by Clara Marina O'Donnell
On October 19th, the UK's coalition government published its 'strategic defence and security review' (SDSR), laying out the future shape of Britain's armed forces. As was to be expected at a time of budget austerity, the SDSR foresees significant cuts in military capabilities. But the review also has some good news. The need to save money has made the UK government more willing to move towards long-overdue European co-operation. In addition, the coalition is keen to see the EU play a role in defence, a pragmatism which stands in stark contrast to the eurosceptic views held by the Conservative party before the general election last May.
As part of its plan to reduce the UK's budget deficit, the government has been forced to cut an already overstretched defence budget by 8 per cent in real terms over the next four years. Prime Minister David Cameron has claimed that Britain will continue "punching above its weight" in the decades to come. But, inevitably, the UK's level of ambition has been scaled back.
Britain will no longer be able to maintain a long-term operation of the size that is currently deployed in Afghanistan: while there are nearly 10,000 British troops in Afghanistan today, the maximum size of such operations in future will be around 6,500. The size of large-scale fighting operations will also be cut back – to around two-thirds of the forces that went into Iraq in 2003. The government has also been forced to give up big items of military equipment. Britain will mothball or sell one of the two new aircraft carriers it has committed to build; the UK is also retiring its Harrier fleet of military jets early, leaving the other carrier without any British aircraft for several years.
Extensive cuts in UK defence capabilities risk further weakening the ability of Europeans to contribute to global crises, already poor as a result of years of insufficient and inefficient defence spending across the continent. But at least the British government is showing an unprecedented interest in closer defence co-operation – not only with the US, but also with its European allies. Acknowledging that it can no longer afford to maintain capabilities alone, the government has committed to exploring the possibilities of joint formations for future operations, joint training and maintenance, and even sharing assets or relying on others to provide some military equipment.
Frustrated by the inefficiencies and cost overruns of large multinational programmes, the coalition wants to focus on bilateral co-operation. In particular, the government wants to work more closely with France, which has a similar defence budget and shared military ambitions. Prime Minister Cameron and President Nicolas Sarkozy are expected to announce a series of common defence projects at a bilateral summit in Paris in early November. Now that both France and the UK will rely on only one aircraft carrier each, this should also lead to new avenues for co-operation. Britain has already decided to redesign its remaining carrier so it can be used by French (and US) aircraft.
The coalition government's plan to work more closely with its allies is both positive and long overdue. For decades, Britain and other European countries have wasted a lot of money by duplicating the development of military equipment. Depending on the outcome of the Franco-British summit, the new UK government might go further in promoting the cause of European defence co-operation than any of its predecessors.
But London must invest the same political energy it has devoted to France towards exploring additional savings with other European countries. In the SDSR, the government opens the possibility of closer defence co-operation with Germany, Italy, the Netherlands and Spain. But other countries could also offer niche savings, including Poland and Sweden which have shown a keen interest in improving their military capabilities in recent years. The UK should also actively encourage its European allies to strengthen co-operation amongst themselves. As Britain's own military preparedness diminishes, it has a greater interest in other European countries taking up the slack.
The second piece of good news in the SDSR is the rather constructive attitude of the UK towards EU defence co-operation. Before the general election last spring, key members of the Conservative party – in particular William Hague, now the Foreign Secretary, and Liam Fox, now in charge of defence – voiced serious reservations about EU efforts in defence. Liam Fox worried that federalists within the EU were trying to develop a European army. He openly opposed some of the steps towards a stronger EU foreign policy foreseen in the Lisbon treaty. And he was keen to withdraw the UK from the European Defence Agency, a body which encourages common efforts amongst EU countries in developing defence capabilities.
But since their arrival in government with the Liberal Democrats, the Conservatives have agreed to support the new institutions created by the Lisbon treaty. The coalition has chosen to remain in the European Defence Agency for a trial period of two years. And the SDSR has recognised that while NATO remains the "bedrock of Britain’s defence", an "outward-facing" EU also has a role to play in “promoting security and prosperity”. In the defence review, the government even stresses its support for EU military and civilian missions – as long as they offer good value for money and NATO does not want to intervene.
The new government's stronger focus on value for money in EU missions has already ruffled feathers in Brussels, as the UK has become more critical of EU deployments that it considers are failing to deliver – such as the EU mission in support of security sector reform in Guinea-Bissau (which was ended in September 2010) or the military training mission for Somali security forces. But the coalition's desire to see EU missions deliver a real impact on the ground should be seen as a good thing. Too often EU deployments have been too small to make a lasting contribution to stability, like the police training mission in Afghanistan, or their effectiveness has been damaged by an ambiguous mandate, as was the case at the beginning of the police mission in Bosnia-Herzegovina.
If the UK government is going to oppose missions which it considers are not adding value, it must also be willing to strengthen those missions which are effective. Britain is actually one of the EU countries keen to maintain the EU's military deployment in Bosnia-Herzegovina (which some other member-states want to dismantle). But the UK should go further and, when appropriate, increase the budget of effective EU operations and send more British personnel – notwithstanding the UK's budgetary troubles.
If the coalition strengthens EU missions, it would help reassure EU partners that the UK is not opposed to EU operations out of principle. More importantly, effective EU military and civilian deployments would contribute to one of Britain's key objectives within its SDSR – to strengthen stabilisation and conflict prevention efforts around the world.
At a time when additional defence cuts cannot be precluded down the road, the UK must work closely with its European partners over the next few years – in developing military capabilities and deploying stabilisation and crisis management missions, including through the EU. Only through co-operation now will Britain feel more comfortable to explore even deeper common efforts when the next SDSR takes place in 2015.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
Thursday, October 28, 2010
Friday, October 15, 2010
What currency wars mean for the eurozone
By Simon Tilford
The dollar has now fallen to $1.40 against the euro. This is still below the low of almost $1.60 that it reached in the middle in July 2008, but it represents a steep decline from under $1.20 in early June. Moreover, the US currency is likely to weaken further. The euro has also risen sharply against the British pound in recent weeks. Why is this happening? And what are the implications for the eurozone economy and, in particular, the member-states currently experiencing difficulties funding their government deficits?
The renewed strength of the euro is not down to optimism about the eurozone’s economic prospects. Most forecasters foresee only modest growth in the eurozone economy next year and in 2012. Nor does the appreciation in the value of the single currency reflect receding investor concerns over the solvency of various eurozone economies. The spreads between the German government’s borrowing costs and those of the struggling member-states of currency union remain very high. The reason for the strength of the euro reflects the differing policies of the US Federal Reserve (and the Bank of England) on the one side and the European Central Bank on the other.
The Federal Reserve will almost certainly embark on a further round of so-called quantitative easing before the end of 2010. The Bank of England may follow suit. Quantitative easing involves pumping money into the economy through the purchase of assets (usually government bonds), ostensibly with the aim of boosting credit growth and hence consumption and investment. Both central banks are considering such action because of the failure of their respective economic recoveries to gain traction and their consequent fears that inflation will fall too low. Weak economic growth and low inflation (or worse, deflation) is very dangerous for highly indebted economies, because it makes it much harder to reduce the real value of their debt.
The ECB has taken a different line. Some of its board members believe that they need to tighten monetary policy. The bank has already reined in its policy of providing unlimited liquidity to eurozone banks, with the result that market interest rates have risen sharply. Axel Weber, head of the influential German Bundesbank, has called for an increase in official interest rates and spoken out strongly against any quantitative easing comparable to that under consideration by the Federal Reserve or the Bank of England. The institutions’ contrasting approaches partly reflect philosophical differences – the ECB believes the potential inflationary risks of quantitative easing outweigh the threat of deflation. But the differing economic outlooks of the various eurozone economies are also a factor. For example, the German economy is expanding rapidly, explaining Weber’s call for tighter policy.
The problem for the eurozone is that unorthodox monetary policy such as quantitative easing tends to depress the currencies of the countries whose central banks are engaged in it. The reason is that some of the money issued flows abroad. The weakness of the dollar (and the pound) has led many to question whether the US and UK are engaging in competitive currency devaluations. In short, they stand accused of attempting to bolster their trade competitiveness at others’ expense. Because the ECB has elected to pursue a different monetary policy course and because – unlike East Asians countries such as China, South Korea and even Japan – the ECB does not intervene in the foreign currency markets to hold down the value of the euro, it is the single currency which is bearing the brunt of a weaker dollar.
There is no doubt that the Federal Reserve and the Bank of England are keen to keep their respective currencies weak. It is not hard to see why. For the best part of three decades, both economies have more or less continuously run current account deficits as their domestic savings have fallen short of their investment levels. They now need to close these external imbalances, which are a drag on their economies, and are one reason why both are running such large fiscal deficits. Savings rates in both countries have certainly picked up and investment remains weak, but a rebalancing of their economies remains elusive. Indeed, after narrowing in the immediate aftermath of the financial crisis, the US trade deficit is widening. A major reason for this is that many countries remain wedded to export-led growth and are unwilling or unable to rebalance their economies in favour of domestic demand.
Global imbalances were one of the key drivers of the financial crisis. They led to excessive capital flows into the US and other fast-growing developed economies. These pushed down the cost of capital and encouraged – together with poor management – excess leverage and risk-taking. US attempts to cajole the Chinese and others to pursue more balanced economic growth have largely fallen on deaf ears. By pumping out lots of dollars, the US central bank hopes to make it more costly for countries to hold down their currencies. China will have to buy more dollars if it is to maintain the renminbi’s peg to the US currency. This will be costly because the dollar will ultimately have to fall in value, reducing the value of China’s dollar holdings. Moreover, the inflows of dollars into China will prove destabilising, exacerbating bubbles and pushing up inflation. This, in turn, should make Chinese goods less competitive on the US market. However, it is impossible to say how long it will take before the Chinese and other East Asian governments blink.
In the meantime, the euro is set to remain very strong. This is bad news for the stability of the eurozone. If it persists, the adjustment facing struggling members of the currency union, such as Spain, will be even harder to bring off. Spain requires strong growth in exports to offset the weakness of its domestic economy, and a strong euro will make its goods and services less competitive in export markets outside the currency bloc. But is the eurozone an innocent bystander in all this? The eurozone’s trade with the rest of the world is broadly in balance, and no-one could accuse of the ECB of adopting policies aimed at weakening the euro. However, to an extent, the eurozone economies are reaping what they have sown.
First, Spain is so dependent on exports to the rest of the world to dig itself out if its current hole because the eurozone has failed to take action to address the trade imbalances between member-states of the currency union itself. Spain must close its external deficit without any corresponding obligation on countries such as Germany and the Netherlands to narrow their surpluses. In short, the eurozone is relying on demand generated elsewhere in the world to bail it out. In essence, its strategy to overcome the crisis involves running a trade surplus with the rest of the world. US action to weaken the dollar combined with the mercantilism of East Asian governments makes this all but impossible. Second, the Chinese were not the only ones who were deaf to US calls for action to rebalance the global economy. The German government was instrumental in preventing any discussion of imbalances within the G20, joining the Chinese in arguing that it is for the deficit countries alone to put their houses in order.
The G20’s failure to agree a global strategy to address imbalances leaves the eurozone in a tricky position. At the very least, the ECB should hold off tightening monetary policy, as this would further increase the attractiveness of the euro relative to the dollar. Secondly, it must get serious about removing barriers to stronger domestic demand across the eurozone. There will be no export-led exit from the eurozone crisis. Signs of a pick-up in German domestic demand are positive in this regard, but it remains to be seen how vulnerable this is to a weakening of external demand for German goods.
Simon Tilford is chief economist at the Centre for European Reform
The dollar has now fallen to $1.40 against the euro. This is still below the low of almost $1.60 that it reached in the middle in July 2008, but it represents a steep decline from under $1.20 in early June. Moreover, the US currency is likely to weaken further. The euro has also risen sharply against the British pound in recent weeks. Why is this happening? And what are the implications for the eurozone economy and, in particular, the member-states currently experiencing difficulties funding their government deficits?
The renewed strength of the euro is not down to optimism about the eurozone’s economic prospects. Most forecasters foresee only modest growth in the eurozone economy next year and in 2012. Nor does the appreciation in the value of the single currency reflect receding investor concerns over the solvency of various eurozone economies. The spreads between the German government’s borrowing costs and those of the struggling member-states of currency union remain very high. The reason for the strength of the euro reflects the differing policies of the US Federal Reserve (and the Bank of England) on the one side and the European Central Bank on the other.
The Federal Reserve will almost certainly embark on a further round of so-called quantitative easing before the end of 2010. The Bank of England may follow suit. Quantitative easing involves pumping money into the economy through the purchase of assets (usually government bonds), ostensibly with the aim of boosting credit growth and hence consumption and investment. Both central banks are considering such action because of the failure of their respective economic recoveries to gain traction and their consequent fears that inflation will fall too low. Weak economic growth and low inflation (or worse, deflation) is very dangerous for highly indebted economies, because it makes it much harder to reduce the real value of their debt.
