8420 CER bulletin june-july 2012 25/05/2012 14:53 Page 1
Forthcoming events 18-19 June
20 June
CER/DemosEUROPA/Swedish Parliament seminar on ‘The future of European foreign policy’ Speakers include: Carl Bildt, Patricia Flor and Jakub Wiśniewski, Stockholm CER/Kreab Gavin Anderson breakfast meeting ‘Democracy and the eurozone crisis’ with Martin Schulz MEP, Brussels
Forthcoming publications The continent or the open sea: Does Britain have a European future? David Rennie Saving EU emissions trading from irrelevance Stephen Tindale How Britain can re-engage with the EU Jo Johnson The EU and its external action service Edward Burke The City, the EU and the UK Philip Whyte
Recent publications How Hollande should handle Merkel Charles Grant Ireland’s fiscal treaty referendum: (More) fear and loathing in the eurozone? Hugo Brady Germany’s choice: Higher inflation or sovereign defaults Simon Tilford Why France is threatening to leave Schengen Hugo Brady How to create a single European electricity market – and subsidise renewables David Buchan Governance reforms have left the euro’s flawed structure intact Philip Whyte The European Union budget 2012-2014: More boldness needed John Peet & Stephen Tindale five
by Jana Kobzova and Tomas Valasek
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LADIMIR PUTIN’S RE-ELECTION as Russia’s president, and his absence from recent summits of the G8 and NATO, indicate a hardening of Russian attitudes towards the West. What does this imply for Russia’s relations with the former Soviet republics in Europe and Central Asia? The EU and NATO have little interest in further enlargement; yet Moscow’s policy towards the ‘near abroad’ still matters. For example, clashes with Russia on issues such as Moldova’s right to join the EU could derail co-operation on issues such as Iran’s nuclear programme. In October 2011, Putin proposed the creation of a ‘Eurasian Union’, a political grouping of some former Soviet republics, with Moscow at its centre. Kremlin watchers say Putin believes that each great power should have its ‘entourage’, and that the West will take Russia more seriously if it leads a cluster of neighbours. Putin’s latest effort to constitute such a group is a reversal of sorts: under his predecessor, Dmitry Medvedev, Moscow reduced subsidies on oil and gas exports to Belarus and Ukraine, and refused to intervene in Kyrgyzstan when a revolt toppled the president there in 2010. Russia has never relinquished the ambition to exercise economic and political control over its neighbours, but lately it had been more hands-off. Putin’s Eurasian Union may well succeed where previous integration projects such as the ‘Eurasian economic community’ failed. First, it makes economic sense for Russia: the proposed membership only includes Moscow’s important trade partners (Belarus, Kazakhstan and Ukraine), which have energy resources and other businesses Russia covets. When poor Kyrgyzstan expressed interest in joining, Moscow demurred. By cherry-picking members who hold assets of interest to Russia, the Kremlin made the idea of a workable Eurasian Union more credible. Second, the US and EU governments are focused on ending the economic crisis and are paying less attention to foreign policy issues. In the past, the US and the EU would have given political support and money to help build the economies and political systems necessary for former Soviet satellites to stand independent from Russia. Today, such help is in short supply. Third, Eastern Europe itself has become less attractive to the West. The government of Ukraine, the most populous of the countries between the EU and Russia, has persecuted political opposition and curbed freedom of speech. It has also mismanaged
★ Time for France to take the lead on Syria Edward Burke 2
the Ukrainian economy. Belarus, the most authoritarian of East European countries, has periodically flirted with reforms and the prospect of drawing close to the EU. But since his re-election in 2010, President Lukashenka has cracked down on the opposition and relations with the EU are in deep freeze. Many Western governments have concluded that they cannot help a region that does not want to help itself. THE CRISIS OF DEMOCRACY IN Ukraine and Belarus favours Russia: it has discouraged Western investors and made key former Soviet republics dependent on Moscow’s aid and investment. Russian companies control seven of Belarus’ 32 banks. Last November, Minsk handed control over its gas transit system to Gazprom in exchange for loans. Ukraine needs help with repaying S4.2 billion in loans in 2012, and may be forced to surrender control of its oil and gas pipelines to Russia in exchange for financial assistance. But the causes of the two countries’ misfortune have little to do with Putin or his return; Moscow has benefited from, not instigated, misguided Ukrainian and Belarusian policies. Moldova will feel Russia’s renewed interest in the neighbourhood most acutely. Shortly after Putin’s election, Moscow appointed the nationalist politician Dmitry Rogozin as point man for relations with Moldova and the Transnistria region, which broke away in the 1990s. The selection of a strongman suggests that Russia will only tolerate reconciliation in the country on Moscow’s terms, likely to include a pledge by Moldova to eschew a free trade deal with, and membership of, the EU. While Moldova is not among the countries mooted for Eurasian Union membership, Russia seems keen to make sure that it does not join alternative groups either. Notwithstanding Putin’s foreign policy ambitions, Russia will be distracted by economic issues and the maintenance of internal political stability over the coming years. Moscow will devote less than full attention to the Eurasian Union, though it will systematically seek to deny the former Soviet republics closer ties with the EU. And Russia will have plenty of opportunities to do so, thanks to the EU’s waning interest, and to economic incompetence and authoritarian tendencies in Minsk and Kyiv.
