bans and asset freezes on 232 individuals associated with the regime. A number of companies close to the government are also sanctioned. Belarusian ministers argue that the EU’s stigmatisation of Belarus is unfair, given that Azerbaijan is a full member of the Eastern Partnership, despite having a human rights record no better than that of Belarus.
But despite a certain degree of bitterness towards the EU, some senior figures in the Belarusian government hope for a rapprochement. Opinion in the EU is divided. Those who oppose re-engaging Belarus point out that the last attempt to do so ended in tears. After the 2008 war in Georgia, Javier Solana, the then High Representative, visited Minsk and brokered a deal with Lukashenko. In 2009 his government released all political prisoners and in return the EU suspended sanctions and encouraged the IMF to lend. But at the time of the December 2010 presidential election, the security forces clamped down hard on demonstrators, presidential candidates were locked up and then in February 2012 the EU withdrew its ambassadors. Belarusian opponents of rapprochement, such as Andrei Sannikov – a former presidential candidate who was in prison and is now in exile – argue that the regime will never change as long as Lukashenko is in power, and that engagement is futile.
But advocates of engagement, who include senior figures in Lithuania, Poland and Sweden, draw a different lesson from Solana’s efforts: that in the right circumstances the regime is capable of softening, for example by releasing prisoners. There is talk of appointing an independent mediator to broker a deal between Brussels and Belarus. One name mentioned is Solana himself, now in retirement; another is Alexander Kwasniewski, the former Polish president, who last autumn tried and failed to bridge the gap between Yanukovych and the EU. The geopolitical fall-out from the Crimean crisis seems likely to ensure that the advocates of engagement win the argument. It is not in the EU’s interests for Belarus to become a complete satellite of Russia.
In May the Ice Hockey World Championship will take place in Minsk, which may give Lukashenko an excuse to release political prisoners (the EU counts six of them) and soften aspects of his regime. Nevertheless there are clear limits to how far any rapprochement can go. The IMF is unlikely to lend billions of dollars to a country with a state-run economy that is undemocratic. That means that Belarus needs Russia’s good will and money in order to sustain its economy. If Minsk moved too close to Brussels, Moscow would have plenty of levers to pull, in order to yank it back.
Charles Grant is director of the Centre for European Reform.
Events in Ukraine have worried the regime of Alexander Lukashenko, Belarus’s president since 1994. His government, of course, dislikes popular revolutions of the sort that overthrew Viktor Yanukovych in Kyiv. But it also opposes the dismembering of a country like Ukraine. On a recent visit to Belarus, I noticed that officials became visibly nervous when asked about the new ‘Putin doctrine’ – the assertion of Russia’s right to intervene in neighbouring states to protect the interests of Russians or Russian-speakers (ethnic Russians make up 8 per cent of the population of Belarus; everyone speaks Russian but 15-20 per cent also speak Belarusian regularly).
Belarus’s response to the Ukraine crisis has therefore been ambiguous. It has condemned the disorder of the Maidan protests, blaming the fall of Yanukovych on Ukraine’s economic mismanagement and corruption (Belarus is indeed richer and less corrupt than Ukraine). But in the early phases of the crisis, Lukashenko and his ministers spoke out in favour of Ukraine’s territorial integrity and against its ‘Yugoslavisation’. But then – presumably because of growing pressure from Moscow – Minsk stopped repeating this implied criticism of Russia. Lukashenko’s most recent public comment was to say that Crimea was now part of Russia and that, if forced to choose “Belarus will always be with Russia”. But he added that the annexation “sets a bad precedent”.
One thing that some government officials and opposition leaders agree on is that in the long term, there is a danger of the country losing its independence. Belarusians both for and against the government muse openly on whether, post-Lukashenko, there will be anyone strong enough to stand up to Russia. The self-styled ‘father of the nation’ has long played a clever game with Russia, extracting economic benefits to allow Belarusians to maintain a reasonable standard of living, in return for making promises that he often wriggles out of (per capita GDP is about 50 per cent higher than in Ukraine, and almost as high as in Russia). Around 10-15 per cent of the country’s GDP derives from Russian subsidies, mainly in the form of cheap oil and gas. Recent Russian credits were tied to the privatisation of state-owned industries, so that Russian industrial groups would be able to buy them, but the privatisations never happened.
Though Lukashenko’s slippery behaviour has infuriated Russia’s leaders, they have tolerated it since they see him – as Franklin Roosevelt supposedly said of Nicaragua’s President Somoza – as ‘our son-of-a-bitch’. Russia and Belarus share a common travel area and an air-defence system; recently Russia sent a squadron of fighter jets to a Belarusian airbase.