The ECB has taken a different line. Some of its board members believe that they need to tighten monetary policy. The bank has already reined in its policy of providing unlimited liquidity to eurozone banks, with the result that market interest rates have risen sharply. Axel Weber, head of the influential German Bundesbank, has called for an increase in official interest rates and spoken out strongly against any quantitative easing comparable to that under consideration by the Federal Reserve or the Bank of England. The institutions’ contrasting approaches partly reflect philosophical differences – the ECB believes the potential inflationary risks of quantitative easing outweigh the threat of deflation. But the differing economic outlooks of the various eurozone economies are also a factor. For example, the German economy is expanding rapidly, explaining Weber’s call for tighter policy.
The problem for the eurozone is that unorthodox monetary policy such as quantitative easing tends to depress the currencies of the countries whose central banks are engaged in it. The reason is that some of the money issued flows abroad. The weakness of the dollar (and the pound) has led many to question whether the US and UK are engaging in competitive currency devaluations. In short, they stand accused of attempting to bolster their trade competitiveness at others’ expense. Because the ECB has elected to pursue a different monetary policy course and because – unlike East Asians countries such as China, South Korea and even Japan – the ECB does not intervene in the foreign currency markets to hold down the value of the euro, it is the single currency which is bearing the brunt of a weaker dollar.
There is no doubt that the Federal Reserve and the Bank of England are keen to keep their respective currencies weak. It is not hard to see why. For the best part of three decades, both economies have more or less continuously run current account deficits as their domestic savings have fallen short of their investment levels. They now need to close these external imbalances, which are a drag on their economies, and are one reason why both are running such large fiscal deficits. Savings rates in both countries have certainly picked up and investment remains weak, but a rebalancing of their economies remains elusive. Indeed, after narrowing in the immediate aftermath of the financial crisis, the US trade deficit is widening. A major reason for this is that many countries remain wedded to export-led growth and are unwilling or unable to rebalance their economies in favour of domestic demand.
Global imbalances were one of the key drivers of the financial crisis. They led to excessive capital flows into the US and other fast-growing developed economies. These pushed down the cost of capital and encouraged – together with poor management – excess leverage and risk-taking. US attempts to cajole the Chinese and others to pursue more balanced economic growth have largely fallen on deaf ears. By pumping out lots of dollars, the US central bank hopes to make it more costly for countries to hold down their currencies. China will have to buy more dollars if it is to maintain the renminbi’s peg to the US currency. This will be costly because the dollar will ultimately have to fall in value, reducing the value of China’s dollar holdings. Moreover, the inflows of dollars into China will prove destabilising, exacerbating bubbles and pushing up inflation. This, in turn, should make Chinese goods less competitive on the US market. However, it is impossible to say how long it will take before the Chinese and other East Asian governments blink.
In the meantime, the euro is set to remain very strong. This is bad news for the stability of the eurozone. If it persists, the adjustment facing struggling members of the currency union, such as Spain, will be even harder to bring off. Spain requires strong growth in exports to offset the weakness of its domestic economy, and a strong euro will make its goods and services less competitive in export markets outside the currency bloc. But is the eurozone an innocent bystander in all this? The eurozone’s trade with the rest of the world is broadly in balance, and no-one could accuse of the ECB of adopting policies aimed at weakening the euro. However, to an extent, the eurozone economies are reaping what they have sown.
First, Spain is so dependent on exports to the rest of the world to dig itself out if its current hole because the eurozone has failed to take action to address the trade imbalances between member-states of the currency union itself. Spain must close its external deficit without any corresponding obligation on countries such as Germany and the Netherlands to narrow their surpluses. In short, the eurozone is relying on demand generated elsewhere in the world to bail it out. In essence, its strategy to overcome the crisis involves running a trade surplus with the rest of the world. US action to weaken the dollar combined with the mercantilism of East Asian governments makes this all but impossible. Second, the Chinese were not the only ones who were deaf to US calls for action to rebalance the global economy. The German government was instrumental in preventing any discussion of imbalances within the G20, joining the Chinese in arguing that it is for the deficit countries alone to put their houses in order.
The G20’s failure to agree a global strategy to address imbalances leaves the eurozone in a tricky position. At the very least, the ECB should hold off tightening monetary policy, as this would further increase the attractiveness of the euro relative to the dollar. Secondly, it must get serious about removing barriers to stronger domestic demand across the eurozone. There will be no export-led exit from the eurozone crisis. Signs of a pick-up in German domestic demand are positive in this regard, but it remains to be seen how vulnerable this is to a weakening of external demand for German goods.
Simon Tilford is chief economist at the Centre for European Reform
Tuesday, October 12, 2010
The EU should be much bolder on energy efficiency
by Stephen Tindale
The most pain-free way for European governments to fight climate change is to use energy more efficiently. At a recent energy conference hosted by the European Commission, it struck me that the EU still has a poverty of ambition when it comes to energy efficiency. This is hard to fathom at a time when it could alleviate several of the ills currently troubling European governments: unemployment, energy security and climate change.
EU policy and performance in this area has been disappointing to date. In a speech to a conference on EU energy policy on September 30th 2010, energy commissioner Gṻnther Oettinger identified energy efficiency as his “first priority”. However, he then talked mainly about how energy is used by consumers and the importance of improving the insulation of buildings. This is a significant part of the energy equation, but not the only important part of it. The EU must also focus on how energy is produced.
Too much of the debate on climates focuses on targets. The EU has legally binding targets to reduce greenhouse gas emissions by at least 20 per cent (from 1990 levels) by 2020, and to get 20 per cent of energy from renewables by the same date. A third target, energy savings of 20 per cent by 2020, is so far only for for guidance. Oettinger has said that he will decide whether to make this target binding after evaluating progress made towards the voluntary target in 2012. Targets have some value; they lead to greater political and business attention and help secure agreement on specific policies. However, it would be a waste of political and negotiating capital to spend too much time or effort making the target binding. It would be more sensible for governments, businesses and non-governmental organisations to focus instead on specific regulations and on funding.
The Commission is due to publish a new Energy Efficiency Action Plan before the end of 2010. This should identify regulations and funds to deliver improved efficiency, both in energy use and in energy production. The Energy Performance of Buildings Directive, Energy Services Directive and Cogeneration Directive should be strengthened. The Energy Performance of Buildings Directive mandates that all buildings undergoing major renovation will have to meet minimum energy performance requirements, but these are to be set by member-states. Germany already requires that any building undergoing substantial renovation should meet high energy efficiency standards. Sweden has gone further: every time a building is sold or rented out it must meet high efficiency standards. All member-states should follow the Swedish example, and the new Action Plan should require that strong building regulations be met whenever a building is renovated, sold or rented.
The Energy Services Directive is an attempt to get energy companies to act as energy services companies, delivering not just power and heat but also advice to help their consumers use energy more efficiently and so reduce costs. The directive requires energy suppliers to promote energy efficiency to their customers and to expand energy metering. But it is vaguely worded and has no significant regulatory teeth. It should in future require energy companies to give money to organisations which carry out energy efficiency work at no up-front cost to customers.
The third directive to strengthen is the Congeneration Directive. When a fuel is burnt to generate electricity, heat is also produced. Most of the heat from most power stations is simply wasted up chimneys. Additional fuel is then burnt to provide heat for homes and industry. It is quite possible to use the heat from electricity generation for industrial or domestic heating. Cogeneration is a well-established technology which makes obvious economic, energy security and climate sense. Yet in 2007 only 11 per cent of EU electricity and 13 per cent of heat used came from cogeneration plants.
The Cogeneration Directive requires member-states to remove barriers to cogeneration. It allows, but does not require, them to support cogeneration. Some governments have done so, but the leading countries were doing this well before the directive was adopted in 2004, and the directive has not delivered a significant increase in cogeneration Europe-wide. Cogeneration should therefore be made mandatory. Whenever anything is burnt to generate electricity, the heat must be captured and used.
As well as regulation, the EU must focus on funding. Grants will be necessary to expand cogeneration and district heating networks. In 2008 the Commission allocated €4.8 billion of cohesion policy funds to renewables, decentralised energy production (which makes cogeneration much easier) and district heating. It has recently proposed that €115 million of unspent money from the European Economic Recovery Fund to be allocated to energy efficiency. The Commission should go much further. It should propose a substantial increase in energy efficiency funding, using some of the estimated €112 billion that will be raised by auctioning Emissions Trading Scheme permits.
Whatever the Commission does, most of the finance will have to be mobilised nationally. Much of the funding should come via low-interest loans, as has been done successfully in Germany through the publicly-owned KfW bank, resulting in the improvement of more than 1.5 million homes. The Energy Services Directive allows member-states to establish energy efficiency funds, but does not require them to do so, while the Energy Performance of Buildings Directive merely requires them to list existing and proposed financing schemes. These provisions are too weak. Member-states must be required to set up energy efficiency financing schemes.
The EU likes to claim to be a world leader on tackling climate change. It cannot claim any sort of leadership in energy efficiency, but there are some reasons for optimism that 2011 will at last see significant progress. President Herman Van Rompuy has called a summit on energy in February 2011. This will be a good opportunity to make progress on implementing the Energy Efficiency Action Plan. Hungary, which holds the EU presidency for the first half of 2011, has particularly strong reasons to focus on improving existing buildings. Doing so could reduce its annual gas imports by 40 per cent, and prevent up to 2,500 people dying from hypothermia every winter. Poland, which has the presidency in the second half of 2011, has improved residential energy consumption by almost 20 per cent over the last five years by retro-fitting existing buildings.
Progress is no guaranteed, of course. Raising the price of energy through taxation is one way to encourage less consumption, and would also help reduce fiscal deficits, but energy taxation proposals provoke extensive and often effective lobbying by industry and consumer organisations. Public grants don't face opposition, but will be limited by the economic situation. Nevertheless, the Commission does now appear to be serious about energy efficiency. It has estimated that reducing EU energy consumption by 20 per cent by 2020 would reduce the cost of energy imports by €100-150 billion annually, and could create a million new jobs. The means to achieve this 20 per cent reduction are already known, and the technologies are available. Yet under current policies the EU will only reduce consumption by 10 per cent, so the EU will miss out on at least €50 billion a year in cost savings and half a million new jobs. Stronger policies to save more energy must be the top priority for Oettinger and Jose Manuel Barroso for the rest of 2010 and the whole of 2011.
Stephen Tindale is an associate fellow at the Centre for European Reform.
The arguments outlined above will be expanded in a CER policy brief, 'Delivering EU Energy Efficiency', in November 2010.
The most pain-free way for European governments to fight climate change is to use energy more efficiently. At a recent energy conference hosted by the European Commission, it struck me that the EU still has a poverty of ambition when it comes to energy efficiency. This is hard to fathom at a time when it could alleviate several of the ills currently troubling European governments: unemployment, energy security and climate change.
EU policy and performance in this area has been disappointing to date. In a speech to a conference on EU energy policy on September 30th 2010, energy commissioner Gṻnther Oettinger identified energy efficiency as his “first priority”. However, he then talked mainly about how energy is used by consumers and the importance of improving the insulation of buildings. This is a significant part of the energy equation, but not the only important part of it. The EU must also focus on how energy is produced.
Too much of the debate on climates focuses on targets. The EU has legally binding targets to reduce greenhouse gas emissions by at least 20 per cent (from 1990 levels) by 2020, and to get 20 per cent of energy from renewables by the same date. A third target, energy savings of 20 per cent by 2020, is so far only for for guidance. Oettinger has said that he will decide whether to make this target binding after evaluating progress made towards the voluntary target in 2012. Targets have some value; they lead to greater political and business attention and help secure agreement on specific policies. However, it would be a waste of political and negotiating capital to spend too much time or effort making the target binding. It would be more sensible for governments, businesses and non-governmental organisations to focus instead on specific regulations and on funding.
The Commission is due to publish a new Energy Efficiency Action Plan before the end of 2010. This should identify regulations and funds to deliver improved efficiency, both in energy use and in energy production. The Energy Performance of Buildings Directive, Energy Services Directive and Cogeneration Directive should be strengthened. The Energy Performance of Buildings Directive mandates that all buildings undergoing major renovation will have to meet minimum energy performance requirements, but these are to be set by member-states. Germany already requires that any building undergoing substantial renovation should meet high energy efficiency standards. Sweden has gone further: every time a building is sold or rented out it must meet high efficiency standards. All member-states should follow the Swedish example, and the new Action Plan should require that strong building regulations be met whenever a building is renovated, sold or rented.
