by Simon Tilford
Japan has long had the highest level of public debt of any developed economy. The country’s public debt to GDP ratio is around 200 per cent of GDP, far in excess of even the EU’s worst performers. The collapse of real estate and equity prices in the early 1990s and the resulting banking crisis combined with a fast ageing population have condemned Japan to huge deficits, economic stagnation, and deflation, and an enormous rise in overall indebtedness. The country has been able to finance these deficits domestically, and very cheaply, because of Japan’s high domestic savings, and the readiness of Japanese savers to accept a very low rate of return. Deflation (and the strength of the Yen) has meant the Japanese have been willing to invest in Japanese governments bonds despite the low rate of nominal interest rather than invest abroad.
European governments have tended to be very dismissive of any suggestion that Europe is at risk of heading in a Japanese direction. Typically, they argue that the Japanese made egregious policy mistakes, which Europe would not repeat, such as failing to recapitalise the country’s banks quickly enough or tightening fiscal policy before the economic recovery had gained sufficient momentum. These criticisms of the Japanese authorities are probably fair. However, there are structural reasons for Japan’s plight, which many European economies share. And, despite protestations to the contrary, Europe is busy making the same policy mistakes as the Japanese authorities. Much of Europe is now on a Japanese course. Indeed, for some European countries the outlook looks much worse.
One group of EU economies should escape this predicament, largely as a result of favourable demographics. These include the Nordic economies, the Netherlands, and notwithstanding their current fiscal travails, France and the UK. Debt ratios will rise very strongly in all these economies, especially France and the UK, but these should be sustainable because their economies will continue to grow and they should avoid prolonged deflation. Although their populations are ageing, they will largely escape the demographic tsunami which is set to overwhelm much of Europe. For example, fertility rates in France and UK are over 1.9, and hence close to the replacement rate of 2.1 – the level needed to ensure stable populations. It is a similar story in the Nordics, while the picture is bit less favourable in the Netherlands, where the fertility rate is around 1.7.
A second group – basically comprising Germany (and probably Austria) – looks on course to emulate Japan’s experience. Germany has not experienced an asset price collapse equivalent to Japan, or the associated explosion in private sector indebtedness. But there are plenty of similarities between the two countries. Germany is experiencing a similarly drastic population ageing. The country’s fertility rate has been hovering around 1.3 for a generation, guaranteeing – in the absence of mass immigration – very rapid population decline. Like Japan, the country’s economic growth potential is now very low, domestic demand stagnant and deflationary pressures building. Germany also has badly undercapitalised banks. Like Japan, Germany can rely on large trade surpluses to partially offset the weakness of the domestic economy. High levels of domestic savings probably mean that Germany will be able to finance the borrowing domestically and be able to run up a similar debt burden to Japan without running into serious financing difficulties.
However, like Japan, this accumulation of debt will not be sustainable indefinitely. Japan’s household savings rate has fallen steeply in recent years as its ageing population starts to draw down on savings. The only reason the Japanese have been able to continue financing the fiscal deficit domestically is that corporate sector savings have ballooned, reflecting a collapse in investment. Once Japanese firms start to invest or their profitability declines, Japan will have to attract capital from abroad and foreign investors will demand a higher rate of interest than domestic investors are currently prepared to accept. Higher borrowing costs will spell serious trouble for a country as indebted as Japan.
A third group of EU economies – Italy, Portugal and Spain and of course Greece – looks set to fare worse than Japan. These economies combine the worst of all worlds. They have very weak public finances, fast ageing populations, very poor economic growth prospects and current account deficits – in the case of Greece, Portugal and Spain, very large ones. They cannot inflate their way out of their predicament, because they are members of the eurozone. Unlike Germany and Austria, they do not have surplus savings, and rely – to a greater or lesser extent – on foreigners to finance their deficits. Investors have already concluded that the debt dynamics of the weakest of the four – Greece – are unsustainable. Given their very poor growth prospects and dependence on foreign borrowing, Portugal and Spain will struggle to convince investors that they will be able to service steadily rising levels of debt. Italy looks somewhat less vulnerable than the other countries in this group in that it has a higher savings rate. However, it is hard to imagine Italian or foreign investors remaining sanguine about an unchecked build-up of Italian debt.
Simon Tilford is the chief economist at the Centre for European Reform.
Friday, April 30, 2010
Wednesday, April 21, 2010
Clameronism
From 'A Thousand Years of History: Britain in Europe 1066-2066', Oxford University Press, 2070.
Britain's 'national government' of 2010 was not unprecedented. Britons had accepted patriotic coalitions before during the First Great Recession and Second World War. Still, David Cameron's Conservatives fought hard in the aftermath of that year’s general election to preserve a minority government propped up by an unlikely assortment of regional parties and independents. But industrial unrest and a stuttering economic recovery ate away at investor confidence in Britain’s public finances. With pressure on sterling mounting, Cameron was finally forced to invite Liberal leader, Nick Clegg, into a national coalition.
Buoyed by a huge increase in the Liberal vote, Clegg at first opted for opposition. He bet that a swift second election was likely and that the Liberal Democrats would again double their seats. But the threat of a new financial crisis later that year spelt an end to normal politics. And Cameron's offer to give Vince Cable – the Liberals' ever popular shadow chancellor – the role of deputy at the treasury to help fight Britain's "economic blitz" could not be refused.
Clegg himself took on the post of foreign secretary, setting the scene for the coalition's first crisis: Britain's European policy. Despite howls of protest from the Conservative grass roots, Cameron agreed to "put on hold" Tory demands for a membership renegotiation that would have withdrawn Britain from EU policies on social policy, human rights and justice and policing. Instead, Britain pursued its interests in Europe based on a joint strategy called 'Leading critically: A new pro-Europeanism', swiftly dubbed "Clameronism" by The Economist.
For a time, the odd fusion of Cameron's detached euroscepticism and Clegg's pro-European stance worked well. Though he had to cope with a handful of defections from his own party, Cameron no longer had to fret about how he might extract himself from his pre-election promises on the EU when they proved undeliverable. Nor did he have to endure the ignominy of blocking Croatia's EU accession with demands for special concessions for the UK. And Clegg's ability to woo the European Parliament – where the Alliance of European Liberals held the balance of power – proved critical in protecting Britain from overly onerous financial regulation and restrictive laws on working hours. The Conservatives, meanwhile, could afford occasional gestures to stubbornly high eurosceptic sentiment at home.
In 2012, a British-French initiative set up St-Malo II, an EU defence avant-garde needed to cope with plummeting defence budgets. Later, President Strauss-Kahn supported the European Commission's drive to complete a functioning EU services market by 2017 in return for basic rules on corporate taxation. Ever closer Anglo-French partnership contrasted sharply with what became known as Germany's 'strategic lethargy', where Berlin glumly viewed continued European integration as a negative but lacked the will to take alternative initiatives.
It was ironic, then, that events in Germany were to trigger the unravelling of the Tory-Liberal consensus and the end of what many considered to be their unholy alliance. In the so-called 'Four Professors' crisis of 2013, a brittle hodgepodge of bailout guarantees needed to keep Greece and other countries in the euro were struck down as unconstitutional by the Bundesverfassungsgericht on a third attempt by a group of German academic economists. A mushrooming series of financial and political crises finally forced EU leaders to confront the question of European Economic Union (EEU) at a hastily convened Inter-Governmental Conference in early 2014.
The so-called Treaty of Prague – which established a centrally managed eurozone treasury fund equal to 3 per cent of EU GDP – irrevocably split the coalition. A major change to the EU's treaties with implications for its budget, the treaty still required ratification in Britain. Cameron was unable to contain a backbench revolt in his own party over what were perceived as overly weak safeguards secured on Britain’s ‘red lines’ by the foreign secretary. For his part, Clegg insisted on a protocol which would leave open the option that Britain might one day join the euro.
Both parties had previously committed to holding a referendum on Britain's future in Europe and now that too became unavoidable. The Liberals, campaigning with Gladstonian fervour, insisted that a vote on the Prague treaty was vital for EU stability and must be considered the same as a vote on Britain's continued membership. The Tories countered that a rejection would merely halt the establishment of a European super-state on the brink of becoming financially independent of the member-states. The bitterly fought referendum, held alongside a general election in May 2014, marked a decisive shift in Britain's relationship with ‘Europe’, especially given the scale of the resulting landslide…
Hugo Brady is a senior research fellow at the Centre for European Reform.
Britain's 'national government' of 2010 was not unprecedented. Britons had accepted patriotic coalitions before during the First Great Recession and Second World War. Still, David Cameron's Conservatives fought hard in the aftermath of that year’s general election to preserve a minority government propped up by an unlikely assortment of regional parties and independents. But industrial unrest and a stuttering economic recovery ate away at investor confidence in Britain’s public finances. With pressure on sterling mounting, Cameron was finally forced to invite Liberal leader, Nick Clegg, into a national coalition.
Buoyed by a huge increase in the Liberal vote, Clegg at first opted for opposition. He bet that a swift second election was likely and that the Liberal Democrats would again double their seats. But the threat of a new financial crisis later that year spelt an end to normal politics. And Cameron's offer to give Vince Cable – the Liberals' ever popular shadow chancellor – the role of deputy at the treasury to help fight Britain's "economic blitz" could not be refused.
Clegg himself took on the post of foreign secretary, setting the scene for the coalition's first crisis: Britain's European policy. Despite howls of protest from the Conservative grass roots, Cameron agreed to "put on hold" Tory demands for a membership renegotiation that would have withdrawn Britain from EU policies on social policy, human rights and justice and policing. Instead, Britain pursued its interests in Europe based on a joint strategy called 'Leading critically: A new pro-Europeanism', swiftly dubbed "Clameronism" by The Economist.
For a time, the odd fusion of Cameron's detached euroscepticism and Clegg's pro-European stance worked well. Though he had to cope with a handful of defections from his own party, Cameron no longer had to fret about how he might extract himself from his pre-election promises on the EU when they proved undeliverable. Nor did he have to endure the ignominy of blocking Croatia's EU accession with demands for special concessions for the UK. And Clegg's ability to woo the European Parliament – where the Alliance of European Liberals held the balance of power – proved critical in protecting Britain from overly onerous financial regulation and restrictive laws on working hours. The Conservatives, meanwhile, could afford occasional gestures to stubbornly high eurosceptic sentiment at home.
In 2012, a British-French initiative set up St-Malo II, an EU defence avant-garde needed to cope with plummeting defence budgets. Later, President Strauss-Kahn supported the European Commission's drive to complete a functioning EU services market by 2017 in return for basic rules on corporate taxation. Ever closer Anglo-French partnership contrasted sharply with what became known as Germany's 'strategic lethargy', where Berlin glumly viewed continued European integration as a negative but lacked the will to take alternative initiatives.