But although almost all Belarusians want their country to be independent, they are divided on where its future lies. Opinion pollsters and political analysts say that support for the EU has grown in recent years. Some of them reckon that about a third of the people want Belarus to be democratic and closer to the EU, a third want to stay close to Russia and a third do not care. But these analysts reckon that the crisis in Ukraine has boosted support for Lukashenko: he is seen as a bulwark against the instability and chaos of their southern neighbour. The state media, of course, reinforce this message.
The main reason to worry about Belarus losing its independence is the dire state of its economy. Unemployment is negligible, thanks in part to at least 70 per cent of the workforce being employed by the state. But economic growth has almost come to a halt and the factories are full of unsold goods. Apart from a respectable IT sector, Belarus has little modern industry. It sells refined oil products to the EU, and tractors, lorries and heavy vehicles to Russia. Sales to Russia have slumped, not only because of Russia’s own economic slow-down, but also because of Moscow’s entry into the WTO; Belarus’s goods now face stiff competition from emerging economies in the Russian market. They are not competitive because productivity growth in Belarus’s state-owned industries has been minimal. Another problem is that earnings from the staple export of potash have slumped: last year a Russian potash firm pulled out of its cartel with a Belarusian partner, leading to a sharp fall in the global price.
All these problems led to Belarus’s current account deficit ballooning from 3 per cent of GDP in 2012 to 10 per cent last year – that is $7.3 billion. Although the Belarusian rouble has depreciated by 15 per cent since 2011, when there was a sudden devaluation of 36 per cent, this deficit is likely to worsen in 2014. The central bank only has $6 billion of reserves, which means that the country is going to have to borrow a lot of money. It is hard to see Western governments or institutions lending substantial sums. Which leaves only Russia, and the regional bodies it controls. But Moscow will set tough conditions on any loans, and given the weakness of the Belarusian economy, Lukashenko may be less able to resist the conditionality than in the past.
Russia’s first demand is for supportive statements on Crimea, which Belarus has more-or-less complied with (in 2008, after Russia invaded Georgia, Belarus was less compliant: it refused to recognise the independence of Abkhazia and South Ossetia). The second demand is for the privatisation of state-owned industrial assets. The third demand is that Belarus agree to the Customs Union between Russia, Belarus and Kazakhstan being transformed into a stronger ‘Eurasian Economic Community’ (EEC).
That last demand is already the subject of tense negotiations between Moscow, Minsk and Astana. The Eurasian Economic Community is a pet project of President Vladimir Putin, who says that its rationale is economic but seems to see it as a geopolitical counterweight to the EU.
The Customs Union, up and running since 2010, has many holes in it. About a third of all goods and two-thirds of all services are excluded from its rules, so that the three members can protect cherished industries. Belarus and Kazakhstan have to accept the high external tariffs that Russia has insisted on, to protect sectors such as car manufacturing. Independent economists in Belarus say that it does not benefit much, since it had free trade with Russia before the Customs Union started – with one important proviso. Russia bought Belarus’s support for the Customs Union by offering it cheaper energy prices than those available to other export customers. Officials in Minsk are more positive about the economic benefits of the Customs Union, but still worry that its institutions – notably the Commission (in theory, modelled on the European Commission) that is based in Moscow – are dominated by Russians.
The plan is for Presidents Putin, Lukashenko and Nursultan Nazarbayev of Kazakhstan to sign an agreement on the Eurasian Economic Community in May. Armenia (which last September decided not to sign the EU association agreement that it had negotiated) and Kyrgyzstan have expressed an interest in joining but are several years away from doing so. The EEC is supposed to cover the ‘four freedoms’, meaning free movement of goods, services, capital and labour. However, the rules are still being haggled over. Belarusian officials say proudly that they and the Kazakhs have blocked Russian plans for the EEC to become a political organisation; they insist that they will thwart Russia’s desire to re-establish parts of the USSR via the Eurasian Economic Community. They are also reluctant to accept free movement of capital, since that would enable Russian oligarchs to start buying up Belarus.
Many Belarusian economists think that the Eurasian Economic Community would not bring much in the way of economic benefits. However, as with the Customs Union, there is an important qualification. Every year Belarus has to transfer about $4 billion to Russia, from the export duties paid on refined products made with Russian oil. Belarus is desperate to hold on to that money, and Russia may agree – in return for the EEC treaty being signed.
Lukashenko and his ministers are keen not to become too dependent on Russia, and have therefore renewed their on-off flirtation with the EU. Foreign Minister Vladimir Makei attended the EU’s Eastern Partnership summit in Vilnius last November, since Belarus is allowed to take part in the partnership’s multilateral discussions. That visit led to the EU and Belarus starting talks on ‘visa facilitation’ (a softer visa regime) and a readmission agreement (whereby Minsk would agree to take back those who enter the EU illegally from Belarus). They are also talking about talks on what the EU might do to help the Belarusian economy.
