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The reliability of the COPGPT algorithm never disappoints. Every recent COP climate conference is labelled as a ‘make or break moment’ as expectations rise in the build-up. The host nation carries the mantle of an honest broker while simultaneously pushing a separate agenda to clean up its own image or grab lucrative side deals. An international coalition led by the European Union tries to achieve another, final climate breakthrough, but is met with fierce opposition. In the end, the summit saves face with a climate pledge that sounds appealing, but changes little when it comes to limiting global warming.

The recently concluded COP28 summit in Dubai followed a very similar pattern. Filtering through the media hype and the UAE’s self-praise, what are the most important takeaways?  

‘The historic deal’

Labelled as the ‘UAE Consensus’, the hosts have lauded the final communiqué as a global breakthrough on fossil fuels. The official commitment calls for the signatories to pursue: “transitioning away from fossil fuels in energy systems, in a just, orderly and equitable manner […]” The joint document didn’t live up to the ambition to feature explicit language about the need to ‘phase-out’  fossil fuels, a pledge supported by more than 100 countries, including the US and EU member states.

Instead, ‘transitioning away’ remains an extremely lofty commitment, which serves mostly the interests of petroleum exporting nations (OPEC+), who won’t be feeling any additional pressure to cut down on their production. Not to mention the fact that this call doesn`t feature any tenable timeline for its implementation. The open interpretations surrounding a ‘just and orderly’ transition are also a wink to oil price stability, which is why Saudi officials left the summit in a jubilant mood.

Almost a decade after the landmark Paris Agreement, we are sold the ‘UAE Consensus’ as an actual breakthrough on limiting fossil fuel dependencies.

It is not.

Renewables and energy efficiency

One of the more notable highlights of the climate conference has been the growing interest in the Global Renewables Alliance. More than 120 countries have joined the pledge to triple renewable energy generation capacity to at least 11 TW by 2030, and collectively double the global average rate of energy efficiency improvements also by 2030. The implementation of such a demanding promise remains to be seen, but at least we are seeing a tangible pledge which strives to keep global stakeholders closer to the goals of the Paris Agreement.

However, the good news was darkened by the unwillingness of China and India to sign this specific commitment. The two Asian economies are the first and third biggest global polluters, jointly being responsible for around 40% of global greenhouse gas emissions. Even though China has an impressive record in renewable energy deployment, Beijing has refused to commit, most probably due to their concerns that they won’t be able to follow up on energy efficiency improvements.

Nuclear energy and carbon management

Another positive signal came from a group 20 countries who made a separate agreement to triple their nuclear energy capacity until 2050. More than half of the signatures came from European countries, also joined by the US, Canada and Japan, among others. Traditional nuclear power plants remain a costly endevour, and much of this renewed engagement will bear fruit much later, in the 2030s. However, considering that every rigorous decarbonsation scenario requires a manifold increase of clean electricity supply, nuclear energy remains an important piece of a 2050 outlook.

In parallel, as a separate coalition building exercise, countries from six continents launched the carbon management challenge, which aims to accelerate the deployment of carbon capture and storage technologies. Countries such as Brazil, Canada, Indonesia, Kenya, the UK and the US are among the main interested, while this type of technology has a large potential for developing countries globally.

Climate finance

As always, the issue of financing the global transition remained thorny. The necessity to mobilise international funds in support of developing countries’ decarbonisation effort is beyond doubt. However, as exemplified by the disappointing progress of the Green Climate Fund (GCF), the actual involvement of developed countries remains lukewarm. Not to mention the fact that the recent COP 28 promises on climate finance pale in comparison to the trillions of euros of annual investments needed to transform the global economy towards a more sustainable path.

One of the most misdirected initiatives has been the ‘loss and damage’ fund. This is a new compensation vehicle which would require rich nations to provide funds to poorer nations after suffering severe climate events. Letting aside the complex legal issues which will challenge both international and national legal frameworks, this mechanism could create a downwards spiral of endless claims and controversies between nations. If the ‘loss and damage’ fund is just another way of providing development aid, it will be cursed with the same shortcomings. Unfortunately, such a mechanism would also disincentivise developing countries to invest in climate mitigation and adaptation measures.

All of the developments and disappointments discussed above seem to exemplify the nature of the COP format. Expect smart and nimble small coalitions between like-minded countries, a common front by the Asian polluters, as well as cloak and dagger tactics by OPEC+. National development objectives will always prevail, while the ambitious pledges of the industrialised nations will never cover their own shortcomings, making them less of a role model for others.

The travelling circus of the COP and its coterie of consultants and climate gurus is trumpeted as a success for its ever growing participation and global ‘engagement’. However, the forum is mostly valuable for what happens on its fringes. Make no mistake, the conference in its current format and with its built-in limitations can only overpromise and underdeliver on the global transition towards carbon neutrality.

Dimitar Lilkov Peter Hefele Climate Change Crisis Energy Foreign Policy

On October 7, a group of Hamas terrorists managed to infiltrate Israeli territory, execute a pogrom against Israeli civilians and capture over 200 hostages. The heinous attack shattered Israel’s deterrence and defence credibility and brought into question Netanyahu’s policies vis-a-vis Hamas and the Palestinian issue.

The attack came at a time when Netanyahu’s coalition government, with its extreme right-wing partners, had normalised relations with Arab states in the Gulf (through the Abraham Accords) and was working towards normalising relations with Saudi Arabia. Derailing this normalisation of relations between Israel and Arab states, which did not include the Palestinians, was obviously an unspoken objective of Hamas’ terrorist act. Their other objective was to drag Israel into the abyss, into urban warfare in Gaza, using civilians as human shields, a bloodbath that eventually Israel could not sustain.

Israel has the right and the duty to defend itself, to restore its deterrence and defense credibility and to restore a sense of security for its people. The shock and awe from the slaughter of innocent civilians brought back memories of the Holocaust. The Israeli state, after all, was founded so that the Jewish people would never again have to suffer such an atrocity. The pogrom of its people demanded an immediate and decisive response. A demand for catharsis that cried for military action. The intruders surely knew that the degree of their atrocities would lead Israel to a disproportionate and escalatory response. Rage and the serious blow to Israel’s sense of security derailed the option of a proportionate, punitive, surgical, and measured response. Israel declared war against Hamas, very much like the U.S. declared a war on terror after 9/11, and set to dismantle the Hamas regime in Gaza and destroy its military capabilities.

The British never called them wars. They called them “emergencies”. “Emergencies” were campaigns against terrorists that used the qualities of “secrecy, intelligence, political sagacity, quiet ruthlessness, covert actions, and above all infinite patience” as Michael Howard put it. Declaring war against terrorists, Israel’s second war of independence as Netanyahu defined it, however, attributes to them the status of belligerent and a legitimacy they do not have. This is not just a matter of legality or semiotics. War has a whole different set of policy implications and political consequences. The Hamas terrorists wanted to provoke Israel into using overt armed force against them. To declare war against them. The air strikes and the bombardment of Gaza have already caused many Palestinian civilian casualties and have led to a serious humanitarian crisis, before the ground operation even began. With the Palestinians becoming the victims of the victims, Israel runs the risk of seeing the moral justification of its right to self-defence whittled away. Memories of the atrocity will soon be overtaken by the loss of innocent civilian lives. The “battle for hearts and minds” is an important aspect of this campaign against terror. And the frontline of this battle is in Tel Aviv and Jerusalem but also in Gaza, the streets of the West Bank, the capitals of the Arab states and the multicultural cities of the West.  

The war has brought the US back to the region in a heavy-handed involvement. The US, following the catastrophic results of the war on terror after 9/11, and the failure of the neoconservative project in the Middle East, had partially withdrawn from the area. The war shows, however, that the US remains the only power with the reach, military might, and diplomatic clout to mediate regional conflicts such as this on a global scale. China and Russia, the revisionist powers, can be spoilers in the international scene but they cannot play the role the US does. The US declared its support for Israel and sent two aircraft carrier groups to deter Iran, Hezbollah, or any other actor from becoming involved in the conflict. It pressured Israel to open a humanitarian corridor from the south, and engaged in backchannel diplomacy for the release of hostages by Hamas. To that effect, it has urged Israel to postpone its ground operation to give time to diplomacy. The Biden administration, drawing upon the mistakes the US made after 9/11, is trying to admonish Israel to not let rage direct its policy. To be rational, calculating and measured in its response.

Israel is now facing four major considerations with no easy answers: 1. Is the military objective of a ground operation feasible? 2. What will succeed the dismantling of the Hamas regime in Gaza? 3. Can Israel avoid the opening of a second front by Hezbollah in the north and a wider regional war? 4. What will be the ramifications of the war for its relations with the Palestinians, and the Arab states, in the aftermath?

Constantine Arvanitopoulos Crisis Defence Middle East

Western Europe, long regarded as a bastion of prosperity and progress, is facing an alarming rise in mental health crises, particularly among its youth. While numerous factors contribute to this disturbing trend, including the rise of social media and mobile phones, two key elements stand out: the economic and political volatility of the past two decades and the potential impact which the prevailing values of today and modern culture have on mental health.

Economic and political volatility has a tremendous negative impact on people’s lives, and the economic and political landscape in Western Europe has been marred by instability and uncertainty over the past two decades.

The global financial crisis of 2008, followed by the sovereign debt crisis, Brexit, and the various political upheavals in that time have left many individuals grappling with the unsettling feeling that their future is far from secure. Economic recessions, job instability and austerity measures have become the unfortunate norm for many Westerners, especially among the younger generation.

The constant fear of financial insecurity takes a substantial toll on mental health, contributing to anxiety, depression, and a pervasive sense of hopelessness. The consequences extend beyond mental health, including young families postponing having children, or having fewer children than planned.

Secularisation and Individualism – What are the Limits?

Western societies have undergone a significant transformation, with secularisation and individualism gaining prominence. While these developments have merits, they have also led to unintended consequences.

As societies become more secular, traditional sources of meaning and guidance, such as religion, have waned in influence. Consequently, individuals are left to navigate life’s complexities with fewer external moral compasses, enabling them to define their own values and purpose.

Individualism, in and of itself, is not a detriment to mental health. It fosters personal growth, autonomy, and self-expression. However, when coupled with the erosion of traditional norms and guidance, it can leave a substantial portion of society feeling adrift, without a clear sense of purpose or direction. As people abandon normative suggestions about the meaning of life, many struggle to find a sense of purpose, leading to a growing crisis of meaninglessness.

Have Westerners Lost Their Meaning? – Hedonic vs. Eudaimonic Happiness

The crisis of meaning in Western societies has given rise to a preoccupation with hedonic happiness, the pursuit of pleasure and immediate gratification. While there is nothing inherently wrong with seeking pleasure, relying solely on hedonic happiness as a life strategy has proven not to work in the long term. It can lead to a shallow and fleeting sense of satisfaction, leaving individuals perpetually dissatisfied and anxious about the next source of pleasure.

What many Westerners may need is a shift and return towards eudaimonic happiness, which involves pursuing a life of purpose, personal growth, and fulfilment. Eudaimonic happiness is deeply rooted in meaningful relationships, personal values, and long-term contribution to the greater good. Unfortunately, in the absence of clear societal guidance, the pursuit of eudaimonic happiness often takes a backseat.

There is an impression that Western culture has abandoned guidelines related to meaning, and individuals are encouraged to find their own meaning rather than accept what is given by society. The problem is that a large portion of individuals feel lost in the process and, while they do not find eudaimonic happiness, fall back to the hedonic approach. In the case of the youth, and sometimes among older people as well, purpose is often given by popular culture and social media.

The Path Forward: Science-Based Guidance

Finding a solution to the growing mental health crisis in Western Europe requires a delicate balance, and finding meaning plays a crucial part in the solution. On the one hand, Westerners value their autonomy and resist being told how to live their lives. On the other hand, they need guidance to effectively navigate the complexities of the modern world.

One promising approach is to emphasise science-based studies that provide value-free conclusions about good life strategies. For instance, the Harvard Study of Happiness has offered valuable insights into the factors contributing to long, happy, and successful lives. By disseminating such research findings widely, society can help individuals with knowledge about what leads to a fulfilling life without imposing normative rules.

Moreover, initiatives like the Yale Science of Wellbeing course, which have gained immense popularity, highlight the hunger for guidance on leading a more meaningful and satisfying life. Similar courses, not limited to universities but adapted in schools could offer practical tools and evidence-based techniques to enhance mental well-being, fostering personal growth and resilience.

The Need for a Paradigm Shift

To effectively address the mental health crisis in Western Europe, a paradigm shift is imperative. Instead of primarily concentrating on treatment, our endeavours should be channelled towards prevention and psychological empowerment.

Remarkable results have emerged from implementing Social and Emotional Learning (SEL) programmes in schools. If we incorporate these programs extensively into education and community settings, we can provide individuals with the emotional intelligence and coping skills necessary to navigate the complexities of modern life. By investing in mental health and psychological guidance, we are not only combatting mental health problems but also fostering the growth of an empowered, productive, and happier new generation.

Tomi Huhtanen Crisis Health

It is easy to get lost in all the recent developments on the energy front. After a full month of formal, informal, and emergency meetings, EU leaders have adopted a set of measures that address some challenges, while remaining divided on other thorny issues.

Taxes and Caps

What has been agreed so far is the introduction of a ‘windfall tax’ on energy companies’ excessive profits and a collective push (albeit voluntary) from all countries to reduce their electricity consumption. The additional levy on the extra profits raked by energy companies will be implemented nationally by the end of the year with the expectation that the generated sums can be redistributed to consumers and businesses.

Even though such a tax finds support among mainstream EU politicians, it is uncertain whether it will provide the expected relief in the months to come. It will take some time for national capitals to implement these measures and for the projected €140bn to be collected, let alone distributed. The biggest risk here is that the agreed extra tax on fossil fuel companies and price cap on revenue by non-gas companies (wind, solar, nuclear) will further distort the market and reduce even more the EU domestic energy supply. It is also unclear how this extra tax will affect both fossil and non-fossil fuel companies’ plans for future investment in improving their services and further deployment of much-needed renewable capacities.

The jury is still out if (and when) the energy ‘windfall tax’ will provide its expected benefits. However, it is little wonder that national capitals want to get additional tax revenue in their coffers. In the last 12 months, EU governments have spent more than €300bn on national subsidies in order to rein in the skyrocketing price of gas and electricity. Expect this figure to continue to grow.

What EU leaders vehemently disagree on is whether the block should implement a cap on natural gas prices. The different geographies, economies and national interests of the EU-27 tie up a complex knot, which the European Commission is struggling to untangle. Some worry that such a price limit on gas prices might drive off future supply, complicate LNG deliveries or further stress domestic markets. Alternatives include capping the price for deliveries of a certain origin (like Russia) or limiting the scope of the measure so it doesn’t affect LNG supply.

All these concerns on taxes and caps are valid; EU leaders rightfully want to limit the pain for households and industry. However, even if all these market interventions and levies artificially stabilise prices, this won’t solve the energy crisis, which is far from its closing act. The elephant in the room is that the EU might simply not have enough power supply this winter. Energy rationing and frozen industrial production could become a grim reality in some EU countries.

Demand Reduction and Security of Supply

The current problem is that every country is essentially subsidising gas and electricity prices at a level which doesn’t propel neither households nor businesses to drastically reduce their power usage. Be it the infamous German 200 billion euro package, or France directly nationalising a private energy champion, governments across the board are subsidising a sector which is too big to fail. The risk of social unrest and economic meltdown (and loss of electoral support) has convinced every national leader that heavy market intervention is justified. Justified, but ultimately unsustainable and dangerously inflammatory during rampant inflation and a cost of living crisis. Lowering the price of energy is important, but so is ensuring that your citizens and industry use at least 10-15 % less energy overall. Many European governments are not clearly communicating the urgency of the situation to their citizens and the need to save as much energy as possible.

The huge gap of missing Russian gas is currently filled by a combination of urgent (and costly) shipments of LNG deliveries, together with traditional gas pipeline flows from Norway and Algeria. The problem with LNG shipments is that they are expensive, rely on building additional European regasification terminals, and lead to competition with international (mostly Asian) markets for the limited amount of LNG production. This emergency patchwork might work in the weeks ahead but is not a stable foundation for ensuring Europe’s energy supply in the long run.

True, the EU managed to ensure its gas storages were 90+% full in October, which is a feat on its own. However, most of this storage gas came in the spring and summer from Gazprom deliveries, which simply won’t be there in early 2023. Not to mention the fact that storage facilities are there for stabilising peak demands or emergency situations for certain days or weeks. No country can run its economy on gas storage alone.

A True European Energy Union

To reiterate, high gas prices are half of the problem. European member states need to act fast to ensure our collective energy security. In parallel to all current initiatives to stabilise energy prices, all European governments should increase their efforts on ambitious national campaigns for decisive demand reduction. More importantly, it is urgent that the EU-27 coordinates on a number of measures that ensure a collective energy response that is bigger than the sum of its parts.

First, the EU needs to pioneer joint gas purchases by groups of member states in order to lower negotiated prices with external providers and ensure security of supply. This measure will be extremely important next spring/summer, when the EU will need to refill gas storages again, but this time with potentially zero volumes coming from Russia. European member states should not be in competition with each other for securing the best price and the necessary volumes.

Second, certain national capitals should come to grips with the gravity of the situation and overcome internal domestic constraints. Germany and Belgium should wake up to the fact that their countries and the whole continent needs more power and should prolong the lifespans of their nuclear reactors beyond 2023 and as long as possible. Not to speak of France’s selfish decision to block a new Pyrenean gas pipeline, which could foster the transfer of energy from the Iberian Peninsula to the rest of the continent.

Additionally, the Netherlands should also reconsider their stance on producing just the minimal quantities of natural gas from their fields of Groningen, which is the largest natural gas field in the EU. Pumping additional domestic volumes in 2023 and 2024 could provide an important lifeline for the country and European partners in partially replacing Russian natural gas. After the energy storm has receded, the Netherlands could continue the planned phase-out.

The silver lining in this crisis is that the pledge to ‘improve interconnectivity between member states’ will hopefully finally come to fruition and graduate from the pages of defunct policy papers. Joint gas storage between European neighbours or better connecting infrastructure will bring the EU one step closer to a true common energy market.

Lastly, the current energy emergency needs to convince European governments that any future bilateral deal with Gazprom on gas is cursed. Putin has hinted that one pipeline of Nord Stream 2 remains operational and that some of the volumes to Europe can be also redirected through TurkStream. Russia’s thinking is to make national capitals resort back to Russian gas as an energy lifeline in the coming winter as a tool to break European unity and continue Moscow’s energy blackmail.

It is clear that Russia does not have sufficient gas infrastructure to Asia, so it cannot easily pivot its European deliveries elsewhere. Gazprom is forced to burn the gas in the air right now or liquefy it for LNG. The longer the EU abstains from Russian gas purchases, the bigger the squeeze on the Russian federal budget and the bigger the pressure on their energy sector to struggle due to lower investment. Gazprom is already crumbling in terms of share price and overall market standing.

The European Union is de facto in an energy war of attrition with the Russian Federation. An open hand shouldn’t be extended to the barbarians in the Kremlin once again. Europe must stand united with a determined, clenched fist.

Dimitar Lilkov Crisis Energy EU-Russia

It used to be that politicians in power understood the economic constraints under which they operated. James Carville, an advisor to President Bill Clinton in the 1990s, summed up this unavoidable relationship when noting that “I would like to come back as the bond market. You can intimidate everybody”.

The context for Carville’s comments – 1994 financial market worries about US public spending and debt accumulation – spurred the Clinton administration’s embrace of fiscal rectitude. It also resulted in the last period of US federal budget surplus’, between 1998 and 2001.

The decades since have fundamentally altered how politicians (and increasingly whole societies) approach economic policy. This is a change driven primarily by a decade of monetary easing on a stupendous scale, negative interest rates, corporate debt bingeing, and ever-expanding mortgage credit.

The natural corollary to this dawn was the emergence of a supportive economic theory – Modern Monetary Theory (MMT).  Under this model, deficits aren’t necessarily bad and only old-fashioned fiscal conservatism is preventing the birth of what MMT proponents call a true, deficit-backed “people’s economy”.

From a politician’s perspective, the emergence of free money (from their own central banks) and MMT complemented what many elected officials realised to be the biggest lesson of the 2008 economic crash.

Namely, that voters don’t tend to reward governments that preach fiscal rectitude and austerity. In fact, regardless of the scale of the crisis or the terrible alternatives (banking sector failure, mass unemployment, even sovereign default) it is those governments that make the hard decisions that are usually looking for new jobs after the following election.

In this context, cheap money was an easy way out.

So while the Great Recession starting in 2007 required a monetary stimulus to maintain and then restart economic activity, elected governments consistently failed in the subsequent years to live up to their side of the bargain.

They failed because monetary support was supposed to be the prelude to economic reform. Real structural reforms that would drive long-term growth.

Alas, Mario Draghi’s commitment to saving the Eurozone insulated member states (and the European Union itself) from market pressures. As a result, critical reforms were abandoned, ignored, or went unfinished.

From Italy’s unsustainable pensions to Ireland’s sky-high legal fees, from the failure to complete the last pillar of the EU’s banking union (a common deposit insurance scheme) to its still unfinished capital markets union – cheap liquidity overrode the political will required to attain difficult objectives.

It allowed politicians to keep riding the supposedly “free” monetary train.

But this engine was never built on sustainable tracks.

In reality, the pandemic has only worsened the dependence of the political class on central bank largesse. And while the need for fiscal support was obvious in March 2020, the de facto response – borrow cheap and worry about the consequences later – has now become embedded as a desired political response to every crisis or unforeseen shock.

What is probably most worrying is that this political reflex to spend, spend, spend has become embedded at both ends of the political spectrum. Where once these policies were centred primarily on the left, recent years have also seen them embraced by those on the right.

Rassemblement National in France, Fratelli d’Italia and Lega in Italy have all embraced huge increases in public spending as a means of increasing their potential pool of voters. By slamming the orthodoxy and constraints of the “financial markets” they position themselves as “outsiders” determined to “fix” the system.

On the right, Britain is the most extreme case of how basic economic principles have been laid waste. An entire growth strategy based on “trickle-down economics” requiring hundreds of billions of pounds of additional public borrowing is simply macroeconomics gone loco. Particularly in a state already reeling from almost a decade of political stability and a debt to GDP ratio approaching 100%.

It’s also completely incompatible with an independent Bank of England attempting to control runaway rising prices. Britain is showing, just as predicted by Mario Draghi in 2018, that “When inflation is rising, short-term political considerations still create a certain set of incentives to pressure central banks into prioritising economic growth”.

Ironically, the markets are already reminding Westminster what real financial constraints actually look like. The Bank of England will likely do the same. A falling sterling and rising bond yields point not to Britain’s national bankruptcy (as correctly noted by the economist Tyler Cowen), but to a serious loss of credibility in Britain’s ability to effectively manage the economic challenges ahead.

Even high inflation (to which MMT offers no real solution) is no impediment to those who prefer to keep shaking the magic money tree rather than face hard economic realities. Paul Johnson (from the Institute of Fiscal Studies) recently stated the obvious when tweeting that “economic and fiscal constraints are real. It’s not just “Treasury orthodoxy” or a failure of imagination”.

In this context, the forthcoming global recession should be viewed as only a starting point. The commencement of a likely bloody battle to reacquaint policymakers today with some basic economic realities.

Unfortunately for us, the past decade of easy money hasn’t (in general) been invested well, or accompanied by the required structural reforms. Instead, politicians choose the easy way out. Borrowing simply covered rising current costs. As a result, debt levels in major global economies – US, Britain, France, Italy and China have never been higher.

Easy money has changed how politicians view the economics of being in power. The exceedingly painful readjustment has only just begun.

Eoin Drea Crisis Economy Macroeconomics

War is raging on the European continent. As a result, President Ursula von der Leyen’s State of the Union speech of 2022 did not follow the typical script of previous addresses. It was not a follow up to the points emphasised by the Commission at the beginning of von der Leyen’s term, and perhaps cleverly so.

The COVID-19 pandemic, but much more so the war in Ukraine, have changed the EU’s role both regionally and globally. The State of the Union speech was an opportunity to run through Europe’s war-related efforts and re-state the bloc’s support to Ukraine. In the presence of Olena Zelenska, First Lady of Ukraine, in Strasbourg and against the backdrop of recent Ukrainian military successes, President von der Leyen had the tools she needed to give a passionate opening to her speech.

The speech then continued with Ukraine-related topics. Though sustainability was underlined often and a proposal for a hydrogen bank was declared, contrary to previous speeches, the Commission Green Deal was not the speech’s red line. This was likely a good choice, given the ongoing sensitive debate on how to rebalance the Commission’s ambitious green transition goals with the current energy crisis, a crisis which no doubt is the priority for Europeans.

Although Ukraine was mentioned various times, Ukrainian EU membership status was not. President von der Leyen made specific remarks about aiming to bring Ukraine closer to the Single Market and her own negotiations in Kyiv on further cooperation. These reflect the opinion shared by many that while EU candidate status has been granted, in reality focusing on immediate, concrete steps for integration rather than on the membership process itself will yield better results.

The State of the Union speech often lists various proposals by the Commission, always with impressive titles but often left wanting in terms of content. Sometimes, those proposals move forward and become a core of the Commission’s policy proposals and EU agenda; other times little happens. Who can recall the “Global Gateway strategy” from last year’s State of the Union speech, for example? While the President referred to it again in her speech, the ambitious proposal from last year has remained limited within the EU toolbox.

The President proposed the Defence of Democracy Act. The plan, she said, would aim to uncover covert foreign influence and shady funding. This plan will no doubt receive support from EU member states, but can quickly become politically sensitive, depending on how it is implemented and by whom.

French President Macron’s proposal on a political community received President von der Leyen’s endorsement. Was this a polite gesture for the French or something more substantive? Despite some draft papers circulating EU corridors, the discussion on a political community has not truly taken off at a higher level. Since Ukraine obtained its candidate status with the support of many EU member states, it is highly unlikely that a substantive discussion on the community’s basic modalities will begin in earnest anytime soon.

But of course, should such a thing happen, most likely an EU Convention of some kind would be needed. The President’s request for the EU convention to begin was received by the European Parliament with enthusiasm. However, those EU member states bearing the brunt of the current extraordinary crisis, will most likely be less enthusiastic. Other touchy topics for the future are the proposals for new fiscal rules. Even if the current rules do not correspond to the current reality, the discussion will be heated between EU member states; and it seems even within the Commission, the vision is not united.

President Ursula von der Leyen finished by referring to the importance of standing strong with the US and on China, with a clear and welcome message. This ending closed the rhetorical circle, which began with the war in Ukraine and ended with the EU’s position globally.

Between last year’s State of the Union speech and this year’s, there is an obvious difference. While a year ago, the EU was aspiring to have a global role and weight, it has obtained some of that through the war in Ukraine. The EU has played an important, even unexpected role, and has been able to break some of the taboos which hindered it previously.

It is a promising start, and the President’s speech played on it. Building on the war in Ukraine and the EU’s role offered the President a possibility which was used. The speech had a more solid structure and was less of a patchwork of different topics and proposals, which it previously was on occasion. And of course, no State of the Union speech would be a true EU SOTU without a human story, which were plenty also this year, from First Lady Zelenska’s visit to the story of two Polish women helping Ukrainian refugees. The latter was also an interesting choice; perhaps a small gesture towards Poland in the sensitive rule of law debate?

Photo Credits: EPP Group Flickr

Tomi Huhtanen Crisis Democracy European Union Ukraine

As the European Central Bank (ECB) begins to tighten monetary policy, Ireland, as the famous band U2 once wrote, really is “stuck in a moment it can’t get out off”. With inflation at multi-decade highs (9.6% and rising), a worsening housing crisis, escalating public spending and full employment, the Irish economy is remarkably unbalanced.

However, unlike in the 2007 crisis, these characteristics are not unique to the Emerald Isle and the Mediterranean fringe. Rather, they are now shared by an increasing number of other EU member states. In Estonia, prices are rising at an annual rate of 22%. Eight other Eurozone states are now experiencing double-digit inflation. All the while, unemployment across the EU remains at historic lows.

A common narrative is that COVID, followed by war in Ukraine, has turbo-charged price levels. Spikes in energy and food prices are exacerbating the mix of excess savings and supply-side shortages deriving from pandemic shutdowns. The contribution of these events to current economic conditions is undoubtedly true. However, such an overwhelming focus on these risks ignores the longer-term underpinnings of Europe’s destabilising economies.

Namely, the Eurozone’s addiction to cheap money as the principal driver of its growth and investment.

Even before the February 24th invasion of Ukraine, inflation was becoming embedded across the Eurozone. In January 2022 – much to the increasing consternation of the “transitionary” inflationary brigade – price rises were already above 5% in the Eurozone. And these are inflation readings which continue to take no account of most households’ biggest cost of living expense – housing!

Even in that pre-Ukraine context, the politicisation of the ECB was clearly evident. President Lagarde’s view at the time that raising interest rates too soon risked “putting the brakes on growth” highlighted how political concerns have superseded the ECB’s core objective of maintaining price stability.

The scale of global monetary imbalances cannot be understated. The ECB and the Bank of England now account for nearly 40% of their own government bonds. In this world of puny yields “fund managers were effectively pushed into taking ever greater risks to deliver the returns that their end investors expected”.  The ongoing shake-out in the broader crypto-assets markets highlights just how skewed the risk-return trade-off has become.

And this rebalancing dance has only just begun.

Worse still has been the invocation of central banks – most notably the ECB – as agents of social change. The development of Frankfurt as a key facilitator in the battle against climate change has further diluted its focus on controlling inflation and further increased uncertainties in the financial markets. The argument is not that central banks should be detached from helping to tackle climate change, but that they are not the most effective, or appropriate, mechanism for doing so.

The cumulative result of these trends – greater politicisation and a widening scope – is the erosion of the ECB’s credibility in controlling inflation. As noted by Jürgen Stark and others, the ECB has “jeopardised its political independence and compromised its primary objective. Actions that are clearly intended to anticipate political pressure leave no doubt that it has exceeded its mandate”.

For the Eurozone, the implications will be profound.

Because, just like Ireland, the ECB now finds itself facing an intractable policy bind. In allowing inflation far above its 2% mandate, Frankfurt is seeking to soothe the political implications by deliberately lagging on raising interest rates in the hope of maintaining economic growth. But, just as Ireland discovered in 2007, the belief in a “soft landing” for the economy is more wishful thinking than sound economics.

There simply is no easy way out.

The result is an ECB that is now a prisoner of fiscal policy. A captive of its own member states with high debt, low growth and a tradition of unfinished reform programmes. And while this reality is the implicit rationale for the ECB’s current strategy, it belies a much wider structural problem. Namely, that the Eurozone continues to be characterised by weak potential growth, a Germany over-reliant on exports to China (and energy imports from Russia) and an unresolved “doom loop” between indebted governments and banks holding that debt.

Ultimately, the most far-reaching results of the ECB’s policy failures will be political. As evidenced in recent French elections, a prolonged cost of living crisis will sap strength from centrist parties, feed the political extremes on both the left and right and destabilise wider society. National elections in Italy in 2023 may well mark the beginning of the political fragmentation amplified by over a decade of easy money and limited reforms.

Back in 2012 former ECB President Mario Draghi calmed markets when he proclaimed he would do “whatever it takes” to protect the Euro. Unfortunately, the ECB seems to have lost any such commitment to controlling inflation.

Eoin Drea Banking Crisis Economy

The recent downgrades of the Russian economy have increased the prospect of the Kremlin defaulting on its foreign debts. Tied to international sanctions and the retreat of foreign investment from Russia, there is much speculation about the prospects of a reeling Russian economy.

But although President Putin is a self-proclaimed scholar of economics, the economic implications of invading Ukraine for the Kremlin will have little in common with the chaos of the 1990s (or Russia’s last default in 1998). In fact, prolonged conflict in Ukraine resulting in a continuation of sanctions against Russia by key global economies makes 1918 a more relevant comparator.

Then, as now, Russia was experiencing soaring interest rates, a collapsing currency, foreign exchange controls, roaring inflation, military conflict and increasing international isolation. The overall economic consequences for the Russian population at large was uniformly devastating, a factor exacerbated dramatically by the domestic policies undertaken by the newly established Communist authorities (who had seized power in November 1917).