It was ironic, then, that events in Germany were to trigger the unravelling of the Tory-Liberal consensus and the end of what many considered to be their unholy alliance. In the so-called 'Four Professors' crisis of 2013, a brittle hodgepodge of bailout guarantees needed to keep Greece and other countries in the euro were struck down as unconstitutional by the Bundesverfassungsgericht on a third attempt by a group of German academic economists. A mushrooming series of financial and political crises finally forced EU leaders to confront the question of European Economic Union (EEU) at a hastily convened Inter-Governmental Conference in early 2014.
The so-called Treaty of Prague – which established a centrally managed eurozone treasury fund equal to 3 per cent of EU GDP – irrevocably split the coalition. A major change to the EU's treaties with implications for its budget, the treaty still required ratification in Britain. Cameron was unable to contain a backbench revolt in his own party over what were perceived as overly weak safeguards secured on Britain’s ‘red lines’ by the foreign secretary. For his part, Clegg insisted on a protocol which would leave open the option that Britain might one day join the euro.
Both parties had previously committed to holding a referendum on Britain's future in Europe and now that too became unavoidable. The Liberals, campaigning with Gladstonian fervour, insisted that a vote on the Prague treaty was vital for EU stability and must be considered the same as a vote on Britain's continued membership. The Tories countered that a rejection would merely halt the establishment of a European super-state on the brink of becoming financially independent of the member-states. The bitterly fought referendum, held alongside a general election in May 2014, marked a decisive shift in Britain's relationship with ‘Europe’, especially given the scale of the resulting landslide…
Hugo Brady is a senior research fellow at the Centre for European Reform.
Wednesday, April 14, 2010
Whatever happened to the G20?
By Katinka Barysch
George W Bush convened the first G20 summit in Washington in November 2008, at the height of the global financial and economic crisis. At two further summits in 2009, G20 leaders pledged to co-ordinate their economic stimulus packages (as well as exit strategies), avoid protectionism, address global imbalances, triple the resources of the IMF, and work out stricter rules for banks, hedge funds and other financial players.
The G20 was hailed as the body that would prevent the global economy from hurtling into another great depression. It would also allow the world's top economies, including for the first time the big emerging markets, to co-ordinate their policies in such a way as to make future crises less likely.
"Whatever happens, the G20 is already a winner", wrote Martin Wolf in the Financial Times at the time of the G20 Pittsburgh summit in September 2009. "The fact that it has become central to global policymaking may prove a more important legacy of this crisis than any specific agreements it reaches."
Less than 18 months after the initial Washington summit, however, the G20 has almost disappeared from public view. As growth has returned in most countries, the sense of urgency to 'fix' the world economy has started to fade. The new body's legitimacy is already being questioned. That is unfortunate because the G20 still has a daunting to-do list. The risk now is that the debate about what the G20 should do is superseded by one about what it should look like.
Critics are right that the G20 is unwieldy. Once the representatives from international organisations such as the IMF and the WTO, as well as regional groupings such as ASEAN, are added, the total number of leaders and top officials at G20 summits is closer to 30. The easiest way to cut the G20 down to size would be to reduce Europe's over-representation: France, Germany, Italy and the UK are members. Spain, which holds the rotating EU presidency, will once again attend the next G20 summit. So will the presidents of the European Commission, the European Council and the European Central Bank (and now Jean-Claude Juncker, who heads the eurogroup, wants to come, too). The fact that one third of G20 participants hail from Europe and only two from Africa reduces the legitimacy of this body in the eyes of many poorer countries.
The Europeans will one day have to streamline their representation. (Meanwhile, Pascal Lamy suggests how the Europeans can make less of a nuisance of themselves, see 'Too many Europeans in G20: If you must hog the seats, could you at least talk less?'.) Perhaps other emerging economies will be added instead. But this is not the time to open the Pandora's box of who should be allowed to attend G20 summits. If the group is to regain momentum and authority, it needs to first and foremost deliver on its promises.
On trade, G20 governments have not fully lived up to their pledge to refrain from protectionism. In the 12 months following the Washington summit, the countries represented there adopted 179 policies that harmed foreign trade, investment or workers, according to Global Trade Alert. The overall damage, however, has been limited and the pace with which G20 countries have imposed new tariffs and anti-dumping actions has slowed in the last six months. World leaders had also instructed their trade negotiators to finish the WTO's Doha round by the end of 2009. But multilateral trade talks remain stuck.
The G20's report card is similarly mixed when it comes to re-regulating financial markets. Despite the promise to work out new rules together, several G20 members have announced measures without consulting their partners, for example the US administration's Volcker rule or the EU’s alternative investment directive. Nevertheless, the newly established Financial Stability Board (consisting of G20 finance ministers, central bankers and regulators) has helped to forge a broad consensus on what needs to be done in terms of capital and liquidity ratios, bankers' pay and so on. At the next G20 summit in June in Toronto, governments are likely to back plans for a new levy on banks.
Least progress has been achieved on global imbalances. The G20 has been sidelined, while the real discussions about exchange rate policies and trade balances have taken place between Washington and Beijing. Whether the Americans manage to put global imbalances on the Toronto agenda despite Chinese opposition is a serious test for the new forum.
To achieve results, the G20 leaders need to do two things. First, they need to concentrate on unfinished business and resist the temptation, or the pressure, to take on new tasks. The G20 has rightly rejected suggestions that it should discuss geo-political issues, such as Iran's nuclear programme. It should avoid being saddled with global climate change discussions. South Korea's idea of adding development and poverty reduction to the agenda of the G20 summit in Seoul in November is harder to dismiss. Such a broadening of the agenda would keep emerging economies interested and show that the G20 agenda does not merely reflect rich countries' interests.
Second, for the G20 to make a difference, leaders need to focus on the urgent but unexciting task of integrating the G20 into the existing systems of global governance. The G20, like the G7/8 before it, is a process, not an organisation. It cannot take legally binding decisions. It does not have a permanent secretariat. But it does have a signalling function that can galvanise governments and other international organisations to act. It did so, for example, by adopting a strong stance on tax havens at the London summit in April 2009. In March 2010, Angel Gurria, secretary-general of the OECD, said (at the GMF Brussels Forum) that on taxation and transparency, there has been "more progress in the last 12 months than in the previous 12 years, because of a clear mandate from the G20". But not all institutional links function that smoothly. Officials in the UN and other venerable bodies resent that the G20 is hogging the limelight. Yet it is these bodies that will have to implement G20 decisions.
Katinka Barysch is deputy director of the Centre for European Reform.
George W Bush convened the first G20 summit in Washington in November 2008, at the height of the global financial and economic crisis. At two further summits in 2009, G20 leaders pledged to co-ordinate their economic stimulus packages (as well as exit strategies), avoid protectionism, address global imbalances, triple the resources of the IMF, and work out stricter rules for banks, hedge funds and other financial players.
The G20 was hailed as the body that would prevent the global economy from hurtling into another great depression. It would also allow the world's top economies, including for the first time the big emerging markets, to co-ordinate their policies in such a way as to make future crises less likely.
"Whatever happens, the G20 is already a winner", wrote Martin Wolf in the Financial Times at the time of the G20 Pittsburgh summit in September 2009. "The fact that it has become central to global policymaking may prove a more important legacy of this crisis than any specific agreements it reaches."
Less than 18 months after the initial Washington summit, however, the G20 has almost disappeared from public view. As growth has returned in most countries, the sense of urgency to 'fix' the world economy has started to fade. The new body's legitimacy is already being questioned. That is unfortunate because the G20 still has a daunting to-do list. The risk now is that the debate about what the G20 should do is superseded by one about what it should look like.
Critics are right that the G20 is unwieldy. Once the representatives from international organisations such as the IMF and the WTO, as well as regional groupings such as ASEAN, are added, the total number of leaders and top officials at G20 summits is closer to 30. The easiest way to cut the G20 down to size would be to reduce Europe's over-representation: France, Germany, Italy and the UK are members. Spain, which holds the rotating EU presidency, will once again attend the next G20 summit. So will the presidents of the European Commission, the European Council and the European Central Bank (and now Jean-Claude Juncker, who heads the eurogroup, wants to come, too). The fact that one third of G20 participants hail from Europe and only two from Africa reduces the legitimacy of this body in the eyes of many poorer countries.
The Europeans will one day have to streamline their representation. (Meanwhile, Pascal Lamy suggests how the Europeans can make less of a nuisance of themselves, see 'Too many Europeans in G20: If you must hog the seats, could you at least talk less?'.) Perhaps other emerging economies will be added instead. But this is not the time to open the Pandora's box of who should be allowed to attend G20 summits. If the group is to regain momentum and authority, it needs to first and foremost deliver on its promises.
On trade, G20 governments have not fully lived up to their pledge to refrain from protectionism. In the 12 months following the Washington summit, the countries represented there adopted 179 policies that harmed foreign trade, investment or workers, according to Global Trade Alert. The overall damage, however, has been limited and the pace with which G20 countries have imposed new tariffs and anti-dumping actions has slowed in the last six months. World leaders had also instructed their trade negotiators to finish the WTO's Doha round by the end of 2009. But multilateral trade talks remain stuck.
The G20's report card is similarly mixed when it comes to re-regulating financial markets. Despite the promise to work out new rules together, several G20 members have announced measures without consulting their partners, for example the US administration's Volcker rule or the EU’s alternative investment directive. Nevertheless, the newly established Financial Stability Board (consisting of G20 finance ministers, central bankers and regulators) has helped to forge a broad consensus on what needs to be done in terms of capital and liquidity ratios, bankers' pay and so on. At the next G20 summit in June in Toronto, governments are likely to back plans for a new levy on banks.
Least progress has been achieved on global imbalances. The G20 has been sidelined, while the real discussions about exchange rate policies and trade balances have taken place between Washington and Beijing. Whether the Americans manage to put global imbalances on the Toronto agenda despite Chinese opposition is a serious test for the new forum.
To achieve results, the G20 leaders need to do two things. First, they need to concentrate on unfinished business and resist the temptation, or the pressure, to take on new tasks. The G20 has rightly rejected suggestions that it should discuss geo-political issues, such as Iran's nuclear programme. It should avoid being saddled with global climate change discussions. South Korea's idea of adding development and poverty reduction to the agenda of the G20 summit in Seoul in November is harder to dismiss. Such a broadening of the agenda would keep emerging economies interested and show that the G20 agenda does not merely reflect rich countries' interests.