However, EU sanctions on Belarus, imposed because of its human rights record, remain in place. There are visa bans and asset freezes on 232 individuals associated with the regime. A number of companies close to the government are also sanctioned. Belarusian ministers argue that the EU’s stigmatisation of Belarus is unfair, given that Azerbaijan is a full member of the Eastern Partnership, despite having a human rights record no better than that of Belarus.
But despite a certain degree of bitterness towards the EU, some senior figures in the Belarusian government hope for a rapprochement. Opinion in the EU is divided. Those who oppose re-engaging Belarus point out that the last attempt to do so ended in tears. After the 2008 war in Georgia, Javier Solana, the then High Representative, visited Minsk and brokered a deal with Lukashenko. In 2009 his government released all political prisoners and in return the EU suspended sanctions and encouraged the IMF to lend. But at the time of the December 2010 presidential election, the security forces clamped down hard on demonstrators, presidential candidates were locked up and then in February 2012 the EU withdrew its ambassadors. Belarusian opponents of rapprochement, such as Andrei Sannikov – a former presidential candidate who was in prison and is now in exile – argue that the regime will never change as long as Lukashenko is in power, and that engagement is futile.
But advocates of engagement, who include senior figures in Lithuania, Poland and Sweden, draw a different lesson from Solana’s efforts: that in the right circumstances the regime is capable of softening, for example by releasing prisoners. There is talk of appointing an independent mediator to broker a deal between Brussels and Belarus. One name mentioned is Solana himself, now in retirement; another is Alexander Kwasniewski, the former Polish president, who last autumn tried and failed to bridge the gap between Yanukovych and the EU. The geopolitical fall-out from the Crimean crisis seems likely to ensure that the advocates of engagement win the argument. It is not in the EU’s interests for Belarus to become a complete satellite of Russia.
In May the Ice Hockey World Championship will take place in Minsk, which may give Lukashenko an excuse to release political prisoners (the EU counts six of them) and soften aspects of his regime. Nevertheless there are clear limits to how far any rapprochement can go. The IMF is unlikely to lend billions of dollars to a country with a state-run economy that is undemocratic. That means that Belarus needs Russia’s good will and money in order to sustain its economy. If Minsk moved too close to Brussels, Moscow would have plenty of levers to pull, in order to yank it back.
Charles Grant is director of the Centre for European Reform.
Tuesday, April 01, 2014
Europe and Russia: Continental divide?
In annexing Crimea, President Vladimir Putin violated a powerful post-1945 taboo against incorporating other countries’ territory into your own. So far, not only does he seem to be getting away with his land grab, but he has moved on to demanding that Ukraine becomes a looser federation and gives Russia a veto over its international relations. The EU and the US should be united in rejecting this attempt to reduce Ukraine to a satellite of Russia; and they should ensure that any larger ambitions Putin may have are contained.
Putin’s March 18th speech to Russia’s Federal Assembly should have triggered a comprehensive reappraisal of the West’s relationship with Russia. Through it ran a worrying thread of ethno-nationalism. Putin claimed that in creating Soviet Ukraine after the Russian Revolution, the Bolsheviks incorporated in it territory from the “historical south of Russia”, inhabited by ethnic Russians. He expressed his resentment that Russians had become the world’s largest “divided population” after the fall of the Soviet Union. And he spoke of “the striving of the Russian world, of historical Russia, to re-establish its unity”.
The West has consistently underestimated the extent to which Putin means what he says: he told George W Bush in 2008 that Ukraine was “not even a state”, and he is now acting accordingly. In 2006 he said that Russian ‘peacekeeping’ forces would stay in the Georgian separatist regions of Abkhazia and South Ossetia despite Georgian “provocations”; in 2008, using the excuse of such provocations, Russia took military action against Georgia, effectively annexed the two enclaves and strengthened its forces there. In 2005 Putin denied that Estonia had been occupied by the Soviet Union after the Second World War, and suggested that it had only existed as an independent state between 1918 and 1939 because of a deal between the Soviet Union and Germany (when in fact it fought a war of independence to escape from Russian control).
Despite Estonia’s NATO and EU membership, the West should not wholly discount the possibility that Putin still thinks of the independence of the Baltic States as a mistake that could be reversed. Indeed, Andrei Illarionov, a former senior economic adviser to Putin, believes that Putin’s ultimate aim is to re-establish Russia’s rule over the lands it held before the 1917 revolution – which would include Finland, the Baltic States and part of Poland as well as the former Soviet Union.
Given the state of Russia’s economy, such a goal would be pure fantasy; but Eastern and Central Europe, as well as Russia itself, would suffer enormous damage from any attempt to make it a reality. Both the EU and NATO need therefore to take measures to deter further intervention by Russia, whether in Ukraine or elsewhere; to reinforce the freedom of action of allies and partners in Europe; and to encourage change in Russia itself.