It is sometimes incorrectly assumed that Russia’s participation in the First World War (fighting alongside Britain and France) directly contributed to its economic collapse beginning in 1918. But this is only partially true. In fact, up to 1917, Russia had financed its enormous war efforts without radically compromising the living standards of its population. The decline of average incomes in Russia between 1914 and 1917 (about 20%) was less than that evident in the German and Habsburg Empires.

The decades up to 1918 also witnessed Russia becoming a viable investment location for capital from Western Europe, particularly France. By the time Russia exited the war (through the Treaty of Brest-Litovsk in March 1918) the Kremlin’s debt to its war allies totalled over $3.5 billion, or well in excess of 125% of its GDP. By 1917, Russia was very much part of the global trading economy.

Yet, it wasn’t even the Communist seizure of power in November 1917 that ultimately ensured Russia’s isolation from the international financial community. Rather, it was the Communist decision in February 1918 to repudiate all international debts contracted by both the previous Tsarist regime (up to March 1917) and the Provisional Government of March-October 1917. Not only were debts defaulted on, but all assets of foreign investors in Russia were also seized by the state.

For Russian leaders like Lenin and Trotsky, the 1918 repudiation was the long held realisation of their 1905 Financial Manifesto which declared that:

“Foreign capital is going back home. ‘Purely Russian’ capital is also seeping away into foreign banks. The rich are selling their property and going abroad in search of safety. The birds of prey are fleeing the country and taking the people’s property with them”.

The economic impact arising from the debt default of 1918 cannot be underestimated. It convinced western economies of the unreliability of Communism as an economic model (notwithstanding French disbelief at the loss of their investments), encouraged Western support for anti-Kremlin “White” forces in the Russian Civil War, led to a blockage of the Russian economy, and resulted in the isolation of Russia from the world’s markets for much of the following decade.

For the Russian population, the debt default contributed to a downward economic spiral of almost unimaginable proportions. From 1917 to 1919, output per head in Russia halved. The Kremlin’s attempts to centralise industrial and agricultural assets resulted in famine-like conditions appearing in some regions in 1920, and again during the early 1930s. All the while, the Russian government was still engaged in expensive, large-scale military campaigns against its many foes, including in Ukraine.

The events of over a century ago provide important lessons for the prospects of the Russian economy in 2022. 

Firstly, Russia defaulting on its foreign debt will only serve to increase its international isolation. It will presage a wider move towards nationalising all foreign-held assets in Russia, as the Kremlin will seek to centralise many more key sectors of the Russian economy to sustain the war effort.

Second, living standards in Russia will decline as long as Russia remains internationally isolated. Although not approaching the levels of decline evident in 1919–20, it is likely that 2022 will bring a double digit contraction of the Russian economy. However, it must be noted that even with only limited support from states like China, the Kremlin will likely be able to continue to operate on a more enclosed, war-like footing for the medium term.  A footing which prioritises the “war effort” over the production and availability of many consumer goods.

Third, a Russian debt default in 2022, as in 1918, will not have any direct systemic impact upon the global financial system, due to the relatively limited size of Russia’s foreign debt. With a debt to GDP level of less than 30% in 2021, and a limited exposure to foreign currencies (a policy implemented by Russia after its invasion of Crimea in 2014), the Russian economy can continue to operate in greater autarkic conditions for a considerable period; albeit with a continuous decline in its population’s living standards.

The danger is not in the direct impact of a Russian default, but rather in its potential contagion to exposed sectors, like banking and aviation. The exposure of French and Italian banks to Russian default is estimated at $50 billion. Irish aviation companies’ exposure to Russian airlines exceeds $4 billion alone. Like in 1918, international investors in Russia face a very uncertain future, allied to huge disconnection from existing business models.

In 1905, the Communist Financial Manifesto began with the words “the government is on the brink of bankruptcy. It has reduced the country to ruins and scattered it with corpses”. More than a century later, President Putin seems intent on bringing those terrible words to life.

Eoin Drea Crisis Economy EU-Russia

A touching speech by a teenage activist. An ambitious pledge to reduce greenhouse gas emissions. A breakthrough agreement by world leaders to rein in rising global temperatures. These are not the key takeaways from the recent COP26 in Glasgow, but a mishmash of the last 30 years of global summits and pledges on climate change. Perhaps this is beginning to sound familiar: the global community is on the brink of catastrophe and this year’s UN Climate Change Conference is the last chance to stop it.

It is easy to become cynical of these international conferences, even though climate change remains one of the biggest collective problems for the international community. Was the recent COP26 summit in Glasgow any different?

Coal

For the first time in the history of UN climate agreements, the Glasgow Climate Pact referenced ‘coal’ and confirmed the commitment of nearly 200 countries to ‘phase down’ its use. Young urbanites from Brussels or San Francisco might raise their eyebrows and shrug off this accomplishment as old news. After all, didn’t we all agree that coal is finished?

Far from it. For all its damaging effects on the environment, coal accounts for close to 30% of global energy consumption. All fossil fuels combined make up to 80% of the global energy mix annually by providing relatively affordable and stable energy supply. Even in the EU, coal and lignite are still in everyday use; this will be a fact until at least the mid-2030s.

Completely phasing out the likes of coal is necessary but extremely costly due to pre-existing infrastructure and energy grids. The recent Glasgow Pact commitment to limiting coal on a global scale is important, as the developing world relies mostly on fossil fuels for their energy security and economic growth. Disappointment came from China and India, who led a coalition that watered down the language and replaced ‘phase-out’ with ‘phase down’ in order to reflect their entrenched national interests.

Divisions between Global North and Global South

This brings us to the ongoing friction between developing and developed countries on the climate front. Warning shots came just before the Glasgow summit when the group of Like-Minded Developing Countries issued a statement criticising rich countries for pushing the universal goal of net-zero emissions by 2050. The group posits that the developed Global North should raise their own ambition, fully decarbonise by the end of this decade and ‘leave the remaining atmospheric space for the developmental rights of the developing world’. It`s true thatone of the established principles of the UNFCCC is that international actors have different capabilities and responsibilities due to their respective social and economic conditions. However, shifting the onus primarily to developed countries with the expectation that they should completely restructure their economies in less than a decade is not only impossible to achieve, but also deepens dividing lines.

A case in point is the contested ‘loss and damage facility’ proposed by the G77+China group of developing nations, which would require rich nations to directly compensate poorer nations after severe climate events. Essentially, developed countries would be deemed as responsible for future natural disasters and stand ready to provide relief funding. This would turn into a downward spiral of endless claims and controversies between nations, with developing countries likely disincentivised to invest in adaptation measures as long as someone else is footing the final bill. Fortunately, this proposal was successfully blocked by the EU and US.

A point should be made on the political narrative and the debate on ‘climate justice’. The transatlantic political elite should be wary not to fall into a trap of its own making, where actual progress on climate change mitigation is replaced by claims for compensation or correction of historical injustices. A good example is the Foreign Minister of the island nation of Tuvalu, who received global attention when delivering his COP26 speech knee-deep in water. This narrative feeds well into our media-generated perception of the approaching climate cataclysm, but the facts tell a different story. Scientific research shows that in the past four decades, Tuvalu registered a net increase in land area of almost 3%, despite rising sea levels. We shouldn’t undermine the fact that many countries are, indeed, suffering disproportionately from environmental degradation or rising temperatures. However, cool-headed policymakers should be equidistant from both over-exaggerated victimisation and useless online virtue signalling when addressing climate change.

Hard Truths

What developed countries should do is finally own up to an overdue promise to create a dedicated $100 billion fund to support less wealthy nations as they develop long-term measures for climate adaptation and sustainability. Although some Western countries committed to at least double their financial support by 2025, embarrassingly, there was once again no clear breakthrough at COP26 in finalising the full climate finance pledge.

The Glasgow summit might have left many disappointed due to the lack of ground-breaking headlines, but there were several overlooked positive spill-overs. More than a hundred nations supported the US-EU initiative on slashing methane emissions by 2030. A number of governments and automobile manufacturers joined a pledge on accelerating the transition to zero emissions from cars and vans by 2040 or earlier. We also saw a surprising joint declaration by the US and China on boosting climate cooperation over the next decade. Beijing remains an important piece in this complex puzzle, as China is the largest polluter globally (more than the US, EU, and India combined in terms of CO2 emissions). These small wins should not be underestimated and are a useful reminder of the true purpose of the COP summits.

Perhaps our perception of these much-anticipated UN Climate Conferences should be about expectations management. The British hosts sang the usual tune by raising expectations through the roof, despite the fact that they produced only a half-baked summit. Modern media cycles and activist rallies convince us that fundamental change should happen immediately, without mentioning astronomical costs related to this change or the fact that developing countries would be denied opportunities for raising their standard of living. Citizens should not be misled. These international fora remain a lowest-common denominator affair that promise big but enable many to free-ride during a slow and painful coordination process. The important thing is that they ensure the fleet of international ships sails in the same direction and holds a steady course.

For better or worse, this is the harsh reality of the international system.

Dimitar Lilkov Climate Change Crisis Leadership

The coronavirus has taken the West by surprise. It has called into question basic assumptions about globalisation, how our society is organised, how safe we actually are and to what extent we control the world around us. The virus arrived when we were without the proper conceptual framework to deal with a new type of virus, and we could not have imagined how much of a social challenge it would represent. The novelty of the situation has made most of us feel strangely confused, numb and calm, and in many cases has left us not knowing what to do with ourselves. This satirical review seeks to put some distance and detachment between us and the situation and give us an outside perspective of what the corona crisis can teach us, both at the individual and social levels. Before the situation becomes the ‘new normal’, we should take the time to extract some lessons from this mess.

Read the full article of the June 2020 issue of the European View, the Martens Centre policy journal.

Jan Czarnocki Theo Larue Crisis European Union Society

The travel industry is one of the economic sectors most harshly affected by the Coronavirus epidemic. Airline companies are facing the worst challenge in decades by cutting costs and laying off employees, fighting to survive another day.

National airline companies have now become a significant challenge for EU member states. Airline companies do not only employ large amounts of people; they are part of the core transport system of each EU member state, and often potent national symbols. Should national airline companies collapse, national governments would have to foot the bill.

Therefore, the European Commission’s announcement on 2 July, launching an infringement procedure against ten EU member states in breach of the bloc’s passenger rights rule was met with discontent in some EU capitals.

In many EU member states, the view is that passenger rights should be temporarily suspended. Lobbied by airline companies, twelve EU countries have demanded the suspension of passenger rights. In practice, this would mean if a flight is cancelled, instead of immediate reimbursement (for which the delay is currently one week), passengers would be offered a voucher instead. The member states’ letter proposes ‘a clear right of reimbursement immediately at the end of validity’. The short-term implications of this are unclear, but if the voucher’s validity is 2 years, the consumer could wait for their money a long time.

The problem is that as the airlines are fighting for survival, and enjoy the moral backing of the member states, questionable tactics are already being used. After the EU has already helped airline companies by waiving the obligation to use 80% of their take-off and landing slots, airline companies across the board have begun cancelling flights last minute. This has obviously caused a big headache or two for airline customers.

For airlines, the logic seems to be to ensure that flights are full and profitable. Unfortunately, some airlines are currently selling tickets for routes which they know full well the flight will probably be cancelled.

The business logic is that through these unfair tactics, companies can improve their immediate cash situation by reimbursing customers with several months’ delay. Additionally, certain clients will end up returning the money to airline companies through vouchers, because airlines do not inform travellers about reimbursement options, or often make the reimbursement process so complicated that customers give up and accept the voucher right away.

Fool me once, fool me twice…

Of course, one can argue that it is in the customers’ interest for airline companies to survive, and the current climate is very tough for airlines. But misled customers should not be the ones paying the industry’s bill.

As things stand today, the situation for us, as airline customers, is radically different. When buying a flight ticket, one has to take into account that the risk of flight’s cancellation has increased substantially. Secondly, one is better off buying a ticket from a company which you plan to fly with in the near future so the voucher is of some use, in case the flight is cancelled. Finally, remember that obtaining reimbursement for your ticket might be a lot of work, and you would be waiting a long time for compensation.

By using deceptive tactics with customers, airlines are adding rapidly declining consumer trust to their long list of problems, the most obvious of which is a drop in demand for flights as a result of the Coronavirus epidemic.

Once this trust is damaged, it will take a long time to regain it. The EU’s infringement procedure is not only protecting European customers, it is also protecting the flight industry by maintaining consumer trust. After all, the airline industry can only thrive with happy and confident travellers.

Credits: Photo by Skitterphoto on Pixabay

Tomi Huhtanen Crisis Economy EU Member States European Union

Few symbols of upheaval are as powerful as the toppling of a statue. The last couple of weeks have been a good demonstration of this, across all Western societies – and Belgium is no exception. The cities of Antwerp and Ghent in Belgium removed statues of King Leopold II from their streets. This political compromise may appease radical demands, but it constitutes a missed opportunity to engage in a broad civic debate on identity and history.

There was a time when these statues honoured the Belgian sovereign for what was seen as his national and colonial heroism. Today these monuments inconveniently remind us of an embarrassing past, and of political and ethical norms that have long lost their validity. Still, Belgians are divided whether or not the statues should go because many interpret history differently.

The controversy around Leopold II doesn’t stand alone. In the Belgian town of Zottegem, a statue of Julius Caesar was vandalised. In London, protesters aimed their anger at a memorial for Winston Churchill, and in Johannesburg, paint was thrown at a statue of Mahatma Gandhi. Radical polarisation around identity has intensified emotions; it condemns those who assumed the role of ‘privileged’ leadership, and it hinders an objective debate on history. We deserve better than that in our democracies.

It is not the first time that statues fall prey to public anger. During the 4th century reign of Roman Emperor Constantine, monuments of as many as 25 former emperors were removed from public view. Europe’s Great Iconoclasm of the 16th century saw Catholic art and church decorations destroyed in Protestant mob actions across the continent. Statues and monuments are also a prime target after wars or violent regime change. ISIS materialised political change by destroying the artefacts in the ancient Semitic city of Palmyra. The Taliban blew up Buddha statues. And who does not remember the gripping images of Iraqis, or Libyans, celebrating their freedom by dancing on the fallen monuments of Saddam Hussein or Moammar al-Qadhafi?

But against the backdrop of this history – and a recent racial incident in the United States – should we therefore conclude that a statue of Leopold II symbolises the structural racism of the Belgian people or their government? Is a monument to Winston Churchill the embodiment of white British exceptionalism? Should we tear down a statue of Julius Caesar for the same reasons Americans are now removing Confederate symbols across their nation? Will this damnatio memoriae – the condemnation of memory – contribute to social progress? Most likely not.

Perhaps a fairer debate is first to understand why some democracies struggle to talk about their history openly? Why is it sensitive in the Netherlands to touch on the role of the Dutch East India Company in 17th century Indonesia, or to talk in France about the atrocities committed during the Algerian War in the 1950s?  The answer lies in part in our values, and in the fact that our societies still have a very complicated relationship with our principles of equality – principles enshrined in every democracy’s constitution, but that are, or at least were, difficult to implement correctly.

Pioneers advocated women’s suffrage as early as the 19th century, but only in the 20th century did a critical mass support such a political innovation. Today, even if the public has grown accustomed to narratives of pluralism, multiculturalism, and wealth redistribution, the reality is too often one of isolation, gentrification, and inequality. The fact that government leaders or public influencers rarely raise this topic is not a sign of racism. Rather, it demonstrates a more significant inability to conduct a proper reflection that includes all groups of society. In an environment dominated by peaceful debate and within the framework of the rule of law, public attitudes are slow to evolve, and even the most progressive minds are often hesitant to embrace disruptive change.

That is why change coming from the grassroots needs to focus on creating a broad consensus and avoid polarisation. Only this way can powerful ideas transcend and transform into concrete evolutions. Today’s protesters will need to work with the political leaders that they oppose. And more importantly, they will need to win the hearts and minds of the silent majority, so that everyone embraces the proposed change. Clearly, destroying statues divides the public and achieves no progress on either front. Exceptions to this rule are rare. The removal of Nazi symbols in post-World War II Germany or the toppling of Lenin statues after 1989 in Central and Eastern Europe are different cases: That was about visualising fundamental change in, or at the end of, a systemic upheaval within the lifetimes of the citizens.    

Today’s bilderstürmer are right to condemn the mistakes of the past. But censorship rarely works. History cannot be a subject one likes or dislikes, and exists for us to learn from. We need more conversations about history, not less. Looking at statues and monuments can actually serve as a helpful reminder of the undesirable. Today in our democracies, there is a broad consensus against racism. Civic and political leaders would be wise to promote more debate on that positive foundation. Blaming old statues may please the strongest emotions, but it will take more than that to make for a better society.    

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• Values

Bruno Lété Crisis Democracy Society Values

For as long as the EU has had a China policy to speak of, it has been ambiguous. The EU’s most recent China strategy calls the country “a partner, a competitor, and a systemic rival.” Europeans understand the challenge posed by Chinese mercantilism and its ambitions for continental hegemony. Even before the pandemic, most Europeans held an unfavourable view of China, with 70 percent of Swedes and 57 percent of Czechs seeing the country in a negative light. However, devising a coherent approach has proven difficult.

One reason is that even among the more ‘hawkish’ countries, there is not necessarily an understanding of what an effective European response should resemble. For France, Chinese mercantilism is best confronted by mercantilism of a European variety: building European champions and tossing aside competition and state rules. But that is a no-go for governments of smaller countries wary of China – say, Sweden – who nevertheless understand that European monopolies showered with public funds are a costly and ineffective response to the challenge at hand.

Another reason is a persistent distrust of US President Donald Trump. Joining forces with the United States is a losing political proposition as long as America is seen as erratic, mercurial, and primarily concerned with its own bilateral trade deficit, instead of the broader economic and geopolitical challenges that China’s rise involves.

Yet, the current triangulation between Beijing and Washington often requires a denial of reality. At his recent press conference, the High Representative Josep Borrell claimed that Chinese leadership “do not have military ambitions and they do not want to use force and participate in military conflicts”, notwithstanding China’s recent grab of Indian territory and the militarisation of the South China Sea. Whom does one believe: Mr Borrell or one’s lying eyes?

The EU’s ambiguity has also provided a permission structure for member states to strike deals with China, which will harm the continent’s interests over the long term. Examples include Italy’s embrace of the Belt and Road initiative – or, more recently, the rushed and secretive decision by the Hungarian government to proceed with the construction of a Chinese-financed rail connection with Belgrade.

Finally, the lack of a principled China policy erodes the EU’s status as a champion of human rights and democracy around the world – a mantle which Europeans have been keen to carry in the era of ‘America First’. After years of pussyfooting around the status of Taiwan, Tibet, or the regime’s appalling treatment of the Uighur minority, the milquetoast criticism of China over its crackdown on Hong Kong is a case in point. An unambiguous violation of a commitment that was thought to carry the full force of international law requires more than “grave concern” and to “raise the issue in our continuing dialogue with China”, as Mr Borrell’s office put it.

With its heavy-handed ‘public diplomacy’ response to the COVID-19 pandemic, Beijing has squandered a lot of goodwill in Europe. “We should not shy away from naming and shaming” said Věra Jourová, the European Commission’s vice-president, regarding China’s disinformation efforts in the wake of the pandemic. Ms Jourová’s home country, Czechia, saw the Chinese regime seek to co-opt political and business elites for years, inviting a broad-based backlash after it overplayed its hand.

The current situation is Europe’s opportunity to rethink and step up. The simultaneous invocation of ‘partnership’, ‘competition’, and ‘systemic rivalry’ in the EU’s relationship with China is not sustainable. Partnership presupposes trust and the existence of common goals. Competitors have different interests but adhere to shared rules of the game. Conversely, a ‘systemic rival’, as the Greens’ MEP Reinhard Bütikofer correctly put it, “just wants to win.”

Nobody expects the EU to embark on a Trump-led China crusade or to ‘decouple’ itself from Chinese trade and investment flows. Yet, clear guidance for member states on Chinese investment in critical sectors, whether they be infrastructure, finance, or tech, would be helpful. Similarly, a commitment to exclude Huawei from 5G networks across the bloc and joining the UK’s bourgeoning initiative to get the world’s leading democracies to cooperate on technological alternatives to Huawei are worthwhile endeavours.

The EU ought to be ready to walk away from the mirage of an investment treaty with China, currently in its 30th negotiating round. The EU wants China to scrap quantitative restrictions, equity caps, and joint venture requirements currently imposed on European companies. Also, EU businesses ought to be able to “compete on an equal footing when operating in China” by achieving “non-discriminatory treatment, prohibition of performance requirements – in other words, measures requiring investors to behave in a certain way or to achieve certain outcomes (including those leading to forced technology transfer) – and equal participation in standard-setting work.”

Unfortunately, those practices are central to China’s state capitalism. The absence of noticeable progress since the decision was taken to start negotiations in 2012 shows that no matter how hard the EU presses for “full reciprocity”, a non-discriminatory business environment in China is not on the table. Meanwhile, Beijing is eager to turn Western economies into its playground. After all, only 15 per cent of Chinese corporations listed on the Fortune Global 500 are in private hands.

European discussions over China would be much easier if the United States today were a trusted and reliable partner, providing strategic guidance, instead of the current administration’s petty displays of hostility towards the EU. The nature of China’s challenge to Europe, however, remains unchanged, regardless of who the current occupant of the White House is. Thus, it is imperative that Europeans use the window of opportunity provided by the pandemic and Beijing’s overreach to step up, hopefully to be joined in their efforts by the United States.

Credits: Photo by Peggy_Marco on Pixabay

Dalibor Roháč Crisis EU Member States European Union Foreign Policy

Amid -at times- stringent lockdown measures taken all over Europe, it seemed almost providential that one of our main platforms for home entertainment proposed a very bizarre show. 

As we all guiltily binge-watched Netflix’s hit ‘documentary’, “Tiger King: Mayhem, Murder and Madness”, and revelled in its larger-than-life characters, we must be serious for a moment: the trade of exotic animals is a highly lucrative and unregulated business. In Europe, we have our own Tiger Kings.

Where does regulation stand at the EU level? The EU mostly settles for the current CITES regulation. The Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) is an international norms system that began in the 1970s, that regulates international trade in over 35,000 species of plants and animals, including their products and derivatives. It ensures their survival in the wild with benefits for the livelihoods of local people and the global environment.

Illegal wildlife trade is a flourishing business, comparable to the traffic of drugs and weapons, and amounts to 7 to 23 billion dollars annually, according to a UNEP-Interpol report. Therefore, it was a welcome announcement when the European Commission pledged in its EU Biodiversity Strategy for 2030, published on the 20th of May, that it “will take a number of steps to crack down on illegal wildlife trade”. The Commission said that, among other things, it will revise its EU Action Plan against Wildlife Trafficking in 2021.

This communication was initially scheduled to be released two months ago, but due to the current pandemic that has been shaking the continent and the world, it could only come out now. COVID-19 can, in fact, be directly linked to the necessity of strengthening the future Action Plan against Wildlife Trafficking.

The COVID-19 outbreak has dramatically shone a light on how wildlife markets, as well as the use of wildlife for traditional medicine, represents severe risks for zoonotic disease transmission. The proximity with humans provides a path for the transmission of dangerous pathogens. Wildlife markets, like the one in Wuhan from where COVID-19 is supposed to have originated, exist all around the world, and the European continent is a central hub of transport and trade for the lucrative business of wildlife trade. Besides wet markets, it is not uncommon to come across monkey meat in Brussels, or European baby eels in Asia.

Zoonoses do not have to stem from direct contact between wild animals and humans, it can also spread from wildlife to parasites (ticks, mosquitoes, fleas) or to domestic animals, before eventually spreading to humans. COVID-19 had a zoonotic origin, but is now mostly contracted from other human beings. 61% of new and re-emerging diseases are of zoonotic origins, and although they can originate from the world over, some parts of the world are more prone to develop them due to larger biodiversity, a high density of humans and animals, and the international mobility of these humans and animals. The EU is both a vital marketplace and storage space for exotic animals that could represent a risk for zoonoses.

It comes as no surprise that, with the emergence of the pandemic, members of the European Parliament have demanded a stronger clampdown on both the legal and illegal trade of exotic animals in the EU, where favourable conditions for the outbreak of diseases like COVID-19 are also rife. The difficulty lies in the effective differentiation between the legal and illegal trade of wildlife, since they are very closely intertwined, as this 2016 report by the European Parliament’s trade committee states.

This is where a positive list can step in. French MEP Agnès Evren, from the EPP Group, is hopeful the EU will include a more restrictive positive list in tradeable species in its European Green Deal plan for the environment. A positive list sets into legislation what can be brought into the EU, and everything not on the list cannot come in. This method would considerably reduce regulatory bureaucracy at the government level, and facilitate custom officers’ work when distinguishing what is legal versus what is not. Currently, the limited, legal and regulated trade often acts as a cover for illegal trade of the same species.

Criticism has been levelled against positive lists, invoking subsidiarity, and putting into question whether the EU even has competence on wildlife trade. In fact, some member states have adopted their own methods for tackling wildlife trafficking through positive lists. Others resort to negative lists which, contrary to positive lists, state which species are forbidden from trade, but where permits can be granted following a strict set of rules. Some member states barely have any regulation at all. Once an animal is inside the EU, it becomes harder to track its progression, and transportation is an even bigger headache when following every member states’ individual regulatory mechanisms. Here, EU regulation can create a level playing field for all actors, and reduce cumbersome bureaucratic efforts for national governments.

Another benefit of further regulating what comes into the EU is the possibility of checking each animal for known pathogens, such as the one which has stemmed from SARS-CoV-2. Checks would allow for closer inspection of animals that are meant for food consumption, but also those that are intended to be kept as pets, as they too can contract the virus.

The discussion on zoonotic diseases has indicated that poor regulation of wildlife trade can have serious consequences, the likes of which should not be ignored. COVID-19 is not the first and will not be the last pandemic to occur on our continent. EU regulation on this trade should, therefore, be adopted with the view of protecting the health of EU citizens.

The EU Biodiversity Strategy, which will be an integral part of the European Green Deal, offers the perfect opportunity to take immediate action in preventing the rapid spread of diseases. We should not lose sight of the bigger picture either, which is to avoid future pandemics from happening in the first place. An EU positive list for species and pets is one way to bring much-needed regulation into a trade that has proven dangerous for the safety and health of European citizens.

So no, don’t hit play on that follow-up meta-documentary about the hit documentary series. Instead, “Think Positive”.

Anna van Oeveren COVID-19 Crisis European Union Trade Values

Amid the lockdown, we’re left awestruck by the arrival of spring: blue skies, brisk air, and the general abundance of nature. However, our senses have not been suddenly heightened as we mark the second month in self-isolation. Rather, the recent statistics from the European Environment Agency and the European Space Agency show that air pollution fell dramatically, in many European cities by up to 50%, as the world came to a standstill amid the Coronavirus pandemic.

The unprecedented public health crisis exposed the many vulnerabilities of humanity, with air pollution among the risk factors. The link between COVID-19 and poor air quality appears to be threefold: death rates are higher in patients with chronic illnesses linked with exposure to air pollution. Secondly, pollutants inflame the lungs, which become more susceptible to catching the virus. And lastly, particles of pollution might even serve as a vehicle to carry the virus further. However, smog has been deadly long before the COVID-19 outbreak and it causes 430,000 premature deaths in the EU each year. The World Health Organization identified air pollution as the biggest environmental risk to health in the EU.

Air quality in tandem with climate action

The political commitment to reduce emissions has been embodied by the fight against climate change, with the primary target being carbon dioxide emissions, whose greenhouse effect warms up the atmosphere with devastating consequences for the planet. This noble cause rightly spurred global climate action, keeping world leaders awake until dawn during lengthy international negotiations, and attracted celebrity champions from Hollywood actors to youth activists.

Yet improving air quality is just as acute, with direct benefits to human health, biodiversity, and the climate as a whole. Air pollutants are different from CO2, and, rather than piling up in the atmosphere, they negatively and directly affect the air we breathe. The substances most harmful to human health are the dust-like particulate matter (PM), nitrogen dioxide (NO2), sulphur dioxide (SO2), and ground-level ozone (O3). They are primarily caused by road traffic, shipping, agriculture, domestic heating, and power generation. One might wonder, if air pollution is so dangerous, shouldn’t the EU do something about it? Thankfully, it already does, as air quality has been one of Europe’s main political concerns since the late 1970s.

Air pollution is currently regulated both at the international level, by the UN Gothenburg Protocol that sets binding emission reduction targets, and on the European level, by the Ambient Air Quality Directives that sets standards for the quality of the air we breathe. The EU also oversees the National Emission Ceilings Directive, that obliges member states to reduce total emissions of certain air pollutants, alongside other sectoral legislation.

Despite these comprehensive rules, in November 2018, the European Court of Auditors published a revealing report on air pollution, which concluded that citizens’ health remains insufficiently protected. While air quality has been improving, most member states still do not comply with the EU’s air quality standards. The European Commission faces limitations in monitoring and enforcing the rules. As of January 2018, it had 32 ongoing infringement cases regarding air pollution, and these cases can take up to eight years to resolve. So how can we advance from the status quo?

Never let a good crisis go to waste

EU standards have played a pivotal role in reducing air pollution in Europe, with simple measures such as the mandatory use of catalytic converters for petrol cars since 1993, and tighter norms for all vehicles ever since. On the other hand, the fact that many member states still fail to reach some of the air quality targets demonstrates that there are limits to the effectiveness of regulation, and that over-regulation is hardly the way to go. However, we can hardly deny the ecological and health urgency.

What is needed is a paradigm that will shift the attitudes – of policymakers, businesses, and citizens – towards a new ‘normal’. And the Corona crisis might serve as the right trigger for the much-needed synergy between public support and political action. Behavioural scientists argue that people were able to comply with the stringent lockdown measures because they understood the logic behind them. The same public awareness can now be used to advance from compliance to commitment and secure some of the new habits we have adopted as a society.

The EU should continue to highlight the political priority of the European Green Deal as the centrepiece to Europe’s resilient post-Corona economic recovery with concrete, incremental initiatives towards achieving the long-term goal of climate neutrality and zero pollution. The future common agricultural policy is designed to contribute to climate action, as is the whole EU budget for the upcoming period 2021-2027. Sustainability should be mainstreamed in all EU policies, including finance and investment, promoting research, innovation, education, and improving public information. On the global level, as has been the case with climate diplomacy, the EU should promote clean air policies in all international fora.

Member states have a pivotal role to play. As governments outline plans for massive public investment and fiscal measures to aid industries struggling due to the Corona crisis, they should not miss the ecological opportunities to attain sustainable growth and resilient jobs. Strategies to achieve cleaner air for all citizens should be supplemented by the efficient and transparent use of available EU funds. People in rural areas should have access to affordable cleaner fuels to heat their homes. In cities, local governments ought to promote more sustainable forms of transportation. Many mayors already began adding cycling infrastructure and enlarging public spaces, as a step towards deconfinement while maintaining social distancing. Where feasible, employers should enhance the possibilities to work from home, which will reduce traffic peaks. And citizens should be empowered to make informed individual choices to opt for less polluting alternatives.

Let’s do it right so that we can all take a breath of fresh air!

Eva Palacková COVID-19 Crisis Environment EU Institutions

The view of the chair of the Federal Reserve in the United States – Jay Powell – that “for the economy to fully recover, people will have to be fully confident. And that may have to await the arrival of a vaccine” belies the stark economic realities facing the US economy over the next 12 to 18 months.

For the United States – an economy where consumer spending accounts for over 70% of its activity – the risks of a long, slow, grinding economic recovery are immense. Multi-trillion dollar Federal support programmes for workers and businesses will never fully replace the absence of comprehensive social supports at state level, nor full-time employment income.

With unemployment at rates not seen since the Great Depression, an uncoordinated public health response at federal level and increasing political polarisation it is clear that American companies and workers will require more trillion dollar support packages in the future. The immediate economic consequence is obvious. By the end of 2021, the US will have a federal debt to GDP ratio much closer to Greece than to Germany.

The enthusiasm of many US Governors to reopen their states as quickly as possible (regardless of public health advice) will not supply the economic adrenaline shot so desperately desired by many policymakers in Washington. Even the most minimal of social distancing requirements will reduce consumption across almost all sectors of the US economy. In many sectors, such as hospitality, it will continue to have a disastrous impact for the foreseeable future.