Second, for the G20 to make a difference, leaders need to focus on the urgent but unexciting task of integrating the G20 into the existing systems of global governance. The G20, like the G7/8 before it, is a process, not an organisation. It cannot take legally binding decisions. It does not have a permanent secretariat. But it does have a signalling function that can galvanise governments and other international organisations to act. It did so, for example, by adopting a strong stance on tax havens at the London summit in April 2009. In March 2010, Angel Gurria, secretary-general of the OECD, said (at the GMF Brussels Forum) that on taxation and transparency, there has been "more progress in the last 12 months than in the previous 12 years, because of a clear mandate from the G20". But not all institutional links function that smoothly. Officials in the UN and other venerable bodies resent that the G20 is hogging the limelight. Yet it is these bodies that will have to implement G20 decisions.
Katinka Barysch is deputy director of the Centre for European Reform.
Thursday, April 01, 2010
Turkey's turmoil
by Katinka Barysch
Political convulsions are nothing new in Turkey. But recent events have made some observers gloomy about the fate of the country and its suitability as an EU member. Tensions are escalating between the ruling AK party, on the one hand, and the army and the secular opposition, on the other. Some observers warn that another military coup cannot be ruled out completely. Others think that the highest court could launch a new case to ban the AKP. Political disputes, however heated, do not disqualify Turkey from EU accession. The danger is that the government and its opponents damage state institutions and undermine the rule of law by using the police, courts and other public bodies in their battle for political survival. This is where the EU must focus its efforts.
Dozens of former generals and other military personnel have been jailed in recent months, accused of plotting coups against the government of Recep Tayyip Erdogan. This followed hundreds of arrests under the ‘Ergenekon’ case against an alleged terrorist network of arch-secular judges, professors, soldiers and officials. More than 100,000 Turks have had their phones tapped, say media reports. Many ordinary Turks fear being caught up in the continuing investigations.
The opposition accuses Erdogan’s AK party of transforming Turkey into an Islamist state and of using the police and the judiciary to get rid of its opponents. They feel vindicated by the government’s hasty moves to amend the constitution in a way that would give the AKP more influence over the composition of the constitutional court and the ‘supreme board of judges and prosecutors’.
AKP leaders say that the constitutional amendments are needed to get the country closer to the EU. They point out that the legal package contains some bits that are needed to allow for the opening of new ‘chapters’ in the accession talks (like allowing civil servants to strike) and others that are long-standing EU demands (such as making it harder for the courts to close down parties). They say that recent waves of arrests are part of a much-needed process of democratisation at the end of which elected politicians – not generals, judges and other unaccountable figures – will have the last say in Turkish politics.
A complex mix of social change, internal power struggles and clashing ideologies is behind the current commotion. A changing Turkey needs a new system of political checks and balances. For too long, Turkey’s secular establishment has relied on the army, the constitutional court and the (traditionally secular) president to keep elected politicians in check. In each decade since Turkey became democratic in 1950, the army has forced an elected government from power. The constitutional court has banned scores of political parties suspected of undermining the secular order or the unity of the state. Much of the media and the education system used to spread Kemalist ideology. These are not the ingredients of a modern democracy.
Change was inevitable. And in a country with many fault lines and a fair number of fanatics, it was never going to be smooth. Nevertheless, the new system that now seems to be emerging is flawed. The president now hails from the AKP and is accused of using his wide-ranging powers of appointment to fill public bodies with party supporters. The armed forces no longer appear unified or strong enough to depose of the government (they last tried, and failed, in 2007). But they are still fighting to forestall what they regard as the AKP’s growing dominance. The judiciary appears torn in the clash between secularists and pious conservatives. The media is deeply polarised.
Perhaps most importantly, Turkey’s political parties do not present a proper choice to the Turkish people. The main opposition parties – the Kemalist CHP and the nationalist MHP – proffer little more than identity politics. Both lack a vision for a modern, dynamic Turkey at peace with itself and its neighbours. Their tired slogans and obstructionism have limited appeal. The rigid hierarchy within these organisations (“Shrinking cults for outsized egos” FT columnist David Gardner recently called them) make internal renewal improbable.
The AKP promised to be a political force of a different kind: a grass-roots movement, transparent (ak means white or pure in Turkish), representative of a more diverse nation, focused on policies rather than ideologies. But eight years after winning its first election, the AKP has started to resemble its political opponents. Erdogan, it is said, takes all important decisions. Corruption allegations have become more frequent – as have the party leadership’s attempts to use state power to deflect them. Media outlets that criticise the government have come under pressure. The AKP used to accuse the CHP of using the courts and the security apparatus to intimidate its opponents. Now such allegations are heaped onto the AKP itself. Public bodies, such as the higher education board, have become more, not less politicised under AKP influence.
There are some stirrings in Turkey’s political system, with old parties trying to regroup and new ones springing up. But lack of money and a prohibitive 10 per cent threshold to enter parliament make life very tough for smaller parties and newcomers. Although Erdogan promised years ago to reduce the 10 per cent threshold, such a change is conspicuously absent from the constitutional reform package that the AKP has now sent to parliament.
The new enlargement commissioner, Stefan Fule, has said that “the proposed reforms [in the constitutional package] go in the right direction”. But while broadly satisfied with the substance, Fule and his colleagues are unhappy about the process. They are right. Even if the AKP manages to push through its package (it will probably have to resort to a referendum since it lacks the necessary super-majority in parliament), it is questionable whether the current antagonistic climate is a good time for a very incomplete constitutional reform. The move smacks of political manoeuvring and could discredit the very process of constitutional renewal. Given that Turkey’s democracy badly needs better rules, rights and institutions, this would be a tragedy. The AKP should wait until after the 2011 parliamentary election and then start the broad constitutional debate, including opposition parties and civil society, that it has promised ever since 2007. The EU is right not to take sides in Turkey’s current political battles. But it should not be afraid to say loud and clear that a more thorough reform of the constitution and the law on political parties is necessary if such battles are not to undermine Turkey’s accession chances in the medium term.
Katinka Barysch is the deputy director at the Centre for European Reform
Political convulsions are nothing new in Turkey. But recent events have made some observers gloomy about the fate of the country and its suitability as an EU member. Tensions are escalating between the ruling AK party, on the one hand, and the army and the secular opposition, on the other. Some observers warn that another military coup cannot be ruled out completely. Others think that the highest court could launch a new case to ban the AKP. Political disputes, however heated, do not disqualify Turkey from EU accession. The danger is that the government and its opponents damage state institutions and undermine the rule of law by using the police, courts and other public bodies in their battle for political survival. This is where the EU must focus its efforts.
Dozens of former generals and other military personnel have been jailed in recent months, accused of plotting coups against the government of Recep Tayyip Erdogan. This followed hundreds of arrests under the ‘Ergenekon’ case against an alleged terrorist network of arch-secular judges, professors, soldiers and officials. More than 100,000 Turks have had their phones tapped, say media reports. Many ordinary Turks fear being caught up in the continuing investigations.
The opposition accuses Erdogan’s AK party of transforming Turkey into an Islamist state and of using the police and the judiciary to get rid of its opponents. They feel vindicated by the government’s hasty moves to amend the constitution in a way that would give the AKP more influence over the composition of the constitutional court and the ‘supreme board of judges and prosecutors’.
AKP leaders say that the constitutional amendments are needed to get the country closer to the EU. They point out that the legal package contains some bits that are needed to allow for the opening of new ‘chapters’ in the accession talks (like allowing civil servants to strike) and others that are long-standing EU demands (such as making it harder for the courts to close down parties). They say that recent waves of arrests are part of a much-needed process of democratisation at the end of which elected politicians – not generals, judges and other unaccountable figures – will have the last say in Turkish politics.
A complex mix of social change, internal power struggles and clashing ideologies is behind the current commotion. A changing Turkey needs a new system of political checks and balances. For too long, Turkey’s secular establishment has relied on the army, the constitutional court and the (traditionally secular) president to keep elected politicians in check. In each decade since Turkey became democratic in 1950, the army has forced an elected government from power. The constitutional court has banned scores of political parties suspected of undermining the secular order or the unity of the state. Much of the media and the education system used to spread Kemalist ideology. These are not the ingredients of a modern democracy.
Change was inevitable. And in a country with many fault lines and a fair number of fanatics, it was never going to be smooth. Nevertheless, the new system that now seems to be emerging is flawed. The president now hails from the AKP and is accused of using his wide-ranging powers of appointment to fill public bodies with party supporters. The armed forces no longer appear unified or strong enough to depose of the government (they last tried, and failed, in 2007). But they are still fighting to forestall what they regard as the AKP’s growing dominance. The judiciary appears torn in the clash between secularists and pious conservatives. The media is deeply polarised.
Perhaps most importantly, Turkey’s political parties do not present a proper choice to the Turkish people. The main opposition parties – the Kemalist CHP and the nationalist MHP – proffer little more than identity politics. Both lack a vision for a modern, dynamic Turkey at peace with itself and its neighbours. Their tired slogans and obstructionism have limited appeal. The rigid hierarchy within these organisations (“Shrinking cults for outsized egos” FT columnist David Gardner recently called them) make internal renewal improbable.
The AKP promised to be a political force of a different kind: a grass-roots movement, transparent (ak means white or pure in Turkish), representative of a more diverse nation, focused on policies rather than ideologies. But eight years after winning its first election, the AKP has started to resemble its political opponents. Erdogan, it is said, takes all important decisions. Corruption allegations have become more frequent – as have the party leadership’s attempts to use state power to deflect them. Media outlets that criticise the government have come under pressure. The AKP used to accuse the CHP of using the courts and the security apparatus to intimidate its opponents. Now such allegations are heaped onto the AKP itself. Public bodies, such as the higher education board, have become more, not less politicised under AKP influence.
There are some stirrings in Turkey’s political system, with old parties trying to regroup and new ones springing up. But lack of money and a prohibitive 10 per cent threshold to enter parliament make life very tough for smaller parties and newcomers. Although Erdogan promised years ago to reduce the 10 per cent threshold, such a change is conspicuously absent from the constitutional reform package that the AKP has now sent to parliament.
The new enlargement commissioner, Stefan Fule, has said that “the proposed reforms [in the constitutional package] go in the right direction”. But while broadly satisfied with the substance, Fule and his colleagues are unhappy about the process. They are right. Even if the AKP manages to push through its package (it will probably have to resort to a referendum since it lacks the necessary super-majority in parliament), it is questionable whether the current antagonistic climate is a good time for a very incomplete constitutional reform. The move smacks of political manoeuvring and could discredit the very process of constitutional renewal. Given that Turkey’s democracy badly needs better rules, rights and institutions, this would be a tragedy. The AKP should wait until after the 2011 parliamentary election and then start the broad constitutional debate, including opposition parties and civil society, that it has promised ever since 2007. The EU is right not to take sides in Turkey’s current political battles. But it should not be afraid to say loud and clear that a more thorough reform of the constitution and the law on political parties is necessary if such battles are not to undermine Turkey’s accession chances in the medium term.