The immediate need is for deterrence. The Western response has to change Putin’s calculus. The US and Europe need to make clear that if Russia moves into more Ukrainian territory, they will deny Russian financial institutions access to dollar- and euro-denominated financial markets in a way that will cause serious damage to the Russian economy and specifically to the elite around Putin. Russia’s economy barely grew last year, and the World Bank has forecast a contraction of 1.8 per cent and record capital flight of $150 billion this year (capital flight in the first quarter of 2014 was $70 billion). As a result of the Ukraine crisis, Russia’s cost of borrowing is rising, and downward pressure on the ruble will lead to increased inflation. But these effects may not last if the West returns quickly to business as usual.
It will be hard to get agreement on more comprehensive economic sanctions against Russia, particularly in the EU, where countries like Italy (heavily dependent on Russian gas and industrial contracts) and Cyprus (still tied to Russia through its off-shore financial services sector) will resist. Germany is Russia’s largest trading partner in Europe, and German businesses would clearly prefer to avoid further action against Russia; a number, including Siemens, ThyssenKrupp, Adidas and Deutsche Post have publicly criticised the EU’s approach. The German government is sending mixed signals, with Vice Chancellor and Economy Minister Sigmar Gabriel telling ARD TV that Germany did not want sanctions but had to show that it did not accept Putin’s “imperial policy”.
The risk is that the limited measures taken so far and the obvious divisions in the EU may lead Putin to think that the West will in the long term tolerate action in Eastern and Southern Ukraine as well as Crimea. One element in achieving agreement on tougher sanctions may be a ‘solidarity package’ to support states which would suffer disproportionately from their imposition, at the expense of others who are less affected. Lithuania is already feeling the economic impact of Russia blocking some imports via the port of Klaipeda; and the Latvian Prime Minister has indicated that in the worst case scenario a total shut off of trade with Russia could reduce Latvia’s GDP by 10 per cent.
Deterrence should not be limited to financial steps. Though the immediate threat is to Ukraine, Russia has also made threatening moves in the Baltic, with surprise military exercises including amphibious landings in its Kaliningrad exclave. In an interview with German ARD TV on March 23rd, German Defence Minister Ursula von der Leyen urged increased NATO support for the Baltic states. She was right. NATO has already increased the size of its air policing mission, based in Lithuania (the UK will send four aircraft to join the mission in April), and the US has moved 12 F-16 aircraft to Poland. But so far NATO has not deployed any ground forces in the region. It should place small multinational contingents near the eastern borders of the Baltic States and Poland, as a visible statement of intent to live up to NATO’s Article 5 commitment to assist any ally subject to armed attack.
President Barack Obama and other Western leaders have made a serious mistake in categorically ruling out military involvement in Ukraine on the grounds that NATO’s security guarantee does not cover non-members. In doing this, they have reassured Putin that the West’s reaction will be diplomatic and economic; knowing that so far the EU has been split on imposing tough sanctions, he may feel that the price of further intervention is worth paying. Obama might instead have reminded Putin that Kuwait was not a NATO member, but the US-led coalition nonetheless intervened to restore its independence when Iraq sought to annex it in 1990. Western leaders should follow the Royal Navy motto: “Si vis pacem, para bellum” (“If you want peace, prepare war”). They should state publicly that if Ukraine were attacked and called for assistance in exercising its right to self-defence, they would be ready to deploy NATO forces. And to underline that this is more than empty rhetoric, they should open discussions with the Ukrainian government on concrete arrangements for such a deployment.
If such deterrent measures succeed in preventing any rash Russian action in the immediate future, they will still leave a changed security picture in Europe. A quarter century of (relatively) low levels of tension between the major powers in Europe is over. As long as Putin or others with similar views are in power in Russia, there will be a military and political threat to Russia’s neighbours.
In the 1997 NATO-Russia Founding Act, NATO stated that “in the current and foreseeable security environment”, it would carry out its missions without “additional permanent stationing of substantial combat forces”. Both sides agreed to respect the “sovereignty, independence and territorial integrity of all states and their inherent right to choose the means to ensure their own security”. NATO should announce that it is revisiting its policy in view of the changed situation. It would be imprudent for the alliance to abide by an agreement that Russia has abandoned.
NATO should review its relations with Georgia and Ukraine. Obama was clearly trying to reassure Putin when he said after the EU-US Summit in Brussels on March 26th that Georgia and Ukraine were “not currently on a path to NATO membership”; but he was ignoring the fact that successive NATO summits since 2008 have said that the two countries “will” become NATO members. NATO could withdraw that commitment, but that would merely reinforce Putin’s sense that former Soviet states are his to deal with as he wishes.
Georgia has consistently backed NATO membership and has been a major contributor to ISAF in Afghanistan; it should be rewarded at the NATO Summit in September with a Membership Action Plan (MAP) and a clear and short pathway to full NATO membership. There has never been a popular majority in Ukraine for joining the alliance, but after the Presidential election in Ukraine, once a new government is in place, NATO should discuss with Kyiv how the NATO/Ukraine relationship should develop. At least one recent opinion poll in Ukraine shows a sharp increase in support for NATO membership since the Russian intervention in Crimea, but at this stage membership remains a divisive issue and an unnecessary distraction from solving pressing economic and political problems.