Two further factors will further undermine the ability of the US to recover in the short term, regardless of states restarting economic activity. First, is the impact of the pandemic in reducing consumer confidence, particularly for those who are retired and most at risk from the Coronavirus.

These “baby boomers” are an important driver of consumption in the US. They are also heavily dependent on US federal payments (such as Medicare) and are hugely overexposed to US equities (37% of the US stock market is owned by retirement funds). This combination of health risk, federal transfers and stock market uncertainty will likely exacerbate, not alleviate, declining consumer confidence in the months and (possibly) years ahead.

Second, is the false hope that restarting the export economy will help restore jobs and confidence to huge swathes of the US economy. As we are already seeing across the US (and indeed globally) the restarting of production in industries such as automotive and aeronautical will be largely dependent on international demand. Boeing – a key US industrial champion – has already cut its employee numbers by 10% as it seeks to deal with the dramatic fall in demand for air travel. These cutbacks will be repeated across most other economic sectors. There will be no quick return to a 2019 “normal”.

But perhaps the biggest danger to prospects of a robust US economic recovery has been the dramatic politicisation of the federal support system.

In an unprecedented health crisis such as the Coronavirus, Europeans have long assumed that the US federal model of government would act as a stabilising force for the states hit worst by the pandemic. It was this “transfer union” which European economists believed signalled the superiority of the US model of currency union when compared to the disjointed and overly complicated Eurozone model.

And indeed the US federal government has provided trillions of dollars of relief to businesses and workers. But the political cost has been significant. And the long term economic damage may be incalculable.

Mitch McConnell’s stated aversion to “blue state bailouts” highlights just how politically tinged the U.S. federal system has become. “Well run states should not bail out poorly run states” has become the new mantra of President Trump. Solidarity is fast becoming another American rarity, just like balanced budgets and social mobility

But the very real danger for the US is that a politicised federal support system further deepens mistrust of central government and reduces the effectiveness of federal spending in limiting the damage to, and then restarting, the US economy.

During the Great Depression, the Detroit riots of unemployed Ford workers in 1932 so startled policymakers that it resulted in the swift development of a property-owning working class (facilitated by cheap federal mortgages). It is the societal model which still dominates in the US and in much of the world today. The point is that economic upheaval of the scale we are now experiencing will have far-reaching, and often unintended, economic and societal consequences. 

Perils abound for the US in a slow, faltering and overly politicised economy recovery. Europe should take note.

Eoin Drea Crisis Economy EU-US Society

The month of May is the perfect time for political contemplation. There are many reasons to think deeper about Europe and our European future these days, particularly as we commemorate the 75th anniversary of the end of World War II and 16 years since the reunification of Europe. Additionally, Europe is facing an unparalleled challenge in the post-war era – the COVID-19 pandemic.

If someone asked me these days how Europe is doing, I would have to say that it is divided once again. We somehow overcame the global financial and economic crisis. But the cracks have since only continued to deepen. We were unable to provide a uniform response to the migration crisis. We seem to have lost the ability to distinguish our allies from our opponents, or other potential threats. We are divided when assessing whether government actions are still democratic, or if they already belong to the apparatus of autocrats. We are divided when deciding if the EU enlargement process should continue or be halted. We are divided on the issue of whether the Istanbul Convention is an opportunity or a threat. We are divided on whether our economies, being bled dry by the pandemic, should be rescued by loans or grants, and whether the future European budget should give priority to cohesion and convergence over security and innovation. It has never been easy to reach a consensus within the EU, but the current level of dissonance makes me very concerned.

Whenever there was a problem, I asked myself if anything could be done about it. I asked a similar question recently when reading the interview with Irene Tinagli, Chairwoman of the EP’s Committee on Economic and Monetary Affairs. I learned from the interview that when in her native Italy you mention the European Stability Mechanism (ESM) as a tool to support economic recovery after the coronavirus crisis, “there is a lot of sensitivity”. The ESM is “seen as a traditional instrument, as a way to control economic and fiscal policies.”

In other words, I learned that indebted Italy does not want to take additional loans under the ESM and that the current Italian government instead wants grants. I can understand why a heavily indebted Italy does not want additional loans. But I do not understand why Italian leaders are hiding behind the sentiments of voters while enflaming such views. I do not understand how the leader of a European country can plead for grants, without presenting in advance, or simultaneously, a set of reforms that would change the country for the better.

Having said this, is there anything that can be done to deal with this serious internal European division? In my opinion, we must start playing fair with voters. Either political leaders opt to play fair, or the post-pandemic wave will sweep us away. Political leaders must have the courage to explain to people that cohesion does not mean everyone will enjoy the same income. That solidarity does not mean that people of responsibility will tolerate or promote moral hazard. That someone will have to foot the bill for the irresponsible decisions of politicians. Political leaders must tell EU citizens that the key to Europe’s future consists, first and foremost, of deep reforms implemented at the national level. Only then can the most indebted countries invoke greater solidarity and support from the others. The leaders of EU institutions, for their part, should not raise unrealistic expectations, but rather patiently explain that they can only exercise the competences entrusted to their administration by the member states. 

I cannot keep myself from saying this: when we, the post-communist countries, were struggling to get back on our feet after the period of morass, there was no Marshall plan, and we had never heard a term such as ‘bail-out’. It had never even occurred to me, as the then-Prime Minister, to ask other countries for grants to make up for Communist mismanagement. We carried out painful reforms, privatised entire sectors in order to repay old debts and rescue the banks. To this day, ex-Communists reproach me for selling “Slovakia’s family silver”. But I can live with this kind of reproach. Yes, we recognised the value of financial instruments, such as the International Monetary Fund’s stand-by loans, or development investment loans from the World Bank or the European Investment Bank. However, what we always valued most was moral and political support from the West, and its vision of a reunited Europe.

There is no magic wand and the only way forward is together. There is no technical finesse that would us rid of old debts. Individual cunning or political threats are not a solution, either. There is only one thing that will determine our success, or failure – sound leadership by politicians, or their resignation in front of voters disoriented by their actions. Schuman, Adenauer, De Gasperi, their travel companions and their successors achieved a unique feat: uniting Europe and making it stand on its feet. Now is the time for its protection and further development.

Mikuláš Dzurinda COVID-19 Crisis EU Institutions European Union Values

The COVID-19 outbreak, and its deep financial aftermath, will put the European Union under unprecedented stress over the next five years or more. Brexit will add to these tensions for some members, notably Ireland. It is a matter of vital national interest for Ireland, that the EU gets its response to the crisis right, and does not allow it to create dangerous social distancing between the states of the EU.

The existing structure of the EU is unfitted to a crisis like this. The public expects the EU to act, but has not been given the EU the powers it needs to do so. Unlike the states of the EU, the EU itself has no capacity to borrow money, and no capacity to raise taxation. So it often lacks the financial clout to take decisive action. The amount it is allowed to spend is a mere 1% of GDP, whereas EU member states can and do spend around 40% of their GDP.

The countries and regions that gain most from the EU Single Market, are either unaware of the gains, or mistakenly think it is all due to their own efforts. A recent study by the Bertelsmann Foundation showed that the big objectors to Eurobonds (Germany, Austria and the Netherlands) gain almost three times as much per capita from the EU Single Market as do the assumed beneficiaries of the Eurobonds, Spain and Italy!

If the Single Market were to fail, the objectors would lose the most. But their national politicians fail to tell them this. Incidentally, the study showed Ireland to be a big gainer from the Single Market.

Meanwhile, the countries and regions that gain comparatively less from the Single Market resent this, and fail to acknowledge that they too are gaining from being in the EU Single Market, albeit a bit less than the others are gaining. Envy blinds some to reality.

Of course, these contradictory feelings are rarely expressed publicly, but they are there under the surface, ready to emerge when a crisis happens and decisions have to be made quickly.

COVID-19 has been such a crisis.

The restrictions on economic activity, as well as the direct health and income support costs, arising from COVID-19 will dramatically increase the debts of all states in the EU. At the same time, the initial reactions in some member states – from Germany blocking sales of vital equipment to Austria closing its border – have left bitter feelings in Southern member states, especially Italy.

Assuming a 20% drop in GDP as a result of COVID-19, an economist in the Bruegel Institute in Brussels has estimated that the Debt/GDP ratio of Italy could rise from 136% of GDP to 189%, that of France from 99% to 147%, that of Spain from 97% to 139%, and that of Germany from 59% to 94%.

As all these countries can expect their workforces to decrease in the next 20 years, because of past low birth rates, this is a very troubling prospect. A way needs to be found to spread the debt as widely as possible and as far as possible into the future.

The EU faces an unprecedented situation which justifies unprecedented actions.

One of the proposals made to do this is Eurobonds/Coronabonds which would enable countries to borrow with a guarantee from all eurozone states. The interest rate might be lower but it is still just another form of borrowing. If Italy issued a Eurobond, it would still be increasing its overall debt, and might face a higher interest rate on its ordinary bond issues. Another objection is that it might take 18 months or more to get these Eurobonds up and running, and the markets need something quicker.

Another proposal, favoured by some Northern member states,  is that distressed countries borrow from the European Stability Mechanism (ESM). Some believe that the ESM is too small for all that needs to be done. Others worry about the conditions that might be imposed.

Meanwhile, the European Central Bank (ECB) continues to buy the bonds of member states. For example, it owns 26% of all German government bonds and 22% of all Spain’s bonds. This bond buying by the ECB enables governments to continue borrowing, but its support is confined to members who are in the euro. It is using monetary policy to achieve the goals of fiscal policy, which is controversial.

I suggest that a better solution would be to allow the European Union itself to borrow, up to a limit of (say) 0.5% of the EU GDP, to spend exclusively on COVID-19 related expenditures.

Article 122 of the Treaty already makes provision for the EU to give aid to help states suffering from “natural disasters and exceptional occurrences” beyond the control of a member state or states. COVID-19 meets this criterion.

But the EU is not using this power, because its budget is fully committed to other things. It has no room to respond to sudden emergencies. It would have such room if it was allowed to borrow. This power could then be activated to allow direct transfers of funds to a state in acute distress because of COVID-19 or the like, without adding to the recipient state’s debt. 

Doing this would require an amendment to Article 310 (1) of the Treaty. This article presently requires the EU always to run a balanced budget. This could be amended to allow borrowing that was confined to spending on matters, like COVID-19,  that had arisen suddenly and were beyond the control of the state looking for help. Such a limited borrowing authority would command a lot of support from the electorate.

It would also be borrowing under the democratic control by the Council of Ministers and  European Parliament, something that does not apply to bond buying by the ECB.

The EU faces an unprecedented situation which justifies unprecedented actions.

John Bruton Brexit COVID-19 Crisis Economy EU Institutions EU Member States

The Coronavirus epidemic is spreading quickly through the planet. Its full impact on societies, on our economies, and simply on people’s lives is still unknown. Nevertheless, chances are that the economic impact of the epidemic alone will be greater than any crisis since the end of the Second World War.

But contrary to an earthquake or a massive tropical storm, the current crisis was not a surprise, nor was it unpredictable. In fact, the risks associated with wild animal markets and their link to potential virus outbreaks were widely studied and debated, including in China, after SARS – the severe acute respiratory syndrome in 2002-3, caused by a very similar coronavirus to the one which recently appeared in China.

As early as 2007, a study by the University of Hong Kong stated that: “The presence of a large reservoir of SARS-CoV-like viruses in horseshoe bats, together with the culture of eating exotic mammals in southern China, is a time bomb.”[i] After SARS, wild animal markets were temporarily banned. Various Chinese scientists wrote about the risks related to the trade and the risks of eating wild meat.

As a result, the Chinese Communist Party and the Chinese government did take measures to control the wild animal markets and limit the risk. However, prohibiting wild animal markets is challenging, due to the fact that many of these markets, and their use of wild animal ingredients, were not only economically important, but also a part of the local culture. Thus, for political reasons, the Chinese Communist Party decided to ignore the risk and the bans were eventually gradually lifted.

But the Chinese Communist Party did not take risks solely on behalf of the Chinese people. The risk was shared by the entire global community. As a result, today, more than 4 billion people are living in some type of quarantine, afraid for their own health, their loved ones’ health, and the future of their livelihood.

Now China has made eating wild animals illegal after the current Coronavirus outbreak. But the fear is that the exceptions will keep the markets functioning and, after some time, the wildlife markets will be fully opened again – just like after the 2003 SARS epidemic.

China has been trying to avoid the question of responsibility related to the Coronavirus epidemic by supporting conspiracy theories that the US army has brought the virus to China and spreading fake news in Europe related to the epidemic.

If, as the Chinese government argues, wildlife markets were not the real source of the current crisis, then there is less reason for China to ban the markets. Therefore, it is the responsibility of the international community to make sure that wildlife markets will be banned, not only in China, but also in Vietnam and other parts of south-east Asia.  We were not able to avoid the current Corona crisis, but we need to be able to stop the next global epidemic.

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[i] Cheng, Lau, Woo, and Yuen, ‘Severe Acute Respiratory Syndrome Coronavirus as an Agent of Emerging and Reemerging Infection’, 2007, Research Centre of Infection and Immunology, The University of Hong Kong, Hong Kong https://cmr.asm.org/content/cmr/20/4/660.full.pdf, Vol. 20, p 683.

Tomi Huhtanen COVID-19 Crisis Globalisation Trade

The pandemic that has now affected billions, forcing nearly half the world’s population into some form of lockdown, is far from over. In fact, infectious disease experts warn that the majority of countries grappling with the virus have not yet reached their respective apex. For the European Union, this means that thousands more will fall ill; supplies of ventilators, masks and other personal protective equipment, as well as hospital beds, will increasingly become scarce; businesses will continue to suffer or face bankruptcy and economic output will stagnate, with a Eurozone (and global) recession all but guaranteed.

As such, this is not only the problem of any one, or a few, EU member states. It is a uniquely European problem, that only a European solution can effectively solve.

In the EU, knee-jerk reactions like the closure of internal borders, and the initial freezes on national exports of protective medical equipment and testing kits — later rectified by the Commission — run contrary to our European way of life, making them appear particularly abrasive and extraordinary.

There have also been numerous examples of member states donating medical supplies to other members who need them more urgently, with some even welcoming cross-border corona patients to their hospitals. But, as noble and heart-warming as these instances of EU solidarity are, alone, they are not enough.

The EU has been far too divided in its response, to its own detriment. A remedy to a crisis of this magnitude (455,901 cases in the EU/EEA and UK at the time of writing) must be proportional, uniquely European, centralised at EU-level, and better communicated to the general public. It must present “EU solidarity” not merely as a platitude, but as a resounding, undeniable fact.

The EU is a coalition of 27 member states that agree to work intimately with one another for benefits they could not otherwise obtain alone. If the EU wants to pass the post-stress test that will inevitably follow this pandemic, and the inescapably intertwined questions of legitimacy, it must start acting like its future depends on it. After all, that is exactly what is at stake.

There have been numerous attempts, and there will be many more temptations, to close off our open societies and revert back to mere nation states. Some measures are indeed vital to contain the spread of the virus, such as internal border closures, but the EU must take coordinated action to counter potential consequences, like threats to food security.

Although the Commission has already taken necessary action to address some of these concerns, like the implementation of “green lanes” throughout the EU, more oversight will be needed to ensure the flow of goods goes unhindered. For instance, it should also lead a coordinated effort to oversee and expedite the distribution of medical equipment from members where production is concentrated, namely the Czech Republic, France, Germany, and Poland, to members in dire need.

This is not only the problem of any one, or a few, EU member states. It is a uniquely European problem, that only a European solution can effectively solve. 

The EU must also continue to pass swift, sweeping emergency measures to support the hardest-hit member states. The Commission-proposed EU Solidarity Fund is a good start, but it is only a temporary lifeline.

The next major hurdle for the EU is the negotiation of a more long-term, far-reaching, joint fiscal package to address the wider economic repercussions caused by the virus. Herein lies the most significant bottleneck for the EU’s COVID-19 response to date, one for which the von der Leyen Commission, as well as the Council, must find a way to overcome. If the already-tainted idea of ‘corona bonds’ does not receive the traction necessary to make it a viable option, then emergency crisis meetings must be held with more frequency in order to expedite alternatives, like the pan-European unemployment reinsurance scheme.

There is one more area, however, where the EU, and the Commission in particular, needs to improve: communication. Rather than highlighting instances of EU solidarity via the actions of individual member states, the EU’s communication strategy should be centralised as well, involving joint press conferences between the heads of the Commission, Council and Parliament, at least once per week. In addition to presenting the latest trends and figures, the EU should use such an occasion to better communicate the co-ordinated efforts that it is spearheading, which to date are largely flying under the radar.

Furthermore, information on the Commission’s webpage documenting the assistance provided by the EU to the member states (and among member states) should be more easily accessible, streamlined, and categorised by country.

This pandemic is a defining moment for the European Union. It has the opportunity to prove its potential and demonstrate that it can overcome a threat of such magnitude, together, by navigating the crisis as a union. Failure to respond in a unified manner could de-rail the progression of the European project for decades to come, or deliver a blow to its legitimacy from which it may never recover.

On the other hand, if the EU effectively demonstrates the benefits of a more coordinated, federal-like response, it could leave the doorway open to further integration and centralised autonomy – from finance to security – to better prepare and respond to crises of similar proportion in the future.

Before we rid ourselves of this virus in Europe, and on a global scale, things will get worse before they get better, but we are all in this together. Instances of EU solidarity, alone, will not be enough to overcome this crisis. However, if the Commission and the other Institutions step up their role as the central nerve system of the EU, facilitating a more centralised, unified, and better-communicated response to Europeans, we may even emerge as a stronger Union.

After all, the coronavirus knows no boundaries, why should our response?

Gavin Synnott COVID-19 Crisis EU Institutions EU Member States Leadership

The outcome of the Slovak parliamentary election held one month ago resonated with the mood of Slovak society, which clamoured for a change. Election winner Igor Matovič and his party OĽANO, (Ordinary People and Independent Personalities) was the only opposition party to have tapped into that emotion. With a pledge to rid the state of the mafia, it sent into opposition corrupt socialists after they had spent almost twelve years in power. The election also brought other surprises, such as the failure of the ambitious conservative-liberal alliance Progressive Slovakia and SPOLU (Together) to obtain seats in parliament or yet another failed parliamentary attempt by the Christian Democrats. Still, there was no space for their political analyses. Winners and losers alike lacked time to process emotions brought up by the election results.

This lack of time was due to the COVID-19 pandemic, which also resulted in the appointment of the government in the record time of three weeks. The new government took over the reins with a collapsing healthcare system and with no reserves of medical supplies. With its slightly more than 400 infected patients to date, Slovakia belongs to the less affected countries. This may be due to insufficient testing capabilities as well as the timely introduction of strict measures and a disciplined population. What played its part in this regard was not only a health concern, but also a particular legacy of communist times. Back then, civil defence drills to prepare for enemy attacks and donning oxygen masks were a normal part of life.

The fragility of the new coalition

Igor Matovič, a seasoned political marketer with a propensity for populism and an admirer of Orbán’s national referendums, undoubtedly had a different idea about taking over the reins of power. Even under standard circumstances, his coalition consisting of parties with diverging views about relations with the EU, and also regarding fundamental ethical issues, would draw bets on how long it would survive. OL’ANO is hardly a normal political party and is run by Matovič like a company. His theatrical manner of appearance, egocentrism and tendency to shoot from the hip has earned him the reputation of a dangerous manipulator, not only in the media. 

A security risk exists with the second strongest party, Sme Rodina (We Are Family). Its chairman, who has a history of mafia contacts and money laundering, is currently the speaker of parliament. The party is a member of the same political group in the European Parliament as Marine Le Pen and Matteo Salvini.

The third member of the coalition is the SaS (Freedom and Solidarity), with its chairman Richard Sulík advocating the return of EU governance to the state level. In 2012, his party did not approve the European Stability Mechanism in a vote serving as a proxy for expressing confidence in the government. This resulted in the demise of the pro-reform government and the comeback of the socialists. Ironically, this time, Sulík as the newly appointed minister for the economy, will call on the help of the ESM to bail out entrepreneurs who are in danger of going bankrupt.

The Za ľudí party (For the People), was also made part of the coalition mainly to obtain the constitutional majority. Its chairman ex-president Andrej Kiska gave up his mandate on the grounds of health making its further crystallization or European profiling remain unclear.

The campaign is over, leadership is needed

Faced with the pressure of the predicted broad spread of the virus, the extraordinary government sessions take place on a daily basis. The biggest car manufacturers shut their factories two weeks ago. Every day brings new self-employed entrepreneurs unable not only to pay their bills, but even to provide for the basic living necessities of their families.

However, the adoption of relevant measures will have to be intensified even further. The media note that Prime Minister Matovič has not yet been able to switch from a campaigning mode to assuming an executive position, as he spends much of his time speaking to the cameras rather than sitting at the negotiating table. Considerable criticism has also been raised by the newly adopted “lex corona” legislation, which allows monitoring people infected with the virus via mobile operators. Let’s hope that such information will not be misused and that Slovakia will not follow the path of Hungary, which restricted democratic freedoms, allegedly in the name of the fight against the virus.

Despite the internal ideological discrepancies, the new Slovak government enjoys considerable support from Slovak society. This is also a consequence of the fact that the opposition is being represented by corrupt socialists and neo-Nazis, who are just waiting for the first faulty step of the current government.

The opportunity is there for Igor Matovič himself to prove, through extensive engagement, cooperation and supporting solidarity within the EU, that his election was the right choice for Slovakia. He has a tremendous opportunity to not become another Beppe Grillo, but a statesman who will lead the country out of this crisis.

Viktória Jančošeková COVID-19 Crisis Democracy EU Member States

Coronavirus disease 2019 (Covid-19) is spreading quickly in European countries, with the situation being most advanced – and worrying – in Italy. Many aspects of the disease are still unknown. How many people in Europe are currently infected and how many will be in the future? What percentage of the infected will need hospital care? How many of the infected will die from the disease?

As answers to these questions are still unknown, there are strikingly different scenarios presented by the main health institutes of the different EU member states. These different scenarios present end results where the final estimation of the infected and deceased can be different by a factor of ten or more.

As a result, there seem to be two different strategic approaches: one is to say that our main aim is to ‘flatten the curve’, aiming to reduce the speed of the spread of the virus by social distancing so it will not overwhelm the healthcare system and, in the most extreme cases, hospital care can be offered. This strategic thinking is most clearly currently expressed in the Netherlands, the United Kingdom and in countries where the disease has not yet spread severely.

The argument is that stopping society altogether for months is not feasible, and when society would become active again, the disease would start to spread anyway – thus again a new lock-down would be needed.

The other approach is to try to contain the spread of the virus as soon as possible. This is what China and other Asian countries have chosen as a strategy, this is what the World Health Organization (WHO) is recommending and clearly what Italy is opting for now.

During the epidemic, there has been a question over how much European health care systems can handle. Before we had some data from China, but as the situation in Italy is evolving, we are having a more detailed and reliable picture. The following conclusion is emerging: If we just try to decrease the speed of the virus’ spread, our health care systems will be overwhelmed. Many more people will require hospital care (read: potential lives saved) than what health care systems can offer. The bottleneck is found at the number of hospital beds, respiratory aids, oxygen pumps, and trained health care professionals. Italy is a concrete example of that reality.

Italy’s case has been painted as an exception, because the virus most probably spread there unnoticed for weeks. But what is often forgotten is that even if the (speculative) real amount of infected in Italy is around 300,000 people, a number way higher than any Italian official has estimated, it would still be only 0,5% of the whole population.

If the disease is allowed to impact the whole society, the mainstream speculative estimations of the percentage of the population infected vary from 30% to Angela Merkel’s maximum 70% in Germany. In Italy, the current estimate of 0,5% of the population to 30% is a long way to go, with the current volume of patients multiplied by 60 even within a longer period of time. Additionally, solely considering average national numbers is misleading, as there are regions where the disease is and will be more intense.

If Covid-19 is allowed to affect the whole society, even at a slower pace, the European health care systems will not be able to take care of all the patients needing care and thousands of people will die. The numbers will be just too big, just flattening the curve will not work out.

If European states want to save lives, they need to embrace now the measures taken by the Italian government in those countries where it has not yet been done: to implement confinement. This approach will have a strong negative impact on society, but so does the death of thousands of people just because of a lack of hospital care. In the upcoming weeks, the focus needs to be total in combating the virus. Passively by staying home as much as possible, and actively by urgently increasing the number of hospital beds, respiratory aids, and training of the temporary health care professionals.

Northern Italy’s health care system is one of the best in Europe. Hard-hit Bergamo’s main hospital let a camera crew in for the rest of Europe to know what an overwhelmed healthcare system looks like. For Italy today, the strategy is very clear: to stop the virus whatever the cost. Other European countries still have one to a few weeks before the situation will reach the same stage as in Italy. They should use them wisely.

Credits: Photo by Anastasiia Chepinska on Unsplash

Tomi Huhtanen COVID-19 Crisis EU Member States Society

Empty supermarkets, sold out face masks, and the prices of hand sanitiser reaching absurd heights; this is the picture that has been portrayed of Italy in the past weeks. As of 10th March, 9,175 people in Italy have contracted COVID-19 (a.k.a. the Coronavirus) with the majority of cases concentrated in the North of the country.

After closing schools, universities, museums and cancelling public events (even sacred Serie A football games), the government took even stricter measures by issuing a decree during the night of the 7th of March. This measure ordered the isolation of the region of Lombardy and 14 provinces in Emilia-Romagna, Veneto and Piedmont. The decree prohibited all circulation in and out of the “red zones” with only partial exemptions granted for emergencies or work.  It also involved closing all schools and universities. These measures are in place until 3rd April. During a press conference on the evening of 9th March, the Italian government extended the restrictive measures to all regions. In effect, placing Italy on total lockdown.

The reason behind such a drastic decision of the government, besides obviously containing the spread of the virus, is to prevent contagion to the southern regions of Italy. The Italian healthcare system, based on universal access, has been put under immense pressure with more and more patients contracting the disease. The mortality rate among infected people is not extremely high and the average age of the deceased is 81, however, a continuously increasing number of people require intensive care. Having a huge wave of contagion in regions like Apulia, Campania or Sicily,  may actually lead to the collapse of already weak southern healthcare facilities should the virus continue to spread.

But the impact on the population’s health, or on normal social interactions, are not the only impacts of COVID-19 on Italy. The repercussions on the already fragile economy of the country will be massive. The shutdown of Lombardy, accounting alone for 46% of foreign investments into Italy, will have significant economic repercussions for the Italian economy.  Repercussions that are now impacting on every region in Italy.

Although the Italian government has already announced stimulus measure totalling approximately 4 billion euros these measures will not be enough to counter the longer-term economic impacts.

Even before the arrival of COVID-19, the Italian economy experienced a significant slowdown in late 2019. In February 2020, the European Commission lowered its forecasts for Italian growth to just 0.3% for the coming year and a budget deficit of approximately 2.2% of GDP.  Events since then – now escalated to an unlimited shutdown of the vast majority of the Italian economy – will result in Italy entering recession in the coming months.  It will also result in a significant deterioration in public finances (both in terms of lower tax incomes and higher health and social security expenditures).

Although the Italian government has already announced stimulus measure totalling approximately 4 billion euros (or a 0.2% increase in the government deficit) these measures will not be enough to counter the longer-term economic impacts. This is due to three main factors.

First, the Italian economy – particularly Northern Italy – is embedded in both European and global supply chains. Thus it is doubly exposed both to the ongoing containment situation in China and the coming restriction of Europe’s economy due to the spread of the virus. Second, tourism in Italy accounts for approximately 15% of total employment. As we enter the start of the tourist season it is likely that there will be a dramatic reduction in tourist visits to Italy, at the very least for the next 3-6 months, but possibly longer. The Italian body representing tourism provides estimates that 22 million fewer visitors to Italy will result in an economic cost of 2.7 billion euros. Third, the Italian economy was already stagnating before COVID-19 arrived.  Thus, the depth of the recession will be deeper (and possibly longer) than many now predict.

COVID-19 should be the starting point for Eurozone 2.0.

In this context, it is likely that Italy will require additional spending of at least 1 to 1.5% of GDP to effectively counter the recession currently underway. This will not be a situation unique to Italy. For example, the recent mitigation measures announced in Ireland will likely account for at least 0.7% of Irish GDP in the short term.

Unfortunately, a severe economic slowdown – with severe societal implications – is now underway across Europe. This also implies a significant level of risk for the future stability of the Eurozone. What is clear is that a European approach which prioritises adherence to existing budgetary rules over mitigating the worst impacts of the coming recession will lead to a further deterioration of economic and social conditions.

What is required now – for Italy, and shortly for the rest of the Eurozone – is an understanding of the exceptional nature of the current circumstances. This should be reflected in the application of highly flexible Eurozone budgetary rules for as long as the crisis lasts. It should also stimulate a renewed push for much more fundamental changes in how the Eurozone is constructed and managed. No more tinkering around the edges, real reform can no longer be subject to political inaction. Completing Banking Union and severing the “doom loop” between governments and banks should now be the top priority. Work should also begin immediately on placing the national capitals back at the centre of the Eurozone family. And that must include greater fiscal flexibility.

It would be easy now – in a state of societal unease – to resort to classical Brussels based thinking about how the economic impacts of the Coronavirus should lead to more centralisation, more common functions in the Eurozone. That would be a mistake. Italy’s largely unreformed and unbalanced economy is an example of all the imbalances the Eurozone was designed to protect against. COVID-19 should be the starting point for Eurozone 2.0. The only alternative is fragmentation and ultimate collapse.

Anna Nalyvayko Eoin Drea COVID-19 Crisis Economy EU Member States Society

The European Union is not disintegrating. Some might be tempted to think so given the chaotic European response to COVID-19, the initial lack of coordination and the rapid introduction of border controls between member states. But in cases of national emergency national leaders rightfully tend to the needs of their citizens. This was to be expected as it mirrors our own individual reactions confronted with a sudden shock – irrational behaviour, potential panic and hoarding of supplies. All in all, the situation reflects the true nature of the European Union – a unique international organisation with federalist features but ultimately driven by national capitals and national interest. Many people expect decisive unilateral federal action but they won’t get one, especially in the short term. We will instead see a retreat to national lines, the adoption of drastic measures and then a decisive ‘make or break’ moment for a collective European response. This may be painful to say, but we will have a textbook EU crisis response.

The European Union does not have exclusive competences to deal with healthcare matters and its role is mostly to coordinate health policies among its members. Additionally, it relies on national capitals for a coherent response in times of emergencies or natural disasters. The EU Civil Protection Mechanism might be pan-European in name but any type of assistance needs to be provided by the individual countries after a national decision. Regrettably, this is why Italy didn’t receive support in the immediate days after the situation got out of hand – the rest of the countries were chaotically wondering how to organise their own limited resources and equipment.

What the European institutions can do in the short-term is to quickly mobilise available resources at their direct disposal and also facilitate the smooth functioning of the single market. In the last several days the European Commission took a number of important steps to achieve these goals by proposing a reshuffle of billions of euros from the European structural funds in order to provide relief to public budgets. Coherent measures were also announced on relaxing state aid rules and also providing liquidity to small businesses across the continent.

No man is an island, and no European member state can cope with such a crisis on its own. 

Most importantly, the Commission started untangling the protectionist knots which several countries started (somewhat understandably) tying due to the emergency in their countries. After the European Commission successfully intervened, medical equipment will not be limited nationally but will be exported throughout the Union. In times of border checks and travel restrictions, the Commission must be on its guard to ensure the free flow of goods and especially the smooth functioning of supply chains which will be vital for citizens, business and industry. Parliament and Council must be on standby to quickly authorise certain acts by the Commission or update relevant legislation where needed. The European Parliament, especially, has a key role in providing due democratic oversight and ensuring the proper communication of the adopted measures with European citizens.

So far, so good. The Commission will try to be the honest broker between member states which on their side will slowly exhaust their budgets on national measures to contain the virus and also in the attempt to soften the blow for employers, workers and industry. In parallel, emergency or redirected European funding will also prove inefficient if the crisis lasts throughout Spring. The Martens Centre already outlined the major political economy implications of the coronavirus for Europe and the need for flexibility without limits when it comes to ensuring liquidity and adequate fiscal response.