The Energy Services Directive is an attempt to get energy companies to act as energy services companies, delivering not just power and heat but also advice to help their consumers use energy more efficiently and so reduce costs. The directive requires energy suppliers to promote energy efficiency to their customers and to expand energy metering. But it is vaguely worded and has no significant regulatory teeth. It should in future require energy companies to give money to organisations which carry out energy efficiency work at no up-front cost to customers.
The third directive to strengthen is the Congeneration Directive. When a fuel is burnt to generate electricity, heat is also produced. Most of the heat from most power stations is simply wasted up chimneys. Additional fuel is then burnt to provide heat for homes and industry. It is quite possible to use the heat from electricity generation for industrial or domestic heating. Cogeneration is a well-established technology which makes obvious economic, energy security and climate sense. Yet in 2007 only 11 per cent of EU electricity and 13 per cent of heat used came from cogeneration plants.
The Cogeneration Directive requires member-states to remove barriers to cogeneration. It allows, but does not require, them to support cogeneration. Some governments have done so, but the leading countries were doing this well before the directive was adopted in 2004, and the directive has not delivered a significant increase in cogeneration Europe-wide. Cogeneration should therefore be made mandatory. Whenever anything is burnt to generate electricity, the heat must be captured and used.
As well as regulation, the EU must focus on funding. Grants will be necessary to expand cogeneration and district heating networks. In 2008 the Commission allocated €4.8 billion of cohesion policy funds to renewables, decentralised energy production (which makes cogeneration much easier) and district heating. It has recently proposed that €115 million of unspent money from the European Economic Recovery Fund to be allocated to energy efficiency. The Commission should go much further. It should propose a substantial increase in energy efficiency funding, using some of the estimated €112 billion that will be raised by auctioning Emissions Trading Scheme permits.
Whatever the Commission does, most of the finance will have to be mobilised nationally. Much of the funding should come via low-interest loans, as has been done successfully in Germany through the publicly-owned KfW bank, resulting in the improvement of more than 1.5 million homes. The Energy Services Directive allows member-states to establish energy efficiency funds, but does not require them to do so, while the Energy Performance of Buildings Directive merely requires them to list existing and proposed financing schemes. These provisions are too weak. Member-states must be required to set up energy efficiency financing schemes.
The EU likes to claim to be a world leader on tackling climate change. It cannot claim any sort of leadership in energy efficiency, but there are some reasons for optimism that 2011 will at last see significant progress. President Herman Van Rompuy has called a summit on energy in February 2011. This will be a good opportunity to make progress on implementing the Energy Efficiency Action Plan. Hungary, which holds the EU presidency for the first half of 2011, has particularly strong reasons to focus on improving existing buildings. Doing so could reduce its annual gas imports by 40 per cent, and prevent up to 2,500 people dying from hypothermia every winter. Poland, which has the presidency in the second half of 2011, has improved residential energy consumption by almost 20 per cent over the last five years by retro-fitting existing buildings.
Progress is no guaranteed, of course. Raising the price of energy through taxation is one way to encourage less consumption, and would also help reduce fiscal deficits, but energy taxation proposals provoke extensive and often effective lobbying by industry and consumer organisations. Public grants don't face opposition, but will be limited by the economic situation. Nevertheless, the Commission does now appear to be serious about energy efficiency. It has estimated that reducing EU energy consumption by 20 per cent by 2020 would reduce the cost of energy imports by €100-150 billion annually, and could create a million new jobs. The means to achieve this 20 per cent reduction are already known, and the technologies are available. Yet under current policies the EU will only reduce consumption by 10 per cent, so the EU will miss out on at least €50 billion a year in cost savings and half a million new jobs. Stronger policies to save more energy must be the top priority for Oettinger and Jose Manuel Barroso for the rest of 2010 and the whole of 2011.
Stephen Tindale is an associate fellow at the Centre for European Reform.
The arguments outlined above will be expanded in a CER policy brief, 'Delivering EU Energy Efficiency', in November 2010.
Friday, October 08, 2010
Divisions remain over euro reform
by Katinka Barysch
Europeans agree that the management of the euro must be improved to prevent future crises, or deal with them better if and when they happen. The European Commission is hopeful that it can get all 27 EU countries to agree on a package of reforms it published at the end of September. However, recent conversations in various EU capitals left me with the impression that divisions still run deep on crucial aspects of eurozone reform. Not everyone shares the Germans’ sense of urgency, and there is a risk that complacency sets in before a sustainable new framework has been created.
On September 29th, the European Commission published six draft laws designed to improve the management of the euro. The package foresees earlier and tougher sanctions on countries that break agreed limits on budget deficits and debt levels, new procedures for macro-economic co-ordination to avoid harmful imbalances among EU countries, and a harmonisation of the way EU countries draw up their budgets. The conclusions of Herman Van Rompuy’s taskforce on eurozone governance are expected to go broadly in the same direction. The Commission hopes that the proposed reforms can become law by the summer of 2011 – an ambitious timetable even by the Commission’s own admission.
So far, discussions have mainly taken place among finance ministers, either among 16 of them in the Euro Group or all 27 in Van Rompuy’s taskforce (a slightly enlarged version of Ecofin). Finance ministries tend to welcome strict EU rules, which help them to fend off spending pleas from cabinet colleagues. But the same unity of purpose does not exist among the EU’s heads of state.
In rough terms, the EU countries fall into two camps: a German-led one which puts the emphasis on strict rules and automatic sanctions to enforce discipline; and a French-led group of mainly South European countries that – although aware of the need for fiscal discipline – want more political wiggle-room for economic policy co-ordination that could require an effort also from surplus countries, for example by trying to boost demand.
France’s club Med is weaker than the German stability camp: members such as Greece, Portugal and Spain are in the dock and their voices count for less in the current debate. Italy traditionally punches below its weight in European policy debates; and Rome’s opposition to attaching sanctions not only to excessive deficits but also stubbornly high debt levels is a little too predictable (its own debt being the second highest in the EU).
The German camp looks firmer and stronger. Austria and the Netherlands agree on the need for tough spending limits and sanctions. So do the Nordics, including non-euro countries such as Denmark and Sweden. Most of the Central and East European member-states, having imposed fierce austerity programmes at home, are not afraid of strict rules. “We are Germany’s natural allies in this”, insists one Polish official. “That’s why the Germans are stupid to try and keep the East Europeans out of the euro.”
However, the German-led group is not as cohesive as it appears at first sight. The non-euro countries do not only want stronger rules for the eurozone. They also want to forestall the emergence of a two-tier EU where euro countries closely co-ordinate their economic policies while non-euro ones wait outside the door. The price most non-euro countries are willing to pay for this is to be bound by the tough new rules and even accept financial penalties. However, the EU treaties allow eurozone countries to agree on new measures and sanctions among themselves but not to extend them to non-euro countries. Some in Central Europe now silently hope that the euro reform debate will drag on for so long that they can slip into the euro in the meantime. Poland has added a long-standing demand to the eurozone debate, namely that the costs of pension reform be excluded from budget deficit numbers. Other EU countries could complicate the reform effort with their own idiosyncratic issues. The UK is in the special position that it wants stronger rules for the euro – knowing that another eurozone crisis would harm its exports and finance industry – but under no circumstances does it want to be bound by them.
Although Germany has so far dominated the eurozone reform debate, it still faces an uphill struggle to get all 27 governments to back new rules and penalties. A restive European Parliament will also have a say on some of the proposed changes. The most important condition for creating a consensus on swift eurozone reform is still for France and Germany to reach an agreement. Christine Lagarde, France’s finance minister, and her German counterpart, Wolfgang Schäuble, have put on an admirable show of unity in the euro debates. But it is not always clear in how far they speak on behalf of their bosses at home. Divisions between Germany and France still run deep.
French policy-makers and economists think that the single currency suffers from a design flaw: a lack of economic governance. Closer economic policy co-ordination, including on such things as tax levels and industrial policy, is therefore what the French government is aiming for. Most Germans think that the reason for the current mess is that existing fiscal limits were not applied properly [for the reasons why they should re-think see How to save the euro, by Simon Tilford]. Germans demand stricter rules not only at the EU level but also at the national level. They want other EU countries to emulate Germany’s new constitutional clause, which mandates all future German governments to run balanced budgets from 2016 onwards. Germans do not mind that this clause will give the country’s already mighty constitutional court a direct say in economic management.
Policy-making by judicial decree would be anathema to most French. For them, discretion is the essence of politics, at home and in the eurozone. “Leaders need to be able to lead, especially in a crisis. They should not tie their own hands”, says one of Sarkozy’s economic advisors. The Commission proposals already embody a compromise between Germany and France: the fines proposed by the Commission will bite unless a qualified majority of EU countries votes against them. For many Germans, that still leaves too much room for political cop-outs. For most French, the thought of the Commission deciding something so eminently political as fines is still hard to accept.
Another profound disagreement concerns the idea of bolstering the euro through a permanent crisis resolution mechanism. The Commission omitted this from its September reform package, which is looking only at steps that can be implemented without changing the Lisbon treaty. The Commission, alongside the French, also argues that the EU should first see how its €440 billion safety net (the European Financial Stability Facility) works before it talks about new institutions.
But Berlin is in a hurry. It refuses to contemplate extending the EFSF beyond 2013. And it will accept a permanent rescue fund only if it comes with a bankruptcy procedure for countries that can no longer service their debt. “Without a resolution mechanism, we will have endless bail-outs and no incentives for countries to run a responsible fiscal policy”, warns one German finance ministry official. He speculates whether the EU could use the treaty adjustment that will be necessary for Croatia to join the EU over the next couple of years to set up this new mechanism.
French officials argue that talking about a bankruptcy procedure for countries now would only spook the markets. Generally, the French do not appear to feel the same sense of panic about the fate of the euro that has gripped many Germans. “The euro?” asks one Paris intellectual somewhat tongue in cheek. “France suffers from an identity crisis! It fears about its role in the world, its traditional dominance of Europe, its social model, even its way of life.” While France is concerned about losing its AAA credit rating and being ‘decoupled’ from the German economy, it has been less pro-active in the euro reform debate. Without a sense of urgency, France and Germany are unlikely to make the concerted effort that is still needed to get all EU countries to support a comprehensive reform package. The spectre of an EU lurching from crisis to crisis has not been banished.
Katinka Barysch is deputy director at the Centre for European Reform
Europeans agree that the management of the euro must be improved to prevent future crises, or deal with them better if and when they happen. The European Commission is hopeful that it can get all 27 EU countries to agree on a package of reforms it published at the end of September. However, recent conversations in various EU capitals left me with the impression that divisions still run deep on crucial aspects of eurozone reform. Not everyone shares the Germans’ sense of urgency, and there is a risk that complacency sets in before a sustainable new framework has been created.
On September 29th, the European Commission published six draft laws designed to improve the management of the euro. The package foresees earlier and tougher sanctions on countries that break agreed limits on budget deficits and debt levels, new procedures for macro-economic co-ordination to avoid harmful imbalances among EU countries, and a harmonisation of the way EU countries draw up their budgets. The conclusions of Herman Van Rompuy’s taskforce on eurozone governance are expected to go broadly in the same direction. The Commission hopes that the proposed reforms can become law by the summer of 2011 – an ambitious timetable even by the Commission’s own admission.
So far, discussions have mainly taken place among finance ministers, either among 16 of them in the Euro Group or all 27 in Van Rompuy’s taskforce (a slightly enlarged version of Ecofin). Finance ministries tend to welcome strict EU rules, which help them to fend off spending pleas from cabinet colleagues. But the same unity of purpose does not exist among the EU’s heads of state.
In rough terms, the EU countries fall into two camps: a German-led one which puts the emphasis on strict rules and automatic sanctions to enforce discipline; and a French-led group of mainly South European countries that – although aware of the need for fiscal discipline – want more political wiggle-room for economic policy co-ordination that could require an effort also from surplus countries, for example by trying to boost demand.
France’s club Med is weaker than the German stability camp: members such as Greece, Portugal and Spain are in the dock and their voices count for less in the current debate. Italy traditionally punches below its weight in European policy debates; and Rome’s opposition to attaching sanctions not only to excessive deficits but also stubbornly high debt levels is a little too predictable (its own debt being the second highest in the EU).
The German camp looks firmer and stronger. Austria and the Netherlands agree on the need for tough spending limits and sanctions. So do the Nordics, including non-euro countries such as Denmark and Sweden. Most of the Central and East European member-states, having imposed fierce austerity programmes at home, are not afraid of strict rules. “We are Germany’s natural allies in this”, insists one Polish official. “That’s why the Germans are stupid to try and keep the East Europeans out of the euro.”