The threats to Europe’s neighbourhood are not only or even primarily military. The prospects of all the EU’s Eastern Partners (Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine) have been blighted by corruption, poor governance and economic mismanagement. Ukraine would not have been so vulnerable either to internal instability or Russian meddling if it had been better governed and economically stronger. Moldova, though less corrupt than Ukraine, is still in 102nd position in Transparency International’s annual ‘Corruption Perceptions Index’. Georgia has done considerably better, but the rule of law is still weak there. And all three countries, lacking Russia’s mineral wealth, remain relatively poor.
Ukraine will need massive international assistance simply to meet its obligations this year; but financial aid should come with strict conditions, and with hands-on technical help. The priorities are to make state finances transparent and limit the opportunities for corruption; to establish courts that decide cases on the basis of laws, not in favour of the highest bidder; and to sort out Ukraine’s energy sector.
Ukraine’s gas industry has been a notoriously corrupt sector in a notoriously corrupt country. Energy inefficiency reduces competitiveness and increases dependence on Russia. Before the overthrow of President Viktor Yanukovych, the Ukrainian government had signed contracts with a number of Western oil majors to explore for both conventional and shale gas. Over time, these will enable Ukraine to buy less Russian gas; but reducing wasteful consumption will bring benefits more quickly and at lower cost. EU member-states like Denmark and Sweden have already identified energy efficiency as a priority area for investment.
A number of EU countries, particularly in Central and Northern Europe, are even more dependent than Ukraine on Russian gas. Reducing this dependence will take time, but is vital if the potential for Russia to use gas as a geopolitical tool is to be reduced. In a forthcoming CER insight Stephen Tindale will set out the options in detail. Europe needs more LNG terminals, and freer access to LNG, including from the US (which, thanks to shale gas, now has a surplus of gas). It needs more interconnectors, both for gas and electricity, particularly between the countries of Central Europe. These countries rely on pipelines from Russia but are largely isolated from each other and from other sources of gas and electricity. Interconnectors would support diversification, increasing both security of supply and competition. Europe needs more pipelines from the Caspian Sea and Iraqi Kurdistan. And it needs to overcome its fear of fracking and of nuclear power.
Europe is also losing the propaganda battle with Russia, not only in Ukraine but in some EU member-states. Russia has a number of means to get its messages across. Many Western articles on events in Ukraine are influenced by Russian reporting on the supposedly deep linguistic and ethnic divide between Eastern and Western Ukraine – a divide which Ukrainian census data shows is very blurred. Because Russian leaders constantly repeat that the Crimean ‘referendum’ reflected the will of the people, most Western media are now uncritically reporting this line without commenting on the shortcomings in the process. Outlets like RT, the Kremlin-controlled English language TV channel, though ridiculed by experts for their misinformation, still get quoted in social media; their views are given the same value as more objective journalism. And Western populists and anti-Europeans, including Nigel Farage of the UK Independence Party and Lord Tebbit of the Conservative Party, are promoting the Russian narrative that EU ‘expansionism’ has created the problems in Ukraine.
Western media should not stoop to propaganda, but Western governments should be more active in ensuring that objective information is available – including through direct engagement on social media. The US embassy in Kyiv has done a better job than most of trying to counter propaganda directed at Ukraine; the EU Delegation there could do a lot more. If Russia’s version of the story is allowed to dominate, it will foment division not only in Ukraine but also in Latvia and Estonia, where Russian TV is widely watched; and Western publics will be less likely to back strong action if Russia continues to expand into its ‘historical’ territories.
A return to some form of implicit containment and East-West competition may be the most likely short- to medium-term scenario, albeit this would (and should) fall far short of a comprehensive ‘Cold War’. But much better in the long term, both for the West and Russia, would be a constructive, win-win relationship. This seems out of reach as long as Putin is in power, or the oligarchic concentration of political and economic power around the Kremlin and the securocrats continues. Putin has been paranoid about attempts by the West to engineer a revolution against him. Perhaps it is time the EU gave up trying to reassure him, and instead worked on a long-term programme to support democratic change in Russia. Elements of this might include:
* Strong enforcement of the international ‘rules of the game’, including in the WTO. EU member-states should also make full use of existing anti-corruption and anti-money laundering legislation, and publicise examples of those in Putin’s circle who have grown rich in suspicious circumstances (the explanation by the US Treasury of the links between Putin and some of those sanctioned by the Americans in relation to the annexation of Crimea provides an excellent model).
