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Forthcoming events 2 December
9 December
23 January
CER/Interel breakfast meeting on The future of the European Commission With Catherine Day, Brussels CER breakfast meeting on What Europe and Britain should do on climate change With John Cridland, London CER seminar on Can Russia escape stagnation? With Igor Yurgens and Dmitri Trenin, London
Forthcoming publications Saving Schengen: How to protect passport-free travel in Europe Hugo Brady The security relationship between Russia and China Dmitri Trenin
EU-Turkey relations: Paralysis or partnership? Katinka Barysch
Recent publications The EU and migration: A call to action Charles Clarke The eurozone and the US: A tale of two currency zones Philip Whyte Russia, China and the geopolitics of energy in Central Asia Alexandros Petersen with Katinka Barysch Why stricter rules threaten the eurozone Simon Tilford and Philip Whyte Governments need incentives to pool and share militaries Tomas Valasek Britain and France should not give up on EU defence co-operation Clara Marina O’Donnell EU climate policies without an international framework Stephen Tindale
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by Katinka Barysch
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IX YEARS AFTER THE START OF accession talks, the EU and Turkey are struggling to keep up a semblance of progress. Having opened talks on 13 chapters of EU law by mid2010, they have not started on a new one for over a year now. Most of the remaining 22 chapters are blocked because of the Cyprus dispute and French opposition to full Turkish membership. And the Turks do not see the point in making difficult changes to trade union laws or public tenders to inch one step forward on a journey that now looks futile to most of them. While almost half of all Turks still want to join the EU, only a third think that they stand a chance of getting in one day, according to a German Marshall Fund survey. At the political level, interest in EU membership is clearly waning. The EU – once the number one issue for Prime Minister Recep Tayyip Erdogan – was hardly mentioned in the June 2011 general election. The year 2012 will, if anything, be more difficult. The French presidential election in April/May could whip up the kind of anti-Turkey rhetoric that makes many Turks seethe with indignation. And Ankara’s decision to boycott direct contact with the Cypriot EU presidency in the second half of the year is bound to cause further friction with the EU. BRUSSELS OFFICIALS, AWARE OF the damage wrought by persistent deadlock, are trying to broaden the EUTurkey relationship beyond the opening of new chapters. The European Commission suggests a “fresh and positive agenda” by focusing on visas, trade, student exchanges and foreign policy co-operation. Most Turkish diplomats had hitherto rejected any cooperation outside the accession channel lest it divert Turkey towards a ‘privileged partnership’. Now pragmatism seems to have broken out on both sides. However, the new agenda will not be easy to implement. Take visas. Turkey wants visa-free travel – something that Germany and some other EU countries refuse to contemplate. The EU insists that even for the more modest step of relaxing visa requirements, Turkey needs to start taking back all illegal immigrants coming from its territory – a tall order in view of Turkey’s open borders with Syria, Iraq and other neighbours. In trade, Turkey, rightly, wants the EU to take its interests into
account when it negotiates free trade deals with the likes of India and South Korea. So far, the customs union obliges Turkey to open its economy as a result of such deals but it does not get access to new markets itself. Some EU governments are against giving Turkey a voice in complex trade talks. On foreign policy, there is now more dialogue between Turkish and EU officials at all levels. But such talks have not translated into joint policies. On the contrary, Turkey is less inclined to align its foreign policies with those of the EU and insists that real co-operation would entail Erdogan being admitted to EU summits. The EU is unlikely to extend such an invitation, not least because Cyprus does not want to mingle with the leader of a country that refuses to recognise it. Furthermore, the Commission’s new approach may further weaken the EU’s influence over Turkish reforms – already much diminished because of the drift in the membership talks. The Commission has added a ‘rule of law dialogue’ to its agenda that could address such problems as the 64 journalists that currently sit in Turkish jails. But, as one EU diplomat explains, the dialogue will be conducted in a “non-confrontational manner” to fuel a new spirit of partnership between Turkey and the EU. However, the EU’s critical but wellmeaning voice is much needed: there is a risk that recent PKK atrocities will push the government back to a ‘force only’ solution to the Kurdish issue, perhaps undoing the progress that it has made on minority rights since 2002. There is also a risk that Erdogan will use the negotiations on a new constitution, which started in November 2011, to create a highly centralised presidential system (with himself as the first occupant of a much-strengthened executive) rather than cementing human rights and individual freedoms. The EU is right to add elements of partnership to its relationship with Turkey. But it must also be prepared to drive this agenda forcefully so that it generates positive momentum. The political blockages that are paralysing membership talks must not be allowed to frustrate the new agenda. Moreover, the EU must make it clear to Turkey that firm and critical dialogue, including about democracy and human rights, is part of any genuine partnership.