Katinka Barysch is the deputy director at the Centre for European Reform
Friday, March 26, 2010
Why Christine Lagarde is right about Germany
Greece’s recent fiscal travails have, slightly unexpectedly, thrown the spotlight on Germany’s current-account surplus. In mid-March, France’s finance minister, Christine Lagarde, urged Germany to do more to boost domestic demand – a call echoed by the European Commission’s president, José Manuel Barroso. The German government and media are bemused and indignant. How can it be, they ask, that corruption and profligacy in Greece has turned in to a trial of German discipline and rectitude? Anyway, what right do French politicians – and, for that matter, Anglo-Saxon commentators – have to lecture Germany? Wouldn’t they be better advised attending to their own countries’ manifold economic problems?
On one thing, everyone agrees. Germany’s current-account surplus is vast. In 2009, it amounted to $169 billion – or 5.2 per cent of German GDP. In absolute terms, this was the world’s second largest current-account surplus after China’s. Measured as a share of GDP, Germany’s surplus was even larger than China’s. A number of countries have even larger external surpluses relative to the size of their economies than either China or Germany. These include European states like Sweden and Switzerland, Asian ones like Malaysia and Singapore, and oil-producing countries like Norway and Saudi Arabia. But because the absolute size of their surpluses is larger, China and Germany have inevitably attracted the most attention.
At issue is what these current-account surpluses represent – and what, if anything, the countries that run them should do about them. Many policy-makers and commentators in Germany believe that their country’s external surplus reflects the ‘competitiveness’ of its economy. A Bundesbank official likened Germany to a country holding top spot in a football league. Pursuing the same analogy, Germany’s finance minister, Wolfgang Schäuble, said it would never occur to him to ask an opposition team to weaken its side to make life easier for the one he supports. And the FT Deutschland’s response to British commentators who expressed sympathy with Lagarde’s position was to ask what on earth Germans were being expected to import from the UK: Walkers crisps, Doc Martens boots or Marmite?
A few years back, a former chief economist of the OECD, David Henderson, coined the term “do-it-yourself (DIY) economics” to describe “firmly held intuitive economic ideas and beliefs which owe little or nothing to textbooks, treatises or the evidence of economic history.” DIY economics, Henderson believed, was ubiquitous. It was as likely to inform the world view of political figures, top civil servants, chief executives, commentators and eminent professors as that of the general public. DIY economics remains as prevalent as ever, as recent German responses to Lagarde’s intervention surely prove. These responses are permeated with assumptions and beliefs that sound plausible to the uninitiated, but are just flat wrong.
The most pernicious of all – because it is the source of so much nonsense – is the tendency to think of countries as if they were companies, and of trade balances as if they were profit and loss accounts. The German economy, on this view, can be thought of as if it is Volkswagen. And its trade surplus shows that Germany is winning the ‘battle for global market share’. But it takes only a moment’s reflection to realise why this is an absurd way of thinking about the matter. One of the world’s most productive economies, the US, runs a large external deficit, while some of the most dysfunctional and least productive, from Russia to the Democratic Republic of Congo (DRC), run surpluses. No one is surely suggesting that the US should make itself more ‘competitive’ by emulating the DRC.
Far from being signs of external strength, countries’ current-account positions can be symptoms of domestic weakness. And here’s the rub. Many of the countries that have run large current-account surpluses over the past decade have suffered from weak domestic demand. One of these countries is Germany. If it had been a closed economy, it would have been in a prolonged slump. As it was, Germany was rescued by the profligacy of foreigners. Between 1999 and 2007, 70 per cent of the growth in its GDP was accounted for by net exports. However, the foreigners that kept the German economy afloat are now mired in debt. In many countries, households and governments are over-extended and need to ‘deleverage’. The question now is whether Germany accommodates this process or resists it.
For the time being, the German government shows every sign of resisting it. It rightly urges the deficit countries to become ‘more German’. But it fails to recognise that this is an impossible task if Germany does not become ‘less German’. This does not mean, as Wolfgang Schäuble claimed, that Germany is being asked to reduce the quality of its products so that other countries can ‘compete’ (a ludicrous move that would only lower the living standards of foreigners who bought German products). It does mean that fiscal consolidation and private-sector deleveraging in previously profligate countries must, as a matter of arithmetic, be accompanied by a fall in Germany’s external surplus. The odd thing about Germany’s domestic debate is that few politicians or commentators seem to recognise this.
The notion that trade and current-account surpluses are badges of economic success is deeply pernicious – not just because it is false, but also because it damagingly portrays international trade as a zero-sum competition between countries. The world economy suffers from huge macroeconomic imbalances that need to be corrected. It should be obvious that this cannot happen if countries like Germany (but also the Netherlands and Sweden) are not prepared to allow their external surpluses to decline. Germany was not to blame for the recklessness of countries like the UK. No-one is asking it to reduce the quality of its excellent manufactures. But Germany must stop fetishising its trade surplus and accept that the chronic weakness of its domestic demand is a problem for itself and the world economy.
Philip Whyte is a senior research fellow at the CER
On one thing, everyone agrees. Germany’s current-account surplus is vast. In 2009, it amounted to $169 billion – or 5.2 per cent of German GDP. In absolute terms, this was the world’s second largest current-account surplus after China’s. Measured as a share of GDP, Germany’s surplus was even larger than China’s. A number of countries have even larger external surpluses relative to the size of their economies than either China or Germany. These include European states like Sweden and Switzerland, Asian ones like Malaysia and Singapore, and oil-producing countries like Norway and Saudi Arabia. But because the absolute size of their surpluses is larger, China and Germany have inevitably attracted the most attention.
At issue is what these current-account surpluses represent – and what, if anything, the countries that run them should do about them. Many policy-makers and commentators in Germany believe that their country’s external surplus reflects the ‘competitiveness’ of its economy. A Bundesbank official likened Germany to a country holding top spot in a football league. Pursuing the same analogy, Germany’s finance minister, Wolfgang Schäuble, said it would never occur to him to ask an opposition team to weaken its side to make life easier for the one he supports. And the FT Deutschland’s response to British commentators who expressed sympathy with Lagarde’s position was to ask what on earth Germans were being expected to import from the UK: Walkers crisps, Doc Martens boots or Marmite?
A few years back, a former chief economist of the OECD, David Henderson, coined the term “do-it-yourself (DIY) economics” to describe “firmly held intuitive economic ideas and beliefs which owe little or nothing to textbooks, treatises or the evidence of economic history.” DIY economics, Henderson believed, was ubiquitous. It was as likely to inform the world view of political figures, top civil servants, chief executives, commentators and eminent professors as that of the general public. DIY economics remains as prevalent as ever, as recent German responses to Lagarde’s intervention surely prove. These responses are permeated with assumptions and beliefs that sound plausible to the uninitiated, but are just flat wrong.
The most pernicious of all – because it is the source of so much nonsense – is the tendency to think of countries as if they were companies, and of trade balances as if they were profit and loss accounts. The German economy, on this view, can be thought of as if it is Volkswagen. And its trade surplus shows that Germany is winning the ‘battle for global market share’. But it takes only a moment’s reflection to realise why this is an absurd way of thinking about the matter. One of the world’s most productive economies, the US, runs a large external deficit, while some of the most dysfunctional and least productive, from Russia to the Democratic Republic of Congo (DRC), run surpluses. No one is surely suggesting that the US should make itself more ‘competitive’ by emulating the DRC.
Far from being signs of external strength, countries’ current-account positions can be symptoms of domestic weakness. And here’s the rub. Many of the countries that have run large current-account surpluses over the past decade have suffered from weak domestic demand. One of these countries is Germany. If it had been a closed economy, it would have been in a prolonged slump. As it was, Germany was rescued by the profligacy of foreigners. Between 1999 and 2007, 70 per cent of the growth in its GDP was accounted for by net exports. However, the foreigners that kept the German economy afloat are now mired in debt. In many countries, households and governments are over-extended and need to ‘deleverage’. The question now is whether Germany accommodates this process or resists it.
For the time being, the German government shows every sign of resisting it. It rightly urges the deficit countries to become ‘more German’. But it fails to recognise that this is an impossible task if Germany does not become ‘less German’. This does not mean, as Wolfgang Schäuble claimed, that Germany is being asked to reduce the quality of its products so that other countries can ‘compete’ (a ludicrous move that would only lower the living standards of foreigners who bought German products). It does mean that fiscal consolidation and private-sector deleveraging in previously profligate countries must, as a matter of arithmetic, be accompanied by a fall in Germany’s external surplus. The odd thing about Germany’s domestic debate is that few politicians or commentators seem to recognise this.
The notion that trade and current-account surpluses are badges of economic success is deeply pernicious – not just because it is false, but also because it damagingly portrays international trade as a zero-sum competition between countries. The world economy suffers from huge macroeconomic imbalances that need to be corrected. It should be obvious that this cannot happen if countries like Germany (but also the Netherlands and Sweden) are not prepared to allow their external surpluses to decline. Germany was not to blame for the recklessness of countries like the UK. No-one is asking it to reduce the quality of its excellent manufactures. But Germany must stop fetishising its trade surplus and accept that the chronic weakness of its domestic demand is a problem for itself and the world economy.
Philip Whyte is a senior research fellow at the CER
Tuesday, March 09, 2010
What should NATO’s new strategic concept say about Russia?
by Tomas Valasek
Since the fall of the Berlin Wall, NATO has strived to reduce mutual suspicions with Russia and to build a more co-operative relationship. So it is vexing that 20 years on, Russia continues to view NATO as a hostile alliance. Moscow competes with NATO for influence in Eastern Europe, it seeks to halt NATO’s eastward enlargement and its recent security proposals for a new European security architecture were aimed in part at weakening NATO's role in European security. Moscow’s policy worries the Central European members of NATO, who have been demanding that the alliance draft defensive plans for the unlikely, but not unthinkable, possibility of a conflict with Russia.
The alliance's new strategic concept - its key guiding document, an update of which is due in the autumn – will not fundamentally change Russia's views. But many speakers at a recent seminar which the CER co-organised with NATO's public diplomacy division concluded that the document could be instrumental in unifying the allies' views on Russia, and in clarifying NATO's intentions towards Moscow.