What comes next? The member states will rightfully focus on preventing contagion and saving lives. However, which European country can individually handle such a shock? China, where the virus started and spread worldwide, registered thousands of deaths, an unprecedented decline of industrial production and a dramatic collapse in car sales, domestic flights, retail and many other economic sectors. The Asian hegemon pumped and redirected a huge chunk of its national resources in order to tackle the crisis. If this terrible outbreak continues throughout the next several months, Europe will be confronted with an economic earthquake which could eventually threaten the Eurozone and the future of the common currency. Some member states will be reluctant to talk about bailouts and mobilising emergency funds but this might prove inevitable.

No man is an island, and no European member state can cope with such a crisis on its own. We have seen it all and will see it again. European summits will grow long; patience will wear thin. Vows will be broken and new ones will be spoken until the EU muddles through. Successfully.

The whole European industry will need to readjust and member states will be forced to collectively rethink the functioning of major parts of their economies. Ultimately, this continent will need to find a way to redistribute vast resources quickly and efficiently.

The European Union will not come out of this crisis as a federation. But this crisis will receive a federal response.

Dimitar Lilkov COVID-19 Crisis EU Member States European Union

Despite partially delivering on his threat, to ‘open the floodgates’ of migrants to Europe, Turkish President Erdoğan remains a rational, albeit undemocratic, politician. The EU should strike a new migration bargain with Turkey, one that involves the creation of a safe zone and the protection of civilians in Idlib. All this should be part of the EU’s selective political support to the Turkish government.

Turkey surprised Europe again when, according to Reuters, an anonymous Turkish official uttered the following sentence on 27 February: “All refugees, including Syrians, are now welcome to cross into the European Union.”

Unlike previous rabble-rousing Turkish statements, this one was immediately followed by action. The Turkish intelligence service began organising transportation of migrants from centres inside Turkey to the Greek border. Refugees from Afghanistan, Iran, and Iraq were told that Greece would accept them on its territory. People boarded buses in the middle of the night and were taken to the border areas. At the same time, the news channel A-Haber, which belongs to President Erdoğan’s family, began advertising the news that the Greek border was open. Turkish police, coastguard and border security officials were ordered to no longer prevent migrant crossings towards Greece and Bulgaria.

The rest has already become history. February 2020 will be known as the month in which another massive migrant crisis started on the EU borders, although no-one can tell how long this one will last.

Timing

According to the Neue Zürcher Zeitung, preparations for the bus transfers of migrants from cities like Istanbul had been going on for days. It is not clear if the Greeks and Bulgarians knew that something was afoot. Nevertheless, they have responded well, and continue to do so, as they refuse any migrant crossings under the current conditions of extreme pressure.

We cannot exclude the idea that Turkey has deliberately targeted Greece at this moment. Just before the Turkish green light to refugees, clashes between local residents and riot police on the Greek islands of Lesbos and Chios were growing increasingly violent.

As is now clear, the main impetus for Turkey to engage in this ‘humanitarian aggression’ is desperation over the situation in the north-west Syrian province of Idlib where Syrian government forces, backed by Russia, have been engaged in indiscriminate killings, not distinguishing between jihadists and civilians. Turkey has a justified fear over a new wave of Syrian refugees crossing into Turkey.

EU response

Since the beginning of the Syrian conflict in 2011, Europe (and the West) have stood on the side-lines, without doing much to defeat Assad or to, at least, try to create peace in the country. The EU’s humanitarian efforts in the war-torn country and the painful lessons of the 2003 Iraq invasion cannot justify the bloc’s scandalous absence from any meaningful involvement in Syria. Europe has been paying the price ever since by having to face a neighbourhood that increasingly seems out of control. So far, the refugee wave of 2015-16 has been the most perceptible reminder. A new reminder is now being issued.

It is perhaps time to recognise that although we choose our friends, we do not choose our neighbours. Turkish aggression in the Mediterranean, and namely its incursions in the Greek airspace and illegal drilling in Cypriot waters, cannot be condoned. The same applies to the customary jailing and ostracism of journalists, academics and opposition politicians at home.

On the other hand, Turkey has already experienced regimes that were much worse than that of Recep Tayyip Erdoğan. The country is hosting the highest number of refugees in the world. If there were a no man’s land where Turkey is, there would be at least 4 million, and probably many more, refugees and migrants in the EU today. It is difficult to imagine in what state European politics would be under that scenario. Those who criticise the 2016 EU-Turkey migration deal invariably fail to answer that question.

And unlike some European NATO members, Turkey is on the right side in Libya, supporting the internationally recognised government in Tripoli. (Despite this, its maritime deal with Libya is very likely illegal.)

All this is to say that not working with the Turks is not an option. Europe, while criticising the Turkish regime on some policies, needs to lend a helping hand to others.

Despite all the recent geopolitical losses to Russia and Iran, there is still scope for meaningful European engagement in the region.

First, continuing with the business as usual is important. EU member states need to start preparing budgets for a new migration deal with Turkey after funds under the current agreement run out.

Second, as the current Turkish migration pressure is tied to the dismal humanitarian situation in the province of Idlib, the EU should strike an additional Idlib-focused bargain with Erdoğan. Persuading Russia to agree at the UN level to the creation of a safe zone with European boots on the ground, would have to be part of this agreement. A less ambitious but still effective means of protecting the local population would be the establishment of a no-fly zone, now promoted by the Netherlands.

Of course, all this should happen under the condition that Turkey has restored control on the Greek border and again, held up its end of the 2016 agreement.

When this condition has been fulfilled, European money and humanitarian assistance should be directed to the civilians in Idlib. Such European support should be tied to taming the unfortunate Turkish tendency to enlist local jihadist units in its service.

European governments need to hold up their end of the 2016 agreement as well. For example, they must resettle substantial numbers of refugees from Turkey, as foreseen by the agreement. Those EU governments that refuse resettlement may soon have to accommodate irregular migrants breaching their national borders en masse and, unlike resettled individuals, bringing along genuine security risks.

The ongoing negotiations on the EU’s long-term budget as well as the branding of the von der Leyen Commission as the geopolitical commission offer an excellent opportunity for Europe to step up its game in Syria.

Recognising that Turkey may not be a friend, but remains an ally would be the first useful step in this process.

Vít Novotný Crisis EU Institutions Immigration Neighbourhood Policy

It is not the first time that Turkey is using civilians as human shields and tools of its foreign policy. During the Great War, the Ottoman Empire deported and exterminated a large part of its Christian population. In 1938, the Kemalist Republic followed a similar policy in Alexandretta. In September 1955, the Turkish state was behind the brutal “pogrom” against the Greek-Orthodox population of Istanbul. Two decades later, Turkey invaded the Republic of Cyprus and forced thousands of Cypriots into exile.

The same strategy is being used today on the Greek-Turkish border. Greece is facing an ongoing hybrid attack on land, sea and air by a so-called NATO ally. Recently, reports of cyber-attacks towards the Greek government and other sensitive sectors of the Greek state by Turkish hackers were published in the international press. In the first months of 2020, the violation and infringement of Greek airspace – with armed planes flying even over inhabited Greek islands in the Aegean – has reached new records.   

The recent decision by Erdogan and his authoritarian regime to encourage and push thousands of desperate people towards the north-east Greek sea and land borders comes as a natural continuation to a series of aggressive actions taken against Greece and Cyprus in the Eastern Mediterranean. These actions include illegal exploration activities in the Economic Exclusive Zone (EEZ) of Cyprus and the illegal Turkish-Libyan Memorandum of Understanding (MoU) that openly violates Greek territorial sovereignty. In addition, reports and footage show that the movement of immigrants -including criminals detained in Turkish prisons- is being implemented with the active participation of the Turkish armed forces, police and the Turkish intelligence services (MIT). 

Turkey has become a state “trafficker” that does not recoil from politicising human pain and misery, in order to make political gains. The Greek government’s rightful decision to increase the level of deterrence at its borders and temporarily suspend the asylum applications is the only possible reaction for any state intent on protecting its territory from a well organised hybrid attack. 

In the last 3 days, there have been over twenty-four thousand instances of people illegally attempting to cross into Greek territory. In Evros, less than 200 were successful, in which case the intruders were immediately arrested. On Monday alone, over 1.000 arrivals were recorded on the Greek islands of the Northern Aegean. The situation is tense and a fatal accident could turn the whole situation into something that risks becoming uncontrollable.

Turkey has become a state “trafficker” that does not recoil from politicising human pain and misery, in order to make political gains. 

It is more than certain that Erdogan’s regime will use fake-news and propaganda in order to attract public sympathy and portray Greece and Europe as the offenders. Turkey de facto cancelled the EU-Turkey Statement and Action Plan. Those who speak about asylum and international humanitarian law from the comfort of their office thousands of miles away from the Greek border tend to forget the geopolitical realities in the region. We are no longer talking about individuals who are escaping conflict zones. What we see is uncontrollable masses trying to reach Europe in huge numbers under the direct encouragement, guidance and facilitation of an official state actor and its services.

Greece and Europe should not succumb to Erdogan’s “Kapalıçarşı”[1] style of bargaining. If you lie down with the devil, you will most probably find yourself in hell. Turkey tried to act as a regional superpower and now reaps what it sowed in Syria. Erdogan, in his vanity, initially supported the ISIS jihadists, then turned against the Kurds and the West. Now, after his military disaster in Syria, he is trying to exercise pressure on Europe and the West in order to save himself from the chaos he created. 

Those in Europe who suggest appeasing Erdogan by sacrificing Greece’s national security should take into consideration that this is a great chance for the EU. It can show that it is a real Union with borders and common values, and that it stands ready to defend them. Today Greece is the frontline and the bastion of Europe. Beyond Greece’s borders, democracy and logic stops. 

In the midst of all of this, the loud silence of many prominent politicians in European capitals is extremely worrying. Politicians once vocal about the values of European civilisation are today finding it hard to say anything to strengthen the morale of a country that, at this very moment, is defending the European way of life in practice. Apart from the three EU institutions, only Austria, the Netherlands, France, and North Macedonia have openly expressed their will to actively support the Greek forces. 

For more than five years, amid a tremendous financial crisis, the Greek population has shown strong solidarity and compassion to the tragedy of all displaced people reaching Greek shores. It seems that this has changed. Local societies can no longer bear an additional influx of immigrants as in 2015. The Greek state is determined not to allow additional “Morias” (this refers to the name of a town in the island of Lesbos that hosts a by now notorious squalid camp) to be formed around the country. Instead, it is only fair that Greece’s European partners step up to the plate.

Usually polarised and divided along partisan lines, all Greeks are currently appearing united against Turkey’s plans. Greeks are determined to defend their country, and thus Europe, at any cost. There is no room for compromise in Turkey’s efforts to destabilise Greece and move forward with claims that put in question the territorial integrity and sovereignty of Greece. Europe should act in this crisis as one if it wants to be taken seriously as a ‘sovereign’, ‘strategic’ and ‘geopolitical’ actor, to use some of the slogans repeated by its leaders in recent years. There is no time for simple statements of support. Tools and manpower must be deployed in the heated zone of Greece’s borders.   

[1] Kapalıçarşı / Grand Bazaar of Istanbul is one of the oldest, covered markets in the world.

Panos Tasiopoulos Crisis European Union Human Rights Immigration

A closely watched trial was opened last Monday against suspects in the murder of journalist Ján Kuciak and his fiancée Martina Kušnírová. The police have yet to identify who commissioned the murder and on what motive, but the investigation is gradually unravelling the kleptocratic functioning of the state apparatus, which uses mafia-style practices for its enrichment. The still incomplete facts that the investigation has revealed show a gruesome picture of linkages between mafia-type oligarchs and the justice system, police and the ruling social democrats’ party. This is the picture of contemporary Slovakia, which was considered until recently to be one of the better democracies of the Visegrad Group. However, its reality today is rather reminiscent of the Balkans in the darker period of the 1990s.

The brutal murder of two innocent people two years ago triggered an unprecedented wave of citizens’ protests whose pressure resulted in a partial government and police reshuffle and replacements at the top of the police force. People’s fervent desire for change and the struggle for a decent Slovakia found their positive reflection in last year’s presidential and European elections. However, it cannot be said today that the same positive wave has survived in the run-up to the parliamentary elections at the end of February. Just the opposite, it risks being transformed into a devastating tsunami, as Slovakia could become another EU member state with a far-right government.

In only a few weeks, Slovaks have the chance to halt the alarming trend of injustice, arrogance, intimidation and attacks on minorities becoming the new normal. 

This risk can be explained by the fact that the street protests grew silent over time and the hope for change has been replaced by skepticism in the wake of political developments. The main reason is the fragmentation, lack of readiness to cooperate and strong egos, as well as the lack of political experience among the leaders of the democratic opposition.

The opposition consists of Christian democrats, liberals, the party of independent personalities, and three new parties which all compete for leadership of the opposition camp, more so than for voters. The latter group of parties includes that of former President Kiska – Za ľudí (For the People), which has no clear-cut party profile, and over which hangs a shadow of unclear financing of its founder’s presidential campaign. Then there is a conservative-liberal party SPOLU (Together), which will run together with another new party, Progresívne Slovensko (Progressive Slovakia), the party on whose ticket President Zuzana Čaputová initially ran. Their programmes are almost identical, calling for a fair and functioning judiciary, better education and health care. All of them declare support for the EU and NATO. However, looking at the demands for strengthening the nation-state at the expense of EU institutions which have been trending in Central Europe and elsewhere, concrete initiatives are missing.  

Three scenarios are possible:

1. A government composed of socialists and neo-Nazis

In this scenario, the Social Democrats (SMER) remain the strongest party. Their chairman, former prime minister Robert Fico, plays the gamble and toughens the tone of the campaign by raising fears of immigration and smearing political opponents. His negative rhetoric is close to that of the increasingly stronger neo-Nazi party of Marian Kotleba. They use the motto of restoring order in the country, which implies spreading fear and hostility towards minorities. A possible coalition partner is also the nationalist Slovak National Party whose chairman is a great admirer of the Kremlin and who, as the speaker of the National Council of the Slovak Republic, has long represented a security threat to Slovakia’s interests. To secure a majority, they could be helped by the populist party Sme Rodina (We Are Family), a member of the Identity and Democracy Party. It seems that this party could be tipping the scales in the formation of the coalition. Needless to say, such a government would be a disaster for both Slovakia and the EU.

2. A government of change

In this scenario, the democratic opposition somehow manages to achieve a majority and overcome its differences. That would mean a chance for real change in Slovakia. But the problem is that this opposition is fragmented and focuses more on its internal matters than on the real problems of the country. It lacks a leader capable of unifying six prospective coalition parties. It is former president Kiska who styles himself into that role, reminiscent of the anti-corruption President of Romania, Johannis. However, Kiska’s problem is his inability to convince voters that he is serious about making a transition from the office of the President to that of a Prime Minister. And there is also the question of whether the rest of the opposition would accept him as their leader.

3. Stalemate

There is a real danger of a standoff if neither side achieves a majority. This is also because of the possibility that, for the first time since the 1989 revolution, no ethnic Hungarian party would cross the parliamentary threshold. This is due to the fragmentation of the Hungarian community, but also to the punishment of the MOST-Hid party for participating in the current coalition alongside nationalists and socialists. This would mean a period of increased turbulence and uncertainty for Slovakia, as well as further fragmentation of the political spectrum. It would also mean a costly waste of time for the country which has been plunged into a deep political and moral crisis. The country needs to rebuild its democratic institutions and return to the reform path of the first decade of this millennium.

But what Slovakia needs most at this moment, is a return to morality and decency on all levels of public life. In only a few weeks, Slovaks have the chance to halt the alarming trend of injustice, arrogance, intimidation and attacks on minorities becoming the new normal. This is a unique chance. It is also an obligation for all democrats towards Ján and Martina. Their tragic deaths should not have been in vain. They should, at last, help bring about a wind of change.

Viktória Jančošeková Crisis Democracy Elections Political Parties

In international affairs, the year 2020 has begun dramatically. On 3 January, the US killed Iran’s most powerful military commander, General Qasem Soleimani, in a targeted airstrike in Iraq. The strike came only days after protesters had assaulted the US embassy in Baghdad in an attack for which the Pentagon blamed Iran and Soleimani in particular.

Iran retaliated on 8 January by hitting American air bases in Iraq with missiles. No American troops were killed and Washington has seemed to accept them as a tit-for-tat response for the earlier strike on Soleimani. Yet, the standoff has also produced casualties: hours after the missile strikes, Iran accidentally shot down Ukrainian International Airlines flight PS752, killing all 176 people on board.

As tensions between the US and Iran have peaked, the EU has found it challenging to play a meaningful diplomatic role in the Middle East, despite the fact the region is located on its own doorstep. The Union’s response has been—as it often is when the EU is confronted with a crisis—haphazard and devoid of strategy.

The EU has made little effort to speak in one voice. Following the American strike on Soleimani, EU leaders issued different and poorly coordinated statements. The first one to do so was European Council President Charles Michel, who emphasised that further escalation needs to be avoided ‘at all cost’. His statement was followed by additional reactions from High Representative Josep Borrell and the President of the new ‘geopolitical’ European Commission, Ursula von der Leyen.

Confusion over who is really speaking for “Europe” was increased further by the separate diplomatic initiatives of France, Germany and the UK—the “E3” European signatories of the Joint Comprehensive Plan of Action (JCPoA) on Iran’s nuclear programme. At the height of the standoff, France spoke to Iraq, Germany engaged Iran and the UK put the Royal Navy on standby in the Gulf. The E3 also released a separate joint statement to add to the pile of European reactions.

As tensions between the US and Iran have peaked, the EU has found it challenging to play a meaningful diplomatic role in the Middle East, despite the fact the region is located on its own doorstep.

The various European statements have two things in common. First, they emphasise the need to de-escalate tensions in the Middle East in order to avoid a spiral of violence. Second, they emphasise the need to preserve the JCPoA, which has been on life support ever since the US decision to withdraw from it in 2018. Yet, Europe doesn’t seem to be in a strong position to impact the former and the latter seems little more than a dead letter, especially after Iran announced that it would no longer abide by the JCPOA’s uranium enrichment limits.

EU foreign ministers did discuss the situation in the Middle East in an extraordinary Foreign Affairs Council (FAC) meeting on 10 January and they mandated the High Representative to carry out diplomatic efforts with all parties to the standoff to contribute to the de-escalation of tensions. Beyond this, the outcomes of the FAC were meagre (i.e. call for de-escalation and restraint, rhetorical support for Iraq’s stability and the preservation of the JCPoA).

The most significant European move took place on 14 January when the E3 triggered the JCPOA’s dispute resolution mechanism in order to bring Iran back into full compliance with the agreement. High Representative Borrell will oversee the dispute resolution process but the EU doesn’t seem to have an Iran strategy beyond the preservation of the JCPOA, which may well collapse entirely if the process fails and UN sanctions are re-imposed on Tehran.

The causes of Europe’s strategy deficiency are multiple and would take an entire book to address sufficiently. However, it suffices to say here that the EU suffers from multiple problems. These include, inter alia, a leadership vacuum in foreign policy, difficulties in taking decisions that do not create positive win-win outcomes, an unwillingness to make political sacrifices in international affairs, and a lack of appetite for strategic thinking.

None of these problems can be fixed with a single silver bullet such as expanding the use of Qualified Majority Voting (QMV) in EU foreign policy. This is because the Union’s problems are either structural in character or rooted in strategic culture, which means that they cannot be overcome by simply moving away from unanimity decision making in the Council.

Yet, there are things the EU could do. The current practice in which the presidents of different EU institutions issue separate statements on major foreign policy events should stop. This is confusing to audiences both within and outside the EU who seek to understand the Union’s position on a given issue. Ideally, there should be a single joint statement by the President of the European Commission, the President of the European Council and the High Representative if a statement by the latter alone is considered insufficient.

There should also be a permanent operational contact group consisting of the major European powers, which inevitably are expected to take charge in a crisis. It could take the form of a European Security Council, under the umbrella of which major European countries could coordinate their diplomatic activities. Such a structure could be based outside the EU to make it politically feasible to include post-Brexit UK as well.

The current practice in which the presidents of different EU institutions issue separate statements on major foreign policy events should stop.

Finally, there should be a permanent EU level strategy development process, which should lead to the adoption of a new European Security Strategy (ESS) every five years. At the moment, documents such as the 2016 EU Global Strategy (EUGS) are developed on ad hoc basis whenever the member states have an interest in them. This is why there was a 13-year gap between the 2003 ESS and the 2016 EUGS. A more formalised process would push the EU to think about what it wants to achieve on the world stage in regular intervals.

These are small steps, but smalls steps are preferable to doing nothing. The risk is that Europe will continue to sink into further strategic irrelevance and that EU foreign policy will be reduced to empty slogans, hollow statements and photo opportunities.

At a time when tensions in the Middle East remain high, when Russia continues to be assertive, when China’s rise is challenging the established international order, muddling through—Europe’s default foreign policy strategy—should be rejected as an option. Continuing to follow it would be detrimental to Europe’s ability to defend its interests as well as those of its partners.

Niklas Nováky Brexit Crisis EU Institutions European Union Foreign Policy Middle East

The leading Twitter hashtags on 3 January – the day Qasem Soleimani was killed by an American drone strike in broad daylight in front of Baghdad Airport – were #WorldWarIII and #FranzFerdinand – the latter not referring to the Scottish indie band, but to the murder of Austria’s heir presumptive that triggered World War I. Alas, 2020 is not 1914, Baghdad isn’t Sarajevo, and the one thing we can safely predict is that World War III is not about to break out. Which doesn’t mean everything is ok and we can safely go back to de-hibernation in rainy Brussels. And the disaster of the downed Ukrainian passenger plane demonstrates that there is no such thing as a conflict without tragic losses. But it means that Europe’s hyperventilation, even if shared by many US liberals in the solidly partisan biotope of Washington, should give way to a healthy dose of sobriety. I propose to take it in five steps.

1. The big Middle Eastern War is not imminent

If the price of crude oil, as a reaction to Soleimani’s killing – jumps up a mere 3 %, as it did last Friday, you know that Armageddon will have to wait, no matter what the Twittersphere says. That doesn’t mean the crisis is over. But the very measured missile strike without casualties against US bases in Iraq on 8 January, the tweets by Iranian leaders that they don’t want further escalation and also Trump’s non-escalatory statement after the missile strikes all speak for lowering tensions for the moment. In fact, while both sides of the conflict have no interest in letting this grow into a full-blown war, it’s the Iranian regime whose very existence is at stake in case the US and/or Israel take out the Islamic Revolutionary Guards Corps’ (IRGC) structure – of which they are very well capable. While full-blown war might jeopardise Trump’s re-election, in Iran it would put the whole system into question and likely end mullah rule.

2. Soleimani’s killing has re-established deterrence against Iran

Taking out the mastermind behind Iran’s export of terror in the Middle East and beyond, the engineer of the slaughter in Aleppo and elsewhere who is also responsible for the deaths of hundreds of US soldiers, may well go down in history as a textbook example of escalating to de-escalate. This, nota bene, after a couple of Iranian attacks that remained essentially unanswered by the US. The bombing of tankers in the Strait of Hormuz in spring 2019, the shooting down of a state-of-the-art US drone in June and the missile attacks against Saudi refineries in September come to mind. And remember, it was a good part of the American and European security community that began to worry that Trump is being too soft on Iran, especially after he called back planes and drones already in the air after the drone incident.

Apparently, this week the Iranian military before the strike called up the Iraqi authorities, who then warned the US soldiers so they could get into shelters. Iranian leaders are tweeting very clearly that they want to avoid further escalation. Iraqi Shia leaders have issued calls to their faithful not to attack US troops for the moment. All these are signs that, for the first time in almost a year of direct aggression against the US, Iran is indeed standing down. Soleimani’s killing caused this.

3. The killing has not weakened Iranian moderates

First of all, don’t be deceived by Iranian TV pictures of millions of mourners in the streets of Iranian cities. Soleimani may have been a popular figure with some Iranians; but being the second most powerful leader and his IRGC the decisive pillar of the regime, he was certainly reviled by all dissenters – whose numbers have been growing, if anything, recently. Naturally, the regime spent all the carrots and sticks at the disposal of an authoritarian system to make people attend the rallies. And secondly, Iran’s moderate reaction this Wednesday can very well be read as a sign that the radicals, especially in the IRGC itself, are not calling the shots anymore, contrary to recent years.

4. US forces are not being kicked out of Iraq

That may still happen, and it would be detrimental to Iraqi democracy and especially the fight against ISIS, but Iraq’s non-binding parliamentary resolution of last weekend will not lead to an immediate withdrawal of US troops. Anti-ISIS operations have been halted; some US allies are withdrawing troops from Iraq, but this may very well not be the last word. It’s definitely too early to predict the end of the US presence in Iraq.

5. It is Europe’s sacred mission to bring both sides back to reason – NOT!

Non-European observers may be forgiven for thinking that Europe’s habitual calls on both sides to exercise utmost restraint, and defer from further escalation, have all the quaintness – and the effectiveness – of a Pottawatomi rain dance. Which doesn’t mean that de-escalation doesn’t happen (see above) but it certainly isn’t the result of Europe’s well-meant efforts to ‘bring both sides back to reason’, as German Foreign Minister Heiko Maas put it.

Fortunately, the heads of government of the UK, France and Germany were slightly more sober, putting the blame squarely on the Iranian side and Soleimani personally before repeating the standard memes of EU Iran policy. Europe’s problem with this crisis, as generally with the Middle East, is twofold: First, the EU and its members don’t have the wherewithal to take on any serious diplomatic role because, without the necessary military resources (not only troops but also transport, intelligence and command & control), they cannot alone become a security provider which is essential in the region. And second, some important European actors (Germany, for example) have a huge problem with the very idea of deterrence. Deterrence meaning the ability and the willingness to escalate, in a precise and limited and targeted manner in specific situations, as it happened last Friday. As long as this is so, we can call for utmost restraint or try to save the Joint Comprehensive Plan of Action (JCPOA) until we’re blue in the face.

Again: All this doesn’t mean that we’re heading for a peaceful future in the Middle East, or that the Soleimani killing was a brilliant, well-planned chess move by a stable genius in the White House. But it means that we Europeans have to rethink some time-honoured principles about security. Remaining pure vegetarians, we won’t survive in a jungle of carnivores.

Roland Freudenstein Crisis EU Institutions Foreign Policy Middle East Security

On Thursday 28 June 2018, the European Council gave its endorsement to the concept of ‘regional disembarkation platforms’. These centres would be built in non-EU countries (presumably in North Africa) in cooperation with those countries. They would serve as facilities to which migrants rescued in the Mediterranean would be brought. Thus, a new option would be open to the EU, not to bring the rescued migrants automatically to one of the EU’s coastal member states.

This point from the Council conclusions elaborates one aspect of the broader trend to externalise EU migration controls. This trend is being promoted by the Austrian Chancellor Sebastian Kurz. Earlier in June, Kurz suggested sending immigrants back to the countries of transit and origin. These measures would stem mass migration and prevent drownings in the Mediterranean.

The idea of reception centres outside the EU borders has been circulating for decades now, without much tangible progress. The reason why implementing the idea has been so slow is the daunting scale of the challenge. The security, humanitarian, legal, political, diplomatic and financial aspects of the problem are multifaceted and interdependent in unexpected ways.

Agreement by a high number of institutions is necessary but the predictability of many players (national governments in and outside the EU and sub-national authorities and assorted tribal, religious and political groups in North Africa and the Middle East) is low.

Unlike Australia and the US which, each in a different way, have partly externalised migration controls, Europe is surrounded by several highly unstable regimes. Migration flows into the EU are notoriously mixed, including refugees and economic migrants from different countries. This increases the scope of the challenge that lies in front of the EU.

Main elements in externalising migration controls

The main elements in externalising immigration might be:

• significantly improved EU external border management, in cooperation with third countries
• determining asylum status of migrants as close to the country of origin as possible; this could be done at EU consulates or at reception centres set up by the EU
• guaranteeing safety, security and basic welfare in the reception centres
• encouraging voluntary returns to countries of origin
• offering (positive and negative) incentives to governments of non-EU countries, especially for accepting their own nationals
• potential resettlement of the most vulnerable individuals into the EU (resettlement means accepting selected refugees after security screening)
• decoupling of life-saving operations in the sea from bringing refugees into the EU.

Implementing these measures would herald a major step in tackling irregular migration. Thanks to common efforts, the migration crisis of three years ago is under control. No masses of refugees and migrants are crossing the Balkans into Western Europe, and the EU’s border management is now better than ever – although there is still a lot of room for improvement.

The EU is still searching for a recipe for cooperation with third countries on migration. The bloc is still struggling to mobilise finance, police the Mediterranean,  agree on internal distribution of asylum seekers, implement returns and fulfil its resettlement pledges.

Develop expertise by starting small

Some EU members are conducting pilot schemes in externalising migration controls. We should look closely at, and learn from, these experiments. They promise to result in much-needed European expertise that can serve the larger goal of bringing migration controls closer to the sending countries:

• The EU-Turkey deal of 2016 should serve a major source of learning.
• In Niger, an EU-financed ‘multi-purpose centre’ in Agadez provides information and assistance to migrants, registers migrants and allows opportunities for safe and voluntary return and reintegration in the home country. Military presence has proved necessary. In January this year, the Italian government sent some 500 troops to the country to suppress migrant smuggling and exploitation.
• Also in Agadez and in other African cities, the French government has begun interviewing asylum seekers on a small scale. These individuals are typically returnees from Libya who have been pre-screened by the workers for the United Nations High Commissioner for Refugees (UNHCR).
• Certain EU members, for example Denmark, have been allowing asylum applications at their consulates, although only in a third country, not in a country of the asylum seeker’s origin.

The efforts conducted outside the EU borders have had a negligible influence on the numbers of people trying to cross the Mediterranean. But they send a message. Those with a credible claim have a chance of being granted asylum in the EU. Those without such a claim should not risk their lives with Libyan traffickers and smugglers.

Also, let us not forget Europe’s operations on its own territory. Italy and Greece have run, with the assistance of the EU and UNHCR, ‘hotspots’ to process asylum claims during the refugee wave of 2105-16. Evaluating this experience should be helpful in setting up similar centres outside the EU.

The Marshall Plan for Africa

Migration control always consists of carrots and sticks. A ‘Marshall Plan’ for Africa, advocated, for example, by Angela Merkel, would represent the former. The existing reincarnation of this plan, the Trust Fund for Africa, has so far been inadequate. Currently worth some €3.4 billion, the Trust Fund lacks public and private funds to make a real impact. But in the long run, helping Africa prosper – also by preferential trade tariffs – would motivate its inhabitants to stay at home.

On the legal front, two alternatives offer themselves.

Legal option one: reinterpret the Refugee Convention

As one option, the EU member states may start reinterpreting the Refugee Convention of 1951. As it is individual states, not the EU, who have signed up to the Refugee Convention, a coordinated approach would be essential.

Such a reinterpretation might be along the lines of the US and Australia. Australia does not apply the Convention outside its mainland territory. The US does not apply it outside its territorial waters. Both the US and Australia intercept unauthorised vessels. They save lives even outside their territorial waters but remove migrants to remote own or third-country territories, where lives are not in danger.

The rescued individuals have a chance of obtaining asylum (in the US case, only in a third country). Australia and the US take a punitive approach to ‘spontaneous’ asylum claims launched by those who attempt to cross the sea, but, in collaboration with UNHCR and the International Organisation for Migration, maintain resettlement programmes for those asylum seekers who enter through via regular channels.

Option two: encourage third countries to implement the Refugee Convention

A strategically more promising, although a much more demanding and long-term approach, would be to geographically extend the application of the Refugee Convention. With the exception of the Middle East, most countries in the immediate and distant EU neighbourhood are signatories of the Refugee Convention. Especially in North Africa though, official signatures on the Convention have not been followed up by setting up functioning asylum legislation.

The EU might incentivise these countries to adopt asylum legislation in line with their commitments under the Refugee Convention.

As one step further into the future, one can imagine the EU inducing neighbouring countries to buy into the EU’s ‘Dublin system’ of asylum seeker distribution. According to the Dublin rules, the first country of contact has responsibility for the asylum seeker who entered its territory.