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Katinka Barysch is deputy director of the CER.
★ The ECB must stand behind the euro Simon Tilford
★ Is Turkey our partner now? Katinka Barysch
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Monnet loses to de Gaulle by Charles Grant
T Issue 81 ★ December 2011 / January 2012
Three views on Russian modernisation and the rule of law Christopher Granville, Philip Hanson and Alena Ledeneva
In this issue
Is Turkey our partner now?
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
HE EURO CRISIS IS transforming the balance of power in Europe. Germany is emerging, for the first time in the EU’s history, as the unquestioned leader. France is having to adjust to a subordinate role. The euro countries are likely to integrate more closely, leading to a two-speed Europe. Britain is moving to the margins. One other key shift has attracted less attention but is just as significant: the European Commission is becoming weaker vis-à-vis the member-states. In the 1950s and 1960s, two great Frenchmen, Jean Monnet and Charles de Gaulle, had rival visions for Europe. Jean Monnet understood that national governments, left to their own devices, would never agree to significant steps of political or economic integration. He wanted effective institutions to cajole them and the rule of law to constrain them. The Commission incarnates Monnet’s philosophy and can take much of the credit for achievements such as the single market and the enlargement of the Union. But de Gaulle wanted a Europe des Patries, with national governments – and especially those from big countries – calling the shots. On returning to power in 1958 he almost scrapped the justcreated European Economic Community, only keeping it in the hope that it could act as a counterweight to the US. But he blocked the extension of majority voting and treated the Commission with disdain. The EU has always been a compromise between supranationalism – represented by the EU’s Commission, Court of Justice and Parliament – and intergovernmentalism. The Commission’s influence peaked when Jacques Delors was its president, from 1985 to 1995: the EU extended majority voting and laid plans for the euro. But the larger member-
states have been trying to shackle the Commission ever since. Both the financial crisis and the euro crisis have accelerated the Commission’s decline. The Commission has failed to lead Europe’s response to these problems, though the big member-states have not wanted it to lead. They provide the money for eurozone bail-outs and will not let the Commission tell them what to do. Public opinion has become more nationalist in much of the Union, weakening those – like the Commission – who favour European solutions. THE KEY DECISIONS ON THE EURO crisis have been taken by Merkel and Sarkozy – with Merkel primus inter pares – and then endorsed by other leaders. The Commission has been sidelined in the euro bail-out mechanisms, which are inter-governmental (though it does play an important role in some of the new eurozone governance procedures). The German insistence on treaty change could further weaken the Commission. The new treaty may cover only eurozone members, or current members and others that plan to join the euro, in which case it will establish new institutions. But even if the treaty is for all 27 member-states, France and Germany seem determined for the eurozone to have its own institutions. Either way, the Commission’s role in the management of the eurozone seems likely to be fairly modest. France and Germany make no secret of wanting less Monnet and more de Gaulle. In November 2010, Chancellor Angela Merkel’s Bruges speech criticised the ‘community method’ (which gives the Commission and Parliament a key role in decision-making), praising instead what she called the ‘Union method’, with leaders in the European Council setting the agenda. Merkel’s CDU recently adopted a programme calling for the
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Commission to lose one of its key powers, the sole right of legislative initiative. The Commission bears some responsibility for these attacks. It has sometimes lacked focus and been insensitive to the needs of the leading member-states. It is too concerned to safeguard its own prerogatives. It feels the need to follow the agenda of the European Parliament – increasingly powerful but of questionable legitimacy. The quality of the commissioners has declined, though that is the fault of the governments that appoint them. But when the Commission takes initiatives, defends the single market or enforces a tough competition policy, it is merely doing its job – even if that job annoys Paris and Berlin.
Charles Grant is director of the CER.