The document should make two important points regarding Russia, several speakers argued. The first message is one of reassurance to the Central and Eastern European members of NATO who worry about Russia, especially after the war in Georgia in 2008. Their anxieties are eroding solidarity in NATO. Some are seeking bilateral security assurances from Washington in the form of US bases on their territory - but this would leave the 'have-nots' more vulnerable than the ‘haves’. It would therefore be better if the strategic concept sent a clear message that the alliance's mutual defence clause – Article V – remains as valid as ever. NATO should also underpin this message with the minimum necessary military planning and exercises.
The second message concerns Russia itself. No NATO ally wishes a conflict with Russia – least of all those on the alliance's eastern fringes, who know they would be more secure if Russia enjoyed a co-operative relationship with NATO. The alliance has repeatedly made this point in its communiqués, to little avail. But some speakers at the CER seminar argued that NATO should try again, and that this time the allies should go for a full ‘reset’: that is, tell Moscow that NATO is open to Russian membership, should it decide to join and meet the accession criteria. This would allow the Russian military – historically focused on a possible conflict with the West but now in the midst of deep reforms – to pay greater attention to the far more real threat of terrorism on its southern border, in the North Caucasus. It would also strengthen the hand of those in the Russian government who argue for an economic and political modernisation of Russia and for a closer relationship with the West.
In essence, NATO would follow a two-pronged approach: showing strength and solidarity vis-Ã -vis Russia but, at the same time, sending a message of inclusiveness to Moscow. The idea is not novel; the alliance pursued a similar ‘dual track’ approach for most of the 1970s and 1980s. But would it work in this day and age? Can the twin messages of reassurance and reset be reconciled?
Several speakers at the CER seminar argued for a positive answer, though they acknowledged the difficulties. The Russian government would view any new reassurance measures such as military exercises in Central Europe as a sign of ill intent. That would weaken the effect of any positive words the strategic concept may have for Russia.
Other speakers emphasised that reassurance measures should calm the relationship. By increasing solidarity among the allies, NATO would take away the opportunities – and the incentives - for the Russian government to pit one NATO member against another, as it has been doing in recent years. Moreover, reassurance measures would make the new allies feel more secure and therefore more willing to support a bold new outreach to Russia. Reassurance, several speakers said, is a precondition for reset.
Would a message of inclusion change Russia’s view of NATO? It is a tall order: the newly released Russian military doctrine calls the enlargement of NATO the most significant danger to the country's security. The Russians seem more and more concerned about NATO; the number of those worried about a conflict with ‘a major country’ – presumably western – has increased 12 per cent year-on-year in 2010 in one respected poll (though this could also reflect rising anxiety about China).
NATO’s ability to change this mindset is limited. The alliance carries so many negative associations in Russia that its capacity to aggravate tensions far outweighs its ability to induce positive change in Russian thinking. Nor is it obvious that the current government in Moscow is unhappy with the current situation – as one speaker at the seminar suggested, it suits some Russian elites to paint NATO as an enemy: doing so stimulates nationalist sentiment that may strengthen public support for the government.
Even so, a clear offer of reset from NATO could bring long-term benefits. The economic crisis has made Russia less certain and self-assured. While the regime is too inflexible to change in the short term (as Katinka Barysch argues in her recent CER policy brief http://www.cer.org.uk/pdf/pb_eu_russia_22feb10.pdf), it also seems more introspective than at any time since the boom years of the mid to late 2000s. As Dmitri Trenin argues in his recent study http://http://www.carnegie.ru/en/pubs/briefings/engaging_russia.pdf today’s bluster often hides uncertainty about the country’s economic and political future.
To overcome the mistrust between NATO and Russia, the country’s leaders would have to rethink some of the most fundamental bases of their foreign policy. NATO by itself cannot bring about that change. But it can create space for Russia’s independent thinkers and for the more reform-minded parts of the government to entertain the possibility of a future without a hostile relationship with the West. That could be a significant benefit of NATO’s new strategic concept carrying a message of reset.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
Since the fall of the Berlin Wall, NATO has strived to reduce mutual suspicions with Russia and to build a more co-operative relationship. So it is vexing that 20 years on, Russia continues to view NATO as a hostile alliance. Moscow competes with NATO for influence in Eastern Europe, it seeks to halt NATO’s eastward enlargement and its recent security proposals for a new European security architecture were aimed in part at weakening NATO's role in European security. Moscow’s policy worries the Central European members of NATO, who have been demanding that the alliance draft defensive plans for the unlikely, but not unthinkable, possibility of a conflict with Russia.
The alliance's new strategic concept - its key guiding document, an update of which is due in the autumn – will not fundamentally change Russia's views. But many speakers at a recent seminar which the CER co-organised with NATO's public diplomacy division concluded that the document could be instrumental in unifying the allies' views on Russia, and in clarifying NATO's intentions towards Moscow.
The document should make two important points regarding Russia, several speakers argued. The first message is one of reassurance to the Central and Eastern European members of NATO who worry about Russia, especially after the war in Georgia in 2008. Their anxieties are eroding solidarity in NATO. Some are seeking bilateral security assurances from Washington in the form of US bases on their territory - but this would leave the 'have-nots' more vulnerable than the ‘haves’. It would therefore be better if the strategic concept sent a clear message that the alliance's mutual defence clause – Article V – remains as valid as ever. NATO should also underpin this message with the minimum necessary military planning and exercises.
The second message concerns Russia itself. No NATO ally wishes a conflict with Russia – least of all those on the alliance's eastern fringes, who know they would be more secure if Russia enjoyed a co-operative relationship with NATO. The alliance has repeatedly made this point in its communiqués, to little avail. But some speakers at the CER seminar argued that NATO should try again, and that this time the allies should go for a full ‘reset’: that is, tell Moscow that NATO is open to Russian membership, should it decide to join and meet the accession criteria. This would allow the Russian military – historically focused on a possible conflict with the West but now in the midst of deep reforms – to pay greater attention to the far more real threat of terrorism on its southern border, in the North Caucasus. It would also strengthen the hand of those in the Russian government who argue for an economic and political modernisation of Russia and for a closer relationship with the West.
In essence, NATO would follow a two-pronged approach: showing strength and solidarity vis-Ã -vis Russia but, at the same time, sending a message of inclusiveness to Moscow. The idea is not novel; the alliance pursued a similar ‘dual track’ approach for most of the 1970s and 1980s. But would it work in this day and age? Can the twin messages of reassurance and reset be reconciled?
Several speakers at the CER seminar argued for a positive answer, though they acknowledged the difficulties. The Russian government would view any new reassurance measures such as military exercises in Central Europe as a sign of ill intent. That would weaken the effect of any positive words the strategic concept may have for Russia.
Other speakers emphasised that reassurance measures should calm the relationship. By increasing solidarity among the allies, NATO would take away the opportunities – and the incentives - for the Russian government to pit one NATO member against another, as it has been doing in recent years. Moreover, reassurance measures would make the new allies feel more secure and therefore more willing to support a bold new outreach to Russia. Reassurance, several speakers said, is a precondition for reset.
Would a message of inclusion change Russia’s view of NATO? It is a tall order: the newly released Russian military doctrine calls the enlargement of NATO the most significant danger to the country's security. The Russians seem more and more concerned about NATO; the number of those worried about a conflict with ‘a major country’ – presumably western – has increased 12 per cent year-on-year in 2010 in one respected poll (though this could also reflect rising anxiety about China).
NATO’s ability to change this mindset is limited. The alliance carries so many negative associations in Russia that its capacity to aggravate tensions far outweighs its ability to induce positive change in Russian thinking. Nor is it obvious that the current government in Moscow is unhappy with the current situation – as one speaker at the seminar suggested, it suits some Russian elites to paint NATO as an enemy: doing so stimulates nationalist sentiment that may strengthen public support for the government.
Even so, a clear offer of reset from NATO could bring long-term benefits. The economic crisis has made Russia less certain and self-assured. While the regime is too inflexible to change in the short term (as Katinka Barysch argues in her recent CER policy brief http://www.cer.org.uk/pdf/pb_eu_russia_22feb10.pdf), it also seems more introspective than at any time since the boom years of the mid to late 2000s. As Dmitri Trenin argues in his recent study http://http://www.carnegie.ru/en/pubs/briefings/engaging_russia.pdf today’s bluster often hides uncertainty about the country’s economic and political future.
To overcome the mistrust between NATO and Russia, the country’s leaders would have to rethink some of the most fundamental bases of their foreign policy. NATO by itself cannot bring about that change. But it can create space for Russia’s independent thinkers and for the more reform-minded parts of the government to entertain the possibility of a future without a hostile relationship with the West. That could be a significant benefit of NATO’s new strategic concept carrying a message of reset.
Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.
Friday, February 26, 2010
It’s the economics, stupid
by Simon Tilford
There was always a risk that a one-size-fits-all monetary policy would lead to big divergences in inflation and competitiveness across the eurozone. This, in turn, would result in trade imbalances which would be difficult to reverse. Proponents of the single currency dismissed such concerns, arguing that the single currency was a political project, and that the economics would fall into place once the currency became a reality. The consequences of this line of reasoning are now clear. The eurozone faces a severe test. Greece – the member-state in the tightest spot – is far from unique. A number of other member-states could easily find themselves fighting to retain the confidence of the financial markets.
The crisis that has erupted within the eurozone has been brewing for a long time. The problems of the southern member-states – Greece, Spain and Portugal – were disguised by the credit boom, which underpinned economic growth (and tax revenues), while investors were happy to lend them money to cover their current account deficits. But when the financial crisis hit and economic growth collapsed, the underlying weakness of their public finances and trade positions were exposed.
The external deficits these countries are running with the eurozone’s surplus members – principally Germany and the Netherlands – are a huge drain on their economies, and will make it all but impossible for them to put their public finances on a sustainable footing. They need to devalue and rebalance their economies away from domestic consumption to exports. However, unlike in the case of Britain, which shares quite a few of their characteristics, they no longer have that option.
Many eurozone governments do not seem to have understood the implications of membership. When they signed up to the euro they effectively committed themselves to liberal economic policies. There is no eurozone government to transfer funds from stronger to weaker member-states. So if a country loses competitiveness it has no option but to cut its costs relative to the rest of the currency bloc. The best way of doing this is through higher productivity. The governments of the southern member-states have shown no urgency to improve their dire productivity performance. That leaves cuts in wages. To do this, countries need flexible labour markets, so real wages can fall as fell as rise. Unfortunately, they have shown similarly little enthusiasm for reforming their highly regulated labour markets.