However, the German-led group is not as cohesive as it appears at first sight. The non-euro countries do not only want stronger rules for the eurozone. They also want to forestall the emergence of a two-tier EU where euro countries closely co-ordinate their economic policies while non-euro ones wait outside the door. The price most non-euro countries are willing to pay for this is to be bound by the tough new rules and even accept financial penalties. However, the EU treaties allow eurozone countries to agree on new measures and sanctions among themselves but not to extend them to non-euro countries. Some in Central Europe now silently hope that the euro reform debate will drag on for so long that they can slip into the euro in the meantime. Poland has added a long-standing demand to the eurozone debate, namely that the costs of pension reform be excluded from budget deficit numbers. Other EU countries could complicate the reform effort with their own idiosyncratic issues. The UK is in the special position that it wants stronger rules for the euro – knowing that another eurozone crisis would harm its exports and finance industry – but under no circumstances does it want to be bound by them.
Although Germany has so far dominated the eurozone reform debate, it still faces an uphill struggle to get all 27 governments to back new rules and penalties. A restive European Parliament will also have a say on some of the proposed changes. The most important condition for creating a consensus on swift eurozone reform is still for France and Germany to reach an agreement. Christine Lagarde, France’s finance minister, and her German counterpart, Wolfgang Schäuble, have put on an admirable show of unity in the euro debates. But it is not always clear in how far they speak on behalf of their bosses at home. Divisions between Germany and France still run deep.
French policy-makers and economists think that the single currency suffers from a design flaw: a lack of economic governance. Closer economic policy co-ordination, including on such things as tax levels and industrial policy, is therefore what the French government is aiming for. Most Germans think that the reason for the current mess is that existing fiscal limits were not applied properly [for the reasons why they should re-think see How to save the euro, by Simon Tilford]. Germans demand stricter rules not only at the EU level but also at the national level. They want other EU countries to emulate Germany’s new constitutional clause, which mandates all future German governments to run balanced budgets from 2016 onwards. Germans do not mind that this clause will give the country’s already mighty constitutional court a direct say in economic management.
Policy-making by judicial decree would be anathema to most French. For them, discretion is the essence of politics, at home and in the eurozone. “Leaders need to be able to lead, especially in a crisis. They should not tie their own hands”, says one of Sarkozy’s economic advisors. The Commission proposals already embody a compromise between Germany and France: the fines proposed by the Commission will bite unless a qualified majority of EU countries votes against them. For many Germans, that still leaves too much room for political cop-outs. For most French, the thought of the Commission deciding something so eminently political as fines is still hard to accept.
Another profound disagreement concerns the idea of bolstering the euro through a permanent crisis resolution mechanism. The Commission omitted this from its September reform package, which is looking only at steps that can be implemented without changing the Lisbon treaty. The Commission, alongside the French, also argues that the EU should first see how its €440 billion safety net (the European Financial Stability Facility) works before it talks about new institutions.
But Berlin is in a hurry. It refuses to contemplate extending the EFSF beyond 2013. And it will accept a permanent rescue fund only if it comes with a bankruptcy procedure for countries that can no longer service their debt. “Without a resolution mechanism, we will have endless bail-outs and no incentives for countries to run a responsible fiscal policy”, warns one German finance ministry official. He speculates whether the EU could use the treaty adjustment that will be necessary for Croatia to join the EU over the next couple of years to set up this new mechanism.
French officials argue that talking about a bankruptcy procedure for countries now would only spook the markets. Generally, the French do not appear to feel the same sense of panic about the fate of the euro that has gripped many Germans. “The euro?” asks one Paris intellectual somewhat tongue in cheek. “France suffers from an identity crisis! It fears about its role in the world, its traditional dominance of Europe, its social model, even its way of life.” While France is concerned about losing its AAA credit rating and being ‘decoupled’ from the German economy, it has been less pro-active in the euro reform debate. Without a sense of urgency, France and Germany are unlikely to make the concerted effort that is still needed to get all EU countries to support a comprehensive reform package. The spectre of an EU lurching from crisis to crisis has not been banished.
Katinka Barysch is deputy director at the Centre for European Reform
Monday, September 27, 2010
Immigration: why Brussels will be blamed
By Hugo Brady
Liberal Sweden elects an explicitly anti-immigrant party to parliament for the first time. France's president and the European Commission lacerate each other in public over deportations of Roma. A former German central banker publishes a bestseller warning that immigration is diluting the nation's human stock. And even Britain moves forward with plans to cap economic immigration. The last three weeks have been a startling illustration of how immigration has come to dominate European politics.
At first, the EU seemed only a marginal player in this drama. The European Commission cannot dictate how many immigrants member countries let in, how many refugees they accept or how host societies should integrate newcomers. EU powers over the issuing of work visas are limited. But, as the row between President Sarkozy and Viviane Reding, the EU's justice commissioner, demonstrates, the Union has become a central player in immigration policy, even when governments point to public safety to defend their actions. This is mainly because the Commission is legally obliged to protect the mobility rights of citizens under a 'free movement' directive agreed by governments in 2004. (The law aims to make sure that EU nationals can move to each others' countries without the need for work or residency permits, a commitment originally laid down in the EU's founding treaties.)
This responsibility is unlikely to make the EU any more popular with the public, however. It means EU law limits the powers of national governments to tighten immigration policy in response to popular demand during tough economic times. Britain, for example, will set a cap on the numbers of new immigrants coming to the UK starting next year. But the cap seems largely cosmetic, given that citizens from EU countries will continue to be able to seek work there under free movement rules. Voters tend to value control and security over the freedoms they either do not use or take for granted. And there are a number of reasons to think that – in the febrile political atmosphere created by the 2009 recession - they may begin to regard the EU as part of the problem rather than the solution to immigration challenges.
For starters, EU officials should remember that what they often doctrinally dismiss as merely 'free movement' is immigration in anyone else's language, including Europe's politicians. Tensions over immigrants were evident in Western Europe long before the onset of global recession. And they are bound to continue because the east-west European migration that followed the EU's 2004-2007 enlargement has yet to run its course. Germany and Austria will lift transitional restrictions on the free movement of workers from eight Central and East European countries next year. All EU countries must do the same for Bulgaria and Romania by 2014.
Second, the Commission has plans to toughen up the application of EU rules on asylum seekers over the next two years. It will propose higher standards for the treatment and accommodation of refugees and access to the job market for those who wait a long time for their claims to be heard. But like few other issues, the cost of maintaining asylum seekers touches a very raw nerve, especially in countries that are faced with budgetary austerity. The Sweden Democrats owe their electoral success in part to widespread public concerns over the country's recent generosity to thousands of Iraqi refugees. However high-minded the intention, the cost implications of the Commission's proposals may further erode public support for the EU especially as governments are likely to portray such measures as being imposed by Brussels.
Third – as Commissioner Reding has already made clear in the case of France – she wants EU rules on free movement to be more strictly enforced in every member-state, and is prepared to take miscreant countries to court, if necessary. Reding's zeal to apply the law is laudable: EU rules must be uniformly implemented across the 27 member-states to be effective. However she also risks opening a Pandora's box of national discontent at the wrong time. Several EU countries grumble that the free movement directive is too broad in scope, especially after a 2008 court ruling expanded free movement rights even to non-EU nationals in certain circumstances. Faced with a further ultimatum by Reding, governments might be tempted to support a proposal from Italy to water down the directive and allow governments greater leeway to refuse residency based on economic circumstances or security concerns.
If the Commission refused to table such a draft, it might hand a political platform to far right and eurosceptic forces throughout the EU. On the other hand, the EU's institutions have little choice but to stand firm in the face of pressure to compromise on free movement rights or to ignore their non-implementation. They believe - probably rightly - that if such freedoms were rescinded or weakened now, EU governments would not return to the status quo at a future date. Welcome to Europe's battle over immigration and free movement. Appalled Swedish liberals, a floundering French president and an indignant European commissioner are just the opening salvos.
Hugo Brady is a senior research fellow at the Centre for European Reform.
Liberal Sweden elects an explicitly anti-immigrant party to parliament for the first time. France's president and the European Commission lacerate each other in public over deportations of Roma. A former German central banker publishes a bestseller warning that immigration is diluting the nation's human stock. And even Britain moves forward with plans to cap economic immigration. The last three weeks have been a startling illustration of how immigration has come to dominate European politics.
At first, the EU seemed only a marginal player in this drama. The European Commission cannot dictate how many immigrants member countries let in, how many refugees they accept or how host societies should integrate newcomers. EU powers over the issuing of work visas are limited. But, as the row between President Sarkozy and Viviane Reding, the EU's justice commissioner, demonstrates, the Union has become a central player in immigration policy, even when governments point to public safety to defend their actions. This is mainly because the Commission is legally obliged to protect the mobility rights of citizens under a 'free movement' directive agreed by governments in 2004. (The law aims to make sure that EU nationals can move to each others' countries without the need for work or residency permits, a commitment originally laid down in the EU's founding treaties.)
This responsibility is unlikely to make the EU any more popular with the public, however. It means EU law limits the powers of national governments to tighten immigration policy in response to popular demand during tough economic times. Britain, for example, will set a cap on the numbers of new immigrants coming to the UK starting next year. But the cap seems largely cosmetic, given that citizens from EU countries will continue to be able to seek work there under free movement rules. Voters tend to value control and security over the freedoms they either do not use or take for granted. And there are a number of reasons to think that – in the febrile political atmosphere created by the 2009 recession - they may begin to regard the EU as part of the problem rather than the solution to immigration challenges.
For starters, EU officials should remember that what they often doctrinally dismiss as merely 'free movement' is immigration in anyone else's language, including Europe's politicians. Tensions over immigrants were evident in Western Europe long before the onset of global recession. And they are bound to continue because the east-west European migration that followed the EU's 2004-2007 enlargement has yet to run its course. Germany and Austria will lift transitional restrictions on the free movement of workers from eight Central and East European countries next year. All EU countries must do the same for Bulgaria and Romania by 2014.
Second, the Commission has plans to toughen up the application of EU rules on asylum seekers over the next two years. It will propose higher standards for the treatment and accommodation of refugees and access to the job market for those who wait a long time for their claims to be heard. But like few other issues, the cost of maintaining asylum seekers touches a very raw nerve, especially in countries that are faced with budgetary austerity. The Sweden Democrats owe their electoral success in part to widespread public concerns over the country's recent generosity to thousands of Iraqi refugees. However high-minded the intention, the cost implications of the Commission's proposals may further erode public support for the EU especially as governments are likely to portray such measures as being imposed by Brussels.
Third – as Commissioner Reding has already made clear in the case of France – she wants EU rules on free movement to be more strictly enforced in every member-state, and is prepared to take miscreant countries to court, if necessary. Reding's zeal to apply the law is laudable: EU rules must be uniformly implemented across the 27 member-states to be effective. However she also risks opening a Pandora's box of national discontent at the wrong time. Several EU countries grumble that the free movement directive is too broad in scope, especially after a 2008 court ruling expanded free movement rights even to non-EU nationals in certain circumstances. Faced with a further ultimatum by Reding, governments might be tempted to support a proposal from Italy to water down the directive and allow governments greater leeway to refuse residency based on economic circumstances or security concerns.
If the Commission refused to table such a draft, it might hand a political platform to far right and eurosceptic forces throughout the EU. On the other hand, the EU's institutions have little choice but to stand firm in the face of pressure to compromise on free movement rights or to ignore their non-implementation. They believe - probably rightly - that if such freedoms were rescinded or weakened now, EU governments would not return to the status quo at a future date. Welcome to Europe's battle over immigration and free movement. Appalled Swedish liberals, a floundering French president and an indignant European commissioner are just the opening salvos.
Hugo Brady is a senior research fellow at the Centre for European Reform.
Thursday, September 23, 2010
Observations from Russia
By Charles Grant
On a recent trip to Russia, I found that the momentum for reform, very evident last year, has dissipated. The more encouraging news is that Russia’s leaders are trying to be civil to Americans and Europeans. In early September I was in Russia with the Valdai Club, a group of think-tankers, academics and journalists that meets Russian leaders and intellectuals once a year. A year ago, the economic crisis was biting and President Dmitri Medvedev’s schemes for ‘modernisation’ were being taken seriously. There was much talk of shifting the economy away from dependency on natural resources – and also of encouraging manufacturing and service industries, boosting innovation and R&D, and fighting corruption. Some Europeans, and the German government especially, became excited about the prospect of helping Russia to modernise.
On this visit Prime Minister Vladimir Putin was less combative than he had been in previous Valdai meetings. He went through the motions of saying that modernisation mattered, but did not engage on the subject. He talked of the need to avoid sudden changes of direction. Stability is his watchword. A number of factors may explain his relaxed mood. Last year the economy shrunk by about 8 per cent, but this year the oil price is above $70 a barrel and there is solid growth. Ukraine is not going to join NATO and is more or less in the Russian camp (this matters hugely to Russian leaders). Relations with the US are quite good, and there has also been an – entirely unreported – ‘reset’ with China.