* Investment in the next generation of Russians through scholarship schemes and increased links between universities. The more that ordinary Russians are exposed to the realities of life in the West – and particularly in former Communist countries which have benefited from economic and political reform – the harder it will be to mislead them with propaganda, and the more they will understand how free societies work.
* Support for small and medium enterprises (SMEs) in Russia. SMEs suffer from weak rule of law in the current system; entrepreneurs have a strong interest in change. There is funding available for help to SMEs in the framework of the EU-Russia ‘Partnership for Modernisation’, but there should be more.
* Support to civil society organisations – not necessarily political ones, but those working in areas such as protecting the environment, aiding vulnerable groups or identifying and combating corruption. This would be deeply unpopular with the Russian government, which has tried to brand NGOs that work with international donors as ‘foreign agents’, but it should be left to the NGOs themselves to decide whether to run the risk of taking Western funding or advice.
* Long-term political and economic engagement with Russia’s neighbours. If the EU can help the countries of the Eastern Partnership move from basket-cases to success stories, that will show that post-Soviet countries, including Russia, have alternatives to the way they have done things for the last 20 years, and undermine Putin’s argument for the system he has created.
* Consistent messaging to Russian society that it was not democracy and the free market that left Russia chaotic and impoverished in the 1990s, but the legacy of autocracy and communism, the worst elements of which Putin is now perpetuating with his imperial adventures.
Ian Bond is director of foreign policy at the Centre for European Reform.
Putin’s March 18th speech to Russia’s Federal Assembly should have triggered a comprehensive reappraisal of the West’s relationship with Russia. Through it ran a worrying thread of ethno-nationalism. Putin claimed that in creating Soviet Ukraine after the Russian Revolution, the Bolsheviks incorporated in it territory from the “historical south of Russia”, inhabited by ethnic Russians. He expressed his resentment that Russians had become the world’s largest “divided population” after the fall of the Soviet Union. And he spoke of “the striving of the Russian world, of historical Russia, to re-establish its unity”.
The West has consistently underestimated the extent to which Putin means what he says: he told George W Bush in 2008 that Ukraine was “not even a state”, and he is now acting accordingly. In 2006 he said that Russian ‘peacekeeping’ forces would stay in the Georgian separatist regions of Abkhazia and South Ossetia despite Georgian “provocations”; in 2008, using the excuse of such provocations, Russia took military action against Georgia, effectively annexed the two enclaves and strengthened its forces there. In 2005 Putin denied that Estonia had been occupied by the Soviet Union after the Second World War, and suggested that it had only existed as an independent state between 1918 and 1939 because of a deal between the Soviet Union and Germany (when in fact it fought a war of independence to escape from Russian control).
Despite Estonia’s NATO and EU membership, the West should not wholly discount the possibility that Putin still thinks of the independence of the Baltic States as a mistake that could be reversed. Indeed, Andrei Illarionov, a former senior economic adviser to Putin, believes that Putin’s ultimate aim is to re-establish Russia’s rule over the lands it held before the 1917 revolution – which would include Finland, the Baltic States and part of Poland as well as the former Soviet Union.
Given the state of Russia’s economy, such a goal would be pure fantasy; but Eastern and Central Europe, as well as Russia itself, would suffer enormous damage from any attempt to make it a reality. Both the EU and NATO need therefore to take measures to deter further intervention by Russia, whether in Ukraine or elsewhere; to reinforce the freedom of action of allies and partners in Europe; and to encourage change in Russia itself.
The immediate need is for deterrence. The Western response has to change Putin’s calculus. The US and Europe need to make clear that if Russia moves into more Ukrainian territory, they will deny Russian financial institutions access to dollar- and euro-denominated financial markets in a way that will cause serious damage to the Russian economy and specifically to the elite around Putin. Russia’s economy barely grew last year, and the World Bank has forecast a contraction of 1.8 per cent and record capital flight of $150 billion this year (capital flight in the first quarter of 2014 was $70 billion). As a result of the Ukraine crisis, Russia’s cost of borrowing is rising, and downward pressure on the ruble will lead to increased inflation. But these effects may not last if the West returns quickly to business as usual.
It will be hard to get agreement on more comprehensive economic sanctions against Russia, particularly in the EU, where countries like Italy (heavily dependent on Russian gas and industrial contracts) and Cyprus (still tied to Russia through its off-shore financial services sector) will resist. Germany is Russia’s largest trading partner in Europe, and German businesses would clearly prefer to avoid further action against Russia; a number, including Siemens, ThyssenKrupp, Adidas and Deutsche Post have publicly criticised the EU’s approach. The German government is sending mixed signals, with Vice Chancellor and Economy Minister Sigmar Gabriel telling ARD TV that Germany did not want sanctions but had to show that it did not accept Putin’s “imperial policy”.