However, the southern member-states should not shoulder all the blame for the fault lines within the eurozone. Germany is often cited as the country which understands how to flourish within a currency union. Germany has certainly shown discipline. Wage restraint has been relentless, boosting the country’s export competitiveness and producing a yawning current account surplus. Even after the crisis – which caused its exports to contract by nearly 20 per cent – Germany still has an external surplus of around 6 per cent of GDP and rising, over half of which is with the rest of the eurozone. But Germany’s strategy is hardly one that other countries can follow, because one country’s surplus is another’s deficit.
Despite the much-vaunted strengths of Germany’s exporters, the country’s economic growth performance has been poor since the introduction of the euro. And there is no sign of change. The only real impetus in the German economy comes from exports; private consumption remains chronically weak. After escaping recession earlier than most eurozone countries in 2009, Germany’s economy ground to a halt in the final quarter of 2009 and is likely to contract in the first three months of this year. Private consumption is all but certain to fall this year.
The weakness of Germany’s domestic demand will no doubt lead to renewed falls in real wages and to a further decline in Germany's trade-weighted exchange rate within the eurozone. Exports will again keep an otherwise stagnant economy afloat. But it will be all but impossible for the likes of Spain and Greece to put their public finances in order unless they can get their economies growing. For this, they must rebalance their trade with the rest of the eurozone. They need Germany to grow under its own steam.
Germany’s structural mercantilism may be little short of a beggar-thy-neighbour strategy, but the struggling member-states of the eurozone can hardly claim they were not warned, not least by Germany itself. The Germans were hardly cheerleaders for the euro, and were decidedly lukewarm about the southern Europeans joining. They were certainly not the ones holding the shot-gun at the wedding. They reluctantly accepted a broad membership, but on the condition that countries understood what they were getting themselves into.
Neither the Germans nor the other countries running big surpluses are taking steps to rebalance their economies. In order to retain the confidence of lenders the eurozone’s hard-hit governments will make big cuts in public spending. In the absence of strong exports, this will depress demand and with it economic growth, in turn undermining the attempt to strengthen public finances. Germany will agree to support a member-state which finds itself unable to tap the bond markets, in order to prevent contagion to other struggling member-states. But it will resist pressure for economic union, as this would involve the "stronger" economies transferring money to the "weaker" ones on an ongoing basis. Does this mean the eurozone is destined to unravel? No, but the future certainly looks decidedly troubled.
Simon Tilford is the chief economist at the Centre for European Reform.
There was always a risk that a one-size-fits-all monetary policy would lead to big divergences in inflation and competitiveness across the eurozone. This, in turn, would result in trade imbalances which would be difficult to reverse. Proponents of the single currency dismissed such concerns, arguing that the single currency was a political project, and that the economics would fall into place once the currency became a reality. The consequences of this line of reasoning are now clear. The eurozone faces a severe test. Greece – the member-state in the tightest spot – is far from unique. A number of other member-states could easily find themselves fighting to retain the confidence of the financial markets.
The crisis that has erupted within the eurozone has been brewing for a long time. The problems of the southern member-states – Greece, Spain and Portugal – were disguised by the credit boom, which underpinned economic growth (and tax revenues), while investors were happy to lend them money to cover their current account deficits. But when the financial crisis hit and economic growth collapsed, the underlying weakness of their public finances and trade positions were exposed.
The external deficits these countries are running with the eurozone’s surplus members – principally Germany and the Netherlands – are a huge drain on their economies, and will make it all but impossible for them to put their public finances on a sustainable footing. They need to devalue and rebalance their economies away from domestic consumption to exports. However, unlike in the case of Britain, which shares quite a few of their characteristics, they no longer have that option.
Many eurozone governments do not seem to have understood the implications of membership. When they signed up to the euro they effectively committed themselves to liberal economic policies. There is no eurozone government to transfer funds from stronger to weaker member-states. So if a country loses competitiveness it has no option but to cut its costs relative to the rest of the currency bloc. The best way of doing this is through higher productivity. The governments of the southern member-states have shown no urgency to improve their dire productivity performance. That leaves cuts in wages. To do this, countries need flexible labour markets, so real wages can fall as fell as rise. Unfortunately, they have shown similarly little enthusiasm for reforming their highly regulated labour markets.
However, the southern member-states should not shoulder all the blame for the fault lines within the eurozone. Germany is often cited as the country which understands how to flourish within a currency union. Germany has certainly shown discipline. Wage restraint has been relentless, boosting the country’s export competitiveness and producing a yawning current account surplus. Even after the crisis – which caused its exports to contract by nearly 20 per cent – Germany still has an external surplus of around 6 per cent of GDP and rising, over half of which is with the rest of the eurozone. But Germany’s strategy is hardly one that other countries can follow, because one country’s surplus is another’s deficit.
Despite the much-vaunted strengths of Germany’s exporters, the country’s economic growth performance has been poor since the introduction of the euro. And there is no sign of change. The only real impetus in the German economy comes from exports; private consumption remains chronically weak. After escaping recession earlier than most eurozone countries in 2009, Germany’s economy ground to a halt in the final quarter of 2009 and is likely to contract in the first three months of this year. Private consumption is all but certain to fall this year.
The weakness of Germany’s domestic demand will no doubt lead to renewed falls in real wages and to a further decline in Germany's trade-weighted exchange rate within the eurozone. Exports will again keep an otherwise stagnant economy afloat. But it will be all but impossible for the likes of Spain and Greece to put their public finances in order unless they can get their economies growing. For this, they must rebalance their trade with the rest of the eurozone. They need Germany to grow under its own steam.
Germany’s structural mercantilism may be little short of a beggar-thy-neighbour strategy, but the struggling member-states of the eurozone can hardly claim they were not warned, not least by Germany itself. The Germans were hardly cheerleaders for the euro, and were decidedly lukewarm about the southern Europeans joining. They were certainly not the ones holding the shot-gun at the wedding. They reluctantly accepted a broad membership, but on the condition that countries understood what they were getting themselves into.
Neither the Germans nor the other countries running big surpluses are taking steps to rebalance their economies. In order to retain the confidence of lenders the eurozone’s hard-hit governments will make big cuts in public spending. In the absence of strong exports, this will depress demand and with it economic growth, in turn undermining the attempt to strengthen public finances. Germany will agree to support a member-state which finds itself unable to tap the bond markets, in order to prevent contagion to other struggling member-states. But it will resist pressure for economic union, as this would involve the "stronger" economies transferring money to the "weaker" ones on an ongoing basis. Does this mean the eurozone is destined to unravel? No, but the future certainly looks decidedly troubled.
Simon Tilford is the chief economist at the Centre for European Reform.
Thursday, February 18, 2010
How to build an EU energy market
by Katinka Barysch
Unbundling the supply of energy from its transport, moving Europe towards a low-carbon energy system, and getting the Nabucco pipeline built – these were the priorities of the last energy commissioner, Andris Piebalgs. His successor, Günther Oettinger, will write his own to-do list. The EU now has a dedicated climate change commissioner, Connie Hedegard, with whom Oettinger will have to work closely. When it comes to the EU’s internal energy market and security of supply, Oettinger will also have to rethink.
Twelve years after the EU passed its first law to open up gas markets, and seven years after adopting a second package, there is still no EU-wide market for gas (electricity looks a little better). In France, Germany and other EU countries, big, vertically integrated energy companies have resisted the Commission’s successive attempts to create real competition. The last big push to break up these companies ended in a truce: the third energy package, adopted in 2009, allows gas companies to keep their pipelines, provided they run them as truly separate entities.
Oettinger and his team in the EU directorate-general for energy will have their hands full to make sure that EU countries implement the third package by the 2011 deadline. There is little appetite for re-opening the unbundling debate for now. If and when Europeans start talking about the fourth gas package, their focus will probably shift towards infrastructure and market regulations.
It has become clear that passing laws on liberalisation will not in itself deliver a European energy market. The physical links between national markets are missing. Moreover, the 2009 gas crisis illustrated that a functioning internal market is not only needed to deliver reliable, low-cost energy to European households and factories. It is also the EU’s main tool for improving security of supply. Gas links allow countries to switch suppliers in case of emergency.
The EU budget allocates only around €250 million a year to energy infrastructure (under the trans-European networks for energy, or TEN-E, programme). The EU’s economic recovery programme from last year earmarked €2.4 billion for energy projects, parts of it for the so-called interconnectors between national power grids and gas pipeline networks. Now the Commission has suggested that the EU should set up a new fund for the next EU budget period, which starts in 2014. This ‘energy security and infrastructure instrument’ could dispatch €1-2 billion a year.
Energy experts disagree whether public money is needed to build interconnectors, and if so, how much. The market alone will probably not deliver all the links needed for a Europe-wide network. But it should deliver most of it. The Clingendael Institute, a Dutch think-tank, reports that over the last decade, Europe has added a mere 1,000 kilometres to its trans-national pipeline network. In the US – where unbundling was completed by the early 1990s – private companies have built around 30,000 kilometres of new pipelines over the same period (in response to approximately the same gas demand growth).
The difference between the European and the American gas market is not only its size and the degree of liberalisation but also the way the market is regulated and run. Even if EU companies were fully unbundled, different regulations and licensing procedures in the various EU countries would still make it unnecessarily hard to build infrastructure that straddles borders. Harmonisation is needed here. Moreover, the EU may have to allow those companies that build cross-border links higher returns on their investment. To figure out which connections would make most sense for the EU as a whole, a Union-wide infrastructure plan is needed.
The EU has asked a new group of network operators (called ENTSO) to draw up a European infrastructure priority plan. And it is establishing a new ‘agency for the co-operation of energy regulators’ (ACER) in Slovenia. However, ENTSO’s plan may well be subject to the same national horse-trading that has characterised the allocation of previous EU infrastructure money. And it will not be binding on companies or governments. For economic and energy security considerations to take precedence, ACER should be given a stronger say in defining infrastructure priorities and driving harmonisation of licensing regimes forward. Only then could the EU justify setting up a new multi-billion euro energy infrastructure fund.
Katinka Barysch is deputy director of the Centre for European Reform.
Unbundling the supply of energy from its transport, moving Europe towards a low-carbon energy system, and getting the Nabucco pipeline built – these were the priorities of the last energy commissioner, Andris Piebalgs. His successor, Günther Oettinger, will write his own to-do list. The EU now has a dedicated climate change commissioner, Connie Hedegard, with whom Oettinger will have to work closely. When it comes to the EU’s internal energy market and security of supply, Oettinger will also have to rethink.
Twelve years after the EU passed its first law to open up gas markets, and seven years after adopting a second package, there is still no EU-wide market for gas (electricity looks a little better). In France, Germany and other EU countries, big, vertically integrated energy companies have resisted the Commission’s successive attempts to create real competition. The last big push to break up these companies ended in a truce: the third energy package, adopted in 2009, allows gas companies to keep their pipelines, provided they run them as truly separate entities.