Supported and co-financed by the EU, extending a similar system to Eastern Europe, the Western Balkans and North Africa would spread the burden of caring for refugees across many more countries than is currently the case. This would contribute to creating a supra-regional system of refuge governance in Europe and its surroundings.

Vít Novotný Crisis Immigration Migration North Africa

Media headlines seem to have given much larger attention to the bailout programme in Greece than to those of most other countries. But Greece’s experience with economic adjustment is in many ways an outlier, complicated by the election of the radical-left government of Tsipras.

Cyprus offers the interesting example of an economy saved with the help of economic adjustment and responsible reforms. Cyprus under centre-right leadership seems to be a rags-to-riches story after being shut out of financial markets only six years ago.

During the 2000s Cyprus registered strong growth driven by buoyant domestic demand according to a European Commission report. On average, Cyprus’ real GDP grew at a rate of 2.75% between 2000 and 2010 compared to the 1.4% of the euro area for the same timeframe.

The country enjoyed high employment rates, low inflation rates and rising real disposable income. This led to real convergence with the stronger economies in the European Union. Apart from domestic demand, Cyprus’ accession to the European Union in 2004 and its joining the euro area in 2008 contributed to this growth by boosting investor confidence.

While Cyprus resembles other countries in the euro area most affected by the crisis, it represents a success story in crisis management.

However, this positive image was underpinned by economic vulnerabilities and imbalances due to the mismanagement of the public finances. Notably, Cyprus ran current account deficits averaging 6.9% of GDP for approximately one decade during EU accession and entry to the euro area. In order to finance its current account deficit, Cyprus relied on foreign direct investment, which provided little added value to the economy.

Furthermore, the public sector had grown extensively in the 2000s, taxpayer compliance was low, and total government expenditure as a share of GDP increased. Additionally, the banking sector was vulnerable because of inadequate prudential supervision and because of its openness toward Greece.

When the financial crisis and subsequent euro crisis hit, the Cypriot banking sector was severely impacted. Cyprus reached a 6.3% budget deficit and gross debt rose sharply to 85.8% of GDP and subsequently going over 100%. Cyprus was shut out of financial markets for 18 months starting in mid-2011.

In order to adjust its economy, Cyprus agreed a bailout programme and undertook comprehensive structural reforms under centre-right President Anastasiades. The implementation of the bailout programme of €10 billion (56% of Cypriot GDP) took place between 2013 and 2016.

It was one of the largest sovereign bailouts in history. The bailout programme targeted Cypriot banks and involved a severe austerity programme (cuts to public spending, tax increases, and privatisation of semi-government organisations).

The reform to the banking sector, which saw Cyprus’ second-largest bank shut down, was received negatively by the public as it involved losses to all stakeholders in the banking sector, especially bondholders and depositors.

The government in Cyprus was determined in its response to the crisis and Cypriots were stoic in their resolve to see the reforms through. Apart from minor unrest toward the beginning of 2013, there were little protests and no riots against the austerity programme.

While Cyprus resembles other countries in the euro area most affected by the crisis, it represents a success story in crisis management.

The performance of Cyprus is a clear example of the positive link between a bailout programme for a country in deep crisis and sustainable economic activity. 

The country exited the bailout programme on track in 2016 due to ambitious and consistent implementation of necessary reforms by the centre-right government led by President Anastasiades.

Statistical data from Eurostat supports the positive contribution government policy since 2013 has made to the country’s recovery. Cyprus ranks among the top ten countries in the European Union on key financial indicators.

Data for the third quarter of 2017 shows a 0.9% increase in GDP over the previous quarter and a 3.9% increase over 2016. Employment has increased by 0.7% in the third quarter when compared to the second and by 3.5% when compared to 2016.

Equally, Cyprus registered the fifth largest year-on-year decrease in unemployment in the European Union, from 13.1% in 2016 to 11.0% in the third quarter of 2017.

Cyprus had the largest year-on-year drop in government debt to GDP ratio (7.4%) in the EU in the third quarter of 2017. According to a European Commission forecast, growth is expected to remain strong in 2018 and 2019 coupled with a strong labour market and modest inflation.

The economy of Cyprus has outperformed the government’s budgetary targets, and government debt is likely to fall below 100% of GDP in 2019.

The academic literature on public administration reform often emphasises the difficulty of agreeing to and implementing reforms as well as of deciding whether or not the intended reforms had the intended outcome.

In this respect, the performance of Cyprus is a clear example of the positive link between a bailout programme for a country in deep crisis and sustainable economic activity. Notably, it is a victory for the centre-right, which has once more shown its ability to deliver results in highly challenging circumstances.

Even so, the Cypriot economy should not rest on its laurels even if it has registered a significant improvement. A forecast by Oxford Economics warns that reform is still necessary as the ‘legacy of the 2012-2013 crisis can still be seen in the banking sector’.

Further work on restructuring non-performing loans and improving public finances is required in order for the positive forecasts to become a reality. Rags-to-riches stories are popular, but so are riches-to-rags. 

Andrei Moraru Centre-Right Crisis Economy EU Member States Macroeconomics

The Libyan conflict is the result of a complex and controversial series of developments, where local political events have been strongly influenced and driven by exogenous factors. A dual set of conflicting interests can be found in both the Euro-Mediterranean and inter-Arab dimensions, with Italy and Turkey struggling against France and Great Britain on one side, and Qatar being opposed by the United Arab Emirates and Saudi Arabia on the other.

Muammar Qaddafi’s regime, which was certainly not an example of good governance and respect for human rights, was quickly swept away by a conflict primarily fought by non-Libyan actors, which eventually caused the collapse of the central institutions in Libya and the creation of dozens of local militias. The failure of both local and exogenous ambitions has caused a crisis in which additional factors have been able to influence the Libyan civil war, making the situation very opaque and extremely difficult to solve.

Read the full article in the June 2017 issue of the European View, the Martens Centre policy journal.

Nicola Pedde Crisis Mediterranean North Africa Security

The architecture of the original euro was flawed, and so was the commitment of the EU member states to abide by fiscal orthodoxy. However, both did convey sound monetary principles, these being (1) to preserve the purchasing power of the euro and (2) to isolate it as much as possible from political pressures.

As evidenced in the euro crisis, both EU member states and European institutions have committed to maintaining the euro via further integration and the growing centralisation of monetary and fiscal powers in EU institutions. The European Banking Union is one example of this commitment.

This article argues that these changes have paved the way for the creation of another modern-state currency: a currency that belongs to a supranational state and that is ultimately linked to an ever-growing supranational treasury that works hand in hand with the central bank. This article offers a more market-friendly monetary alternative to such an arrangement.

Read the full article in the June 2017 issue of the European View, the Martens Centre policy journal.

Juan E. Castañeda Banking Crisis Eurozone

The need for a fiscal union in the EU is an issue which has been debated many times and about which much has been written. However, the economic and financial crisis we have experienced in recent years has cast doubt on whether we have taken this debate in the right direction. Sometimes we tend to focus the debate on marginal issues and unrealistic proposals. Rather than helping us to move forward, this paralyses the EU and distances us from feasible targets. This article aims to give a general overview of the debate on a fiscal union to find out where we are in the process of fiscal integration and what we can really expect from it.

Read the full article in the June 2017 issue of the European View, the Martens Centre policy journal.

Miguel Marín Crisis Eurozone Integration Macroeconomics

This article looks at how the Greek, German and British press have addressed the issue of the refugee crisis in Europe. Using a mixed research approach that combines corpus linguistics and discourse analysis, this article examines 1340 articles that were published online between 20 March and 31 May 2016 in Greece (Kathimerini, To vima), Germany (Die Welt, Süddeutsche Zeitung) and the UK (The Guardian, The Telegraph). The results presented by this article suggest that the press in all three countries mostly presented the refugee crisis in numbers. Geographical qualifiers were also deployed in the effort to broach this thorny issue, while the managerial aspect of the refugee crisis, the critical issue of child refugees and the EU–Turkey agreement were all among the most frequent topics covered by the press.

Read the full article in the December 2016 issue of the European View, the Martens Centre policy journal.

Stergios Fotopoulos Crisis EU Member States Mediterranean Migration

Joris Luyendijk was invited by The Guardian in 2011 to write a blog about the City of London and learn about the financial world. He did so for two years. Known in The Netherlands as a journalist and writer on the Middle East, he wrote a book entitled Het zijn net mensen (Hello everybody) in which he separated fiction from reality in journalism. Luyendijk himself knows little more about the financial world than we do and he had to find his way into the City to meet bankers, traders, analysts, brokers, lawyers, etc.

As an anthropologist he tried to go native in the world of finance. His book, translated from its Dutch title This can’t be true, is a summary from his blog for The Guardian, in which the mist of the credit crunch slowly evaporates. The reader gets a feeling of these faceless humans in their bespoke suits, its unwritten rules, taboos and hierarchies in this city that functions like a village or tribe. The book exposes the secrecy of the financial world and how it developed its own rules and (inter)national laws. The bankers’ personal opinions give the reader a human feeling of a world that is often considered in the popular media to be made up of little more than incalculable economic theories.

The problem described in the book is the onset of the financial crisis in 2008, which according to his interviewees had, at it’s a core, a small group of projects and people. Even the people that were most involved did not expect this crisis to happen. Over lunches and glasses of wine, Luyendijk learns about the reasons for the 2008 crash in the financial world. A lot of profit making by traders and brokers was, and still is, based on short-term thinking. Job insecurity makes the bankers less involved with their bank and therefore they are not concerned with long-term consequences. The CEO’s of the big banks only seem to be interested in profits and have little care about the impact or consequences of their products. And all of these pawns play with other people’s money for banks that are listed and have grown so big that they have become too big to fail.

Everybody was shocked when the credit crunch happened, nations, consumers and banks all agreed that something had to be done to alter financial practices. But, years later it looks like it is business as usual notwithstanding the increased financial regulation imposed by both the EU and British authorities. The banks are still too big. The so-called Chinese walls that separate divisions within banks, and the many extra rules are still breeched.  And the same outrageous bonuses are back in the city. Bankers explained to Luyendijk that the caveat emptor, the contract law principle, of which the buyer should beware is still in a place. Hence, the buyer is responsible for any loss concerning the purchase, not the broker.

Joris Luyendijk ends his book the way he starts, with a story of him being on a plane when he sees a big flame coming out of the engine. He turns to his neighbous, but everybody tells him that all is well. He makes his way to the front of the plane and finds out that the cockpit is empty. The system with its perverse incentives is the problem and if we do not tackle the problem, 2008 will happen all over again. The increased financial regulation imposed in the EU since 2008 is only the first step in making the financial system safer for us all.

Pieter Habets Banking Crisis Development

Last week at the Munich Security Conference, the Russian Prime Minister Dmitri Medvedev once again threatened the West with a “new Cold War” and repeated the old blame-game approach to relations with the West. There’s one problem: a growing call from ordinary Russians to reconcile with the West, and normalize relations.

According to recent polls as conducted by FOM, a polling agency which is traditionally loyal to the Kremlin, 60% and 62% of Russians say that Russian leaders “must aim to improve relations” with the United States and Europe respectively. These numbers match those of an independent polling centre, Levada, which claims that 54% of Russians believe that Russia should “strengthen its ties with the West” (up from 40% a year ago).

This is not to say that the viewpoint of Russian citizens to the West has changed for the better. All pollsters show that more than two-thirds of Russians view the U.S. and the E.U. in a negative light (which is no surprise, given the tireless 24-hour brainwashing by propaganda machines, which claim that Russia is “under attack” by the West and that they “aim to overthrow the legitimate government” and “exploit Russian resources”). However, given all that negativity, it’s also quite clear that this is not backed by some kind of deep-rooted aggression within Russian society. 

Russian people have visibly grown tired over the past several years of confrontation, and are not truly interested in the Kremlin’s foreign policy-related mobilization efforts. For instance, according to Levada, only 18% of Russians follow Russian military campaign in Syria attentively (half a year ago, the maximum number of people interested was only 25%), whereas over 80% show limited interest in the subject. The same thing has happened in relation to events around Ukraine: Levada has shown a recent surge in public indifference to those, with the number of people who do not truly follow these events or not follow them at all reaching almost 70%.

All these developments are hardly surprising, given the severity of the developing economic situation in Russia. I have described the nature of this crisis, hitting the consumer purchasing power of Russians the hardest since 1990s, in more detail in December; since then, retail sales in Russia have fallen further by 15.3% year on year in December and by another 7.3% in January, and real wages – by 10% and 6.1% respectively. Notably, in January 2016 sharp declines continued contrary to the “low base effect” that optimists hoped for (in January 2015, the decline had already commenced, and optimistic outlooks were based on the assumption that the population’s purchasing power will level off compared to last year’s weak numbers).

It’s quite clear that Russians are unhappy with these developments, and demand that the Russian Government devote more effort to domestic economic policies so as to solve these problems and to reconcile with the West.

Given Medvedev’s Munich speech, Russian leaders seem to be totally ignorant of that demand from the Russian society by simply continuing with the old confrontational style. This is worth remembering for any Western politician talking to them further: The Kremlin’s international tough talk is not really backed by solid public support anymore.

Vladimir Milov Crisis Economy EU-Russia

Joris Luyendijk was invited by The Guardian in 2011 to write a blog about the City of London and learn about the financial world. He did so for two years. Known in The Netherlands as a journalist and writer on the Middle East, he wrote a book entitled Het zijn net mensen (Hello everybody) in which he separated fiction from reality in journalism. Luyendijk himself knows little more about the financial world than we do and he had to find his way into the City to meet bankers, traders, analysts, brokers, lawyers, etc.

As an anthropologist he tried to go native in the world of finance. His book, translated from its Dutch title This can’t be true, is a summary from his blog for The Guardian, in which the mist of the credit crunch slowly evaporates. The reader gets a feeling of these faceless humans in their bespoke suits, its unwritten rules, taboos and hierarchies in this city that functions like a village or tribe. The book exposes the secrecy of the financial world and how it developed its own rules and (inter)national laws. The bankers’ personal opinions give the reader a human feeling of a world that is often considered in the popular media to be made up of little more than incalculable economic theories.

The problem described in the book is the onset of the financial crisis in 2008, which according to his interviewees had, at it’s a core, a small group of projects and people. Even the people that were most involved did not expect this crisis to happen. Over lunches and glasses of wine, Luyendijk learns about the reasons for the 2008 crash in the financial world. A lot of profit making by traders and brokers was, and still is, based on short-term thinking. Job insecurity makes the bankers less involved with their bank and therefore they are not concerned with long-term consequences. The CEO’s of the big banks only seem to be interested in profits and have little care about the impact or consequences of their products. And all of these pawns play with other people’s money for banks that are listed and have grown so big that they have become too big to fail.

Everybody was shocked when the credit crunch happened, nations, consumers and banks all agreed that something had to be done to alter financial practices. But, years later it looks like it is business as usual notwithstanding the increased financial regulation imposed by both the EU and British authorities. The banks are still too big. The so-called Chinese walls that separate divisions within banks, and the many extra rules are still breeched.  And the same outrageous bonuses are back in the city. Bankers explained to Luyendijk that the caveat emptor, the contract law principle, of which the buyer should beware is still in a place. Hence, the buyer is responsible for any loss concerning the purchase, not the broker.

Joris Luyendijk ends his book the way he starts, with a story of him being on a plane when he sees a big flame coming out of the engine. He turns to his neighbous, but everybody tells him that all is well. He makes his way to the front of the plane and finds out that the cockpit is empty. The system with its perverse incentives is the problem and if we do not tackle the problem, 2008 will happen all over again. The increased financial regulation imposed in the EU since 2008 is only the first step in making the financial system safer for us all.

Pieter Habets Banking Crisis Development

If Greeks themselves do not trust their own government and their own banks with their money, it is difficult to expect the taxpayers of other countries to do so. Yet that is what the critics of the severity of the conditions imposed for the third Greek bailout seem to expect.

The euro was not imposed on Greece. It was something that Greece joined of its own accord. The fact that the possibility of Greece leaving the euro was raised by Germany, has been greeted by some as dealing a blow to the euro, because it supposedly ended the notion of the euro being “irreversible”. But nothing in political life is irreversible, even though some things, like the Byzantine and Ottoman Empires, did last a very long time indeed. “Irreversibility” was always a legal fiction, and fiction is not a sound basis for an economic policy. 

The euro is a contingent compromise, where members trade some short term losses for greater long term gains. A euro, where rules were easily broken, would not endure. I agree with those who say that, eventually, some of the Greek debt will have to written off. That is both financially necessary and morally just. But that can only be contemplated when the Greek political and administrative system has reformed itself, and is capable of benefitting from a write off, and not looking at it as a precedent for a further write offs later on. We are not there yet. 

The crucial difficulty seems to be that the Greek state does not work. The fact that Tsipras’ offer of reforms had to be crafted, not by Greek civil servants on their own, but with the help of French officials, tells its own story.

Some complain that elements of the package involve intrusion on Greek “sovereignty”. But a state is only sovereign to the extent that it is capable of fulfilling the internal and international responsibilities of a state.  I believe Greece needs help in this regard, and it would be good if the World Bank, as well as the IMF, were involved in helping Greece reform its public administration.

Recapitalising the Greek banks will be a major task. Interestingly the biggest national exposure to the Greek banks is  by banks in the UK. The UK is not in the euro, and is not contributing to the Greek bailout, which could be regarded as unfair.

Some argue that the austerity, that Greece is going through to meet its international obligations, is damaging its economic growth prospects. In the short run, this is true. But fuelling temporary growth, by taking on even MORE debts, would not be an answer. That would weaken longer term growth prospects, because of the additional debt service it  would entail. This is the problem. The opponents of austerity never explain where the extra money would come from, other than from inflation and devaluation, and they solve nothing.

The important way of  improving growth prospects is by  generating confidence. If people believe the future will be better, and can borrow money to invest in it, the economy will grow. With renewed confidence, some of the money that Greeks themselves have moved abroad will then come back to Greece. If the bailout terms are fully and quickly implemented, by both Greece and its creditors, that will restore confidence, especially if it is rewarded  by a prospect of some conditional and staged debt write offs in the future.

Meanwhile, Greece is in close proximity to the biggest refugee crisis in world history, caused by the Syrian and Iraqi civil wars. More migrants are now arriving in Greece from the Middle East, than are arriving in Italy from North Africa. 65% of the arrivals in Greece are Syrian. Greece’s neighbour, Turkey, is already providing shelter at its own expense for 1.8 million Syrian refugees. Meanwhile most Western countries are reluctant to take in any refugees. Greece, because of its geographic position, does not have that luxury.

The European Union should reorientate its Development Aid programmes to help middle income countries, like Greece, Turkey, Lebanon and Jordan, which are facing major refugee inflows, to cope with that huge burden. Some EU countries, like Germany and Sweden, are hosting many refugees. But most are keeping their heads down and doing little or nothing.

There should be burden sharing, based on relative income and population. Countries that are receiving the largest proportionate number of refugees should be getting direct ongoing cash help from those that are receiving the least.

John Bruton Crisis EU Member States Foreign Policy Human Rights Migration

Paul Krugman, in the New York Times, urges the Greeks to vote “No” in the referendum next Sunday. So does Joe Stiglitz in another article in the Guardian. Is this serious advice, or an unhelpful extension to Europe of an ongoing American polemic?

Paul Krugman says the Euro was a “terrible mistake” because he claims it failed to insulate the public finances of the states of the euro zone from bubbles in particular countries, like he says the US system does. In fact, the US only does this to a limited extent, and, unlike the EU, it has no general bailout fund  for states.

 If I recall things correctly, our present collapse in confidence originated in the United States, in a housing bubble in a small number of US states, that eventually engulfed the whole world! The US system did not prevent that.

 Puerto Rico, a US dependency which is in the dollar zone, has got itself into a Greek style debt trap, without the US monetary union, which is much older and stronger than the EU one, being able to prevent it.

 Krugman says that “most of what you hear about Greek profligacy is false”.

 He makes this bizarre claim on the basis that Greece has made cuts and tax increases since 2010. He completely ignores the profligacy, poor tax collection and the debt accumulation that went on for decades before that, when Greece erected a completely unsustainable pension regime, on the strength of borrowed money.

He says that since 2010, the Greek economy has collapsed because of “austerity”.

He fails to outline what the Greeks might have used for money since 2010 if, as he seems to advocate, they had continued with their previous “non austere” spending policies. They would not have been able to borrow the difference on commercial markets. Where would they have got the money? Just because a country is in the eurozone it does not mean it can have an unlimited call on the taxes  or loans of other euro members.

While there is more to do, like euro area wide deposit insurance, the EU has remedied many of the initial design flaws in the euro, something Paul Krugman does not acknowledge .

He says that “even harsher austerity is a dead end”, as if cuts and tax increases were all that the EU has been urging unsuccessfully on the Greeks.

Product and labour market reforms, opening up the professions, better tax collection, and privatisations, have been an important part of the recipe urged on Greece by the EU, and these would greatly improve the allocative efficiency of the Greek economy, and promote growth. Greece needs to move its human resources out of unproductive activities, into areas that will earn money from abroad and the EU reforms will assist that.

Another Nobel Prize winning economist, Joe Stiglitz, in his article in the Guardian also calls for a “No” vote, but is more extreme.

He claims the eurozone was ”never a democratic project”. He seems to have completely forgotten that the Maastricht Treaty, which created the legal basis for the euro, was approved by the elected parliaments of every state that is currently a member. It was approved in referenda in several countries, including France and Ireland.

Furthermore, each of  the Eurogroup of Finance Ministers, who make all the key decisions, represent democratically elected governments.

Greece was not forced to join the euro in the conditions and at the time that it did. This was a free choice of the Greek government.  Now, governments everywhere would sometimes like to repudiate some decisions of their predecessors, but if that luxury is to be afforded it would destroy the basis for credit and inter state relations.

He makes a more substantial point when he says that a good deal of the money lent to Greece by the taxpayers of other EU countries and the IMF has gone to help them pay debts they owe to private creditors. But he fails to point out that, unlike those of Ireland and Portugal, Greece’s private creditors have been obliged to take a haircut.

It is true that the money from the EU has  been used in part to repay banks money they had put into Greek government bonds. Some of these banks were indeed French and German. But some were from outside the euro zone altogether, including from Professor Stiglitz’s own country and from the UK, in one of whose newspapers he is writing.

Back in the 2010/2012 period, thanks the crisis which started after Lehman Brothers went south, there was a legitimate public interest, a public good, in preventing a run on ANY of these banks. 

There remains a justifiable argument, however, that it was unfair that the taxpayers of a few countries should now be bearing a disproportionate share of the cost of this public good, which the whole world has enjoyed.

 Yes, the taxpayers of the rest of the euro zone should, in moral terms, bear more of the burden.

 But if that is so, so also should the taxpayers of non euro zone countries like the US and the UK, whose banks were also saved when Ireland, Greece and Portugal got help . 

Why should German taxpayers, whose personal incomes have grown more slowly than elsewhere in Europe, and who face substantial extra costs in the near future due to ageing, be the focus of all the wrath?

But then neither Professor Krugman, nor Professor Stiglitz are writing for German, Slovak, Latvian public opinion.

They are writing in journals, published in countries, whose governments are not being asked to write more and more cheques for a Greek Government, that seems to blame everyone else for home grown problems.

There is, I believe, an argument for a comprehensive debt conference to consider whether the burdens of dealing with the aftermath of the Lehman collapse, have been fairly distributed between the governments of the world.

But the convening of any such conference, and eligibility for any help from it, should be something that might happen five years from now, and be conditional on growth promoting reforms, and budget balancing, already having been fully implemented by governments seeking debt relief from it. Perhaps a Third Party might put such a proposal forward, as a way of getting out of the terrible situation Greece is bringing upon itself.

John Bruton Crisis Economy European Union Eurozone

In an act of irresponsibility and opportunism, Alexis Tsipras put on the shoulders of the Greek people the burden of the decision about the country’s destiny. The referendum, scheduled for next Sunday, 5 July, rests on shaky grounds for several reasons.

1. Is it legal? It is questionable whether it is in conformity with the Greek Constitution as it concerns an issue of fiscal economics. There are also serious procedural deficiencies.
2. Is it late? The referendum is untimely as it will be waged five days following the date on which Greece failed to make a debt payment to the IMF. The Tsipras government has planned to receive the people’s verdict when it might be too late.
3. Is it fair? The Greek people are asked a very cunning question. They are called to say whether they approve or not a program consisting of a series of austerity measures, following five years of recession. The ‘Yes’ vote is set to signify approval of some version (as negotiations were never completed) of the bailout program. The ‘No’ vote, that carries the endorsement of the government, indicates disapproval for the program and, allegedly, nothing more. Although the crux of the matter is the country’s position in the Eurozone, Tsipras deceitfully tries to conceal or downplay the true consequences of the people’s choice.

The Greek government has admittedly committed a series of mistakes since its election in January. To be fair, the creditors too have underestimated the socio-economic consequences of a long array of austerity measures that have been applied since 2010. There is widespread ‘austerity fatigue’ in the country and despair for the lack of a clear vision for the return to growth.

Yet, the overwhelming majority of the Greek people unequivocally supports the country’s EU membership. The most vicious part of this campaign is that the government uses a deeply divisive nationalistic rhetoric that seeks to alienate and separate the Greek from the European identity. But this is a nonstarter.

• Are the ‘Yes’ voters less Greek?  On the contrary. In the referendum, most Greeks are expected to vote ‘Yes’ in order to protect their country’s place in the European family. In an unprecedented demonstration of wisdom and bravery, thousands of low-income pensioners and employees may vote themselves (in the place of their government and contrary to the latter’s suggestion) in favor of a bailout plan containing measures that will affect their lives directly.
• Are the ‘No’ voters less European? Far from the truth. Those who will vote ‘No’, do not collectively form an anti-European constituency. Many pro-European forces may buy into the rhetoric of Tsipras that Greece’s position in the Eurozone is not in jeopardy and cast a vote for ‘No’ out of fear of prolonged austerity.

The outcome of a referendum revolving around a complex and nastily articulated question that additionally takes place within just a week in a climate of fear and uncertainty is hard to predict. Although the country’s European future is at stake, we should not hastily read the referendum result as a vote containing a genuine answer to the question, in or out of the EU. Remember, the government has not dared to articulate such a clear-cut question.

Irrespectively of the referendum outcome, the EU is urged not to turn its back to the Greek people. For every Greek, being European is not a matter of choice. It is self-referential. And the EU should not lose sight of the insidious way Tsipras attempts to extract the ‘No’ vote. In all circumstances, the EU partners should be ready to help the country to overcome a hardship that has lasted for too long. If the ‘Yes’ vote prevails as I am expecting, the referendum will be studied in the future as a paradigmatic case of a demos that defied its government in times of crisis and put its European identity above and beyond any other discussion. 

[Photo source:www.bloomberg.com]

Nikolaos Tzifakis Crisis Democracy European Union Eurozone

Ukraine is on the brink of financial collapse. It is not able to meet interest payments it is due to make this week. Its GDP fell by 6.8% last year and is liable to fall by an even greater extent this year. Meanwhile, it is having to defend itself against a neighbour which guaranteed its frontiers as recently as 1994.

Instead of stepping forward to help Ukraine financially, the EU and the United States are both leaving the job to the IMF. The IMF is offering Ukraine $40 billion, whereas the EU says it can only manage $2 billion. The European Union has already extended forty times as much credit to Greece as it has given to Ukraine, whose population is four times that of Greece. If this ratio reflects the EU’s real priority, it is unbalanced.

GDP per head in Greece is, after all, about three times that of Ukraine. Like Greece, Ukraine has a lot to do to create a functioning and efficient legal and administrative system, stamp out corruption, and collect taxes fully and fairly. But Ukraine is having to do this while  recovering  from the effects of a Communist system which was imposed on it from outside since 1919, whereas Greece has been the democratic shaper of its own policies for many years.

Greece is, of course, in the EU and the eurozone, while Ukraine is not. However, both are in Europe and both aspire to a democratic European future.

Furthermore, Ukraine had it borders guaranteed in the Budapest declaration of 1994 by EU countries, including Britain and France, and by Russia and the US,  in return for Ukraine giving up nuclear weapons. Despite this, Ukraine was invaded and a portion of its territory annexed by one of its guarantors, Russia, because Ukraine wanted to make a modest cooperation agreement with the EU.

Notwithstanding that, the EU is now being stingy in helping Ukraine in its financial crisis, and is fixated instead on the drama in Athens.

Ukrainians believe they have a European destiny, and are prepared to die for it.

The Russian leadership, on the other hand, believes that Ukraine, with its Russian speaking minority, is in their sphere of influence, and sees a link up of Ukraine with the EU as a form of foreign interference in their backyard. One would have to respond that this view is not in accord with Russia’s guarantee to Ukraine of 1994, nor with international law.

The entire post World War Two European security order rests on the acceptance of international law. Similarly, any prospect of voluntary nuclear disarmament in future must depend on solemn obligations, like the Budapest commitment given to Ukraine in 1994 being seen to be honoured.

In Ukraine’s case, all the EU is expected to do is provide financial help. But if Ukraine falls, the Russian threat may move on to other countries, with Russian speaking minorities, like Latvia and Estonia, which are NATO members  and  to whom most EU countries (not Ireland) have a solemn, Treaty-based obligation to provide military help if their  territory is threatened.

Meanwhile, the Greek government, while looking for new loans and debt write-offs from the EU, is ostentatiously aligning itself to the very country that has invaded Ukraine, Russia. It is looking for more credit from the EU, without implementing reforms that would generate long term growth, which would enable those loans to be repaid.

In contrast, the new Ukrainian government is implementing painful reforms to increase the growth potential of its economy, for example by eliminating inefficient consumption subsidies, which have quadrupled gas prices paid by Ukrainian households. Parts of its reform programme are being delayed in its parliament by opposition figures like Julia Timoshenko, once the darling of the Western media and still part of the EPP family to which Fine Gael and the German CDU belong.

Ukraine’s financial situation is now so critical that President Putin believes that all he has to do is sit and wait, and Ukraine will collapse back into Russian control simply because, in the absence of large western credits, it will run out of money.

If this happens, and if the EU continues to do little or nothing to stop it beyond talk, that will deal a huge blow of confidence in the EU’s ability to defend its values and help its friends.  Other countries on Russia’s perimeter will they too feel that they have to make a deal with Putin rather than rely on the EU.

In Ukraine’s case, European countries do not have a Treaty obligation to give military help. But, in their own interest, they should give generous financial help to ensure that a success in Ukraine does not embolden Russia to undermine countries like Latvia and Estonia, which also have Russian speaking minorities (but where most European countries do have a Treaty based military obligations to help).

When questioned in a recent Pew poll as to whether they would be willing to use force to defend another neighbouring NATO country that found itself in conflict with Russia, 51% of Italians, 53% of French and 58% of Germans answered that they would not.

If that frightful dilemma is to be avoided, it would be wise for Europeans to draw the line in Ukraine now by providing the country with enough financial help to build a properly functioning state that can pay its way and look after itself, as well as be capable on its own to resist intimidation from its big neighbour.

John Bruton Crisis Defence Eastern Europe EU-Russia

If Greece defaults on its debts, and leaves the euro, the effects will be very hard to calculate. Nobody really knows what will happen.  Nobody even wants to talk about it. But a very serious precedent will have been established. That precedent, that of a euro zone country defaulting on its debts and leaving the euro, will eventually place upward pressure on the interest rates charged to small euro zone countries with substantial debts. Financial markets are emotional and erratic and often fail to make distinctions that should be made.

The effect of a Greek default may not, of course, be felt immediately, thanks to quantitative easing, but the underlying precedent will tend to corrode of confidence in government bonds generally and confidence in the irreversibility of the euro, and confidence is the basis for all money. Maintaining confidence, and doing what is just and rational in an abstract sense, are not always the same thing. Just as in the private sector, a risk of not being repaid in full usually leads to a higher interest rate…a risk premium. For example, if , for legal political or cultural reasons, banks  have difficulty getting hold of properties, given as security for loans that are no longer  being serviced by  borrowers,  they will tend to charge a higher interest rate on such loans. The gap between the rate of interest banks charge, and the rate they pay for funds, will be wider than it would be if they knew they could easily realise their security, if a borrower defaults.

The rules for capital adequacy of banks, set by global banking regulators, have treated government bonds held by banks as risk free, and this has meant that banks buy a lot of government debt. If, thanks to a Greek default, government bonds are no longer risk free, this will call these rules into question. That , in turn, would make government  borrowing more difficult.