The risk is that the limited measures taken so far and the obvious divisions in the EU may lead Putin to think that the West will in the long term tolerate action in Eastern and Southern Ukraine as well as Crimea. One element in achieving agreement on tougher sanctions may be a ‘solidarity package’ to support states which would suffer disproportionately from their imposition, at the expense of others who are less affected. Lithuania is already feeling the economic impact of Russia blocking some imports via the port of Klaipeda; and the Latvian Prime Minister has indicated that in the worst case scenario a total shut off of trade with Russia could reduce Latvia’s GDP by 10 per cent.
Deterrence should not be limited to financial steps. Though the immediate threat is to Ukraine, Russia has also made threatening moves in the Baltic, with surprise military exercises including amphibious landings in its Kaliningrad exclave. In an interview with German ARD TV on March 23rd, German Defence Minister Ursula von der Leyen urged increased NATO support for the Baltic states. She was right. NATO has already increased the size of its air policing mission, based in Lithuania (the UK will send four aircraft to join the mission in April), and the US has moved 12 F-16 aircraft to Poland. But so far NATO has not deployed any ground forces in the region. It should place small multinational contingents near the eastern borders of the Baltic States and Poland, as a visible statement of intent to live up to NATO’s Article 5 commitment to assist any ally subject to armed attack.
President Barack Obama and other Western leaders have made a serious mistake in categorically ruling out military involvement in Ukraine on the grounds that NATO’s security guarantee does not cover non-members. In doing this, they have reassured Putin that the West’s reaction will be diplomatic and economic; knowing that so far the EU has been split on imposing tough sanctions, he may feel that the price of further intervention is worth paying. Obama might instead have reminded Putin that Kuwait was not a NATO member, but the US-led coalition nonetheless intervened to restore its independence when Iraq sought to annex it in 1990. Western leaders should follow the Royal Navy motto: “Si vis pacem, para bellum” (“If you want peace, prepare war”). They should state publicly that if Ukraine were attacked and called for assistance in exercising its right to self-defence, they would be ready to deploy NATO forces. And to underline that this is more than empty rhetoric, they should open discussions with the Ukrainian government on concrete arrangements for such a deployment.
If such deterrent measures succeed in preventing any rash Russian action in the immediate future, they will still leave a changed security picture in Europe. A quarter century of (relatively) low levels of tension between the major powers in Europe is over. As long as Putin or others with similar views are in power in Russia, there will be a military and political threat to Russia’s neighbours.
In the 1997 NATO-Russia Founding Act, NATO stated that “in the current and foreseeable security environment”, it would carry out its missions without “additional permanent stationing of substantial combat forces”. Both sides agreed to respect the “sovereignty, independence and territorial integrity of all states and their inherent right to choose the means to ensure their own security”. NATO should announce that it is revisiting its policy in view of the changed situation. It would be imprudent for the alliance to abide by an agreement that Russia has abandoned.
NATO should review its relations with Georgia and Ukraine. Obama was clearly trying to reassure Putin when he said after the EU-US Summit in Brussels on March 26th that Georgia and Ukraine were “not currently on a path to NATO membership”; but he was ignoring the fact that successive NATO summits since 2008 have said that the two countries “will” become NATO members. NATO could withdraw that commitment, but that would merely reinforce Putin’s sense that former Soviet states are his to deal with as he wishes.
Georgia has consistently backed NATO membership and has been a major contributor to ISAF in Afghanistan; it should be rewarded at the NATO Summit in September with a Membership Action Plan (MAP) and a clear and short pathway to full NATO membership. There has never been a popular majority in Ukraine for joining the alliance, but after the Presidential election in Ukraine, once a new government is in place, NATO should discuss with Kyiv how the NATO/Ukraine relationship should develop. At least one recent opinion poll in Ukraine shows a sharp increase in support for NATO membership since the Russian intervention in Crimea, but at this stage membership remains a divisive issue and an unnecessary distraction from solving pressing economic and political problems.
The threats to Europe’s neighbourhood are not only or even primarily military. The prospects of all the EU’s Eastern Partners (Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine) have been blighted by corruption, poor governance and economic mismanagement. Ukraine would not have been so vulnerable either to internal instability or Russian meddling if it had been better governed and economically stronger. Moldova, though less corrupt than Ukraine, is still in 102nd position in Transparency International’s annual ‘Corruption Perceptions Index’. Georgia has done considerably better, but the rule of law is still weak there. And all three countries, lacking Russia’s mineral wealth, remain relatively poor.
Ukraine will need massive international assistance simply to meet its obligations this year; but financial aid should come with strict conditions, and with hands-on technical help. The priorities are to make state finances transparent and limit the opportunities for corruption; to establish courts that decide cases on the basis of laws, not in favour of the highest bidder; and to sort out Ukraine’s energy sector.