The ECB must stand behind the euro by Simon Tilford
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HE EUROZONE IS NOW subject to a full-blown run on its bond market. Spanish and Italian borrowing costs are now higher than those of Greece, Ireland and Portugal when they were forced to seek bail-outs from the EU and IMF. The crisis has spread to Belgium and France, and even to Austria, Finland and the Netherlands. The spread – or difference – between Belgian and German borrowing costs stood at 3 percentage points in midNovember, the same as the spread with Italian and Spanish bonds a couple of months earlier. French spreads have touched 2 percentage points. The fact that Austria, Finland and the Netherlands – indisputably ‘core’ countries with strong public finances – have been drawn
into the crisis shows that investors are starting to price in a break-up of the eurozone. ECB action to stabilise the situation is indispensable, as is a timetable for the mutualisation of member-states’ debt. Germany is holding out against both steps, but it faces mounting isolation. Why has the crisis worsened so dramatically since October’s EU summit and its supposedly ‘comprehensive’ solution? First, the summit agreement failed to secure any additional firepower for the European Financial Stability Fund (EFSF). Instead, it promised to use the existing funds to insure struggling members’ bonds against the risk of partial default (up to 20 per cent of the value of the debt). By doing this, the
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available funds could be “leveraged” and the fund’s firepower increased. Investors were understandably sceptical of such a wobbly construction, and the subsequent deepening of the crisis has rendered the EFSF largely irrelevant. France could not now risk underwriting additional funds without prompting a further rise in its borrowing costs, and Germany and smaller ‘core’ member-states could not guarantee the whole of an expanded EFSF by themselves. The second reason for the worsening of the crisis is that the summit reaffirmed fiscal austerity as the core investor regaining for strategy confidence in the eurozone. All memberstates are required to pursue fiscal austerity simultaneously. They will be subject to tough fiscal targets, and if they fail to meet them they will effectively have to cede sovereignty to a troika of the European Commission, ECB and IMF. Unprecedented fiscal austerity across the currency union has already led to a dramatic deterioration in both consumer and business confidence and pushed the currency bloc to the edge of a slump. Despite being well short of pre-crisis levels of activity, the eurozone economy is almost certainly slide back into recession in the fourth quarter of 2011. THE EUROZONE CRISIS CANNOT BE solved by fiscal austerity alone. The austerity strategy has failed in Greece as well as in Ireland and Portugal, with all three experiencing dramatic increases in their levels of public indebtedness. Despite this, Italy and Spain are being asked by the Commission to follow the same route and tighten fiscal policy severely. This will further erode both countries’ already dire economic growth prospects and with it confidence in their ability to service their debts. It is a similar picture in France, which has responded to the weakening of economic growth by stepping up spending cuts. Eurozone countries are now subject to self-fulfilling crises: fears of default are driving up the borrowing costs of solvent countries, leading to a worsening of their debt positions and heightening fears of default. An announcement that all eurozone economies would move gradually to mutualise their debt would stabilise the markets; there is no prospect of the eurozone as a whole defaulting. Debt mutualisation will have to form part of any lasting solution to the crisis, but it cannot happen quickly enough to reestablish investor confidence: the political basis for such a step is currently lacking. The only available circuit-breaker at this
stage is ECB action: the central bank has to act as a lender of last resort to governments. It stepped up its purchases of struggling eurozone economies’ sovereign debt in November, but not by enough to dispel default fears. The ECB should announce that it will do all that is necessary to bring down Spanish and Italian borrowing costs and make some large initial bond purchases. This would probably suffice to reassure investors, and would be cheaper than the central bank’s current strategy of piecemeal intervention in the markets. The ECB opposes this course of action. The new president, Mario Draghi, has taken a similar line to his predecessor, Jean-Claude Trichet: the crisis is a political one that can only be addressed by governments. However, there is an element of brinkmanship in the ECB’s stance: after all, by November 2011 it had bought around S200 billion of eurozone sovereign debt. The big obstacle to the central bank performing the necessary lender of last resort function is opposition from a number of member-states, in particular Germany. They fear that an open-ended ECB guarantee to intervene to hold down borrowing costs would reduce pressure on governments to push through reforms and ultimately prove inflationary. IF THERE IS A GLIMMER OF HOPE, it is that Germany is becoming increasingly isolated. The French government, shaken by the rise in its borrowing costs, is becoming more openly critical of Germany’s refusal to support more concerted ECB action. With Mario Monti, a former EU competition commissioner, now prime minister in Italy, it will be harder to brush aside Italian concerns. And crucially, with their borrowing costs rising relative to Germany, it is far from clear that the Dutch, Austrian and Finnish governments will continue to support the German line. A Germany in a minority of one and subject to increasingly vocal criticism may yet bend. Germany faces a choice. It can stick to its guns and preside over the dissolution of the currency union, in the process sacrificing much of its post-war investment in an increasingly integrated Europe. Or it can put forward a workable quid pro quo for saving the euro. The outlines of this are clear: in return for tougher fiscal targets and sanctions for missing them, Germany should end its opposition to the ECB acting as lender of last resort and agree to a gradual move to debt mutualisation.
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Simon Tilford is chief economist of the CER.
CER in the press THE WALL STREET JOURNAL 22nd November 2011 “Europe is staring at a lost decade”, says Simon Tilford of the CER. Years of economic stagnation with persistent fears of sovereign and bankingsector defaults “will have a considerable impact on the broader international economy”, he says.