The present Greek crisis was not inevitable. It is the result of a decision by Greek voters.

A few months back, it looked as if the Greek economy was about to start growing again, admittedly from a low base. For example, as recently as August 2014, Deutsche Bank forecast that the Greek GDP would grow by 2.2% this year. This was to be almost twice the forecast growth for the euro zone as a whole, and second only to the forecast growth for Ireland of 2.3%, which has proved to be a big underestimate in the Irish case. Greece had put in place a lot of structural reforms, under the previous Greek government, more than almost any EU country by some measures. The labour market reforms improved the competitiveness of the Greek economy, but the full benefit of these reforms was not achieved because of cartels protecting some professions and services. The reform programme of the previous government was not a “failure”, but it was delivering results too slowly for an impatient electorate in Greece. 40% of loans in the Greek banking system were non performing, but the banks were not dealing with this. Greece was suffering a brain drain.

That prospect of 2.2% growth in the Greek economy was blown away by the uncertainty caused by the Syriza election victory, and the nationalistic rhetoric and grandstanding that surrounded it. This led to a flight of confidence, and money, from the Greek banking  system and an unwillingness of foreigners to invest in Greece as long as the political uncertainty persisted. It did nothing to slow the brain drain.

The new government threatened to undo the labour market reforms and to make it more difficult for Greek banks to deal with non performing loans.

The  structural reforms, put in place by the previous Greek government, had begun to work, when they were derailed by politics.

Syriza won office on a false platform which asserted that the previous structural reform programme had been a “failure”. It had not been a failure, it had  brought Greece to the point where its forecast growth rates for this year were second best in the euro zone. It had simply taken longer to work than it , if international conditions were more favourable, and if it had been extended as vigorously to  the professions, and to tax evasion, as  it had been to employees.

Syriza  convinced Greek voters the “austerity” was a “failure”, without saying what those terms meant in practice, but implying instead that others should pay Greece’s debts for it, as part of some sort of moral obligation the rest of the world had to Greece. This was naive. Greeks forgot that other EU nations have electorates too!

If one is spending more than one is earning, “austerity” is inevitable, sooner or later, unless you can achieve a rate of economic growth that is faster than the growth in your state’s obligations. That was always going to be difficult for an ageing society like Greece, with an under funded  pension system, and a  disproportionate amount of early retirement.

The tragedy is that modern election campaigns have become shouting matches, that do not lend themselves to the sort of informed discussion that would have led voters to see, in time, the fallacy of policies that imply that one can persistently consume more than one is earning, without eventually facing  “austerity”.

There is some ground for hope. A deal can be reached.  Because of the nature of its support base, Syriza may have more freedom to tackle tax evasion and  cartels in the professions, than the previous government. This could get Greece back on a growth path, so long as Syriza does not attempt  to reverse  the reforms  the previous government HAD  put in place.

John Bruton Crisis Economy

As I write, it remains unclear whether Greece will reach an acceptable deal with its creditors, who are mainly other European Governments.

It is important to say that the recession in Greece has been much deeper than expected by those who agreed the original bailout package with Greece in 2010, a 25% fall in output as against a predicted 7% fall. The budgetary adjustments have also been bigger than in any of the other bailout countries.

It must be acknowledged that, when Greece got a bailout from the other Governments and the IMF, the ultimate beneficiaries included banks, not only in Europe but also elsewhere.

These banks had been lending to the Greek Government, long after they should have stopped doing so, and have forced Greece to confront reality. They assumed that, because Greece was in the euro, someone somewhere would ensure they were repaid.

Yes, some the banks, who were thus saved from their errors by the bailout, were indeed German. But many of the banks who were rescued from their embarrassment were British and American, and the British and American taxpayers have avoided a proportionate exposure to the costs, through the Greek bailout, of saving THEIR banks!

The Euro zone is bearing the main burden, while the others offer free advice.

That said, it would have been in nobody’s interest, for a panic about Greece to have infected banks around the world. Bank credit constitutes 95% of the money we use, and a collapse in confidence in money could have had really devastating global consequences. Without confidence in banks, economic activity would have come to a shuddering halt.

We would have had a crash, rather than just a crisis. Hindsight critics can ignore that now, but it was a real risk then. 

The origins of the Greek problem are very deep and longstanding. For years, Greeks had been consuming more than they were producing, retiring on pension earlier than is normal in other countries, and running an educational system that had few links with the real economy. All these gaps were bridged by borrowing money from foolish investors, who averted their eyes from the profound underlying problems of the Greek economy.

Meanwhile Greece supported a cumbersome and slow courts system, and an equally inefficient system of public administration and of regulating entry to professions. These systems got in the way of growth, because growth needs a capacity to move human and other resources quickly from less, to more profitable activities. Such systems might have been affordable in a very rich country, but Greece never was a rich country.

Meanwhile Greece failed to develop a broad modern industrial sector. It relied too heavily on tourism and ship building. Greeks made money selling things to  other Greeks, rather than to the rest of the world.

Greek businesses stayed small, not big enough to become exporters.  Indeed the proportion of micro businesses in Greece is very large, and this sort of business frequently under declares its income for tax purposes. This is part of the reason for poor tax collection in Greece.

There is growth potential in the Greek economy

A McKinsey study back in 2011 suggested, for example, that Greece could develop medical tourism (it has a large population of dentists).  I met someone recently who was waiting for ages a treatment for tonsillitis in Ireland, who went to Greece, and had the operation done in days. McKinsey suggested big scope for Aquaculture and food processing in Greece. Greece could develop its port infrastructure to provide a regional cargo hub.

But none of these things can be financed unless Greek business people have access to a healthy banking system.

The Greek banking system is far from healthy. Its capital is tied up in Greek government bonds. The credibility of these bonds has been called into question by the brinkmanship and loose rhetoric of the new Greek government. The uncertainty over whether Greece will still be in euro, in a few months time, also inhibits investment, and nationalistic rhetoric in Germany on that topic has added greatly to that uncertainty.

Greece’s future needs to be underpinned by a credible plan that focuses on private sector led growth, backed by a healthy European banking system,that invests in productive Greek businesses, rather than just in Greek government bonds, as it did in the past.

If that is to happen, it is not just Greece that needs to do a lot of homework, but the entire European Union. The EU needs a real banking union that allows banks to lend across borders to good projects wherever they are found in the euro zone. This needs common EU legislation on debt collection, collateral and the like.

The fact that Greek, Irish, Portuguese and Spanish taxpayers have borne large burdens to recapitalise their banks, or have undertaken new debts, as part of a project to sustain the global banking system, also needs to be recognised by the rest of the world.

This cannot unfortunately be done straight away. The problems that gave rise to the crisis must be understood, and fixed, first.

The Greek election result would not lead one to believe that Greeks understand the source of their problems. And the credence that many voters elsewhere give to rhetoric that suggests that being “against austerity” constitutes an implementable policy, in a world of free capital movement, suggests that many do not understand what went wrong or what can realistically be done about it.

But ultimately there must be an honest attempt to find a fair settlement of these legacy issues.

A Global Debt Conference, some time before 2022, when Greece has to make huge repayments, should be considered.  It could be sponsored by the IMF, and might negotiate debt relief on the basis of the extent to which countries have, in the seven years between 2015 and 2022, implemented growth promoting reforms and achieved primary surpluses on their current budgets, taking account of the demography and the tax raising potential of each country.

John Bruton Crisis EU Member States Growth

We live in turbulent times. Our world is facing serious challenges: Ukraine is struggling for its very survival, while Putin expends all efforts to prolongue his regime; the Islamic State is waging unspeakable violence across the Middle East while the threat of major terror attacks has returned to Europe; the political establishment is being undermined by a new vawe of populism; the Euro is weaker than ever before, threatened by the twin economic woes of stagnant growth and deflation. And if all this was not bad enough, elections in Greece brought victory to a political party that aims to maintain its place in the Euro club while disregarding all its rules.

The new Greek PM claims that “Greece needs space to breathe.” Translated into plain language: a Greek politician won the post of prime minister on the promise that he would negotiate softer terms for repaying (or even writing off) financial aid, which Greece still needs.

And that is the central problem. In fact, the position that will be taken by other members of the Euro area, by the EU, by the European institutions, can become a dangerous precedent for gamblers of Tsipras‘ ilk in other EU countries. Brussels-bashing, Europe-bashing, has become not only fashionable – it has even become an effective tool for scoring success in the domestic political sphere. This is evident not only in post-communist countries, but also in states with more established democratic states. The blame on “evil” Europe is laid by Cameron in the UK, Le Pen in France, Geert Wilders in the Netherlands. But if the EU gives in to Tsipras, a moral contagion will spread. Blackmailing the EU and its disciplined and responsible members will likely come from Spain, Italy and Portugal. The countries that, albeit with many difficulties, are managing to climb out from the bottom of the economic and financial pit.

The populist movement Podemos is gaining in strength in Spain; Italy has Beppe Grillo; the Portuguese populists could be expected to also raise their voice; and the Irish, who have made significant reform efforts in the recent years, are already seeing surging support for Sinn Féin. If the EU and the Eurozone waver and yield to the demands of Tsipras, the project of a unified Europe would be shaken to its very foundations.

Therefore, the next few days and weeks will be a moment of truth: for Greece, as well as for the whole Euro area and the EU. I believe that the bailout funds have supplied abundant oxygen for countries at risk, including Greece. Many politicians paid a heavy political price for committing their countries‘ finances to bailing out Greece and other countries. Greece faces a serious test of its resilience but also of its civil and political maturity. This includes awareness of the fact that support and solidarity also have their limits. Greece has only two currently viable options: either Tsipras comes to terms with reality in a broader, i.e. the European and the global context, or he is swiftly replaced. Any other option would cause the Greeks much more pain.

But we will soon learn the truth about ourselves and about our united Europe. We will get the answer to the question of whether we are capable of taking a strong, principled and thus a forward-looking position, or whether the Eurozone and the EU will be rocked to such an extent that they eventually fall apsunder. What could destroy us is weakness and yielding to populism. The European institutions – both public and private – have had sufficient time, mainly due to the operation of new financial mechanisms, to prepare for a situation where a Member State would be incapable or unwilling to fully function as a member of the Euro area. Potential losses from giving in to populism would be significantly greater than the possible exit of Greece from the Eurozone. Bowing to populists would destroy the project of European integration.
 

Mikuláš Dzurinda Crisis EU Member States Leadership

Greek elections were not about the end of austerity and debt-write off. This was just an election narrative that captured the hearts of the Greek electorate and, surprisingly, dazzled large majority of the pundits, commentators and economists in Europe.

As good as it gets

As financial analysts are explaining, countries like Italy, Spain, and Portugal are spending larger share of their GDP to service their official debt than Greece. Much of the debt has already been written off or “hair cut”, a lot has been reprogrammed, postponed, the interest rates on the European loans are quite small. The troika is not requiring any substantial new austerity measures anyway. Much of what Syriza claims it wants has been done already.

In the words of Daniel Gros: “… in the end, the difference between a government that has never made good on its promises to pay and a government that promises not to pay might not be that large.”

If not much will change with respect to debt and austerity, what was this election really about then?

Economy?

The problem of Greece is that it is not competitive, exports are sluggish and foreign investors are avoiding it. There is much to be done to make the country friendlier to entrepreneurs. This may include liberating the markets from the capture of tycoons and family networks that prevent fair competitive capitalism. It also includes a more efficient public sector.

The elections were hardly about this either.

Instead of a debate how to achieve that Greek economy would earn more, the elections were a mix of national and social populism. Like any populists, Syriza exploited natural and (in fact positive) instincts of compassion and patriotism.

National and social populism

The national populism was manufacturing an outside enemy in Europe and particularly Germany. The social one was spreading hatred towards capitalists and was promising hand-outs that the Greek citizens should be getting. Cheaper rents, cheaper oil, higher minimum wage, even more employment in the public sector …

National and/or social populism has proven a receipt for populists, anarchists and radicals to get to power. Generally few people fall for it. But under special circumstances, like war or major crisis, it works. As we have learned the hard way in the 20th century.

What is also needed is wishful thinking by democrats. A conviction that what populists say is what they really want. Like ending the humiliation of a country and all will be well; abolishing a treaty; some other small concession.

Economists (equipped with a hammer they too tend to see all problems as nails) are already proposing a compromise between what Syriza wants and what the EU and the creditors need to stick to.

Power. To the “people”

The real danger of Syriza and other populist left and right wing parties is their ambition for revival of ideology that has been proven wrong in the 20th century. Its essence is a disrespect for the human rights, the individual, her life, freedom and property.

The fight against domestic and foreign enemies in the noble name of social justice and patriotism was just a pretext, a side show, a slide show, to capture the hearts of the voters. Let’s not mistake this with the real agenda of the radical left – which is capturing of power and ruling the country, perhaps Europe, according to their ideological agenda. The agenda is to shape a “radically new post 2008 world”.

Center left and right

The radicals and populists may not be alone in this. Tony Judt once wrote that the Western European social democrats were always envious of their Easter European communist comrades. The latter could exercise the leftist agenda without the trouble of elections and without checks and balances of democratic society.

Today, traditional European left has a choice to make. Are left wing populists and radicals an ally or a competitor? Should they celebrate their success and join them in their struggle for a “better” world. Or see them as an enemy of democracy and liberty and therefore incompatible with modern Europe.

While the left may be inclined towards appeasement, the center right must confront populism with reason. That there are no free lunches. That hard work pays. That opportunities are there to exploit for everyone. That jobs are created by entrepreneurs and the role of the state is to make sure there is fair competition among them.

That solidarity is important too and it is not just an internal affair of each member state. 

Revival of populist and radical utopian regressions, not the debate about more or less austerity, is the story behind the curtains in Greece and beyond. Debating austerity and hoping for an economic compromise is a discussion about a smokescreen. Not entirely irrelevant, but definitively not central.

Žiga Turk Crisis EU Member States Growth

The response to Syriza’s election in Greece has been marked by much comment on the impending conflict between the new government and the EU, European Central Bank (ECB) and the International Monetary Fund (IMF).  ‘Greece and global creditors dig in for fresh struggle over austerity’ headlined the Financial Times.  In this narrative, Syriza in Greece, Podemos in Spain and Sinn Fein in Ireland are new forces in European politics, a left wing phalanx with a harder edge and a radical path to economic rejuvenation.  This path to salvation will be achieved, in the short run at least, by increasing public expenditure (everything from pensions to salaries) and casting off the perceived shackles of the existing agreements with the EU, ECB and IMF.

However, as noted recently by my colleague Angelos Angelou, Syriza itself is characterised by deep rooted divisions over its long term economic goals.  The recent moderation of Alexis Tsipras is matched by a substantial internal opposition who view the Euro (and the EU) as symbols of capitalist oppression and real impediments to the creation of a fairer Greek society.  However, now confronting the realities of power, Syriza is faced with a fundamental choice – engage with the wider economic system as it is, or attempt a full blown restructuring of Greek society based on isolating Athens from her European partners.

These internal contradictions within Syriza also form part of the wider strategic shift to left-wing political movements in many member states, particularly in those states subject to bailout programmes since 2009.  For these movements (which are more diffuse than traditional political groupings and generally bring together a diverse range of left wing interest groups) the campaign to end ‘austerity’ represents an opportunity to refashion classic socialist (and even communist) mantras for the twenty first century.

This strategic shift to the left does not just represent a campaign against the bailout agreements  Rather, movements like Syriza are acting as lightning rods for public discontent at dire economic conditions, mistrust in centre-right political elites and a sharp decline in the public’s belief in the EU as a mechanism for achieving higher standards of living.  The populist appeal of Syriza is based on the classical socialist approach of more public spending.  Apart from a laudable commitment to tackle tax evasion the Thessaloniki Programme is very high on aspiration, but very short on hard economic realities or definite timescales. 

For the centre-right in Europe the challenge now is to provide a more coherent vision of the social market economic model in the twenty first century:  An updated model that places private enterprise at the centre of Europe’s return to growth.  A model that gives all people – from start-ups to well established firms – equal opportunities to succeed and flourish.    And of course, we need to keep working on the most effective way to provide countries in distress with a sustainable reform path based on our guiding principle of solidarity.

Eoin Drea Crisis Elections Euroscepticism Eurozone Growth

Book review: European Spring: Why Our Economies and Politics are in a Mess and How to Put Them Right, by Philippe Legrain

The efficiency of Europe’s reaction to the post-2008 economic crisis continues to fuel a vibrant debate. Was austerity the best solution to the problem or did it make things worse by creating a vicious circle of underdevelopment? Did European leaders respond effectively to the challenge or did they get carried away by developments which they just couldn’t control? And what about the European Union itself? Was the crisis a positive test for its coherence or did it prove that it was ill-equipped and badly prepared to deal with extraordinary conditions?

This debate lays the background of Michael Legrain’s analysis which can be found in his much discussed book, European Spring. Legrain argues that Europe has made a series of mistakes, the most important of which is the obsession with fiscal austerity. For Legrain austerity measures not only did not cure the illness of public debts, but on the contrary plunged the members of the European Union into a much deeper recession. The ‘medicine’ had exactly the opposite results than the ones expected. It drained economies of valuable resources without dealing with the deeper underlying causes of the problem: Europe’s low productivity and low competitiveness in comparison with the United States, China, India, Brazil, as well as other emerging economies. He even suggests that the German example, which is presented as the model that other European countries should follow, is nothing more than an illusion.

Apart from describing the grim picture, Legrain makes suggestions on how to build a brighter future for Europe. He seeks the answer in a combination of economic and political renewal. European economies should try to become more adaptable to rapidly changing conditions: openness and flexibility seem to be the key words here. From a political point of view, he argues that Europe should not hesitate to experiment with new forms of democracy (including direct democracy) which will make citizens more actively involved. Economy and politics are seen as the two sides of the same coin. Despite the great obstacles, the author remains optimistic. On condition that European countries make the necessary reforms, he believes that they still stand a good chance of overcoming these obstacles and that the European Union will continue to remain a focus for development in the long term.

Legrain’s book is crisply and obviously benefits from its firsthand knowledge of EU decision making at the highest level based on his period as an Economic advisor to then Commission President Barroso.  His arguments are very well articulated and can be easily understood by the average reader. He appears to have an answer to every question. However, one cannot refrain from thinking that many of the things he proposes are easier said than done. Innovative ideas often seem too good to become reality. But that’s exactly what makes them ever more appealing!

Antonis Klapsis Crisis Development Economy European Union Macroeconomics

According to budgets they published this month, France and Italy are failing to meet the Euro area requirements for reducing Government debts and deficits to sustainable levels. Italy has given an indication that it will meet the European Commission half way and make some  further adjustment, but France is taking a harder line.

If France, as a big country making up 20% of the Euro area’s  GDP, were to be exempted from the EU debt and deficit rules, in ways that were not open to smaller  euro area countries, this would do great damage to the credibility of the euro, and  could drive up to the interest rate euro area governments must pay to borrow. It is thus very important to all EU states that France overcomes it’s problems.

In recent years, France has lost competitiveness, and  is  running a balance of payments deficit. In other words its people are spending more abroad, that than they are earning from abroad.

The French economy is projected to grow by only 1% in 2015, as against a projected growth of 2% in Germany and Spain, 2.7% in the UK, and almost 3% in Greece and Sweden.

The loss of competitiveness of France is due to several factors

   +  Fewer people  are working fewer hours for fewer years. For example, of people between 55 and 64 years of age, only 44% are  still working in France, as against 73% in Sweden, 65% in Japan, 60% in the US and  58% in the UK.
   +  There is substantial youth unemployment, because young people find it hard to get on the career ladder because of an over regulated labour market that protects existing jobs at the cost of discouraging the creation of new ones.  Last year 80% of all new jobs created in France were on temporary contracts.
   + The bigger a company grows, the more rigid are the rules that apply to it in terms of the right to hire and fire.  So, while France has some of the most successful big companies in the world, it lacks a large corps of middle sized export oriented companies, like Germany has.  90% of all French companies have fewer than 10 employees and they have strong incentives to stay small.
   + Monopolistic practices exist in a number of sectors controlled by the state and in some private professions. The vested interests protecting these monopolistic practices are very strong. These inefficiencies contribute to extra costs and  loss of exports by French companies.

The current Socialist Government of Manuel Valls was making a serious effort to tackle these underlying weaknesses, but that the dividends of some the reforms, while very substantial, may be slow in coming, perhaps not in time for the 2017 elections.

There is a risk Prime Minister Valls will lose his majority because of defections in his own party. Meanwhile the opposition UMP is split on personality questions. The Front National is making huge strides in the polls, but its economic policy would break up the EU and introduce heavy state controls which would be incompatible with France’s global economic success. Meanwhile business leaders are afraid to speak up about the global realities France must face.

Faster growth is crucial, and the margin between success and disaster is very narrow.  If the French economy grows at only 1% per annum over coming years, France could be on the  road to ultimate default and a social crisis, but if it can manage a growth rate of 1.6% or better, it will work its way out of its difficulties.
The stimulus for French growth will have to come to come both from inside and  outside France. French people save a lot, and if they could get the confidence to spend a little more of their savings, that would help. Likewise if Germany, which has been neglecting its infrastructure, stated to invest more that would help French exports.

The trouble is that French and Germany economists and politicians have very different intellectual assumptions, and dialogue between them can become a dialogue of the deaf. German economists may accept the Keynesian idea that one should spend extra in a down turn but they doubt if the other, essential, side of Keynes’s theory-running surpluses during the good times is politically realistic, and the historic evidence supports them.

Meanwhile, partly because it was wise enough to stay out of the Iraq debacle in 2003, France alone of the western powers, has the confidence to intervene directly in places like Mali, Libya and the Central African Republic.

France retains a strong nuclear deterrent and a civil nuclear industry that does not do the sort of climate damage that other EU countries’ energy industries do.

Politics are important. Its Presidential system enables France to be strong and decisive in international affairs.
But that strength does not extend to domestic economic policymaking, where factionalism and introspective thinking are preventing the creation of any kind of “Grand Coalition for Reform”, of the kind that has enabled countries like Germany and Mexico to deal decisively with long standing blockages to growth. France needs a new politics, even more than it needs a new economic model.

John Bruton Crisis Economy EU Member States Eurozone

Italy is experiencing the first tepid signs of recovery after years of pain and crisis. According to the IMF, Italian GDP will increase by 0.6% in 2014 and will supposedly reach 1.1% in 2015. Nevertheless, all that glitters is not gold. Unemployment is still high (currently 12.4%) and public debt in January reached a frightening height of 2.089,5 million, more than 133% of GDP. According to Unioncamere, the organization that supervises the Italian Chambers of Commerce, in the first three months of 2014 about 3,600 businesses declared bankruptcy – which equates to an average of forty per day, two per hour.

The decline of the Italian economy started at the end of the 1970s, well before the launch of the monetary union in 1999. The single currency on the contrary gave Rome greater room to manoeuvre by giving Italy access to cheap credit. Instead of using the euro dividend to restructure the economy in the first year of the new millennium the parties in power resorted to an increase in government spending – about €141.7 billion between 2000 and 2010, an increase of 24% – this created a false sense of growth while Italian industry was losing competitiveness in the face of growing global competition. Currently, public spending in Italy accounts for almost €800 billion, which is equivalent to about 50% of the GDP.

In the summer of 2011 the ECB clearly identified the woes of the Italian economy and urged the Italian government to take “bold and immediate action” to balance the budget by reducing taxes, cutting government spending and liberalizing the job market by making it more flexible. However, more than two years later almost none of the abovementioned problems have been addressed.

On the contrary, the incredible tax rises (the fiscal pressure has increased from 41.9% in the early 2000 to 44.1% in 2013) coupled with almost non-existent spending cuts in recent years was a mortal blow to the real economy and plunged the country into recession. According to the World Bank Data, the Total Tax Rate (the amount of taxes and mandatory contributions payable by businesses) in Italy reached the frightening level of 65.6% in 2013 compared to 49.4% in Germany, 34% in the UK and 25.7% in Ireland. If we couple high taxation with slow justice and inefficient bureaucracy, it should come as no surprise that Italy falls behind other big economies, according to the Doing Business ranking – it is in 65th position compared to France 38th and Germany 21th.

After the failure of the previous governments, great hope has been invested in Matteo Renzi, former mayor of Florence and head of the current coalition government. It’s still questionable whether Renzi will be able to reign in the opposition inside his own party, the Democratic Party, and make the necessary reforms. Any action to unravel the current economic crisis will face strong resistance from bureaucrats inside the ministries, who may fear losing their jobs, and from the trade unions, who still enjoy a privileged relationship with some key figures of the ruling élite and who will almost certainly use their power to sabotage the reforms. One example of this is the recent measures aimed at liberalizing the job market, the so called Jobs Act, which faced strong opposition from the leftist side of the Democratic Party that is making every effort to stop or radically change the reform process. Therefore, the chances of success are low.

A failure by the current government would embolden the populist movements and political parties who blame the EU institutions, the common currency and the “eurocrats” for the economic decline. For instance the Five Star Movement, despite being able to uncover and denounce bad practices and corruption cases in politics, still lacks a strategic vision of the future and tends to be easily influenced by conspiracy theories which are of little use in interpreting, let alone solving, the current problems.

Every step to embrace change is going to be delicate and probably painful in the short term. Furthermore, it’s not going to succeed without a clear long-term plan and a new social contract between the citizens, the economic actors, the political élite and the EU institutions. Whoever is at the helm of the country during the current tempest needs to have exceptional leadership qualities and great courage to lead the country towards a better future without being afraid to challenge potential enemies along the way and of opposing populist tendencies for the sake of Italy’s future.

[Photo: European Parliament; Flickr]

Davide Meinero Crisis Economy EU Member States Eurozone Leadership

As the eurozone starts to emerge from the deep financial crisis of the last three years we should maintain a sense of economic urgency. The fact that Europe had a growth problem before the financial crisis was common knowledge. This is still the case. The growth trend, in total factor productivity, has been negative for quite some time and the performance of the European Union’s economy relative to the United States’ economy has been deteriorating for at least twenty years.

This is all the more striking in light of the fact that the EU has undertaken a number of growth initiatives and reforms since 1992, which promised to deliver a significant growth boost, as well as welfare gains. Does this mean that structural reform has not worked in Europe and that some other factor must explain why we still have a growth problem?

I was recently asked to answer this question. My answer was simple: structural reform must be supported and promoted, otherwise it will fail to deliver. It is this element — the political and institutional framework for reform — that we need to focus on as we return once more to Europe’s growth puzzle. The best example we have of structural reform in Europe, the reform agenda of the last ten new member states, was actively promoted by institutional arrangements whose main goal was to expand the policy range of governments during the reform process.

In brief, there is an obvious contradiction between affirming the crucial role of structural reform for economic prosperity while doing far from enough to create the right framework and the right instruments to support and encourage it.

Often structural reform is so difficult because it pits governments against organised interest groups that have a lot to lose from a more open and competitive economic environment. Other times, severe financial constraints force governments to undertake reforms in less than optimal conditions and may even render them entirely unfeasible. Clearly the best way to involve national stakeholders such as social partners and national parliaments is to smooth the rough edges around structural reform and make it much easier to carry out than it is at present.

The good news is that an increasing number of people in Europe have come to realise that there is a better way. Both the European Commission and Council have put forward proposals that aim to mobilise the public for reform, strengthening the hand of governments against organised interest groups and providing financial support where it is needed.

In its December meeting the European Council defended the need for a system of mutually agreed arrangements and associated financial support mechanisms designed to support a broad range of growth and job-enhancing policies and measures. This was a good start, but the conclusions did not sufficiently emphasise the structural reform element. This is above all a political issue. Structural reform partnerships are elements of what I would call a political union. They would help countries become politically closer, allowing them to overcome social and political standstill in order to learn from each other and from the policy dialogue going on between them. Political fragmentation (by which I mean complete path dependence, the inability countries have to break from their habitual way of doing things) is just as dangerous as financial fragmentation.

At the current moment we face a paradoxical situation. Either structural reform is implemented in an emergency, when the right conditions for it are mostly absent, or then it is simply postponed. These structural reform partnerships would introduce a much needed preventive logic into European economic policy making. It makes little sense to wait for structural economic problems to develop into a fully-fledged economic and fiscal crisis before putting together the instruments and political will to address them. At the same time, favourable conditions for reform cannot be wasted if we want to seriously tackle Europe’s growth problem.

[Note: a previous paper on how to create the right framework for structural reform can be found here: http://ces.tc/1fLa7nJ ]

Bruno Maçães Crisis Economy European Union Eurozone Macroeconomics

Heavy soul-searching has been the trademark of the European Socialists for the past decade. Lost elections in country after country led to strong reflections about the future of Socialism and Social Democracy in Europe.

The victory of Hollande in France gave European Socialists a new hope. Finally Socialism would have a new flagship, President Hollande, who would turn the tide not only for France, but would also give a badly-needed boost for socialists across Europe. Or so they hoped.

From the beginning it was obvious that it would not work out for Hollande. Hiring 60000 teachers and 75% taxation on those earning more than €1 million a year were popular for some voters, but it could not return France to economic stability. No real reforms or fiscal balancing was on the shopping list.

Thus, from the beginning one could guess two possible outcomes for Hollande. The first scenario was that he would promote the policies he was proposing in his electoral programme, which would lead to an economic disaster for the country, to an electoral disaster for his party and ultimately, to a political disaster for himself. That is, if he would try to re-run as a President, of course. The second scenario was that he would very soon understand that the only way out for France is to push for reforms. This way he would be able to put France on the right track. However, the stark contrast between the things he said he would do and what he actually did ultimately disappointed his core voters and is costing him and the French socialists dear.

What we see now is that in fact both scenarios happened. French government was paralysed for almost two years and the economic indicators got worse for France every day. At some point he came to realise that he needed to totally change the fundamental philosophy of his economic policy. And so he did. One of the many witnesses of this fundamental change was Krugman’s article bashing Hollande for abandoning the “out from crisis by spending” strategy ( http://nyti.ms/1eSEZiA ). Nevertheless, by his initial inaction Hollande had burned the political capital he had, and so half-hearted attempts for reforms with a demotivated team were very unlikely to produce a success story. Unfortunate for France. And for Europe.

In addition, the understandable U-turn of Hollande in economic policy has led the socialist candidate for the position of Commission President, Martin Schulz, into a difficult position. Schulz’s vision of debt-driven growth matches badly with the current French Economic policy. Often the discrepancy creates odd situations both for the socialists and Schulz. For example, during the visit to Paris, Head of the Spanish socialist list Elena Valenciano was preaching against “the tyranny of austerity”, in a common political rally with the socialist candidate Martin Schulz, only a day after new Socialist French Prime Minister Manuel Valls announced an unprecedented and comprehensive package of austerity measures in France, heading to save over 50 billion euros in the next three years.

Thus, there is a substantial disparity between the programme of Schulz and the policies of Hollande’s administration. But then again, Hollande has to deal with economic reality – and Schulz does not.

Tomi Huhtanen Crisis Economy European Union

“Capitalism is not a form of spontaneous order or the embodiment of a basic structure of human rights, but one of the great constructions of the human mind”, so says David Sainsbury, former UK Minister in the Blair Government in his book “Progressive Capitalism, how to achieve economic growth, liberty and social justice” published last year by Biteback Publishing. Inevitably, the book does not fully live up to its unrealistically ambitious title, but it makes some really important points and goes beyond putting forward a critique of what wrong, but also some constructive solutions.

Capitalism will only work if politics works. Capitalism allows resources, human and material, to be constantly allocated and reallocated in a way that meets people’s needs, as they express those needs by way of the relative price they will pay for different goods and services. Without stable money in which to set those prices, the system would not work. Money is a promise. One must have a stable political system to underpin those promises if one is to have stable money. Without order and security and laws to prevent theft, fraud and unsafe products, capitalism would collapse. Again one has to have a stable political system if these requirements are to be met.

If capitalism leads to outcomes that are socially, financially or environmentally unstable, or are perceived as grossly unfair, the stable political order on which capitalism itself rests will fail.