Ukraine’s gas industry has been a notoriously corrupt sector in a notoriously corrupt country. Energy inefficiency reduces competitiveness and increases dependence on Russia. Before the overthrow of President Viktor Yanukovych, the Ukrainian government had signed contracts with a number of Western oil majors to explore for both conventional and shale gas. Over time, these will enable Ukraine to buy less Russian gas; but reducing wasteful consumption will bring benefits more quickly and at lower cost. EU member-states like Denmark and Sweden have already identified energy efficiency as a priority area for investment.
A number of EU countries, particularly in Central and Northern Europe, are even more dependent than Ukraine on Russian gas. Reducing this dependence will take time, but is vital if the potential for Russia to use gas as a geopolitical tool is to be reduced. In a forthcoming CER insight Stephen Tindale will set out the options in detail. Europe needs more LNG terminals, and freer access to LNG, including from the US (which, thanks to shale gas, now has a surplus of gas). It needs more interconnectors, both for gas and electricity, particularly between the countries of Central Europe. These countries rely on pipelines from Russia but are largely isolated from each other and from other sources of gas and electricity. Interconnectors would support diversification, increasing both security of supply and competition. Europe needs more pipelines from the Caspian Sea and Iraqi Kurdistan. And it needs to overcome its fear of fracking and of nuclear power.
Europe is also losing the propaganda battle with Russia, not only in Ukraine but in some EU member-states. Russia has a number of means to get its messages across. Many Western articles on events in Ukraine are influenced by Russian reporting on the supposedly deep linguistic and ethnic divide between Eastern and Western Ukraine – a divide which Ukrainian census data shows is very blurred. Because Russian leaders constantly repeat that the Crimean ‘referendum’ reflected the will of the people, most Western media are now uncritically reporting this line without commenting on the shortcomings in the process. Outlets like RT, the Kremlin-controlled English language TV channel, though ridiculed by experts for their misinformation, still get quoted in social media; their views are given the same value as more objective journalism. And Western populists and anti-Europeans, including Nigel Farage of the UK Independence Party and Lord Tebbit of the Conservative Party, are promoting the Russian narrative that EU ‘expansionism’ has created the problems in Ukraine.
Western media should not stoop to propaganda, but Western governments should be more active in ensuring that objective information is available – including through direct engagement on social media. The US embassy in Kyiv has done a better job than most of trying to counter propaganda directed at Ukraine; the EU Delegation there could do a lot more. If Russia’s version of the story is allowed to dominate, it will foment division not only in Ukraine but also in Latvia and Estonia, where Russian TV is widely watched; and Western publics will be less likely to back strong action if Russia continues to expand into its ‘historical’ territories.
A return to some form of implicit containment and East-West competition may be the most likely short- to medium-term scenario, albeit this would (and should) fall far short of a comprehensive ‘Cold War’. But much better in the long term, both for the West and Russia, would be a constructive, win-win relationship. This seems out of reach as long as Putin is in power, or the oligarchic concentration of political and economic power around the Kremlin and the securocrats continues. Putin has been paranoid about attempts by the West to engineer a revolution against him. Perhaps it is time the EU gave up trying to reassure him, and instead worked on a long-term programme to support democratic change in Russia. Elements of this might include:
* Strong enforcement of the international ‘rules of the game’, including in the WTO. EU member-states should also make full use of existing anti-corruption and anti-money laundering legislation, and publicise examples of those in Putin’s circle who have grown rich in suspicious circumstances (the explanation by the US Treasury of the links between Putin and some of those sanctioned by the Americans in relation to the annexation of Crimea provides an excellent model).
* Investment in the next generation of Russians through scholarship schemes and increased links between universities. The more that ordinary Russians are exposed to the realities of life in the West – and particularly in former Communist countries which have benefited from economic and political reform – the harder it will be to mislead them with propaganda, and the more they will understand how free societies work.
* Support for small and medium enterprises (SMEs) in Russia. SMEs suffer from weak rule of law in the current system; entrepreneurs have a strong interest in change. There is funding available for help to SMEs in the framework of the EU-Russia ‘Partnership for Modernisation’, but there should be more.
* Support to civil society organisations – not necessarily political ones, but those working in areas such as protecting the environment, aiding vulnerable groups or identifying and combating corruption. This would be deeply unpopular with the Russian government, which has tried to brand NGOs that work with international donors as ‘foreign agents’, but it should be left to the NGOs themselves to decide whether to run the risk of taking Western funding or advice.
* Long-term political and economic engagement with Russia’s neighbours. If the EU can help the countries of the Eastern Partnership move from basket-cases to success stories, that will show that post-Soviet countries, including Russia, have alternatives to the way they have done things for the last 20 years, and undermine Putin’s argument for the system he has created.
* Consistent messaging to Russian society that it was not democracy and the free market that left Russia chaotic and impoverished in the 1990s, but the legacy of autocracy and communism, the worst elements of which Putin is now perpetuating with his imperial adventures.
Ian Bond is director of foreign policy at the Centre for European Reform.
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