One senior Russian official who met the Valdai Club was alarmingly frank. “During the crisis, business was mobilised to change its ways; provincial authorities tried harder to think of improving the business environment. But the economy has suffered from oil going to $70 so rapidly,” he said. “We’d have had more progress on modernisation with a slower rise in the oil price. Now we have complacency.” He said corruption had got worse. He had hoped that last year’s budget cuts would help to squeeze corruption out of the system. But this year the budget had grown again and the “shadow sector” had bounced back, siphoning money out of the economy. “The mind-set [for corruption] has now returned to its pre-crisis level.”
None of the Russian intellectuals on this year’s Valdai trip thought that modernisation would go anywhere. They believe that ‘top down’ efforts to modernise – such as giving Rosnano, a state entity, the money to build a nano-technology industry, or creating a ‘silicon valley’ near Moscow at Skolkovo – will not have much impact without broader political change.
One reason for this pessimism is that the position of Medvedev – who has always been more enthusiastic about modernisation than Putin – seems to have weakened. Conservatives never liked him, but some of them now sneer about him with open contempt. Meanwhile Russian liberals, who used to praise Medvedev, have become disdainful. This is because for all his eloquent talk about modernisation, the rule of law and democracy, he has changed so little. Medvedev has sacked some provincial governors, introduced a little judicial reform, made a start on military reform, and responded to Barack Obama’s initiative by agreeing to a ‘reset’ with the US. And that’s about it. The general assumption in Moscow is that Putin will run for president in 2012. Two terms of six years would then mean Putin staying in charge till 2024.
Some of Putin’s most powerful lieutenants show no enthusiasm for Medvedev’s plans for modernisation. Vladimir Yakunin, who runs Russia’s railways and is close to Putin, argued in a letter to The Economist earlier this month that state capitalism “simply works better” than western models. Russia’s past attempts to “reject all history and tradition, combined with the blind imitation of foreign experience, [had] impeded the country’s political and economic development for 20 years”.
For all the gloom about economic modernisation, Russian foreign policy may offer a slightly happier story. Although the oil price has picked up, the swaggering arrogance of a couple of years ago has not reappeared. Last year’s economic crisis brought Russia’s leaders down to earth with a bump. They saw that the growing disparity between the Russian and Chinese economies will be a serious problem in the long term, and that Russia needs to strengthen its position – economically and politically – by looking west. Hence the reset with the US, modest co-operation with the West on Iran and Afghanistan, the deliberate rapprochement with Poland and the settlement of the maritime border dispute with Norway.
Putin confirmed that the reset between Russia and the US still holds by saying that he found Obama “a deep and profound person whose view of the world coincides with ours”. There has also been an improvement in Moscow’s relations with Beijing. Though unreported in the press, “this is more important than the reset with the US”, according to a senior official in the Russian security establishment.
China and its increasingly assertive leaders have been a source of worry to Russia in recent years. But this year there has been a rapprochement. “We now have a relationship that is strategic, pragmatic and based on equal status,” said the official. Each side has agreed not to play off the other one against the US. And the two governments have reached agreement on some difficult issues, such as building a pipeline to take Siberian oil to China, handling the Iranian nuclear problem and co-operating on civil nuclear power. One minister who met the Valdai Club stressed the importance of integrating the Russian Far East and Siberia into the dynamic Asian economies. He saw China not only as a growing market for Russian raw materials but also as a source of investment in areas such as ships, aerospace and high-tech equipment.
Despite the new modus vivendi with China, deep down Russian leaders still fret about the growth of Chinese power. A new Valdai Club report by a group of Russian thinkers calls for a ‘Union of Europe’, including Russia, the EU, Turkey and Ukraine. The report argues that Russia (with its natural resources) and the EU (with its technology) need to get together in order to prevent a ‘G2 world’ run by the US and China. The report therefore proposes a union that would have supranational institutions and its own treaty, covering not only economics and energy but also foreign and security policy. The implication of the report is that if Russia stays on its own it will become a subsidiary of China. The Union of Europe would also help to further the long-held Russian ambition of drawing European states away from the US.
One minister took a similar line when he met the Valdai Club, saying that in the long term he favoured a single market running from the Atlantic to Vladivostok. The Customs Union that Russia has set up with Belarus and Kazakhstan was a first step to a common economic space and then full integration with the EU. But his westward orientation was rather hesitant. “Don’t try to teach us to be civilised or call us black sheep or we will react badly,” he said. “If you push us away we will want to walk away. For all our problems, we are Europe’s salvation, it needs our new blood. But if you don’t want us we will turn to the more dynamic east.”
Despite the rhetoric about integrating with Europe, few Russians are interested in the nitty-gritty of the EU-Russia relationship; the current talks on a new partnership and co-operation agreement have stalled and nobody in Russia seems bothered. There are two obvious problems with the schemes being floated for union between Russia and the EU. One is that most Europeans will not want a closer union with Russia so long as its political system remains authoritarian. The other is that many people in the EU still look to the US for their security, and would not want to join a union that would inevitably weaken transatlantic bonds.
On current trends neither Russia’s economy nor its political system is likely to undergo serious reform anytime soon. That means that China will continue to pull ahead of Russia economically, while the EU will spurn grandiose schemes for ‘union’.
Charles Grant is director of the Centre for European Reform
On a recent trip to Russia, I found that the momentum for reform, very evident last year, has dissipated. The more encouraging news is that Russia’s leaders are trying to be civil to Americans and Europeans. In early September I was in Russia with the Valdai Club, a group of think-tankers, academics and journalists that meets Russian leaders and intellectuals once a year. A year ago, the economic crisis was biting and President Dmitri Medvedev’s schemes for ‘modernisation’ were being taken seriously. There was much talk of shifting the economy away from dependency on natural resources – and also of encouraging manufacturing and service industries, boosting innovation and R&D, and fighting corruption. Some Europeans, and the German government especially, became excited about the prospect of helping Russia to modernise.
On this visit Prime Minister Vladimir Putin was less combative than he had been in previous Valdai meetings. He went through the motions of saying that modernisation mattered, but did not engage on the subject. He talked of the need to avoid sudden changes of direction. Stability is his watchword. A number of factors may explain his relaxed mood. Last year the economy shrunk by about 8 per cent, but this year the oil price is above $70 a barrel and there is solid growth. Ukraine is not going to join NATO and is more or less in the Russian camp (this matters hugely to Russian leaders). Relations with the US are quite good, and there has also been an – entirely unreported – ‘reset’ with China.
One senior Russian official who met the Valdai Club was alarmingly frank. “During the crisis, business was mobilised to change its ways; provincial authorities tried harder to think of improving the business environment. But the economy has suffered from oil going to $70 so rapidly,” he said. “We’d have had more progress on modernisation with a slower rise in the oil price. Now we have complacency.” He said corruption had got worse. He had hoped that last year’s budget cuts would help to squeeze corruption out of the system. But this year the budget had grown again and the “shadow sector” had bounced back, siphoning money out of the economy. “The mind-set [for corruption] has now returned to its pre-crisis level.”
None of the Russian intellectuals on this year’s Valdai trip thought that modernisation would go anywhere. They believe that ‘top down’ efforts to modernise – such as giving Rosnano, a state entity, the money to build a nano-technology industry, or creating a ‘silicon valley’ near Moscow at Skolkovo – will not have much impact without broader political change.
One reason for this pessimism is that the position of Medvedev – who has always been more enthusiastic about modernisation than Putin – seems to have weakened. Conservatives never liked him, but some of them now sneer about him with open contempt. Meanwhile Russian liberals, who used to praise Medvedev, have become disdainful. This is because for all his eloquent talk about modernisation, the rule of law and democracy, he has changed so little. Medvedev has sacked some provincial governors, introduced a little judicial reform, made a start on military reform, and responded to Barack Obama’s initiative by agreeing to a ‘reset’ with the US. And that’s about it. The general assumption in Moscow is that Putin will run for president in 2012. Two terms of six years would then mean Putin staying in charge till 2024.
Some of Putin’s most powerful lieutenants show no enthusiasm for Medvedev’s plans for modernisation. Vladimir Yakunin, who runs Russia’s railways and is close to Putin, argued in a letter to The Economist earlier this month that state capitalism “simply works better” than western models. Russia’s past attempts to “reject all history and tradition, combined with the blind imitation of foreign experience, [had] impeded the country’s political and economic development for 20 years”.
For all the gloom about economic modernisation, Russian foreign policy may offer a slightly happier story. Although the oil price has picked up, the swaggering arrogance of a couple of years ago has not reappeared. Last year’s economic crisis brought Russia’s leaders down to earth with a bump. They saw that the growing disparity between the Russian and Chinese economies will be a serious problem in the long term, and that Russia needs to strengthen its position – economically and politically – by looking west. Hence the reset with the US, modest co-operation with the West on Iran and Afghanistan, the deliberate rapprochement with Poland and the settlement of the maritime border dispute with Norway.
Putin confirmed that the reset between Russia and the US still holds by saying that he found Obama “a deep and profound person whose view of the world coincides with ours”. There has also been an improvement in Moscow’s relations with Beijing. Though unreported in the press, “this is more important than the reset with the US”, according to a senior official in the Russian security establishment.
China and its increasingly assertive leaders have been a source of worry to Russia in recent years. But this year there has been a rapprochement. “We now have a relationship that is strategic, pragmatic and based on equal status,” said the official. Each side has agreed not to play off the other one against the US. And the two governments have reached agreement on some difficult issues, such as building a pipeline to take Siberian oil to China, handling the Iranian nuclear problem and co-operating on civil nuclear power. One minister who met the Valdai Club stressed the importance of integrating the Russian Far East and Siberia into the dynamic Asian economies. He saw China not only as a growing market for Russian raw materials but also as a source of investment in areas such as ships, aerospace and high-tech equipment.
Despite the new modus vivendi with China, deep down Russian leaders still fret about the growth of Chinese power. A new Valdai Club report by a group of Russian thinkers calls for a ‘Union of Europe’, including Russia, the EU, Turkey and Ukraine. The report argues that Russia (with its natural resources) and the EU (with its technology) need to get together in order to prevent a ‘G2 world’ run by the US and China. The report therefore proposes a union that would have supranational institutions and its own treaty, covering not only economics and energy but also foreign and security policy. The implication of the report is that if Russia stays on its own it will become a subsidiary of China. The Union of Europe would also help to further the long-held Russian ambition of drawing European states away from the US.
One minister took a similar line when he met the Valdai Club, saying that in the long term he favoured a single market running from the Atlantic to Vladivostok. The Customs Union that Russia has set up with Belarus and Kazakhstan was a first step to a common economic space and then full integration with the EU. But his westward orientation was rather hesitant. “Don’t try to teach us to be civilised or call us black sheep or we will react badly,” he said. “If you push us away we will want to walk away. For all our problems, we are Europe’s salvation, it needs our new blood. But if you don’t want us we will turn to the more dynamic east.”
Despite the rhetoric about integrating with Europe, few Russians are interested in the nitty-gritty of the EU-Russia relationship; the current talks on a new partnership and co-operation agreement have stalled and nobody in Russia seems bothered. There are two obvious problems with the schemes being floated for union between Russia and the EU. One is that most Europeans will not want a closer union with Russia so long as its political system remains authoritarian. The other is that many people in the EU still look to the US for their security, and would not want to join a union that would inevitably weaken transatlantic bonds.
On current trends neither Russia’s economy nor its political system is likely to undergo serious reform anytime soon. That means that China will continue to pull ahead of Russia economically, while the EU will spurn grandiose schemes for ‘union’.
Charles Grant is director of the Centre for European Reform
Thursday, September 02, 2010
Has Germany become Europe's locomotive?
By Philip Whyte
The German economy has been growing exceptionally strongly of late. In the second quarter of 2010, it expanded faster than any other economy in the G7 and faster than at any time since the country’s reunification in 1990. Industrial output is surging. The rate of unemployment has been declining for over a year and is now well below the eurozone average (let alone levels in the US). Consumer spending and business investment are picking up – and households and firms are generally less burdened with debt than their counterparts in highly leveraged economies like the UK and the US. Germany, in short, seems to have emerged strongly from the Great Recession. Indeed, some observers think it has entered a self-sustained recovery – and that it is starting to act as Europe’s ‘growth locomotive’.
If this were true, it would be welcome. Over the past decade, Germany has not been a great source of demand for the world or the European economy: in real terms, domestic demand is only about 3 per cent higher now than it was back in 2000. For most of the noughties, Germany was structurally reliant on exports for its economic growth: without debt-fuelled spending elsewhere in the world economy, it would barely have grown at all. So any sign of a sustained recovery in German domestic demand would be good news for the country itself and the rest of the world. Not only would it reduce Germany’s reliance on unsustainable (and hence destabilising) foreign profligacy. It would also allow the eurozone and the world economy to rebalance at a higher level of output and employment than otherwise.