Oettinger and his team in the EU directorate-general for energy will have their hands full to make sure that EU countries implement the third package by the 2011 deadline. There is little appetite for re-opening the unbundling debate for now. If and when Europeans start talking about the fourth gas package, their focus will probably shift towards infrastructure and market regulations.
It has become clear that passing laws on liberalisation will not in itself deliver a European energy market. The physical links between national markets are missing. Moreover, the 2009 gas crisis illustrated that a functioning internal market is not only needed to deliver reliable, low-cost energy to European households and factories. It is also the EU’s main tool for improving security of supply. Gas links allow countries to switch suppliers in case of emergency.
The EU budget allocates only around €250 million a year to energy infrastructure (under the trans-European networks for energy, or TEN-E, programme). The EU’s economic recovery programme from last year earmarked €2.4 billion for energy projects, parts of it for the so-called interconnectors between national power grids and gas pipeline networks. Now the Commission has suggested that the EU should set up a new fund for the next EU budget period, which starts in 2014. This ‘energy security and infrastructure instrument’ could dispatch €1-2 billion a year.
Energy experts disagree whether public money is needed to build interconnectors, and if so, how much. The market alone will probably not deliver all the links needed for a Europe-wide network. But it should deliver most of it. The Clingendael Institute, a Dutch think-tank, reports that over the last decade, Europe has added a mere 1,000 kilometres to its trans-national pipeline network. In the US – where unbundling was completed by the early 1990s – private companies have built around 30,000 kilometres of new pipelines over the same period (in response to approximately the same gas demand growth).
The difference between the European and the American gas market is not only its size and the degree of liberalisation but also the way the market is regulated and run. Even if EU companies were fully unbundled, different regulations and licensing procedures in the various EU countries would still make it unnecessarily hard to build infrastructure that straddles borders. Harmonisation is needed here. Moreover, the EU may have to allow those companies that build cross-border links higher returns on their investment. To figure out which connections would make most sense for the EU as a whole, a Union-wide infrastructure plan is needed.
The EU has asked a new group of network operators (called ENTSO) to draw up a European infrastructure priority plan. And it is establishing a new ‘agency for the co-operation of energy regulators’ (ACER) in Slovenia. However, ENTSO’s plan may well be subject to the same national horse-trading that has characterised the allocation of previous EU infrastructure money. And it will not be binding on companies or governments. For economic and energy security considerations to take precedence, ACER should be given a stronger say in defining infrastructure priorities and driving harmonisation of licensing regimes forward. Only then could the EU justify setting up a new multi-billion euro energy infrastructure fund.
Katinka Barysch is deputy director of the Centre for European Reform.
Monday, February 15, 2010
Britain explores sharing defence equipment with Europe
by Clara Marina O'Donnell
With its public finances under growing strain, Britain may soon be forced to look at saving defence costs by pooling its military assets with those of its allies. The decision will not be taken until after the next general election (which will probably be held in May 2010). In the meantime, however, the issues at stake have been set out in a report published by the ministry of defence on February 3rd.
The ministry of defence’s green paper lays out the main questions for the forthcoming strategic defence review. It is the first British government document to put such a strong emphasis on exploring the possibilities for integrating defence forces amongst allies. The proposals reflect the extent of the financial constraints on the British defence budget. Indeed, the report warns that the UK “cannot proceed with the activities and programmes [it] currently aspires to, while simultaneously supporting [its] current operations and investing in the new capabilities [it] needs.” While restating the importance of bilateral relations with the US, the paper also, unusually, highlights the possibility of pooling assets and specialising in certain equipment within the EU, in addition to NATO.
Because of smaller defence budgets, other European countries have already had to start integrating capabilities and specialising. The Czechs notably have chosen to focus on developing expertise against chemical and biological warfare. But to date Britain has been able to maintain the full spectrum of capabilities autonomously and only shares common equipment for space. (The UK is also somewhat dependent on the US for its nuclear deterrent, because it uses US technology.)
Over the last decades, the only cooperative efforts in which Britain has participated have been joint programmes to develop equipment which Britain has then owned nationally. For example, during the Cold War, the UK teamed up with France to develop the Jaguar aircraft and a series of helicopters, and it worked with Germany and Italy to develop the Tornado aircraft. Today, Britain, Germany and Spain are developing the Eurofighter and the UK is part of the European effort to build the A400M military aircraft. Britain is also a leading partner in the transatlantic initiative to build the Joint Strike Fighter aircraft. And through the EU’s European Defence Agency, the UK takes part in efforts to explore further common procurement programmes.
The CER has long argued that Britain could increase the cost-effectiveness of its defence procurement by working more closely with its allies – be it through sharing assets or less ambitiously through more co-operation on logistics and training. For some collaborative efforts, working through NATO or the EU can be a useful umbrella (such as conducting research for a next generation of unmanned air vehicles). A large group of countries will provide larger funds and ensure more defence ministries adopt the capabilities developed. This in turn strengthens interoperability and increases the amount of capabilities across Europe. But large groups of countries also make cooperative efforts more cumbersome. So for big ticket items, like aircraft carriers, it makes more sense for Britain to explore possible synergies with only one or two likeminded countries. France is an obvious partner with whom to explore sharing assets. It is the only other country in Europe to have maintained a full spectrum of capabilities and it has a defence budget similar to the UK’s. (While the US is Britain’s closest ally, it is not under the same pressure to pool resources because of its large defence budget.)
If Britain were to pool assets or rely more on allies to provide certain capabilities, its autonomy could be affected – if Britain and France shared a fleet of carriers, France might not agree to send them on a mission to which Britain wanted to contribute. But faced with the prospect of having to abandon some capabilities completely, sharing appears less daunting. (For more on the benefits and costs of pooling assets, see Clara Marina O’Donnell, Britain must pool defence capabilities,CER bulletin October/November 2009.)
http://www.cer.org.uk/articles/68_odonnell.html
To what extent might a Labour or Conservative government explore the possibilities of deeper co-operation with various allies in the forthcoming strategic defence review. The fact that the current government has presented the green paper is an encouraging sign, and more than one defence minister has voiced interest in re-exploring collaborations with the French on aircraft carriers.
The Conservative shadow cabinet supports closer collaboration on capabilities with certain allies, in particular the US and France. Conservatives are less keen on strengthening defence co-operation within the EU. Shadow Secretary of State for defence Liam Fox still toys with the idea of withdrawing Britain from the European Defence Agency, if the Conservatives win the next elections.
It would be unfortunate if a Conservative government withdrew from closer EU defence co-operation. Britain stands to benefit from collaborative efforts under the EDA’s umbrella, not least because it can be used to encourage other European countries to develop some badly needed equipment, including for Afghanistan. In addition, France might be less keen to work bilaterally with the UK on big ticket items, if London undermines EU defence efforts in which Paris has invested much political capital over the last decade.
Britain has dared to ask itself the right questions, now it must explore the answers. The defence review will force the UK to reflect on the role it wants to play in the world and how it develops the means to play that role. The next government should explore all avenues of co-operation, from shared maintenance to pooling assets, and it should explore them with all its allies – be it bilaterally, particularly with France, or through NATO and the EU. Such co-operation might somewhat reduce Britain’s autonomy, but it might be the only option for the UK to remain a global player.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
With its public finances under growing strain, Britain may soon be forced to look at saving defence costs by pooling its military assets with those of its allies. The decision will not be taken until after the next general election (which will probably be held in May 2010). In the meantime, however, the issues at stake have been set out in a report published by the ministry of defence on February 3rd.
The ministry of defence’s green paper lays out the main questions for the forthcoming strategic defence review. It is the first British government document to put such a strong emphasis on exploring the possibilities for integrating defence forces amongst allies. The proposals reflect the extent of the financial constraints on the British defence budget. Indeed, the report warns that the UK “cannot proceed with the activities and programmes [it] currently aspires to, while simultaneously supporting [its] current operations and investing in the new capabilities [it] needs.” While restating the importance of bilateral relations with the US, the paper also, unusually, highlights the possibility of pooling assets and specialising in certain equipment within the EU, in addition to NATO.
Because of smaller defence budgets, other European countries have already had to start integrating capabilities and specialising. The Czechs notably have chosen to focus on developing expertise against chemical and biological warfare. But to date Britain has been able to maintain the full spectrum of capabilities autonomously and only shares common equipment for space. (The UK is also somewhat dependent on the US for its nuclear deterrent, because it uses US technology.)
Over the last decades, the only cooperative efforts in which Britain has participated have been joint programmes to develop equipment which Britain has then owned nationally. For example, during the Cold War, the UK teamed up with France to develop the Jaguar aircraft and a series of helicopters, and it worked with Germany and Italy to develop the Tornado aircraft. Today, Britain, Germany and Spain are developing the Eurofighter and the UK is part of the European effort to build the A400M military aircraft. Britain is also a leading partner in the transatlantic initiative to build the Joint Strike Fighter aircraft. And through the EU’s European Defence Agency, the UK takes part in efforts to explore further common procurement programmes.
The CER has long argued that Britain could increase the cost-effectiveness of its defence procurement by working more closely with its allies – be it through sharing assets or less ambitiously through more co-operation on logistics and training. For some collaborative efforts, working through NATO or the EU can be a useful umbrella (such as conducting research for a next generation of unmanned air vehicles). A large group of countries will provide larger funds and ensure more defence ministries adopt the capabilities developed. This in turn strengthens interoperability and increases the amount of capabilities across Europe. But large groups of countries also make cooperative efforts more cumbersome. So for big ticket items, like aircraft carriers, it makes more sense for Britain to explore possible synergies with only one or two likeminded countries. France is an obvious partner with whom to explore sharing assets. It is the only other country in Europe to have maintained a full spectrum of capabilities and it has a defence budget similar to the UK’s. (While the US is Britain’s closest ally, it is not under the same pressure to pool resources because of its large defence budget.)
If Britain were to pool assets or rely more on allies to provide certain capabilities, its autonomy could be affected – if Britain and France shared a fleet of carriers, France might not agree to send them on a mission to which Britain wanted to contribute. But faced with the prospect of having to abandon some capabilities completely, sharing appears less daunting. (For more on the benefits and costs of pooling assets, see Clara Marina O’Donnell, Britain must pool defence capabilities,CER bulletin October/November 2009.)
http://www.cer.org.uk/articles/68_odonnell.html
To what extent might a Labour or Conservative government explore the possibilities of deeper co-operation with various allies in the forthcoming strategic defence review. The fact that the current government has presented the green paper is an encouraging sign, and more than one defence minister has voiced interest in re-exploring collaborations with the French on aircraft carriers.