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Jana Kobzova is a policy fellow at the ECFR and Tomas Valasek is director of foreign policy and defence at the CER.
★ What Putin’s return means for the former Soviet republics Jana Kobzova and Tomas Valasek 6
A Greek exit will not be cathartic by Simon Tilford
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Issue 84 ★ June / July 2012
Smart but too cautious: How NATO can improve its fight against austerity Claudia Major, Christian Mölling & Tomas Valasek
In this issue
What Putin’s return means for the former Soviet republics
CER 14 Great College Street London, SW1P 3RX www.cer.org.uk info@cer.org.uk T +44 20 7233 1199 F +44 20 7233 1117
OW THE EUROZONE handles Greece will determine whether or not the single currency survives – and hence the future of the EU as a whole. If a Greek exit from the eurozone is mishandled, contagion to the other struggling member-states could be uncontrollable, leading inexorably to the collapse of the euro. However, if a Greek exit is accompanied by big institutional reforms, the currency union could still be saved. Indeed, a Greek departure could be positive for the eurozone if it freed up the political space needed for the German authorities to embrace such reforms. Some eurozone policy-makers believe that a Greek ousting from the single currency would be a cathartic experience. A Greek eviction would demonstrate to other struggling eurozone economies the risks of backsliding on their fiscal targets or the terms of their bail-out programmes. Contagion risk would be limited, as governments would have no choice but to knuckle down, which would reassure investors about the sustainability of their public finances. According to this analysis, the ejection of Greece would obviate the need for big institutional reforms of the currency union such as debt mutualisation or paneurozone bank protection. There are a number of problems with this line of reasoning. First, it assumes that Greece and other hard-hit members of the eurozone could meet their fiscal targets if only they tried harder to do so. As such, it is an example of the flawed reasoning that has driven the eurozone’s policy response to date and which is responsible for the crisis having spun out of control. The assumption is that if Greeks want to stay in the currency union, they know what they must do: tighten fiscal policy as much as required and push through the agreed economic
reforms. Greece is admittedly a very poorly-governed country. But this narrative is still misleading, because the extent of fiscal austerity that the Greeks have been required to follow has been self-defeating, pushing the economy into a deep slump and causing a dramatic rise in public debt. THE SECOND PROBLEM WITH THIS analysis is that it underestimates the contagion risk posed by a Greek exit. The political crisis in Greece and the mounting risk of it leaving the euro has already led to a steep rise in the borrowing costs of the weaker eurozone economies and caused a renewed loss of investor confidence in their banks. The reasons for this are obvious: a Greek departure would expose the supposed irreversibility of eurozone membership as a myth. Once it becomes clear that membership is not forever, the risks of lending to other struggling member-states (or their banks) that face economic stagnation and unachievable fiscal targets within the currency will increase still further. Capital flight from the struggling member-states would accelerate, weakening banks and the sovereigns responsible for backstopping them. The third problem with the belief that a Greek exit would somehow be a cleansing experience is that it assumes Greece could simply be pushed out and left to its fate as a tragic example of the risks of non-compliance with bail-out programmes. But this is not what would happen. Aside from accepting huge write-downs on money they have lent to Greece, the rest of the eurozone would have to provide Greece with ongoing support in order to shore up its banks and its public finances. The alternative could be social and economic collapse, and the possible creation of a failed state within the EU. Indeed, a Greek
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