Sadly, it may be premature to conclude that Germany has embarked on a durable, self-sustained recovery that will help to lift growth elsewhere. Much has been made of the scale of Germany’s rebound in the second quarter of 2010. But it needs to be placed in context. Germany resembles a bungee jumper in the spring-back phase. It is rebounding faster than neighbouring France. But this is partly because it fell much further on the way down. The size of Germany’s manufacturing sector has resulted in greater output volatility. Germany was hit disproportionately hard in 2008-09 when manufacturers scrambled to run down stocks, but it has since benefited as the stock cycle has reversed. Even after its recent rebound, however, German output is still lower relative to pre-crisis levels than in France.
Besides, the pattern of the recent upturn casts doubt on the view that Germany is acting as a ‘locomotive’ for other countries. The pick-up in domestic demand in the second quarter of 2010 came after three consecutive quarters in which household consumption fell. As for business investment, it is still a long way below pre-crisis levels. If Germany really had become a locomotive for the rest of the EU, net trade would be exerting a drag on its own economic growth. Yet the reverse is the case: net trade has boosted German GDP growth in three of the past five quarters. True, exports to Asia are making a greater contribution to growth. But Germany’s recovery is doing little to rebalance activity in the EU. Indeed, Germany’s trade surplus with the rest of the EU has risen compared with the first half of 2009.
There is a final reason to be sceptical about the prospect of Europe’s largest economy becoming a locomotive for the rest of the EU: it is not clear that German policy-makers want it to become one. As far as they are concerned, the global financial crisis has discredited profligacy and vindicated German prudence. The lesson of the crisis, they believe, is that countries must learn to live within their means. For them, the direction of change is clear: it is for the erstwhile dissolute to shape up, not for Germany to become more spend-thrift. Any suggestion that Germany needs to adjust tends to be met with bemusement, irritation and contempt. Germany has no lessons to take (least of all from irresponsible Anglo-Saxons). And any attempt to hobble German ‘competitiveness’ will be fiercely resisted.
The hopes currently being vested in Germany may consequently be misplaced. The strength of the country’s recovery is partly an optical illusion created by the depth of the downturn which preceded it. Much of the recovery is being driven by net trade. Domestic demand is still fragile and could weaken as the government’s fiscal stimulus is withdrawn and the stock cycle becomes less favourable. And German policy-makers have yet to be persuaded that it is in their country’s interest to reduce its reliance on export-led growth. In short, Germany is not yet acting as a ‘growth locomotive’ for the rest of Europe. And other EU countries, particularly in the highly indebted geographical periphery, may have to get used to the idea that the region’s largest economy may not be about to become one any time soon.
Philip Whyte is a senior research fellow at the Centre for European Reform
The German economy has been growing exceptionally strongly of late. In the second quarter of 2010, it expanded faster than any other economy in the G7 and faster than at any time since the country’s reunification in 1990. Industrial output is surging. The rate of unemployment has been declining for over a year and is now well below the eurozone average (let alone levels in the US). Consumer spending and business investment are picking up – and households and firms are generally less burdened with debt than their counterparts in highly leveraged economies like the UK and the US. Germany, in short, seems to have emerged strongly from the Great Recession. Indeed, some observers think it has entered a self-sustained recovery – and that it is starting to act as Europe’s ‘growth locomotive’.
If this were true, it would be welcome. Over the past decade, Germany has not been a great source of demand for the world or the European economy: in real terms, domestic demand is only about 3 per cent higher now than it was back in 2000. For most of the noughties, Germany was structurally reliant on exports for its economic growth: without debt-fuelled spending elsewhere in the world economy, it would barely have grown at all. So any sign of a sustained recovery in German domestic demand would be good news for the country itself and the rest of the world. Not only would it reduce Germany’s reliance on unsustainable (and hence destabilising) foreign profligacy. It would also allow the eurozone and the world economy to rebalance at a higher level of output and employment than otherwise.
Sadly, it may be premature to conclude that Germany has embarked on a durable, self-sustained recovery that will help to lift growth elsewhere. Much has been made of the scale of Germany’s rebound in the second quarter of 2010. But it needs to be placed in context. Germany resembles a bungee jumper in the spring-back phase. It is rebounding faster than neighbouring France. But this is partly because it fell much further on the way down. The size of Germany’s manufacturing sector has resulted in greater output volatility. Germany was hit disproportionately hard in 2008-09 when manufacturers scrambled to run down stocks, but it has since benefited as the stock cycle has reversed. Even after its recent rebound, however, German output is still lower relative to pre-crisis levels than in France.
Besides, the pattern of the recent upturn casts doubt on the view that Germany is acting as a ‘locomotive’ for other countries. The pick-up in domestic demand in the second quarter of 2010 came after three consecutive quarters in which household consumption fell. As for business investment, it is still a long way below pre-crisis levels. If Germany really had become a locomotive for the rest of the EU, net trade would be exerting a drag on its own economic growth. Yet the reverse is the case: net trade has boosted German GDP growth in three of the past five quarters. True, exports to Asia are making a greater contribution to growth. But Germany’s recovery is doing little to rebalance activity in the EU. Indeed, Germany’s trade surplus with the rest of the EU has risen compared with the first half of 2009.
There is a final reason to be sceptical about the prospect of Europe’s largest economy becoming a locomotive for the rest of the EU: it is not clear that German policy-makers want it to become one. As far as they are concerned, the global financial crisis has discredited profligacy and vindicated German prudence. The lesson of the crisis, they believe, is that countries must learn to live within their means. For them, the direction of change is clear: it is for the erstwhile dissolute to shape up, not for Germany to become more spend-thrift. Any suggestion that Germany needs to adjust tends to be met with bemusement, irritation and contempt. Germany has no lessons to take (least of all from irresponsible Anglo-Saxons). And any attempt to hobble German ‘competitiveness’ will be fiercely resisted.
The hopes currently being vested in Germany may consequently be misplaced. The strength of the country’s recovery is partly an optical illusion created by the depth of the downturn which preceded it. Much of the recovery is being driven by net trade. Domestic demand is still fragile and could weaken as the government’s fiscal stimulus is withdrawn and the stock cycle becomes less favourable. And German policy-makers have yet to be persuaded that it is in their country’s interest to reduce its reliance on export-led growth. In short, Germany is not yet acting as a ‘growth locomotive’ for the rest of Europe. And other EU countries, particularly in the highly indebted geographical periphery, may have to get used to the idea that the region’s largest economy may not be about to become one any time soon.
Philip Whyte is a senior research fellow at the Centre for European Reform
Friday, July 30, 2010
Is China being beastly to foreign investors?
by Charles Grant
When I visited China a year ago, I was struck by the strong feeling among many foreign firms there that the business environment was getting tougher. Western businessmen complained, in particular, about discrimination against foreigners. On a recent trip to China, I found a more nuanced situation. In some sectors, notably those where intellectual property (IP) is important, there are growing complaints of unfair treatment. But in other sectors foreign companies are making good money, without grumbling much.
Western business leaders are certainly complaining more loudly than they used to. In July, the Financial Times reported Jeffrey Immelt, the chairman of General Electric, as saying that he was “really worried about China. I am not sure that in the end they want any of us to win, or any of us to be successful.” A few days later Jürgen Hambrecht, the CEO of BASF, told Wen Jiabao, the Chinese prime minister, that foreign firms were being forced to transfer know-how to Chinese companies, in return for market access. Hambrecht told him that this did “not exactly correspond to our views of a partnership”. At the same meeting Peter Löscher, the CEO of Siemens, urged Wen to ensure that foreign firms could compete fairly for government procurement contracts. (Like a lot of western business leaders, Löscher had previously taken the Chinese government’s side, as when he criticised German Chancellor Angela Merkel for meeting the Dalai Lama.)
One government measure that has provoked foreign business leaders is the regulation on ‘indigenous innovation’ that was published last November. This would, if enforced, exclude foreign firms from public procurement contracts unless they agreed to hand over IP. The regulation seems to have been driven by the Chinese Communist Party’s belief that market forces alone will not provide a high-tech economy, and that the state therefore needs to get hold of and control advanced technologies. The EU, the US and many other governments lobbied strongly against the measure.
Whether this regulation will bite remains unclear. The government announced a delay in implementation and Chen Deming, the minister of commerce, said the regulation would not affect firms that could prove they added value in China. Some western business lobbies fear that, despite recent reassurances, the regulation will in the long run take effect. If it is enforced, firms like IBM and Microsoft are likely to cut back on R&D in China. On Capitol Hill, Microsoft is now taking a hard line on IP issues in China; until recently, it tended to sympathise with the Chinese point of view. China can no longer assume that US business leaders will, as a bloc, support its interests in Washington.
A similar shift is evident among some European companies. According to the head of one large German firm in China: “They assume their market is so big, that foreigners will stay, and put up with losing IP. That’s a miscalculation. Most foreign investors think IP is very important and that they have a duty not to hand it over.” He thinks that enforcement of the indigenous innovation regulation would dampen FDI in China. Big western manufacturers would not pull out but would source more components to countries such as Vietnam, Taiwan, Malaysia, Indonesia and Singapore. China’s free trade agreements with these countries now make it easier to supply Chinese factories from them.
Within the past two years, some high-tech foreign firms have had to pay higher rates of tax, while new restrictions on representative offices – each is allowed only three non-Chinese staff – are proving irksome. Foreign firms involved in making wind turbines, such as GE, Siemens and Vestas, are particularly annoyed that, as they see it, procurement rules have been skewed to exclude them from the Chinese market (the largest in the world), to the benefit of local firms.
Two-fifths of European businesses in China surveyed by the EU Chamber of Commerce in June 2010 expected the regulatory environment to worsen in the next two years. The same proportion described the discriminatory application of laws and regulations as a ‘significant’ obstacle. The EU Chamber concluded: “Optimism in the overall economic climate has been dampened dramatically by concerns about regulatory interference and unpredictability in the market.”
Some of the shifting balance of power between foreign investors and the Chinese authorities is the inevitable result of the country’s development. A lot of Chinese companies are now stronger and better-equipped to compete with European or American rivals. Twenty years ago the Chinese needed western capital, skills and technology. Now they need the technology, but they have less need of the skills, and plenty of their own capital.
Another issue for foreign investors is that costs are rising, in part due to labour unrest that has been prevalent in the Pearl River Delta area. The emergence of free trade unions is an important and positive step for the country’s future development, signalling the emergence of a civil society that is not controlled by government or party. But many foreign businesses see the new trade unions merely as a source of growing costs.
Mining companies, energy firms, banks and insurers, among others, still face restrictions on their activities in China. Many of them nevertheless make money. That is the case for Shell and BP, which are significant investors, often through joint ventures, but would like to engage in a wider range of activities than they currently do. In many other sectors, such as retailing, advertising, hotels, pharmaceuticals and cars, companies report they are doing well without too much government interference. For example Tesco finds it easier to open stores than two years ago, as central government permission is no longer required; but Tesco says that Chinese retailers face less hassle from red tape than do foreign ones. WPP is allowed to own 100 per cent of local advertising agencies and says that as a foreign firm it faces no discrimination – except that it pays more tax than local competitors. Car companies are doing particularly well: BMW has doubled sales in China over the past year, and Daimler is forming a joint venture to develop electric vehicles.
Since the spring, the government has made an effort to appear friendly to foreign firms: Premier Wen met foreign business leaders to listen to their complaints; several ministries opened their doors to foreign investors in China and asked how they could help; and in July the government appeared to accept a compromise in its dispute with Google, with the result that Chinese citizens can search uncensored via Hong Kong. Chinese analysts point out that many local authorities still compete for FDI and therefore offer special deals (for example, on tax and utilities) to foreign firms.
When China joined the World Trade Organisation in 2002, it failed to sign the agreement on public procurement that prevents discrimination against foreign firms. In July China made new proposals for acceding to this agreement – but western governments think them inadequate (for example, China is not offering to open up local government procurement). Also in July, Chen Deming wrote in the Financial Times that China is “ever more open to business”. He is right that most of the formal rules applying to foreign investors are less restrictive than they were ten years ago. According to his figures, global FDI fell by nearly 40 per cent in 2009, but only by 2.6 per cent in China.
My conclusion is that China still welcomes FDI, but that it is becoming more insistent on setting the terms. For example, it wants to choose the location for big foreign industrial investments – often in the underdeveloped west of the country, where a lot of foreign firms would rather not go. The Chinese government is probably right to calculate that, for all their grumbling, most foreign firms will stay; China is just too big a market to ignore. In any case, despite the difficulties, many foreign investors in China claim that they are managing to hang on to their IP.
China’s strategy is to exploit foreigners’ desire for access to its markets as a means of gaining their technology. From China’s point of view that is a reasonable policy. If a lot of foreign investors clubbed together to speak with one voice and make credible threats to China, they might persuade its leadership to re-examine that strategy. But neither the big foreign companies in China, nor the European and American governments, are likely to get significantly tougher with China. So do not expect much change in China’s policies towards foreign investors.