These are some of the things that David Sainsbury tackles in this book. He points out that:

1. In 1965, the average US CEO earned 24 times as much as the average worker. But by 2007 he earned 300 times as much. That trend is not socially sustainable.
2. UK pension funds earned a 5% return on capital between 1963 and 1999. But between 2000 and 2009, they earned only 1.1% return. That’s not financially sustainable.
3. Between 1950 and 1973, the western economies grew at twice the rate they had grown during the period from 1800 to 1950. That was not economically or environmentally sustainable. But the West built welfare states during that period on the premise that the 1950-1973 growth rates were permanent.

These problems can only be tackled if the rules governing capitalism are updated. Sainsbury makes some useful suggestions.

Company law and taxation should be changed to require CEO’s to be paid on the basis of longer term goals and achievements, rather that short term share price movements. Remuneration of fund managers should be restructured to reflect a similar philosophy of long term returns and stable investment strategies. The threat of takeover, to the extent to which it incentivises pursuit of purely short term share price gains, may have to be mitigated. Firms should have incentives to use scare materials like energy, water, clean air, metals and chemicals extracted from the earth sustainably and renewably. These things cannot be done by one country acting on its own. They need to be tackled at international level, in the European Union and/or between the EU and the US.

This book may not have all the answers, but it asks all the right questions. They are questions that could usefully be tackled in the forthcoming European Elections which are, after all, the only multinational elections that take place anywhere in the world.

John Bruton Crisis Economy Elections European Union

Vít Novotný Crisis Economy Growth Sustainability

The EU Summit last week discussed the digital economy, a youth guarantee, apprenticeships, and the European Semester. During the Semester, each EU state will have an input to the policies of each of the other states. Hopefully, they will learn from each other.

But it would be a mistake to think that the main ingredients of a solution to the economic problems of the countries of the eurozone will be found at European level, because the problems did not, in the main, arise at European level. Although they had the same currency, some countries did much better than others did. Between 2008 and 2013, the growth in the euro zone ranged from plus 6% growth in Slovakia, to minus 6% in Greece. Some countries (Bulgaria, Sweden and Germany) grew faster than the United States between 2008 and 2013, while most of the other EU countries saw their economies contract.

It is good that, at EU level, we will now, through the European Semester, have detailed peer review of one another’s growth policies, including market liberalisation, taxation and public spending. But it would be a great pity if this encouraged national governments to delegate strategic thinking, about how to maximise the growth of their own economies, to the European Union.

Growth promoting reforms, whether these reforms be

+ of professional restrictions,
+ of slow and costly courts systems
+ of welfare systems that penalise work,
+ of educational systems that leave too many 15 year olds unable to read properly,
+ or of public sector wage and pension policies that are unaffordable,

will all differ from country to country, and can only be made on a country by country basis. The EU cannot do that job for national governments. They must do it themselves.

EUROPE MUST TAKE RESPONSIBILITY FOR THE EUROZONE BANKING SYSTEM

The EU has some things it must do. It must set up a single banking system for the euro zone. Given that most money takes the form of bank credit of some kind, it makes no sense to have a single currency without a single banking system. It makes no sense either that, at the moment, a badly run, and possibly insolvent bank in a well run country can borrow much more cheaply than can a well run and solvent bank in a country whose public finances are in a mess. These things can only be put right by EU action. Nor is it right that European arrangements to deal with banking and currency problems should be held hostage to the decision of the constitutional court of one country (Germany).

THE NEXT GENERATION WILL BE LESS ABLE TO REPAY THIS GENERATION’S DEBTS THAN THIS GENERATION IS TO MAKE SAVINGS

I find the arguments against “austerity”, in countries whose governments are spending more than they are collecting, to be lacking in rigorous thought. If a state is spending more than it is taking in by taxes, to borrow more today is simply to decide to pass the “austerity” on to a later generation, and to do so with interest! As a result of compound interest, a future generation will have to repay a lot MORE that the present generation will have borrowed. But the next generation will be far LESS able than we are to meet our bills that this one is.

This is because, 35 years from now, there will be two Europeans at work for every European who is retired, whereas today there are four Europeans of working age for every European who is retired. Thus the future burden of debts taken on today will have to borne out of the earnings of a smaller number of working people than are at work today. And those working people will also have to provide for a larger number of retired people than this generation has to cater for.

I wonder what the anti austerity protesters think of that!

John Bruton Banking Crisis Economy Sustainability

I have just spent three days in Cyprus talking to political and economic figures in the island. I encountered a very strong sense of determination to overcome their present severe economic difficulties.

These difficulties arise from mistakes made in the banking sector, whereby very large overseas deposits (mainly from Russia) were invested by the banks in lending to the Greek private sector and in Greek Government bonds. Banks exposure to Greece totalled 28 billion euro, or 170% of the entire Cypriot GDP. This concentration of risks in one place was bad banking practice, in the same way that excessive concentration of risks in the construction sector, was bad banking practice in Ireland and Spain.

As in Ireland and Spain, Cypriot banks also lend unwisely in the domestic economy, fuelling a real estate bubble. Meanwhile, and partly as a result, the Cypriot economy also lost competitiveness.

The Cypriot Central Bank must accept a major share of the blame for this excessive concentration of risk. It did not use its power to stop it.

At European level, once Cyprus joined the euro, the European Central Bank also had a responsibility. Under article 14.3 of the ECB statute, national central banks are obliged to “act in accordance with the guidelines and instructions of the ECB”. And under Article 25.1, the ECB may also offer advice on the scope of national legislation for the prudential supervision of credit institutions”. It is open to question whether the ECB used these powers in sufficient time. ECB policy of saying that banks did not have to set aside reserves against holdings of government bonds artificially incentivised Cypriot banks to invest in Greek and other government bonds, and that distortion continues.

At the end of 2011, the EU/IMF/ECB found that the situation of the public finances of Greece was so severe that senior bondholders (whose position had been famously protected from haircuts by the ECB in the Irish case) would have suffer a 75% haircut. This created an immediately critical situation for the Cypriot banks. They lost 33% of their capital.

This crisis for the Cypriot banking system was known to the EU/IMF and to the Cypriot Government of the time of the Greek haircut. Apart from a temporary loan from Russia, little was done. The Cypriot Government of the time did not respond to suggestions that it apply for assistance in a timely way. Given the powers cited above, more could perhaps have been done to require the then Cypriot Government to act.

THE MYTH ABOUT RUSSIAN HOT MONEY

Meanwhile a press campaign was mounted to suggest that the Russian depositors in the Cypriot banks were tax evaders, money launderers, oligarchs or worse.

This campaign seemed to be designed to persuade public opinion that depositors in Cypriot banks were less deserving of protection than depositors in banks in Athens, London, or Frankfurt. In fact, little evidence has subsequently emerged to justify any of these stories.
And, indeed, there is a perfectly good, and legitimate reason for these Russian deposits in Cypriot banks.

Many Russian businesses did not trust their OWN legal system, and felt that their assets would be better protected in a country like Cyprus, with a common law legal system, and which was in the euro. But in March of this year, they were to be brutally disabused of the notion that euro zone banks were a safe haven. Eventually the problem was tackled, in March 2013, in an agreement by IMF, the EU, and the ECB with a newly elected Government in Cyprus, who had had little or no time to assess the options for themselves.

TROUBLING ASPECTS OF EU DEAL

The March 2013 agreement contained a number of elements that are troubling.

For the first time this century, depositors have had to take a haircut. This was a radical departure from previous policy.

The fact that this procedure was followed creates a new and permanent uncertainty for depositors who hold more than 100000 euros on deposit in any bank in the euro zone.

They now must, to protect their assets above 100000 euros, scrutinise the situation of their bank on an ongoing basis, and move money regularly out of banks that seem to them to be pursuing risky strategies. Some would see this as a market solution to bank supervision, but markets only work if there is full and timely information available to all marker participants. But most depositors will not have the requisite information.

For a retail bank depositor, who may have little financial expertise, getting the relevant information of the safety of banks, in which he may need to keep a deposit account, will be difficult and time consuming. The accounts of banks are often opaque and do not always tell the full story.
There will be a tendency to move money towards bigger banks, which will aggravate the “too big to fail” problem.

In the Cypriot agreement of last March, no haircut was, however, imposed on the depositors in the Greek branches of the Cypriot banks, and those branches were transferred to Greek banks. This inflicted additional losses on Cyprus, and is hard to justify, within a monetary union that comprises both Greece and Cyprus as equal partners.

CREDIT FROZEN FOR CYPRIOT BUSINESS

The Cypriot banking model of attracting overseas deposits has been destroyed, although Russians continue to invest and holiday in the island, which disproves the suggestion that they were all fly by night tax evaders and hot money merchants. . It would be interesting to know which country’s banks are now benefitting from these Russian deposits that were formerly in the Cypriot banks.

Meanwhile, viable Cypriot businesses, that were well capitalised and equipped with working capital before March, are struggling to access funds to keep going.

Deposits they could have used have been reduced by haircuts, and capital controls mean that what remains in their accounts cannot be used freely. Bank credit is frozen.

A Cypriot export model, to replace the old bank deposit led model, cannot be put in place without access to day to day funding.

I left Cyprus feeling that, if Cyprus did not constitute a mere 0.2% of the euro zone GDP, and was physically closer to the centre of Europe, it would not have been the subject of these radical experiments in European banking policy.

It would, instead, have been the subject of much timelier, and less harsh, actions by its partners. That said, none of the options were palatable. Asking Cypriot or European taxpayers to recapitalise the Cypriot banks would have not have been easy and might have set a dangerous precedent in place. But burning depositors is a bad precedent too, when restoring confidence is so important.

Of course, Cyprus must now abide fully by the terms of the March agreement, and, like Ireland, establish a good track record.

But if it does so, it should, like Ireland, see progressive easements in the terms of its bailout, so that its economy can be allowed to breathe again.

Meanwhile, the Cypriot horror story should remind us of the urgency of completing European Banking Union, including some form of mutual deposit insurance.

Europe also needs to develop automatic stabilisers to deal with the problem of asymmetric shocks to individual states, as suggested in a recent IMF paper on the euro.

Otherwise the European economy will continue to run at below capacity, at the very time when it should be running at full capacity, so it can build up surpluses to deal with the looming cost of ageing.

John Bruton Banking Crisis

Speech by John Bruton, Former Prime Minister (Taoiseach) of Ireland (1994 to 1997), to a meeting of Zhejiang Chamber of Commerce at the Guangzhou Baiyun International Convention Centre, at 9am on Sunday 1 September.

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A COUNTRY TRANSFORMED

The last time I was here in Guangzhou was in 1978 when, as a relatively young member of the Irish legislature, I came here to observe the beginning of the modernisation of China , under the leadership of the late Chairman Deng.
My impression, at the time, was that everybody travelled by bicycle, and wore uniform clothes. The sound of China for me, was the tinkle of a thousand bicycle bells. China struck me, then, as a sensibly frugal society, which let nothing go to waste. There was a sense of order, a sense that people knew where they were going.

I also found a people who were was immensely welcoming towards a European like myself, who came from a continent whose interactions with China, over the previous 150 years, had often been marked, on the European side, by exploitation and racism.
I even saw the remnants of the European concessions here in this city, where, until 1949, European nations had applied their own rules, even though on Chinese sovereign territory. In the French concession I came across a disused Catholic church, that had been converted into a clothing factory. I sometimes wonder if it has since been restored to its former use.

I also had a strong sense, then, that China was a society on the move.

Now, 35 years later, I am back in a very different city. In one of the great commercial centres of the world, to see the results of the modernisation initiated 35 year ago.

Most people in the west did not really understand what China was doing then.

THE FOUR MODERNISATIONS

Many may have thought that the Four Modernisations were only rhetoric.

I came across a phrase recently that will probably be familiar to many here, that sums up the Four Modernisations policy initiated here in 1978.

It was that the country was “wading across a river, by feeling for stones underfoot”.In other words, it was a policy of experimentation, of trial and error, of allowing mistakes to be made, of trying different approaches in different regions, and allowing competition between the different approaches and the different regions.This flexibility explains the difference between Chinese and Soviet economic policy at that time, and explains why the first succeeded, and the other failed.Indeed, the strength of the western capitalist economic model, is that it, too, encourages experimentation and trial and error, but uses different methods to do so.

China has made huge strides since 1978. It is now well established, on an income per head basis, as a middle income country according to World Bank classifications.

FROM A MIDDLE INCOME COUNTRY TO A HIGH INCOME COUNTRY

In 1960, there were 100 middle income countries in the world. Ireland was one of them.By 2008, only 13 of those 100 countries had reached high income status. Ireland was one of the 13 that made it, along with Hong Kong, Japan, South Korea, Mauritius, Spain, Equatorial Guinea, Portugal and Greece. The remaining 87 countries, which were middle income countries in 1960, have undoubtedly made progress since, but they are still middle income countries, and some of those who attained high income status by 2008, may now be falling back into the middle income category.Nothing stands still. Progress to the next stage is not automatic.

Economic growth is, as the economist Schumpeter put it, a process of constant creative destruction. Growth is about change. Change is often painful, and painful, but necessary, change can easily be confused with mindless austerity.

When a country is moving from less developed, to middle income, status, it is often able to compete by doing things , that are already being done, more cheaply than established competitors can do them. It does not have to come up with brand new technologies. it can use existing technologies, but apply at less cost and with minor improvements.

Moving a country, from middle income, to high income status, in contrast, often requires it to push at the boundaries of technology, to find a niche that no one else if filling, to invest in people and ideas as well as in concrete and metal. That is the stage into which China is now moving its 1.4 billion people, a move that promises to be one of the great transformations of human history.

ENGINES OF ECONOMIC GROWTH

The size of the transformation involved explains why China is today spending 2% of its GDP on Research and Development (R&D), which is more, as a proportion of GDP, than Ireland, Netherlands, the UK, Norway, Luxembourg, Italy, and Spain and many other European countries are spending.
Incidentally, Israel, Korea, and Finland are the biggest proportionate spenders on R & D.But R&D alone will not move a country from middle to high income status. It must be made easy for entrepreneurs to use the R&D, by setting up new businesses and to recruiting talented local people to help them do it.Here, Ireland has a strong advantage in that it is one of the easiest places in Europe to set up a new business, and one of the easiest in which to recruit young well educated people at competitive salaries.

This has already attracted 18 different Chinese companies to set up operation in Ireland. Ireland is particularly interested in Chinese companies that are in fields like Life Sciences, Clean tech, financial services and information technology.

Ireland is also active in food exports to China ,which have grown by 92% in just two years!

I believe there are aspects of the Irish educational system from which China could benefit . 5000 Chinese students study in Ireland. Numerous agreements exist between Irish and Chinese Universities. These must be built upon, especially in key areas of research ,like financial services.

REMOVING BLOCKAGES IN THE SYSTEM

If China is to exploit its investment in R&D to the full , it needs to liberalise its system of local residency permits, which discourage migration within China, and to make it easier for new Chinese companies to set up, in competition with existing state owned or established enterprises.
The European Union, with its 0.5 billion people is a much smaller entity than China with its 1.4 billion people, but in the European Union, there are still restrictions on internal migration, analogous to the Chinese residency permit scheme, in that the EU does not have full transferability of Social Security rights, and full mutual recognition of professional qualifications, for internal migrants within the EU.

THE DANGER OF PROPERTY BUBBLES….THE IRISH EXPERIENCE

But it would be unrealistic for me to come here and fail to refer to some of the recent economic difficulties Ireland has encountered. These difficulties are being overcome. Growth has been resumed, foreign investment in the country is at an all time high, and the government is following a careful plan. But it is also important to analyse objectively how Ireland got into these difficulties, and I believe that would be helpful to a country, like China, that is also undergoing rapid development and wants to avoid converting that into a destructive bubble.

Indeed, the latest IMF report on China, contains warnings that will sound familiar to those who have studied recent Irish economic history. It talks of the risks of “a steady build up of leverage eroding the strength of the financial sector”, of “a boom in non traditional sources of credit”, and of the need to take “steps to reduce moral hazard to ensure that banks do not engage in potentially destabilizing competition” in China. On the other hand, it recognises that China has very well capitalised banks.A few years ago, these risks existed in Ireland, and were not adequately addressed by the authorities in Ireland itself, or in the European Union. We have suffered for that, and these are useful lessons for China.As I see it, this is what happened in Ireland. Thanks to artificially cheap credit, and rapidly rising property prices, Ireland experienced a property bubble between 2000 and 2007. This bubble led to a radical distortion of the country’s economic structures, and to a big increase in private and government debt.The cheap credit was available because of decisions taken by the US Federal Reserve and by European Central Bank. Both favoured low interest rates. They did so to avoid dislocations to the economy, that might have arisen from the dot com burst, 9/11, and the costs of German reunification. In these goals they succeeded.But the extra credit found its way across national boundaries into housing markets in various countries, causing a bubble in prices, most notably in Ireland. In 2008, the bubbles burst.

BUBBLES DISTORT THE ECONOMY

The bubble distorted the Irish economy in ways that will take years to repair. There was distortion in the form of a doubling in the size of the construction sector, large and uncompetitive pay increases across the economy, and rapid increases in numbers of people employed in the public sector. The fact that money flowing in, temporarily, to government coffers, made it hard to resist demands to increase the size of the government sector, permanently. In just five years from 2001 to 2006, the share of the workforce in the public sector reached 29%, as against 19% in Germany. The numbers in top grade positions in the civil service grew by 86% .

Bubbles misallocate human capital. Instead of choosing careers and skills, for which there is enduring global demand, talented people were drawn, by quick rewards, into activities for which demand is inherently temporary, like construction.

WHY BUBBLES HAPPEN

In a way, it is easy to see why people made the mistake of thinking, in the 2000 to 2006 period, that house prices in Ireland (and household wealth) would never stop rising. Recent history seemed to suggest that the only way house prices could go was up. House prices had already risen by 133% between 1994 and 2000. These increases were justified by rapid economic growth, immigration, and new family formation, all of which created a genuine demand for housing. The trouble is that the increase in house prices continued after 2000, and was financed, not by improved competitiveness, but by excessive lending, and by income generated from, inherently temporary, construction spending.

The assumption of the bankers, who were lending this money, seemed to be that demand for housing could go on growing, to infinity. A moment’s thought would have shown how nonsensical that was. But, in the middle of a boom, people are often too busy, to take a moment to think. The revenue of the Government became unhealthily dependent on taxes derived from property sales such as stamp duty, capital gains tax, and VAT on house sales. Property related revenues reached 18% of all revenues in 2006, whereas they were only been 8% in 2002. But once house sales stopped or slowed down, of course, that revenue growth stopped, leaving a huge hole in the Government’s budget.

Again, a moment’s thought would have shown how dangerous it was, to build up permanent spending programmes, on the back of inherently temporary streams of revenue. But very few people, in politics or outside it, took a moment to think. For a country like China, the relevant question to ask about Ireland’s recent experience is

“How can sensible, and generally public spirited, people make mistakes like this, and how can such mistakes be avoided ?”

THE CAUSES OF BUBBLES………….SILO THINKING, AND FOLLOWING FASHION, WITHOUT REFLECTION

I would identify two tendencies of policy making in both the public and private sector, that were at the heart of the problem in Ireland
1. “Silo tendencies” within institutions, charged with mitigating risks, where people only thought about their own immediate responsibilities, and did not question wider assumptions.
2. A “consensus approach”, which encouraged a single view to be taken of any issue. Human beings are followers of fashion. We need institutions that deliberately challenge fashionable assumptions, and those institutions did not work, in Ireland or in the wider European Union.
These errors can occur in ANY country, under ANY political system. They are not unique to Ireland, Spain, Arizona, California, Florida, or any of the other parts of the world where property bubbles arose.
China must be wary that these problems do not arise here, and I know the authorities here are fully alive to these risks.

THE GLOBAL CHALLENGES…..AGEING, MIGRATION, CLIMATE CHANGE, AN ERODING TAX BASE , AND SOUND FINANCE.

These are the five big problems that the counties of the world must come together to tackle. They are all loosely related to one another. With the exception of the finance problem, they are all problems that are silently creeping up on us, so silently in fact that it is difficult to create a sufficient sense of immediate crisis, to get anything done about them. Technology will provide some of the answers, and I know China is devoting a significant proportion of its R&D to some of these issues.But sacrifices and compromises will be needed between and within nations. Pension entitlements will have to be limited in some countries, working lives extended, and elder care vastly expanded with the aid of technology. Migration will have to be accepted in ageing economies, and that is a big cultural challenge.CO2 emissions and pollution will have to be tackled by making the ultimate polluter meet the full cost of what he does.

We may eventually need some form of global taxation, to meet the cost of preserving out common global heritage, but, in the meantime, we need to restore the tax base of states, in a cooperative way. We cannot expect Governments perform functions if its revenues are artificially depleted.

And finally we need to put banking on footing that will be sound enough to allow incompetent banks to be closed down without putting the whole economy at risk. “Too big to fail” and “ too interconnected to fail” should no longer be characteristics of our banking systems.

THE EURO….WHAT IS ITS FUTURE?

The existence of the euro, the single currency, has not created the economic crisis in Europe.This was going to come anyway because of lost competitiveness, the emergence of new competitors, like China, for traditional European industries, and the progressive ageing of European societies. Expansionary monetary policy could only have postponed the emergence of the symptoms, it could NOT have prevented the illness.

What the existence of the euro has done is impose discipline and mutual solidarity on Europe.

Without the euro, countries would have pursued the route of devaluation and inflation in response to their problems. Savings would have been wiped out. This is not possible now, and that is good. Instead problems are now being tackled at their source.Without the euro, wealthier and stronger European countries would not have come, so quickly, to the aid of other European countries in difficulty. They have now done so on a systematic basis, and that too is good.The EU is moving toward a common system for winding up banks that need to be wound up, without putting the overall system at risk. It is moving toward a common system of deposit insurance. These are issues that also require attention here in China.Much better systems are now being put in place in the European Union, to ensure that, in future, public finances, and underlying competitiveness, do not get out of line again. Out of the crisis, we are now facing up to problems we had ignored for the past 20 years in Europe.

The euro will survive. Not only that, I believe it will eventually be imitated in other parts of the world.

To sum up, the euro
+ is a protection against the expropriation of savings, through inflation and devaluation.
+ is a factor for economic stability in the world, and
+ is a major political step forward for unity Europe.

John Bruton Crisis European Union Eurozone Foreign Policy

Youth politicians all around Europe are thrilled. The topics of the young generation are finally high up on the political agenda: the Youth Guarantee, Youth Unemployment, and ‘Employability’ are now established in the political jargon. The political focus on the younger generation and the amount of policies made is evolving for each day that goes by.

As much as we embrace the fact and try to make our – the young people’s – voice heard, we still have to ask ourselves which tools would enable us to live a self-determined life – and which are the ones arousing covetousness at its best but add, in fact, little to a sustainable solution. Don’t get me wrong! Any efforts embracing what the young generation calls for should be appreciated. While elderly have their own strong representations, every young generation has to fight for their spot. Two initiatives are highly debated at the moment: The Youth Guarantee and the Loan Scheme for Master students.

While the Youth Guarantee is aiming at sudden support for the youth and tries to offer training or employment opportunities within four months to young people under the age of 25, we have to question whether the allocation of funds to achieve these goals is granted properly: the idea to focus on regions is good since it follows the principle of subsidiarity, solutions should be found on the level on which the problem actually exists. Nonetheless, by setting the measurement that youth unemployment needs to reach a level above 25% in the region, moral hazard behaviour might be triggered. Regions will have an interest in presenting themselves in a worse state than they actually are.

Even if an improvement would be achieved – that means young people will have found their way into the labour market or into training – the regions will have an incentive to present their levels of youth unemployment to remain above 25%. While this race to the bottom will aim at securing cash flow into the region, it weakens the efforts to move the youth out of its misery. It is effective, sustainable solutions that need to be considered. The grants provided in the Youth Guarantee program need to be orientated to programs that ensure sustainable educational programs and trainings. They need to focus on the actual demand in the labour market.

It is important to point out that actual achievements are not the main factor in the planning of policies. It is rather the opposite, if we take a look at the Master Loan Scheme Guarantee. It is a mean that shall empower students to move across Europe, in order to study in a master programme in their desired field of studies. Both, the EU Commission and the European Parliament tasked the European Investment Bank (EIB) to channel through guarantees to private banks. These will then be able to hand out student loans at a reasonable interest rate. It is a tool envisioned to particularly fill one gap: provide financing for students that desire to complete their entire master studies abroad. Conventional Erasmus funds cannot be tapped for such, they can only be utilized if a student is enrolled in a university program from which he then takes parts of his study for a semester or two abroad.

It is more than just closing a financing gap, it is also considering the regional diversity and richness we provide in Europe: in the 21st century, it is more important than ever to invest in human capital ad in education. While technology is certainly a tool in helping to bridge distances, this is only true within a limited scope. When education cannot be delivered to the student wherever he may be, then the student must be enabled to go get this knowledge at another destination. Specialized learning at the best can be achieved easily with the loan scheme guarantee. 300.000 students shall benefit from this mean in the period 2014 – 2020. It is 300.000 young, highly-skilled students that do believe in their abilities. They are willing to put their claims onto the future and their prospect in life.

Opposing this idea of creating opportunities will only result in the creation of a ‘lost generation’: Not a ‘lost generation’ in a sense as some politicians refer to these days when speaking about the unemployed youth. But we need to be careful not to create a lost generation that is being patronised! No one is forced to apply for any loans, but if people want to achieve great things in their lives and have trust in their abilities; they should by no means be stopped.

We need a generation that believes in its bright future here in Europe!

Eva Majewski Crisis European Union Jobs Youth

Jürgen Matthes, co-author of a new CES study on public finances and growth talks about how to counter the dangers of self-defeating austerity and the four objectives that have to be taken into consideration when implementing smart fiscal consolidation measures.

Jürgen Matthes Crisis Growth Macroeconomics Social Policy Sustainability

Today, no one disputes that credit is vital for small and medium enterprises. Despite the momentum that big businesses give to our economies, SMEs are still the basis of the Spanish productive sector and the ones employing the majority of citizens in Spain and in Europe.

With the crisis, the challenges facing SMEs have become more pronounced. Not only because of the drop in sales as it is the case for other companies, but because of major difficulties in accessing credit. A few years ago, almost any solvent SMEs in Europe could take out a loan. However, the situation has changed and today, the financial market is “fragmented”. What do we actually mean with this? Simply that the criteria for accessing credit varies greatly across Europe. For example, an SME in Spain must satisfy vastly different criteria than an SME in Germany in order to take out a loan.. The result of this is that banks are failing to grant loans to companies in Spain, while similar companies in Germany are being provided with the credit they need. Moreover, even in cases where they can access loans, Spanish companies end up paying a hefty premium, estimated by Deutsche Bank to be in the region of three and four percent.

This fact is drowning many small and medium Spanish enterprises and therefore affecting the recovery of the country and of Europe as a whole. If SMEs do not have access to credit, their ability to run a business is severely impeded and this in turn has serious consequences on the employment situation and economic growth. We need to consider the different possibilities available to solve this problem. The ECB is expected to cut the interest rate by 0.5% in a few months. However, we have observed how a decrease in interest rates will not solve the fragmentation in the financial markets. We should therefore consider measures such as the ECB changing its collateral policy and authorising banks to use SMEs debt to access credit from the ECB. There is also possibility that the ECB could buy SMEs debt directly from banks in the periphery countries.

These measures, as opposed to low interest rates, would have a direct impact on SMEs, as they could access credit and thus bring us back to the path of growth. The two questions that will decide the future are: will Germany accept such measures? Will the ECB assume a role that it has until now refused? I have no doubt that something is moving in the ECB.

Pablo Zalba Banking Business Crisis Growth Jobs

WHY ARE MODERN BUSINESS REGULATIONS SO COMPLEX?

I believe that across the western world we may be reaching some sort of limit in the complexity of rules governing business. The response to the financial crisis has been ever more complex rules, that only a tiny number of professional advisors could ever hope to remember or understand properly. In the United States, the Glass-Steagall Act, introduced to regulate banking after the Depression of the 1930’s ran to 37 pages; in contrast, the Dodd-Frank Act, introduced in the wake of the recent crisis, runs to 848 pages of basic text, plus 30,000 pages of implementing rules. In the UK, the 1979 banking act ran to 75 pages, while the 2012 Financial Services act runs to 534 pages. It is the same with taxation: in 1997, Tolley’s guide to the UK tax system had around 5000 pages, while the latest edition has 17,795 pages. I have no doubt the pattern is similar in other countries and in other areas of regulation.

Why is this happening? I think the explanation is ethical, political and legal. Ethics may have declined in many organisations to a point that something is deemed acceptable so long as it is legal, even if it may be very unfair to customers, creditors or the taxpayer. This may be accompanied by other excuses like “everyone else is doing it” or “we must do this to keep market share.” In politics, the” gotcha” principle may be at work: no politician or administrator wants the buck to stop with them if something goes wrong. As a result, they make ever more complex rules to pass the responsibility on to some other body, preferably to an anonymous quango. Also businesses themselves lobby for “certainty” in legislation, which often involves more and more complex exceptions and qualifications. The ingenuity of lawyers in devising complex ways of getting around rules also drives rule makers to introduce new complexities to close loopholes. Some of these new laws are so long that parts of them are never properly debated, or even understood, in parliaments.

A REGRESSIVE TAX

Complex rules are a sort of regressive tax. They give an artificial advantage to those who can hire “the most sophisticated risk modeler, the slickest tax accountant” as Andrew Haldane of the Bank of England pointed out in a speech earlier this month. These complex rules carry huge economic costs. They divert talent, time and money away from productive activity to an activity that adds nothing to the competitiveness of our economies in international markets. Andrew Haldane asked the question: “If complex frameworks come with economic and social costs-why has society not done more to tackle them Resistance is strong, particularly among those who gain most from squeezing through the loopholes. There is also an inbuilt professional inertia among regulators, lawyers and tax accountants with large amounts of human capital invested in complexity.” Simplifying regulations must be part of any serious effort to make the European economy more competitive.

A RETURN TO BASIC ETHICAL QUESTIONS IS NEEDED

Rather than ever more complex rules, covering every conceivable thing that could go wrong, we may need to return to simpler, more general rules and rely on the courts to decide whether people acted in accordance with the spirit and intent of those rules. For example, instead of prescribing in ever greater detail what companies must put in their annual reports, we may need to simply lay down a rule like ”the company must disclose all material facts that shareholders, customers and creditors would need to know in their own interests.” Then leave it to the courts to decide if the company has disclosed all those material facts and provide harsh penalties if the courts decide they have not. That may mean businesses living with more uncertainty: rather than know for sure whether some shortcut they are proposing to take is legal or illegal, and if legal feel free to go ahead with it, businesses in future may have to ask themselves the question “is this action right, fair to my customers, fair to my shareholders, and fair to the general public?” If the answer is “no” to any part of that question, they should decide of their own accord without consulting any regulator or professional advisor, that they will not do it.

John Bruton Business Crisis

News emerged last week which contributed to a climate of confusion, fuelled by conflicting messages fantasising about unlikely scenarios.

After a series of reports suggesting that the Commission could carry out a Macroeconomic Imbalance Procedure (MIP) with Spain, some sections of the media interpreted this as a reprimand of the Government of Spain. Last week the President of the Eurogroup, Jeroen Dijsselbloem, re-affirmed his confidence in Spain, stating that Spain can be the engine of growth in the Eurozone.
These events give the feeling that some sections of the Spanish media are liable to deliberately magnify the negative when reporting economic news.

Despite of the importance that carrying out a MIP could have, one must bear in mind certain facts. Firstly, we must remember that any decision to carry out a MIP will be made on the basis of previous procedures, including an analysis of relevant data in 2011 under the government of President José Luis Rodríguez Zapatero. Subsequently, there is a final check to identify the countries with excessive macroeconomic imbalance. In this case, Spain and Slovenia.

This process involves an information gathering process and does not necessarily involve any mandatory corrective action. We must bear in mind that in order for this procedure to have consequences, like the imposition of conditions or sanctions, we would have to move to a new step of the process in which the Council, on the basis of a recommendation from the European Commission, would advise the concerned Member States to take corrective action.

Therefore, it is obvious that the controversy does not respond to reality. Moreover, I have no doubt that corrective actions will not be recommended. The Vice President of the Commission, Olli Rehn, has already hinted the fact that the Commission would give Spain two additional years to meet its deficit targets.

Data shows that Spain, despite the challenges that still have to be faced and of which its current Government is fully aware, is on the right track.