THE TELEGRAPH
Issue 81 ★ December 2011 / January 2012
AT A TIME WHEN CITIZENS ARE increasingly disillusioned with the EU, does it not make sense for national governments, directly accountable to voters, to seize control of the EU’s machinery? It does not, because Europe will suffer from a weak Commission. First, commissioners do not stand for election and are at one remove from national politics. This makes the Commission well-suited to consider longterm issues affecting Europe, and the wider EU interest. Thus in recent years it has persuaded the member-states that the EU should be active in areas such as climate change and energy security. Second, the Commission is committed to the single market which it polices, together with the Court of Justice. It is trying to extend the market into new areas such as services, energy and the
digital economy. It has a good record of enforcing the merger regulation and of breaking up cartels. Third, the Commission is committed to a global order built on strong, multilateral rules and institutions. It supports free trade, the United Nations, and global solutions to challenges such as climate change, financial instability, economic imbalances and organised crime. Fourth, the Commission is the friend and protector of the small member-states. One consequence of the euro crisis is that small and poor member-states are now much less equal than large and rich ones. That inequality, though to some degree inevitable, subverts the original principles of the EU and erodes the basic solidarity and mutual respect on which its governance depends. So a weaker Commission will be less able to focus attention on long-term issues, deepen the single market, promote multilateralism, and prevent rich and large countries dominating the Union. Both the Commission itself and EU governments should engage in a fundamental rethink of the way it operates. The Commission needs to find ways of restoring its credibility in Paris, Berlin and other capitals that have turned against it. Even a reformed Commission is not going to regain the kind of prestige and power that it enjoyed 20 years ago. Gaullism is too strong. But in the coming negotiations over new treaties, the Commission’s role and prerogatives must be protected.
20th November 2011 Philip Whyte and Simon Tilford argue in a paper for the CER that “the eurozone crisis is as much a tale of excess bank leverage and poor risk management in the core as of excess consumption and wasteful investment in the periphery”.
FINANCIAL TIMES 17th November 2011 As Charles Grant, director of the CER, puts it: “The risk is that Cameron will start making impossible demands. If pushed too far, Germany will go for a completely new treaty outside the EU framework. That will trigger a real crisis in the relationship.”
THE TIMES 17th November 2011 “He [Sarkozy] is rattled. France is being dragged into this crisis”, said Simon Tilford of the CER. Britain is a source of particular irritation, he suggests, because Mr Cameron and George Osborne are saying in public what the French only say in private.
Simon Tilford and Philip Whyte in a hard-hitting essay for the pro-EU CER.
THE OBSERVER 13th November 2011 In a recent CER essay Simon Tilford and Philip Whyte said: “The punishing (and selfdefeating) economic adjustments imposed on debtor countries contrasts with the self-righteous complacency shown in the creditor countries.”
THE ECONOMIST 11th November 2011 “Public opinion is a new actor in the EU,” says Charles Grant, director of the CER. “It limits what technocrats can do.”
THE NEW YORK TIMES 11th November 2011 “The slowdown in economic activity is compounding investors’ concerns about debt sustainability”, said Simon Tilford chief economist at the CER. “In the south of Europe we have very high borrowing costs and no economic growth. That’s a lethal combination.”
THE CHRISTIAN SCIENCE MONITOR 7th November 2011 “A new government will help,” says a sceptical Philip Whyte of the CER. “But even a unity government will be hard pressed to accept the measures that Greeks are being asked to swallow. Greece is having to cut spending faster than the country is presently contracting.”
THE SUNDAY TIMES
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
13th November 2011 “It is clear that the eurozone will remain an unstable, crisis-prone arrangement unless critical steps are taken to place it on a more sustainable institutional footing,” wrote
THE NEW YORK TIMES 5th November 2011 Charles Grant, director of the CER, said that if Greece defaulted or prepared to leave the euro zone before the bloc could build a big enough bailout
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mechanism “and there’s a credible government”, it “bring down the euro system.”
before Italian could whole
THE GUARDIAN 1st November 2011 “If we want [the Chinese] to chip into any new vehicle [to underpin the euro] we have to give them a guarantee ...For policy and finance circles, the expectations [of China] are very low – and hence realistic”, said Katinka Barysch, deputy director of the CER in London.
THE TIMES 27th October 2011 Hugo Brady of the CER said: “What [Merkel] is really saying now is that Germany still needs the EU whether Germans like it or not ...she sounds more like Helmut Kohl every day. She needs to, because there is an argument coming in Germany about ‘getting out of the EU before it ruins us’ and she is saying ‘if we are responsible for this thing breaking up it will ruin us’.”
THE WALL JOURNAL
STREET
26th October 2011 “The EU-Russia relationship is completely stuck, and the Americans are looking for something to continue the goodwill created by the [Obama’s administration’s] reset”, said Katinka Barysch deputy director of the CER.
FINANCIAL TIMES 3rd October 2011 As Tomas Valasek of the CER puts it: “Many governments would rather have autonomous and useless militaries than integrated and capable ones. They want their own armed forces and their own defence industrial base.”