Charles Grant is director of the Centre for European Reform
When I visited China a year ago, I was struck by the strong feeling among many foreign firms there that the business environment was getting tougher. Western businessmen complained, in particular, about discrimination against foreigners. On a recent trip to China, I found a more nuanced situation. In some sectors, notably those where intellectual property (IP) is important, there are growing complaints of unfair treatment. But in other sectors foreign companies are making good money, without grumbling much.
Western business leaders are certainly complaining more loudly than they used to. In July, the Financial Times reported Jeffrey Immelt, the chairman of General Electric, as saying that he was “really worried about China. I am not sure that in the end they want any of us to win, or any of us to be successful.” A few days later Jürgen Hambrecht, the CEO of BASF, told Wen Jiabao, the Chinese prime minister, that foreign firms were being forced to transfer know-how to Chinese companies, in return for market access. Hambrecht told him that this did “not exactly correspond to our views of a partnership”. At the same meeting Peter Löscher, the CEO of Siemens, urged Wen to ensure that foreign firms could compete fairly for government procurement contracts. (Like a lot of western business leaders, Löscher had previously taken the Chinese government’s side, as when he criticised German Chancellor Angela Merkel for meeting the Dalai Lama.)
One government measure that has provoked foreign business leaders is the regulation on ‘indigenous innovation’ that was published last November. This would, if enforced, exclude foreign firms from public procurement contracts unless they agreed to hand over IP. The regulation seems to have been driven by the Chinese Communist Party’s belief that market forces alone will not provide a high-tech economy, and that the state therefore needs to get hold of and control advanced technologies. The EU, the US and many other governments lobbied strongly against the measure.
Whether this regulation will bite remains unclear. The government announced a delay in implementation and Chen Deming, the minister of commerce, said the regulation would not affect firms that could prove they added value in China. Some western business lobbies fear that, despite recent reassurances, the regulation will in the long run take effect. If it is enforced, firms like IBM and Microsoft are likely to cut back on R&D in China. On Capitol Hill, Microsoft is now taking a hard line on IP issues in China; until recently, it tended to sympathise with the Chinese point of view. China can no longer assume that US business leaders will, as a bloc, support its interests in Washington.
A similar shift is evident among some European companies. According to the head of one large German firm in China: “They assume their market is so big, that foreigners will stay, and put up with losing IP. That’s a miscalculation. Most foreign investors think IP is very important and that they have a duty not to hand it over.” He thinks that enforcement of the indigenous innovation regulation would dampen FDI in China. Big western manufacturers would not pull out but would source more components to countries such as Vietnam, Taiwan, Malaysia, Indonesia and Singapore. China’s free trade agreements with these countries now make it easier to supply Chinese factories from them.
Within the past two years, some high-tech foreign firms have had to pay higher rates of tax, while new restrictions on representative offices – each is allowed only three non-Chinese staff – are proving irksome. Foreign firms involved in making wind turbines, such as GE, Siemens and Vestas, are particularly annoyed that, as they see it, procurement rules have been skewed to exclude them from the Chinese market (the largest in the world), to the benefit of local firms.
Two-fifths of European businesses in China surveyed by the EU Chamber of Commerce in June 2010 expected the regulatory environment to worsen in the next two years. The same proportion described the discriminatory application of laws and regulations as a ‘significant’ obstacle. The EU Chamber concluded: “Optimism in the overall economic climate has been dampened dramatically by concerns about regulatory interference and unpredictability in the market.”
Some of the shifting balance of power between foreign investors and the Chinese authorities is the inevitable result of the country’s development. A lot of Chinese companies are now stronger and better-equipped to compete with European or American rivals. Twenty years ago the Chinese needed western capital, skills and technology. Now they need the technology, but they have less need of the skills, and plenty of their own capital.
Another issue for foreign investors is that costs are rising, in part due to labour unrest that has been prevalent in the Pearl River Delta area. The emergence of free trade unions is an important and positive step for the country’s future development, signalling the emergence of a civil society that is not controlled by government or party. But many foreign businesses see the new trade unions merely as a source of growing costs.
Mining companies, energy firms, banks and insurers, among others, still face restrictions on their activities in China. Many of them nevertheless make money. That is the case for Shell and BP, which are significant investors, often through joint ventures, but would like to engage in a wider range of activities than they currently do. In many other sectors, such as retailing, advertising, hotels, pharmaceuticals and cars, companies report they are doing well without too much government interference. For example Tesco finds it easier to open stores than two years ago, as central government permission is no longer required; but Tesco says that Chinese retailers face less hassle from red tape than do foreign ones. WPP is allowed to own 100 per cent of local advertising agencies and says that as a foreign firm it faces no discrimination – except that it pays more tax than local competitors. Car companies are doing particularly well: BMW has doubled sales in China over the past year, and Daimler is forming a joint venture to develop electric vehicles.
Since the spring, the government has made an effort to appear friendly to foreign firms: Premier Wen met foreign business leaders to listen to their complaints; several ministries opened their doors to foreign investors in China and asked how they could help; and in July the government appeared to accept a compromise in its dispute with Google, with the result that Chinese citizens can search uncensored via Hong Kong. Chinese analysts point out that many local authorities still compete for FDI and therefore offer special deals (for example, on tax and utilities) to foreign firms.
When China joined the World Trade Organisation in 2002, it failed to sign the agreement on public procurement that prevents discrimination against foreign firms. In July China made new proposals for acceding to this agreement – but western governments think them inadequate (for example, China is not offering to open up local government procurement). Also in July, Chen Deming wrote in the Financial Times that China is “ever more open to business”. He is right that most of the formal rules applying to foreign investors are less restrictive than they were ten years ago. According to his figures, global FDI fell by nearly 40 per cent in 2009, but only by 2.6 per cent in China.
My conclusion is that China still welcomes FDI, but that it is becoming more insistent on setting the terms. For example, it wants to choose the location for big foreign industrial investments – often in the underdeveloped west of the country, where a lot of foreign firms would rather not go. The Chinese government is probably right to calculate that, for all their grumbling, most foreign firms will stay; China is just too big a market to ignore. In any case, despite the difficulties, many foreign investors in China claim that they are managing to hang on to their IP.
China’s strategy is to exploit foreigners’ desire for access to its markets as a means of gaining their technology. From China’s point of view that is a reasonable policy. If a lot of foreign investors clubbed together to speak with one voice and make credible threats to China, they might persuade its leadership to re-examine that strategy. But neither the big foreign companies in China, nor the European and American governments, are likely to get significantly tougher with China. So do not expect much change in China’s policies towards foreign investors.
Charles Grant is director of the Centre for European Reform
Monday, July 19, 2010
Who is winning Eastern Europe's great game?
By Katinka Barysch
The US is withdrawing from the former Soviet space; the European Union struggles to be taken seriously there. Does that leave Russia free to strengthen its influence in the countries around its borders? Not necessarily, for the situation in the region is complex.
Hillary Clinton toured the Caucasus recently to reassure Georgia, Armenia and Azerbaijan that Washington had not abandoned them in its quest to ‘reset’ relations with Russia. Nevertheless, the predominant feeling in those countries is that the US is a lot less interested and engaged than it had been during the presidencies of George W Bush and Bill Clinton. Similarly, many Central Asians feel that the Obama administration pays little attention to them, unless they can serve as launch pads for planes destined for Afghanistan. NATO membership for Ukraine and Georgia is no longer on the cards.
While much of America’s attention has moved elsewhere, the European Union hardly has a foothold in the region. The EU’s neighbourhood policy has proved rather ineffective, and the 2009 ‘Eastern partnership’ has not yet had time to make much of a difference. Ukraine, still smarting that the EU has never offered the prospect of membership, appears to be turning towards Russia. Moldova looks keener than ever to get closer to the EU – with few people in Brussels and other capitals taking notice. The EU’s Central Asia strategy has lacked political backing and consistency. In the Caucasus and Central Asia, the EU is a rather new player and its traditional approach of exporting norms and values as the basis for bilateral relations has not been received well. The fact that the EU’s foreign policy machinery is currently in bureaucratic paralysis does not help.
In theory, US neglect and European weakness could leave Russia free to consolidate what President Medvedev likes to refer to as a ‘sphere of privileged interests’. Russia is certainly trying. But success has been patchy at best.
Although by far the most populous and prosperous country in the region, Russia does not necessarily have the means to project power into the neighbourhood. Its tools looked more formidable before they were actually used. Now some of them have turned out to be blunt.
Russia’s use of military force in Georgia last year backfired when even Moscow’s staunchest allies scrambled to become less reliant on their dangerous-looking big neighbour: Belarus turned to the EU, Armenia started talking to Turkey and not a single one of the former Soviet countries has followed Moscow in recognising the independence of Abkhazia and South Ossetia.
Russia has repeatedly used trade embargoes and other economic means to put pressure on its neighbours, in particular smaller ones where Russia’s own business interests are limited, such as Georgia or Latvia. But there is arguably not a single instance where the use of economic sanctions has got Russia what it wanted. Businesses in the countries affected have reinforced their efforts to find alternative markets and sources of investments, making them less dependent on Russia in the long term. Russia’s strategy of gaining influence through directly controlling local businesses has proven more successful: in Armenia for example, various sectors from banking to transport are dominated by Russian-owned companies. How this will translate into political leverage remains to be seen.
This leaves energy as the most promising tool of Russia’s neighbourhood policy. Russia has used pipeline plans, nuclear projects, gas prices and oil deliveries to get what it wants from its neighbours. But even here, Russia’s success rate is mixed. In Belarus and Ukraine, Russia is making headway towards its aim of gaining control over transit pipelines. The recent standoff between Belarus and Russia over gas prices and transit fees only highlighted Minsk’s lack of options: Lukashenko’s announcement that he would buy gas from Venezuela was little more than symbolic. In Ukraine, Russia managed to use the offer of cheaper gas to get the lease for its Black Sea fleet in Sevastopol extended. It has also successfully pressured Kyiv into at least considering merging parts of the two countries’ gas monopolies, Gazprom and Naftogaz, which would give Moscow effective control over Ukraine’s transit pipelines.
The situation is very different in the Caucasus and Central Asia, where energy producing countries are gaining room for manoeuvre through building stronger links with China, Iran and Turkey. Turkmenistan opened a large gas pipeline to China at the beginning of the year and signed another gas delivery contract with Iran in June. It has invited international oil majors to help build an internal pipeline that could one day deliver Turkmen gas from the massive Yolotan field to the Caspian shores and from there to Europe. It had previously promised to let Russia build the pipeline and buy much of the gas. Azerbaijan has spurned a Russian offer to buy up all the gas from its new Shah Deniz 2 field, instead committing it to Turkey and to European buyers. Russia’s attempts to lock up Caspian gas supplies by foiling pipeline projects such as Nabucco are looking increasingly desperate.
The perceived withdrawal of the US and the ineffectiveness of EU policy in the region has not so far played into Russia’s hands. Russia (like the EU and other players in the region) has had to learn that the former Soviet Union does not constitute a homogenous neighbourhood. There are cocky and cash-rich energy suppliers such as Azerbaijan and Kazakhstan, and there are poor and divided countries such as Moldova and Armenia. Russia can cajole and coerce in one place but it has to plead and please in another. All countries in the region will benefit from being less dependent on Russia, in trade and energy terms as well as in politics. While the US might pay less attention to the region, the EU should redouble its efforts, while also taking more account of the the specific situations of individual countries.
Katinka Barysch is deputy director of the CER
The US is withdrawing from the former Soviet space; the European Union struggles to be taken seriously there. Does that leave Russia free to strengthen its influence in the countries around its borders? Not necessarily, for the situation in the region is complex.
Hillary Clinton toured the Caucasus recently to reassure Georgia, Armenia and Azerbaijan that Washington had not abandoned them in its quest to ‘reset’ relations with Russia. Nevertheless, the predominant feeling in those countries is that the US is a lot less interested and engaged than it had been during the presidencies of George W Bush and Bill Clinton. Similarly, many Central Asians feel that the Obama administration pays little attention to them, unless they can serve as launch pads for planes destined for Afghanistan. NATO membership for Ukraine and Georgia is no longer on the cards.
While much of America’s attention has moved elsewhere, the European Union hardly has a foothold in the region. The EU’s neighbourhood policy has proved rather ineffective, and the 2009 ‘Eastern partnership’ has not yet had time to make much of a difference. Ukraine, still smarting that the EU has never offered the prospect of membership, appears to be turning towards Russia. Moldova looks keener than ever to get closer to the EU – with few people in Brussels and other capitals taking notice. The EU’s Central Asia strategy has lacked political backing and consistency. In the Caucasus and Central Asia, the EU is a rather new player and its traditional approach of exporting norms and values as the basis for bilateral relations has not been received well. The fact that the EU’s foreign policy machinery is currently in bureaucratic paralysis does not help.