The Conservative shadow cabinet supports closer collaboration on capabilities with certain allies, in particular the US and France. Conservatives are less keen on strengthening defence co-operation within the EU. Shadow Secretary of State for defence Liam Fox still toys with the idea of withdrawing Britain from the European Defence Agency, if the Conservatives win the next elections.
It would be unfortunate if a Conservative government withdrew from closer EU defence co-operation. Britain stands to benefit from collaborative efforts under the EDA’s umbrella, not least because it can be used to encourage other European countries to develop some badly needed equipment, including for Afghanistan. In addition, France might be less keen to work bilaterally with the UK on big ticket items, if London undermines EU defence efforts in which Paris has invested much political capital over the last decade.
Britain has dared to ask itself the right questions, now it must explore the answers. The defence review will force the UK to reflect on the role it wants to play in the world and how it develops the means to play that role. The next government should explore all avenues of co-operation, from shared maintenance to pooling assets, and it should explore them with all its allies – be it bilaterally, particularly with France, or through NATO and the EU. Such co-operation might somewhat reduce Britain’s autonomy, but it might be the only option for the UK to remain a global player.
Clara Marina O'Donnell is a research fellow at the Centre for European Reform.
Friday, January 29, 2010
Pipeline politics: Why Nabucco is stuck
by Katinka Barysch
Last year, plans for the Nabucco pipeline – almost a decade in the making – appeared finally to make some headway. In March, the EU earmarked €200 million for preparatory work. The European Investment Bank and the European Bank for Reconstruction and Development promised to help with financing the €10 billion cost. In July, the countries through which the 3,000 km pipeline will run (Austria, Bulgaria, Hungary, Romania and Turkey) signed a long-awaited ‘intergovernmental agreement’ on transit rules. Ratification of the IGA has been plodding along. Meanwhile, the six energy companies (from the transit states and Germany) that form the Nabucco consortium continued to look for gas to fill the pipeline. Two of them are trying to get involved in a big gas project in northern Iraq and another one in Turkmenistan. The EU started looking at the idea of aggregating European gas contracts through a ‘Caspian development corporation’ to get the likes of Turkmenistan interested in selling large volumes of gas westwards.
Now, however, Nabucco is stuck again. The reason is a dispute between Turkey and Azerbaijan. The 8 billion cubic metres of gas for the first phase of Nabucco was always expected to come from Azerbaijan’s new Shah Deniz II gas development. But Baku and Ankara cannot agree on how much Azerbaijani gas should go to Turkey, at what price and under what conditions. While the dispute continues, the companies involved in Shah Deniz II have stopped drilling.
Turkey already buys around 6 bcm of gas from the Shah Deniz I field, for a very good price. It sells half of that gas on to Greece at a much higher price. Baku insists that the old pricing formula needs to be revised. Turkey disagrees. As long as this issue is not resolved, an agreement on the Shah Deniz II gas looks unlikely. Without that gas, it is hard to see how Nabucco could get under way. Meanwhile, Azerbaijan has started shipping gas to Russia instead and promised to sell some to Iran and even China.
Although both Turkey and Azerbaijan insist that they really quarrel about energy, the fact that the two countries get on badly these days does not help. Azerbaijan became less forthcoming in the negotiations after Turkey announced a courageous plan to normalise its relationship with Armenia last year. Azerbaijan is furious about the idea that Turkey could open its border with Armenia before a solution has been found for the ‘frozen’ conflict in Nagorno-Karabakh, an area that has been occupied by Armenian troops since the early 1990s. Turkish leaders are in fact ambiguous about that, with Prime Minister Erdogan saying that the two issues are linked somehow. The Turkish parliament has not yet ratified the documents needed for the normalisation of relations with Armenia. Some now say it never will.
Although the prospects for a Nagorno-Karabakh settlement are not great, it is likely that Turkey and Azerbaijan will eventually reach a deal on energy that could restore momentum to Nabucco. Baku has a strategic interest in getting access to the European gas market. Turkey’s interest in becoming a European energy hub is just as strong. Both countries know that once gas starts flowing through Nabucco (or another pipeline that connects the EU market directly with the huge gas reserves of the Caspian), oil majors will be much more willing to explore other projects in the region.
The EU should stand ready to give Nabucco a bit of a political push once the Turkey-Azerbaijan dispute is resolved. Europeans have been too ready to dismiss Nabucco as a ‘pipe dream’. Russia, on the other hand, is taking it extremely seriously. Moscow fears that Nabucco will further erode its lucrative and politically expedient gas transport monopoly on the Eurasian landmass. It is pushing the rival South Stream pipeline and has signed agreements with a number of potential transit countries, including Turkey. It is also trying to buy up gas that could potentially feed Nabucco in Azerbaijan and Turkmenistan. A lot of that is posturing: “Any energy company that wants something from Russia at the moment has to sign up to South Stream,” says one gas expert. The memoranda of understanding on South Stream are vague and do not involve any financial obligations. But they could be just enough to put off potential financiers for Nabucco and sap what little political momentum there still is behind the project.
South Stream looks expensive, technologically complicated and unnecessary. Nabucco appears relatively realistic and it is further advanced in the planning process. The EU should call the Russians’ bluff by asking Gazprom to use Nabucco to ship gas into South and Central Europe.
The EU also needs to work harder to create more coherence between its energy policy and the political relationships it is building with potential supplier countries. In the past, the energy and foreign relations departments of the Commission, the European Council's high representative and the member-states have not always acted in unison.
The Lisbon treaty (which streamlines the EU’s foreign policy machinery) should help. But the EU’s nascent energy diplomacy can only make progress if the EU governments allow this to happen. Many European leaders and officials (in particular in Germany) remain convinced that the task of securing oil and gas supplies must be left to private companies and that the EU has no role to play in talking to energy producing countries about gas contracts and pipelines. The current highly politicised dispute over Nabucco should help to convince them of the contrary.
Katinka Barysch is deputy director of the Centre for European Reform.
Last year, plans for the Nabucco pipeline – almost a decade in the making – appeared finally to make some headway. In March, the EU earmarked €200 million for preparatory work. The European Investment Bank and the European Bank for Reconstruction and Development promised to help with financing the €10 billion cost. In July, the countries through which the 3,000 km pipeline will run (Austria, Bulgaria, Hungary, Romania and Turkey) signed a long-awaited ‘intergovernmental agreement’ on transit rules. Ratification of the IGA has been plodding along. Meanwhile, the six energy companies (from the transit states and Germany) that form the Nabucco consortium continued to look for gas to fill the pipeline. Two of them are trying to get involved in a big gas project in northern Iraq and another one in Turkmenistan. The EU started looking at the idea of aggregating European gas contracts through a ‘Caspian development corporation’ to get the likes of Turkmenistan interested in selling large volumes of gas westwards.
Now, however, Nabucco is stuck again. The reason is a dispute between Turkey and Azerbaijan. The 8 billion cubic metres of gas for the first phase of Nabucco was always expected to come from Azerbaijan’s new Shah Deniz II gas development. But Baku and Ankara cannot agree on how much Azerbaijani gas should go to Turkey, at what price and under what conditions. While the dispute continues, the companies involved in Shah Deniz II have stopped drilling.
Turkey already buys around 6 bcm of gas from the Shah Deniz I field, for a very good price. It sells half of that gas on to Greece at a much higher price. Baku insists that the old pricing formula needs to be revised. Turkey disagrees. As long as this issue is not resolved, an agreement on the Shah Deniz II gas looks unlikely. Without that gas, it is hard to see how Nabucco could get under way. Meanwhile, Azerbaijan has started shipping gas to Russia instead and promised to sell some to Iran and even China.
Although both Turkey and Azerbaijan insist that they really quarrel about energy, the fact that the two countries get on badly these days does not help. Azerbaijan became less forthcoming in the negotiations after Turkey announced a courageous plan to normalise its relationship with Armenia last year. Azerbaijan is furious about the idea that Turkey could open its border with Armenia before a solution has been found for the ‘frozen’ conflict in Nagorno-Karabakh, an area that has been occupied by Armenian troops since the early 1990s. Turkish leaders are in fact ambiguous about that, with Prime Minister Erdogan saying that the two issues are linked somehow. The Turkish parliament has not yet ratified the documents needed for the normalisation of relations with Armenia. Some now say it never will.
Although the prospects for a Nagorno-Karabakh settlement are not great, it is likely that Turkey and Azerbaijan will eventually reach a deal on energy that could restore momentum to Nabucco. Baku has a strategic interest in getting access to the European gas market. Turkey’s interest in becoming a European energy hub is just as strong. Both countries know that once gas starts flowing through Nabucco (or another pipeline that connects the EU market directly with the huge gas reserves of the Caspian), oil majors will be much more willing to explore other projects in the region.
The EU should stand ready to give Nabucco a bit of a political push once the Turkey-Azerbaijan dispute is resolved. Europeans have been too ready to dismiss Nabucco as a ‘pipe dream’. Russia, on the other hand, is taking it extremely seriously. Moscow fears that Nabucco will further erode its lucrative and politically expedient gas transport monopoly on the Eurasian landmass. It is pushing the rival South Stream pipeline and has signed agreements with a number of potential transit countries, including Turkey. It is also trying to buy up gas that could potentially feed Nabucco in Azerbaijan and Turkmenistan. A lot of that is posturing: “Any energy company that wants something from Russia at the moment has to sign up to South Stream,” says one gas expert. The memoranda of understanding on South Stream are vague and do not involve any financial obligations. But they could be just enough to put off potential financiers for Nabucco and sap what little political momentum there still is behind the project.
South Stream looks expensive, technologically complicated and unnecessary. Nabucco appears relatively realistic and it is further advanced in the planning process. The EU should call the Russians’ bluff by asking Gazprom to use Nabucco to ship gas into South and Central Europe.
The EU also needs to work harder to create more coherence between its energy policy and the political relationships it is building with potential supplier countries. In the past, the energy and foreign relations departments of the Commission, the European Council's high representative and the member-states have not always acted in unison.
The Lisbon treaty (which streamlines the EU’s foreign policy machinery) should help. But the EU’s nascent energy diplomacy can only make progress if the EU governments allow this to happen. Many European leaders and officials (in particular in Germany) remain convinced that the task of securing oil and gas supplies must be left to private companies and that the EU has no role to play in talking to energy producing countries about gas contracts and pipelines. The current highly politicised dispute over Nabucco should help to convince them of the contrary.
Katinka Barysch is deputy director of the Centre for European Reform.
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