But let us not forget that is also time for Europe to act. Even if Spain is on the right track, every effort will be useless if Europe does not create a banking, economic, fiscal and ultimately political union.

Pablo Zalba Crisis Eurozone Growth

There is a tendency whenever a eurozone country gets into difficulty and needs help from its neighbours to blame Germany for the severity of the terms imposed and to say there is bullying involved. In both Greece and Cyprus, we hear references to the Second World War, as if offering Greece a low interest loan to keep its state functioning was equivalent to a military invasion of the kind Greece experienced in 1941.

There is also talk of the “solidarity” that Germans ”owe” the rest of the rest of the eurozone, even though any money Germany might pay has to be raised from German citizens, under the German tax system. This is the way it has to be done, only because there is no common eurozone tax system, applicable to all euro zonecitizens, from which the money might otherwise come. Indeed those who call most loudly for “solidarity” would probably be the first to object if a common eurozone tax system, equally applicable to all eurozone citizens, was proposed. Others criticise Germany for insisting on “austerity” in spending by countries that are spending more than they are earning, as if there was some alternative to spending less in those circumstances.

The fact is that some countries, including Ireland, are still spending more than they collect in taxation, even after one has left out of account the interest paid on past debts. Such countries have what is called a “primary deficit”. Ireland had a huge primary deficit in 2010, has a small one today, and hopefully will have a tiny primary surplus next year. But if it is to reduce its debts, and thus not be vulnerable to disaster, if there was to be a sudden increase in international interest rates of the kind that occurred in 1979/80, Ireland will have to have a primary surplus for many years to come.

That is the only way to reduce the debts it ran up through the primary deficits it ran in the recent past. This is not something “imposed by the Germans”, it is imposed by the rules of mathematics, and by compound interest in particular. Of course there is one alternative, inflation, the alternative of inflating debts away. Inflation devalues everything. It reduces the value of money, and in so doing, it also reduces the value of debts and, of course, of savings. If inflation is greater than the rate of interest, debts will reduce.

But the value of pension funds, of bank deposits and of life assurance policies would also reduce. Inflation would mean falling living standards all around, because if a country is to stay competitive, wages would have to increase at a slower rate than prices. Those on fixed incomes would see their living standards decline even more, because they could buy much less each year with their fixed income. Inflation is very hard to keep under control, once it starts to take hold.

Germany tried to inflate away its First World War debts in the 1920s, and the experience was a complete disaster. Understandably, it does not see inflation as a solution to Europe’s debt problems today, and nor should we. Some argue that Germans themselves should spend more and save less, and say this would help other countries in Europe. This is already happening to some extent.

German imports were 10% higher in 2011 than they were before the recession, whereas almost every other European country is importing less now that it was then. It is fair to say that Germany’s balance of payments surplus, at 6% of GDP, is very high indeed, too high, and that this surplus is not being used all that wisely. Germany could do more to free up its own internal market, and the OECD has been critical of it on that score, but that offers a long term, rather than a short term solution for the rest of Europe.

It is also important to deal with the myth than Germany is a terribly wealthy country, that it can afford to bail everyone else out. Germany’s present competitiveness is of recent origin. A dozen years ago it was the “sick man” of the European economy, struggling with the unexpectedly high costs of absorbing East Germany. Germany got a big bonus from the opening up of China, which imports a lot of German engineering goods, while other European countries (eg. Italy) have lost for the same reason, because Chinese consumer goods are undercutting them in their specialist markets.

Germany is an elderly country, with far more people approaching retirement age than preparing to enter the work force. Probably for this reason, its medium term growth potential, and thus its medium term debt repayment potential, is low by comparison with other countries in Europe. The OECD did an estimate of real growth potential for different countries from 2016 to 2025. Its estimate for Germany was only 1.2% pa over the ten year period, for Netherlands 1.4%, for Italy 1.5%, for Portugal 2.1%, for Spain 2.3%, and for Ireland it was projected to be 2.7% a year!

German families are apprehensive about the future, and if those OECD figures are to be believed, it is hard to blame them. German families do not FEEL wealthy. Only 44% of Germans own their own home, as against 58% of French people, 69% of Italians and 83% of Spaniards. According to a recent Bundesbank study, the average household wealth in Germany is 195,000 euros, as against 229,000 euros in France and 285,000 in Spain.

This is the reality with which German politicians have to cope. It does not mean that they are always right, but it does mean that they have to be cautious. It also means that Germany alone cannot solve Europe’s financial problems.

John Bruton Crisis European Union Eurozone

If the eurozone had a facebook page, it would have changed its status last year from single to it’s complicated. European leaders had neither time for a spring fever, nor a summer break. They fell into a spiral of emergency summits adopting immediate decisions to save their economies and the eurozone’s single status. Amid this challenging context, political leaders, leading economists, analysts and businesses met last month to discuss the future of Europe at the Tatra Summit in Bratislava; under the title “Shaping a Genuine Economic and Monetary Union“, the event was the first international conference organized by the new kid on the EU-policy scene, the Center for European Affairs, in cooperation with other like-minded organisations in Europe, including the Centre for European Studies as a main partner.

I was there and chaired a session on the upcoming edited volume of the CES and its member foundations, entitled ‘From Reform to Growth: Managing the Economic Crisis in Europe.’ This book looks at the financial and economic crisis in Europe, detailing and comparing the different measures taken to handling this crisis in different countries and regions, and providing a centre-right narrative on approaches to the crisis. The volume is due to be published in late May.

Whoever thought that Slovakia was too small to absorb two big international conferences per year proved to be wrong. The Globsec security conference, which is to take place in Bratislava this April again, has in recent years become one of the leading security conferences in Europe. Without any tradition, the Tatra Summit has also been able to attract a solid number of high-level speakers and participants to Bratislava. Here are my five key takeaway points from the conference:

1. Europe has not been hit by one crisis but by multiple, intertwined crises: financial and economic crisis, banking and debt crisis, eurozone crisis, with all these resulting in a political crisis. These crises have brought to light the “known unknowns” and the “unknown unknowns”, as one leading speaker explained at the conference. Even prior to the crisis, it was clear to everyone that there was a rather strong economic asymmetry between the individual members of the monetary union. What was however unknown, was the degree of the financial fragility of the Economic and Monetary Union (EMU).

2. Because of the always existent unknown unknowns, the future crises cannot be prevented. Nevertheless, as Professor Sklias from the University of Peloponnese in Greece underlined, there’s hope that Europe is better prepared today. We not only know that the crisis is a real thing and not a myth, but we have also improved the EU’s financial infrastructure. For example, the steps towards the creation of a banking union among the eurozone members, and possibly other EU countries, are steps in the right direction; however, its functionality has not been tested yet and belongs to the unknown unknowns.

3. There was a broad consensus among conference participants that “every crisis in Europe always ends with more Europe, never with less Europe.” However, more Europe, according to Harald Waiglein from the Austrian Ministry of Finance, needs better coordination, more flexibility of labour, capital and prices, enhanced capacity, joined liability for debt and a functioning last resort facility. Nevertheless, it remains to be seen whether a genuine EMU is a realistic scenario due to the different economic realities of its members and a general understanding that one size does not fit all.

4. Unlike widespread consensus on “more Europe”, the conference uncovered different approaches among participants towards fiscal consolidation and growth. Slovakia’s Finance Minister Peter Kažimir has been one of the strongest opponents of the growth-friendly fiscal consolidation. According to him, any fiscal consolidation is always bad for growth. On the other hand, ECB Board Member Jörg Asmussen believes that one has to look beyond a short-term perspective because a responsible fiscal consolidation leads to sustainable growth in the medium and long-term.

5. Crisis recovery is not a sprint, it is a marathon. Fiscal recovery is just the first part of the story. Only at a later stage will the improvement on the financial front gradually lead to the improvement of the real economy, the social situation and political stability. Moreover, the level of patience and trust of Europeans in their politicians has never been as low as now, so political recovery is very likely to take even longer than one would imagine. To restore people’s confidence, Europe needs to reform. Drastic spending cuts and tax increases will not do the job but the structural reforms in the healthcare, social and pension systems as well as education reform could be a solution.

A small caveat to these five points: what the conference slightly lacked was a more clear Central European dimension. I would have liked to hear Central European speakers to tell us whether there is something like a common Central European vision on the future of Europe and the economic and monetary union, and to explain whether and if so, what the old Europe can learn from the new Europe.

Nevertheless, there is no doubt that the first Tatra Summit was an icebreaker in bringing the European debate closer to European citizens by moving it from the usual Brussels’ comfort zone to another EU and eurozone capital. I am positive that the Tatra Summit will become a known brand in Europe and will, the next time and among many other issues, offer a stronger Central European perspective.

[photo source: Centre for European Affairs]

Katarina Králiková Crisis EU Member States Eurozone Macroeconomics

All resolutions of banking crises involve imposing and sharing sacrifices. As far as possible, people should know in advance how sacrifices are to be shared. No way of saving is completely risk free, but the greater the risk, the greater should be the reward and vice versa. A high yield bond should be riskier than a low interest deposit.

It is on this basis that the terms of the proposed bailout of the Cypriot banking system should be scrutinised, because it illustrates how Euro Zone policy makers are thinking. The initially proposed bailout of Cypriot banks involved imposing haircuts of the depositors in Cypriot banks who have been covered by the deposit guarantee scheme, that is depositors with amounts less than 100000 euros. Whose idea was this? Setting aside the terms of a deposit guarantee like this would be a very serious step for Euro zone policy makers to have taken. It calls into question the integrity of deposit guarantees generally. That is hardly a good idea when we are trying to restore confidence in banks and rebuild their capital bases

SENIOR BONDHOLDERS TO BE PREFERRED TO DEPOSITORS?

According to today’s Wall Street Journal, an alternative to burning the guaranteed depositors was proposed by the IMF. This was “radically shrinking the two largest banks, including bailing in senior bondholders, and letting deposit insurance kick in. In that case, depositors in Laiki Bank and Bank of Cyprus would have faced losses of 30 to 40% above the insured 100000 euros.” It would appear therefore that an explicit legal guarantee of deposits is to be set aside so that senior bondholders and un-guaranteed deposits are to be reduced, or, in the case of senior bondholders, no haircuts. The net effect of this is that a deposit guaranteed euro in a Cypriot bank is not worth the same as a euro in a bank somewhere else in the eurozone.

This is contrary to the underlying principle of having a single currency. The philosophy behind the decision to afford protection to the position of the admittedly small number of senior bondholders of Cypriot banks at the expense of guaranteed depositors has yet to be explained. Senior bondholders are commercially well informed investors, depositors are not. Senior bondholders also earn a better interest rate than small depositors do.

SHOULD BONDHOLDERS OF BANKS BE PREFERRED TO BONDHOLDERS OF STATES?

It is also hard to understand why the EU policy imposed a haircut on the senior bondholders of the sovereign Greek state a few months ago, but it did not impose a haircut on the senior bondholders of private Cypriot banks, when that was suggested by the IMF. Indeed, part of the problem of Cypriot banks is that they were themselves senior bondholders of the Greek state, who suffered a haircut on those bonds as part of the terms of the Greek bailout. Who are the senior bondholders of Cypriot banks who are so deserving of 100% protection? Who are the big depositors whose haircuts were to be reduced by attacking the under 100,000 euro guaranteed depositors?

A credible and consistent banking system is essential to a modern economy. The EU is committed to establishing a banking union, including a single system for winding up banks and guaranteeing deposits. The precedents being set in the Cypriot case are important and, in my personal view, troubling. They do not indicate clarity or consistency of thought by either the eurozone, finance ministers, or the European Commission. The rejection of the deal by the Cypriot Parliament now gives eurozone policymakers a chance to think again about the underlying philosophy of their approach to the financial crisis.

John Bruton Banking Crisis European Union Eurozone

It has been five years since the banking crisis erupted in the United States. If, instead of boasting of having the most robust financial system in the world, the Spanish Government had immediately begun the process of restructuring its financial system, Spain would not have needed European aid to complete this arduous task. However, we should not cry over spilt milk. The important thing right now is to ensure that this type of crisis will never be repeated.

One year ago the Spanish savings banks finally acknowledged that they had serious problems after making excessive loans to the construction sector. Months later, problems with the saving banks turned into a government crisis: after injecting money into the financial system in order to save the banks, they continued to experience problems with financing because of the lack of trust of investors. This problem in countries like Spain and Ireland spread to the rest of the European Union. What started as a banking crisis ended up being a threat to the euro. It created a vicious circle between the banks, the trust in the Member States and the euro.

If we have learned anything from this crisis is that the architecture of the euro was flawed, since we created a monetary union with different economic policies and banking regulations. The result was that the citizens ended up paying for the banking disaster. Now we have the opportunity to change the structures supporting the euro which we were not able to be put in place at the time of its introduction..We are entirely committed to this task.

In order to do this, the European Parliament has been proposing to create a banking union for more than a year. The primary goal of this proposal is to protect taxpayers being forced to pay for the banking crises. Firstly, we need a single supervisor to ensure that all EU banks are supervised and they do not pose a risk to the rest of the banking system. This would guarantee that, for instance, a badly supervised saving banks in Spain or poorly supervised banks in Ireland would not pose a risk to the rest of the countries. This joint monitoring system, along with a Deposit Guarantee Fund and a common crisis resolution mechanism should be the three axes of a reform that will protect the citizens of all euro countries from another banking crisis.

The truth is that progress in the last year has been substantial. However, there is some cause for concern in relation to the speed at which European institutions are responding to the problems posed by the banking crisis. Sometimes it seems that we fail to react until we are on the brink of another crisis. Progress was made last year because Europe felt the pressure of rising bond spreads. With lower spreads, we probably would have not reacted. Therefore, this year we risk failing to take decisive action and creating the banking union that is so urgently needed as bond markets appear more stable.

These days there is a heated debate on a bailout for Cyprus which seems to be breaking the taboo of the deposit insurance fund and its consequences for the fledgling banking Union. It is important to contextualize the measure. A high percentage of deposits in Cypriot banks are foreigners, mostly Russians. This is not the case in other euro zone states. Also, whether we like it or not, we must not forget that Germany faces an election in two months. I tend to be positive and believe that the Cyprus bailout may be the price we have to pay so that the Banking Union becomes a reality.

Pablo Zalba Banking Crisis Economy EU-Russia Eurozone

The long running crisis in the euro area is caused, at least in part, by the fact that the participants in the bond markets have little understanding of, and for a long time had little interest in how the eurozone makes its decisions at political level. In the past, these bond market participants assumed, without much enquiry as to why, that Greek government bonds were no more risky than German Government bonds, simply because Germany and Greece had the same currency. At that time, they took no interest in the internal politics, or relative competitiveness, of Greece and Germany.

This misunderstanding often also encompassed economic commentators, especially in the English language media, who, then and now, are unduly influential in the mind of bond market participants. Then, in the wake of the shock of the Lehman collapse, everything changed. The slightest political ripple now sends amplified shock waves through the bond markets, and the interest rates charged to lend to different countries within the euro zone vary greatly. Long ignored indices are now scrutinized obsessively. Both bond buyers and economists, having blithely ignored the EU political system for years, now crave complete and definitive answers from it, and they want those answers yesterday!

Of course, the markets worry about the viability of the public finances of individual countries or of their banks, but an even greater concern is to know whether a particular country will stay in the euro in all circumstances. A country leaving the euro could impose an immediate and shocking loss on lenders to that country, and to its banks. So the first priority for the markets is convincing them that, no matter what happens, nobody is going to leave the euro. That is a matter of political conviction, not macroeconomic analysis. After that, everything else can be negotiated. However, the political leaders of the euro zone come at things from a very different angle to that of the commentators and bond buyers. While the political leaders understand the bond buyers’ craving for certainty, they are engaged in a complex multidimensional political negotiation, in which they have to balance the interests of 17 different sets of national taxpayers, some of whom want to shift liabilities to someone else, and others of whom who want to take on as little liability as possible, for the debts of others. The political negotiation is further complicated by the fact that the EU does not yet have the legal power to do some of the things it needs to do, and some of its members want to withhold agreement to giving it those powers, in pursuit of national concessions.

Britain is the most outstanding example of this, but more recently Italy played that game. In Ireland, one political party wanted to veto the ESM, which is beneficial to Ireland, simply to get concessions on something else. This sort of silly thing goes on often in EU negotiations, because EU negotiations are conducted by humans, not by angels. While there is a European Union, the people who make the final decisions for the Union are national politicians, elected by national electorates, and the national electorates frequently do not understand one another very well, or choose not to do so. The cheap caricaturing of Germany in some other EU countries has been matched by equally juvenile caricatures in parts of the German press of other countries, like Greece. Sometimes the critics have a point, as when Germans complain about the possibility of extending their credit to countries like France, which is reducing its retirement age to 60, while Germany feels it has to raise its retirement age to 70 to maintain German creditworthiness. As well as making decisions, leaders have to bring their parliaments, which reflect these very diverse electorates, along. Sometimes they need a two thirds majority, as in Germany, or a referendum, as in Ireland. To use a construction analogy, the markets want the EU to produce a fully constructed and furnished building in time for next week’s bond auction. But the politicians are trying to build the foundations without having finalised the architectural drawings, while simultaneously arguing about the height of the building, investigating whether they can buy some units prefabricated, and deciding how much bricklayers are paid per hour by comparison with carpenters. That’s politics, and this is a political negotiation. It is the way it has to be. No one is going to show their full hand until the moment they are satisfied that everyone else is going to show their hand too.

Commentators criticise the outcome of individual meetings as if it was not a political negotiation, but an academic exercise, and the 17 eurozone leaders were “Platonic guardians” unconstrained by anything except the requirement to produce a theoretically symmetrical outcome. For example, one notable commentator (Wolfgang Munchau in theFinancial Times) announced recently that the crisis was going to last 20 years, just because Angela Merkel had not accepted that there would be joint euro zone insurance of deposits in euro zone banks, before she had seen the details of exactly what level of central scrutiny of their banks, the other countries would accept, so as to ensure that they would not take a free ride on the backs of German depositors. What did he really expect? Mrs Merkel will not show her hand until she absolutely has to, any more than Enda Kenny or Francois Hollande will. Likewise, it is unrealistic of people like Nouriel Roubini to demand that the size of the ESM fund be doubled or tripled at this stage, before anyone knows for sure whether the intended beneficiaries of an enlarged ESM will do all that is required of them to deserve the money. Uncertainty about the size of the fund, and doubt about whether it will be big enough in all circumstances, is essential as an incentive to get debtor governments to do the things they need to do, to be sure they do qualify for the fund, if they need it. The Euro area Summit statement of 29 June said it was “imperative to break the vicious circle between banks and sovereigns.”

But it also said that, for EU funds to be directly invested in banks, an “effective (European) supervisory mechanism” would first have to be established, and that any injection of funds would have to be accompanied by conditions that would be “institution specific, sector specific, and economy wide.” So a deal will have to be negotiated in respect of each individual bank, each national banking sector, and each country. According to a paper published recently by the highly regarded Brussels think tank Bruegel, a European Banking Union would require decisions on at least 8 big questions: 1. whether to include countries not yet in the eurozone 2. whether to bring all banks under direct EU supervision, or just the big ones 3. the scope of an EU wide deposit guarantee, as to the amount covered and whether there would have to a local contribution, without which the system might be abused 4. an EU wide system for closing banks down and distributing the losses between shareholders, different classes of creditors, taxpayers and other banks in the country in question and elsewhere.

Associated with this is the question of requiring all banks to draw up “living wills” to say what would happen if they go out of business 5. some form of limited euro zone wide taxing capacity to act as a back stop if the deposit guarantee fund proves insufficient 6. how to distinguish between past, and potential future liabilities 7. the proper focus of eurozone bank supervision. Should it be on capital ratios, liquidity ratios, business models, diversification or other variables? Should different types of banking be separated from one another, or does a mixed system make it easier to get over short term difficulties? 8. what to do about Britain, which wants nothing to do with the euro or a a European Banking Union, but still wants unfettered access to eurozone financial markets on the same terms as everyone else. These are difficult political issues and they will need to be resolved in a way that is BOTH theoretically sound AND politically balanced, between all the 27 countries in the EU.

Patience will be required.

John Bruton Crisis Eurozone

Spanish parliamentary elections were held on the 20th of November 2011. Spanish citizens elected their representatives for both the Congress of Deputies and the Senate.

The results show a clear victory for Partido Popular (PP) and a remarkable defeat for the Spanish socialists (PSOE). Focusing on the outcome of the elections at the Congress, which is the main legislative body in the Spanish bicameral system, the PP won the elections with the 44.62% of the votes, followed by PSOE with the 28.73%. The global turnout of the elections was 71.69%, slightly lower to the latest elections of 2008. We can fairly speak of historic results concerning the PP and the PSOE alike, but for very different reasons though. These constitute the best results ever for Partido Popular,beating both the number of seats and the total number of votes obtained during the absolute majority of former PP government lead at the time by the Prime Minister Aznar, reaching a total of 10.830.693 electorates. Regarding the seats in the Parliament, PP increases its representation from 154 to 186 (+32), being 176 the minimum seats required in order to have an absolute majority.

Obtaining their worst results ever, the PSOE went from 169 seats in the past elections to 110 (-59). Rubalcaba, the defeated socialist candidate, stood up and explain the electoral results while calling for a party congress to discuss the future political strategy, which will likely include a reorganization of the party leadership. In a speech characterized by its prudence, Mariano Rajoy, leader of the PP and future Prime Minister of Spain, called for national unity and hard work as the formula to get away from the crisis. “My only enemies will be the unemployment, the deficit, the excessive debt, the economic stagnation and anything which keeps our country in this critical situation”.

Concerning the role of Spain in the European Union, Rajoy claimed for Spain to have a leading voice in Brussels and Frankfurt, being the most loyal of the Member States as well as the most demanding one. “We shall stop being a problem to start being part of the solution once again”. The political spectrum after the elections Beyond the results of the two main parties, these elections produced other data which is worth-mentioning. Izquierda Unida (IU), a collation of leftish parties including the Communist Party, raised its representation from 2 seats to 11, with the 6.92% of the votes. Unión Progreso y Democracia (UPyD), a party attending the general elections for the second time in its history, with a support of 4.69%, multiplied by 5 its number of seats, going from 1 to 5. Convergència i Unió (CiU), a Catalanist centre-right coalition, with 4.17%, managed to become, for the first time in history, the leading political force in Catalonia with 16 seats, ousting the socialist from the first place. AMAIUR, a leftish nationalist and separatist Basque coalition, with 1.37%, accessed for the first time in history the Congress and will have its own political group, with a total of 7 seats. Finally,Partido Nacionalista Vasco (PNV), a Basque nationalist party centre-right minded, with 1.33% and 5 seats, is no longer the political party with the biggest representation in the Basque Country. The other parties which managed to obtain representation at the Spanish Parliament are Esquerra Republicana de Catalunya (ERC), Catalan leftish separatist with 1.05 %; Bloque Nacionalista Galego (BNG), Galician leftish and nationalist party with 0.75%; Coalición Canaria-Nueva Canarias (CC-NC-PNC), a coalition of parties from the Canary Islands, with 0.59%; COMPROMÍS-Q, a regionalist leftish and green coalition from Valencia, with 0.51 %; FAC, a regionalist centre-right party from Asturias, with 0.4%; and GBAI, a Basque nationalist and progressist coalition, with 0.17%. This makes a total amount of 13 parties represented at the Congress, one of the highest numbers in Spanish democracy.

A careful reader would have already realized of the fact that there are some apparent contradictions in the above mentioned data. While not examining in depth this question, let us just highlight the fact that, under the current electoral law, geographically concentrated votes (provinces being the constituencies in Spain) have greater value than disperse votes along the Spanish geography. Therefore those parties whose electorates are concentrated in a reduce space, are comparatively overrepresented at the Parliament if we only look at the absolute number of votes. Analysing the results: what happened to the socialists? Taking into account the fact that the global turnout has only been slightly lower than in the past elections, one could wonder where the votes of the socialists went to. If we have a look at the remarkable increase of IU and UPyD, we may find, at least, part of the explanation. IU would have ‘stolen’ votes from the left-side of the PSOE, while UPyD would have taken some of the most centrist or moderate socialist voters.

There is also a pool of independents that has, to some extent, shifted from PSOE to PP. Another interesting variable to analyse would be the impact of the so-called ‘indignados’ movement (Spanish indignants) on the elections outcome. Even if the movement has been characterized from the beginning precisely by the lack of a clear-cut ideology, many of the mottos the movement has used along their demonstrations suggest disagreement with the decisions that are being taking in Brussels and, in broader terms, with the international financial system (some of the messages being openly anti-capitalist). We could therefore fairly expect that, at least part of these ‘indignados’, have shown their support for the leftish coalition IU.

How could these results influence on the Spanish political and social dynamics? On the one hand, the Partido Popular has earned enough popular support to carry out the necessary measures Spain will have to go through to get away from the crisis. Moreover, taking into account the last movements of PM Zapatero following the line proposed by Angela Merkel, the PSOE is expected to support PP actions taken upon Brussels’ request. On the other hand, however, we should not underestimate the increase of power that IU has experienced in the Parliament. We could expect a reinforced IU to gather support from the trade unions and take actions against the future government through, for example, the call of a general strike. After the elections What are the steps to follow? The intention of the PP is to have a transfer of power as soon as possible taking into account the current economic situation. Contacts have been made already between the two main parties in that sense.

The foreseen timeline is as follows: the 13th December a new Parliament will be constituted and the appointment of the new Prime Minister should take place before Christmas time. Speculations are focused now on who will be the men and women Mariano Rajoy will trust to form the new government. Although there are just a few concrete names on the table, what seems to be very likely is the creation of a double-hatted minister who would take care both of economic issues and the relations with the EU. Rajoy’s first contact with some of the most prominent European leaders will be as soon as the 7th of December. The Spanish leader is expected to attend to the European People’s Party Congress in Marseille as the Spanish Prime Minister in pectore. This will be a good opportunity for a first exchange of views between Rajoy and Angela Merkel, Nicolas Sarkozy, Herman Van Rompuy and Durao Barroso, among others.

Crisis Elections

The “Occupy Wall Street Movement” has gathered in New York since September. Organising via blogs and adopting the slogan “We are the 99 per cent” (as opposed to the 1 per cent of the population who are wealthy), these protests have reignited an almost forgotten counter-globalization movement. Many different groups within society–not only unemployed people–are involved in a movement which currently has no real core identity.

The Left, including the extreme Left, wants to claim ownership of the intentions and goals of the very heterogeneous groups participating, which even differ from country to country. In many European cities, protest movements are visibly on the rise, including the “United for Global Change”, a so called world-wide protest day, on October 15th. This counter-globalisation movement is seeking to find a strategy to combine their objections with those of the national protesters. On 15th of May “los indignados” (the indignants) protested in economically troubled Spain, and protests in Greece likewise were composed of people with different political views and social backgrounds united by anger and despair. In Greece, one can even say a massive movement has emerged.

The counter-globalisation movement seeks to use these opportunities to recall their old slogans such as “A better world is possible!”. Indeed, after its emergence at the end of the 1990s, global, European and national elites have taken the old demands of the organization “Attac” seriously (the introduction of the Tobin Tax on financial transactions), which was founded in Paris in 1998 under the name = Association pour une taxation des transactions financières pour l’aide aux citoyens. Maybe surprisingly, the counter-globalisation movement was not very visible during the first global financial crisis in 2008.

Background:

This is changing now. First of all, after 3 years of crisis in many EU countries, with bank bailouts and an apparent retrun of at least some actors in the financial sector to some bad old habits, managers and bankers are much more clearly the scapegoats today. Second, countries like Greece, Spain and Italy have to implement strict austerity measures that are seriously hurting more and more people. Third, dimming economic perspectives for many Europeans correspond to a pervading sense of relative decline of Europe (and North America) vis-à-vis the emerging economies in China and elsewehere. Moreover, “citizens in anger”, formerly supporters of the state and the market economy who are shocked by the political and business elite, correspond very much to the bestselling French booklet “Indignez-vous!” (Time for Outrage). The author, Stéphane Frédéric Hessel, born in 1917, is a former ambassador, concentration camp survivor and French resistance fighter. The 32-page essay was first published in a small batch of 6,000 copies selling for not even 3 euro per piece. By the end of 2010, 6 million copies had been sold. But the ideas are extremely heterogeneous and specific: Hessel’s reasons for personal outrage include the growing gap between social classes, France’s treatment of its illegal immigrants, Israel’s behavior towards the Palestinians, the need to “re-establish a free press”, the need to protect the environment and the importance of protecting the French welfare system. He calls, from a leftist perspective for a peaceful and non-violent insurrection.

The Left has tried with the emergence of the counter-globalisation movement to give themselves a new narrative, in the words of the philosopher Slavoj Žižek, a “communist manifesto for the 21st century”. Žižek was involved in the Wall Street protests, as well as Naomi Klein. The Canadian journalist wrote in 2000 with “No Logo” a bible for counter-globalisation activists. Her bestselling book can be interpreted as a manifesto with neo-anarchist and Marxist inspiration.

But the protests have also met with some applause, or at least profound empathy, among conservative thinkers: Philipp Blond (the “red Tory”) has criticized Thatcherism from a fundamentally Catholic perspective years ago. The Daily Telegraph columnist and biographer of Margaret Thatcher, Charles Moore, has begun to think, in his own words, “that the Left may have been right, after all”, in a column written even before the London riots of early August 2011. His critique of neoliberalism was eagerly taken up by some German conservative intellectuals such as Frank Schirrmacher (editor of Frankfurter Allgemeine Zeitung) and Lorenz Jaeger (journalist). In Southern European countries, conservative criticism of the market has a longstanding tradition. But in European electoral politics, the main thrust relevant to the EPP family will continue to come from the Left.

The mainstream Left, such as the Party of European Socialists and many of its member parties, is trying to profit from the new wave of protests by pointing out that they have criticized “neo-liberalism” and “casino capitalism” for a long time already, and demanded stronger state intervention in the economy (“more politics, less capitalism”), a financial transaction tax, stricter banking regulation, as well as less emphasis on austerity and more on stimulus. Of course, this last point is made especially by socialist parties in opposition, not those in power in Greece and Spain which have to enact austerity themselves.

Currently, we can see all possible forms of protest: violent and non-violent, reactive and preventive in terms of the timing of police intervention, spontaneous and long-planned, illegal and legal in respect to the law, repressive and tolerant in the ways of expression, brutal and calm related to the degree of force used and broad and selective in terms of an intended programmatic agenda. There is an ambivalent, declining confidence in legislatures and governments, but no general distrust of coherent polities within European national systems. But more and more, populations (as well as the media) are in fear of a so-called casino-capitalism and the alleged injustice of the financial system.

Options for a smart reaction:

Here is how the EPP family should react to the protests and their underlying resentments, as well as their instrumentalisation by our political competitors:
• The new global protest movement is extremely heterogeneous. It combines really existing new fears about the future of individual people with well-known and somewhat worn out radical leftist ideology.
• The main difference between 2008 (when protests were expected but never materialized) and today is that austerity has begun to bite, and that the general mood of economic decline has spread.
• The EPP family should point out that it understands the individual fears about economic perspectives, and some of the anger about financial market instabilities and bankers’ payments. But it should not buy into the anti-capitalist rhetoric of the Left. Nor should we show any understanding of the violence used by diverse radical groups which have only been waiting for the moment to profit from protest movements like this.
• It should point out the contradictions in the leftist narrative: between a general critique of austerity on the one hand, and the budget cuts by socialist governments themselves. Above all, it should make a clear distinction between smarter financial market regulation that is needed to SAVE the markets, and a fundamental critique of the market economy which is the road to nowhere.
• It should keep on repeating that besides airing their resentments (however justified or unjustified they are) and criticizing “global capitalism”, the “Occupy together” protests have not shown any coherent, systemic alternative to the globalized economy. Socialism, for the time being, is not on the placards. As soon as it appears, our family’s answer should be to point to the evident failures of socialist economics in the 20th century.
• Above all, it should point out that in order to overcome the crisis, we will all have to work longer and harder, and keep on innovating our economies, which includes both smarter regulation and further liberalisation, f.e. in completing the EU Single Market.

Picture source: www.blog.timesunion.com

Florian Hartleb Crisis Jobs Society Values Youth