In theory, US neglect and European weakness could leave Russia free to consolidate what President Medvedev likes to refer to as a ‘sphere of privileged interests’. Russia is certainly trying. But success has been patchy at best.
Although by far the most populous and prosperous country in the region, Russia does not necessarily have the means to project power into the neighbourhood. Its tools looked more formidable before they were actually used. Now some of them have turned out to be blunt.
Russia’s use of military force in Georgia last year backfired when even Moscow’s staunchest allies scrambled to become less reliant on their dangerous-looking big neighbour: Belarus turned to the EU, Armenia started talking to Turkey and not a single one of the former Soviet countries has followed Moscow in recognising the independence of Abkhazia and South Ossetia.
Russia has repeatedly used trade embargoes and other economic means to put pressure on its neighbours, in particular smaller ones where Russia’s own business interests are limited, such as Georgia or Latvia. But there is arguably not a single instance where the use of economic sanctions has got Russia what it wanted. Businesses in the countries affected have reinforced their efforts to find alternative markets and sources of investments, making them less dependent on Russia in the long term. Russia’s strategy of gaining influence through directly controlling local businesses has proven more successful: in Armenia for example, various sectors from banking to transport are dominated by Russian-owned companies. How this will translate into political leverage remains to be seen.
This leaves energy as the most promising tool of Russia’s neighbourhood policy. Russia has used pipeline plans, nuclear projects, gas prices and oil deliveries to get what it wants from its neighbours. But even here, Russia’s success rate is mixed. In Belarus and Ukraine, Russia is making headway towards its aim of gaining control over transit pipelines. The recent standoff between Belarus and Russia over gas prices and transit fees only highlighted Minsk’s lack of options: Lukashenko’s announcement that he would buy gas from Venezuela was little more than symbolic. In Ukraine, Russia managed to use the offer of cheaper gas to get the lease for its Black Sea fleet in Sevastopol extended. It has also successfully pressured Kyiv into at least considering merging parts of the two countries’ gas monopolies, Gazprom and Naftogaz, which would give Moscow effective control over Ukraine’s transit pipelines.
The situation is very different in the Caucasus and Central Asia, where energy producing countries are gaining room for manoeuvre through building stronger links with China, Iran and Turkey. Turkmenistan opened a large gas pipeline to China at the beginning of the year and signed another gas delivery contract with Iran in June. It has invited international oil majors to help build an internal pipeline that could one day deliver Turkmen gas from the massive Yolotan field to the Caspian shores and from there to Europe. It had previously promised to let Russia build the pipeline and buy much of the gas. Azerbaijan has spurned a Russian offer to buy up all the gas from its new Shah Deniz 2 field, instead committing it to Turkey and to European buyers. Russia’s attempts to lock up Caspian gas supplies by foiling pipeline projects such as Nabucco are looking increasingly desperate.
The perceived withdrawal of the US and the ineffectiveness of EU policy in the region has not so far played into Russia’s hands. Russia (like the EU and other players in the region) has had to learn that the former Soviet Union does not constitute a homogenous neighbourhood. There are cocky and cash-rich energy suppliers such as Azerbaijan and Kazakhstan, and there are poor and divided countries such as Moldova and Armenia. Russia can cajole and coerce in one place but it has to plead and please in another. All countries in the region will benefit from being less dependent on Russia, in trade and energy terms as well as in politics. While the US might pay less attention to the region, the EU should redouble its efforts, while also taking more account of the the specific situations of individual countries.
Katinka Barysch is deputy director of the CER
Thursday, July 08, 2010
Membership for Russia a step too far for NATO?
by Tomas Valasek
There are growing signs that Russia’s relations with NATO are on the mend. Senior Russian thinkers, some close to the government, have been cautiously talking up the possibility of Russia joining the alliance, as have several western officials and think-tanks (including the CER.) While some powerful forces in Russia continue to view NATO as a hostile force, the latest signs from Moscow are encouraging. But even assuming that the more pro-western forces within Russia prevail, membership of NATO will remain at best a long-term goal. In the short and medium term, Russia and NATO need to put considerable effort into reducing mistrust.
A group of prominent Russian thinkers recently invited their western counterparts to talk about the possibility of Russia joining NATO. What prompted this initiative is not obvious, but the atmospherics have clearly changed. Russia is being nicer to its neighbours, while a number of European countries – including those in Central and Eastern Europe – are being nicer to Moscow. NATO has effectively put enlargement on hold. Barack Obama’s ‘reset’ seems to be changing attitudes on all sides. The challenge before Russia and NATO is to try to turn this opportunity into a lasting improvement in relations.
The allies are not of one mind on the subject of Russian membership of the alliance. But conversations with NATO officials and diplomats suggest that NATO could be ready by its November summit to offer Moscow the possibility of joining, if and when the latter meets accession criteria. With additional persuasion – though this is more questionable – NATO may even create a special accession track for Russia, different from the one NATO used for previous candidates, so that Moscow feels that it is being treated like a great power. But the allies’ bottom line is that, one way or another, Moscow will need to adopt many of NATO’s norms, including those on democracy and transparency, before it can become a member.
Those Russians who want to explore the possibility of accession seem to have a different approach in mind. They are looking for a bargain of sorts with NATO. The alliance would promise not to enlarge eastward or arm regimes deemed unfriendly by Russia. Moscow would gain a veto over alliance decisions on matters which may affect Russia. In exchange, NATO would get better co-operation from Russia on things like missile defence or Afghanistan. NATO’s rules or norms do not seem to be a part of the bargain. Tellingly, few Russians use the term ‘membership’ with regard to NATO. They talk either of ‘integration’ or ‘organisational unity’. The former implies that both sides adopt some of the other side’s rules; the latter implies that neither side compromises internally. Either model is distant from what NATO has in mind.
But if membership is not the right thing for NATO and Russia to focus on in the near term, are there other viable ways to improve co-operation in the next few months and years? One Russian speaker at the meeting in Moscow put forth a possible solution. Instead of exploring membership, NATO and Russia should ‘demilitarise’ their relationship. Moscow would stop holding exercises that simulate a war with NATO, like the ‘Zapad’ exercise last year, in which 12,500 Russian and Belorusian troops repelled a fictitious attack from NATO. Russia would also change its strategic documents to make clear that NATO is not a ‘threat’ or ‘danger’. NATO would respond in kind, with no exercises and no new bases near Russia’s borders. If demilitarisation is successful, the theory goes, NATO and Russia would gradually come to view each other as partners. And that could open doors to even closer forms of co-operation in the future.
This is a sensible idea but not without difficulties. For a start, is Russia ready? The government is sending out mixed signals. Besides being nicer to its neighbours lately, Moscow has also launched sweeping defence reforms. These will change the Russian military from a grand force built to fight NATO into a smaller but more agile army better suited for regional conflicts like the one in Chechnya. That is good news for NATO. But only last year the Russian government also agreed a new military doctrine, which calls NATO’s activities the greatest danger to Russian security. So there is presumably a large segment of the Russian establishment that would oppose closer ties with the alliance.
In order to take up demilitarisation, NATO would have to be convinced that Russia is equally serious. Just as important, this initiative would need to win the support of the new allies in Central and Eastern Europe. Some of them feel that NATO has been neglecting the possibility of a conflict in Europe, and they want the alliance to adopt new ‘reassurance’ measures. These would involve, among other things, the creation of a new centre at NATO tasked with keeping an eye on future crises, including those involving Russia.
Some in NATO will argue that ‘reassurance’ would kill the hopes of a rapprochement with Russia, by provoking Moscow. But in fact the opposite is the case: without reassurance NATO will not reach the consensus it needs to offer Russia a new relationship – whether it means demilitarisation or, in the long run, integration. The right approach for NATO is to rebuild trust among the allies through reassurance while striving to reform its relationship with Russia. ‘Demilitarisation’ sounds like a useful idea to explore. The new allies should be supportive: after all, they stand to gain the most should Russia stop rehearsing attacks on Central and Eastern Europe. ‘Demilitarisation’ would be the ultimate reassurance measure.
Tomas Valasek is Director of foreign policy and defence at the Centre for European Reform.
There are growing signs that Russia’s relations with NATO are on the mend. Senior Russian thinkers, some close to the government, have been cautiously talking up the possibility of Russia joining the alliance, as have several western officials and think-tanks (including the CER.) While some powerful forces in Russia continue to view NATO as a hostile force, the latest signs from Moscow are encouraging. But even assuming that the more pro-western forces within Russia prevail, membership of NATO will remain at best a long-term goal. In the short and medium term, Russia and NATO need to put considerable effort into reducing mistrust.
A group of prominent Russian thinkers recently invited their western counterparts to talk about the possibility of Russia joining NATO. What prompted this initiative is not obvious, but the atmospherics have clearly changed. Russia is being nicer to its neighbours, while a number of European countries – including those in Central and Eastern Europe – are being nicer to Moscow. NATO has effectively put enlargement on hold. Barack Obama’s ‘reset’ seems to be changing attitudes on all sides. The challenge before Russia and NATO is to try to turn this opportunity into a lasting improvement in relations.
The allies are not of one mind on the subject of Russian membership of the alliance. But conversations with NATO officials and diplomats suggest that NATO could be ready by its November summit to offer Moscow the possibility of joining, if and when the latter meets accession criteria. With additional persuasion – though this is more questionable – NATO may even create a special accession track for Russia, different from the one NATO used for previous candidates, so that Moscow feels that it is being treated like a great power. But the allies’ bottom line is that, one way or another, Moscow will need to adopt many of NATO’s norms, including those on democracy and transparency, before it can become a member.
Those Russians who want to explore the possibility of accession seem to have a different approach in mind. They are looking for a bargain of sorts with NATO. The alliance would promise not to enlarge eastward or arm regimes deemed unfriendly by Russia. Moscow would gain a veto over alliance decisions on matters which may affect Russia. In exchange, NATO would get better co-operation from Russia on things like missile defence or Afghanistan. NATO’s rules or norms do not seem to be a part of the bargain. Tellingly, few Russians use the term ‘membership’ with regard to NATO. They talk either of ‘integration’ or ‘organisational unity’. The former implies that both sides adopt some of the other side’s rules; the latter implies that neither side compromises internally. Either model is distant from what NATO has in mind.
But if membership is not the right thing for NATO and Russia to focus on in the near term, are there other viable ways to improve co-operation in the next few months and years? One Russian speaker at the meeting in Moscow put forth a possible solution. Instead of exploring membership, NATO and Russia should ‘demilitarise’ their relationship. Moscow would stop holding exercises that simulate a war with NATO, like the ‘Zapad’ exercise last year, in which 12,500 Russian and Belorusian troops repelled a fictitious attack from NATO. Russia would also change its strategic documents to make clear that NATO is not a ‘threat’ or ‘danger’. NATO would respond in kind, with no exercises and no new bases near Russia’s borders. If demilitarisation is successful, the theory goes, NATO and Russia would gradually come to view each other as partners. And that could open doors to even closer forms of co-operation in the future.
This is a sensible idea but not without difficulties. For a start, is Russia ready? The government is sending out mixed signals. Besides being nicer to its neighbours lately, Moscow has also launched sweeping defence reforms. These will change the Russian military from a grand force built to fight NATO into a smaller but more agile army better suited for regional conflicts like the one in Chechnya. That is good news for NATO. But only last year the Russian government also agreed a new military doctrine, which calls NATO’s activities the greatest danger to Russian security. So there is presumably a large segment of the Russian establishment that would oppose closer ties with the alliance.
In order to take up demilitarisation, NATO would have to be convinced that Russia is equally serious. Just as important, this initiative would need to win the support of the new allies in Central and Eastern Europe. Some of them feel that NATO has been neglecting the possibility of a conflict in Europe, and they want the alliance to adopt new ‘reassurance’ measures. These would involve, among other things, the creation of a new centre at NATO tasked with keeping an eye on future crises, including those involving Russia.
Some in NATO will argue that ‘reassurance’ would kill the hopes of a rapprochement with Russia, by provoking Moscow. But in fact the opposite is the case: without reassurance NATO will not reach the consensus it needs to offer Russia a new relationship – whether it means demilitarisation or, in the long run, integration. The right approach for NATO is to rebuild trust among the allies through reassurance while striving to reform its relationship with Russia. ‘Demilitarisation’ sounds like a useful idea to explore. The new allies should be supportive: after all, they stand to gain the most should Russia stop rehearsing attacks on Central and Eastern Europe. ‘Demilitarisation’ would be the ultimate reassurance measure.
Tomas Valasek is Director of foreign policy and defence at the Centre for European Reform.
Subscribe to:
Posts (Atom)