Archive for June, 2008

EU relations will test Russian intentions after Georgia invasion

Sunday, June 29th, 2008

August is the traditional month for invasions. Foreign politicians are on holiday, much of the harvest has finished and there’s time to consolidate before winter sets in. So this time it was Georgia.

None of us who were around at the time will forget the August day in 1968 when Soviet bloc troops invaded Czechoslovakia to scupper the Prague Spring. On that very evening Mstislav Rostropovich and the USSR Symphony Orchestra gave a deeply moving performance of Dvorak’s cello concerto at a London Promenade Concert – a very poignant memory.

So has nothing changed? Russian troops moved into Georgia on August 8 2008, 40 years almost to a day later. But it’s not at all clear whether this was the launch of a more aggressive Russian foreign policy and reversion to an earlier model, or a justifiable response to Georgian military action in South Ossetia, an echo of the NATO campaign in Kosovo with different characters, as the Russians would claim. Truth is always the victim in these circumstances.

The OSCE seems to have serious reservations about Georgia’s role in the whole affair and there are even suggestions that the conflict was provoked by Vice President Dick Cheney in order to boost McCain’s cause in the US elections.

Rash initiatives by the Georgian government in South Ossetia were almost certainly the trigger for the Russian action, but a trigger which Moscow had long been anticipating. Its campaign was surely a far-reaching and thoroughly planned operation to damage the regime of President Mikhail Saakashvili, to assert Russia’s right to dictate political developments in its near abroad and to block NATO expansion in Ukraine and the Caucasus.

The tensions had been building for some months, apparently including a mounting level of cyber attacks on Georgian official websites similar to those previously experienced by Estonia, followed by reprisals against Russian sites by other so-called “hacktivists” who specialise in DDOS – Distributed Denial of Service, where websites are sabotaged by swamping.

It is the scale of Russian actions which may prove deeply counter-productive for Moscow. It seems likely to strengthen the US presence in the region and will raise the level of scepticism about Russia’s good faith in its international dealings. It will no doubt give quite a boost for those who wish to build new oil and gas pipelines which bypass Russia. Much will depend on how quickly the Russians withdraw from occupied Georgian territory and engage with OSCE and EU. However on NATO membership for Ukraine and Georgia the Russians may well have made their point. To offer NATO protection for these two countries under Article 5 would be to play for very high stakes.

The European Union has acted quickly with its ceasefire proposals, some strong words and convening of a special summit in Brussels, where deep divisions of opinion were papered over and a united Franco-German position carried the day.

Europe is at pains to stress that the EU makes common cause with the Americans, but its rhetoric has been much more cautious. Sanctions have been rejected and dialogue sustained. If President Sarkozy and his colleagues can make real progress in their talks with the Russian leadership, especially to the extent of launching a programme to resolve the “frozen conflicts” of South Ossetia and Abkhazia, then that would be a very considerable achievement

Russia needs the EU quite as much as the EU needs Russia, if only to counterbalance and moderate American policies in the region. While keeping the pinch of salt to hand it’s interesting to see what President Medvedev had to say to Euronews in defending the Russian position and describing Russia’s relationship with the EU.

Posted in Energy, Finance, Russia | No Comments »

Enlargement in doubt as Ireland scuppers the Lisbon Treaty

Wednesday, June 18th, 2008

The worst fears of Europe’s leaders have been realised: Ireland’s voters have scuppered the Lisbon Treaty, with 862,415 votes against and 752,451 in favour on a turnout of 53.4 per cent in the Irish referendum. Politicians can complain till the cows come home about small countries and slim majorities. After all, the Irish “no” voters represent maybe one in 300 of the EU’s voting population. But the people have spoken and Ireland cannot ratify.  The treaty will not come into effect at the start of 2009.

There will be no quick and easy solution. The vote was surely another demonstration of popular disdain of the political elites, which is widespread across Europe. It was not enough for all the major parties, the business organisations and the trade unions to argue for a “yes” vote. Their leadership was widely rejected.

I see that the Irish Taoiseach Brian Cowen says that this is Europe’s problem. That seems a bit of an understatement, also  known as passing the buck. But since nobody can identify particular issues which led to the Irish rejection I suppose Mr Cowen is saying that the Irish government can think of no specific changes which could be made to the treaty which would make it more palatable for a second referendum. There is no appetite in Ireland to repeat the double.
 
We’re back to the old argument about representative democracy versus the popular vote. The referendum drew in all kinds of extraordinary allegations about the treaty. One poster said it meant that children would all have to be micro-chipped. Some campaigners claimed that abortion would be legalised under the treaty and others that Irish youngsters would be conscripted for a European army.
 
Yet people’s commonest complaint was that they simply did not understand Lisbon and they refused to vote for something they did not understand. It’s a classic situation where parliament does seem the right place to decide highly complex issues. But it has to be based on the assumption that politicians have the trust of the people. To win the support of the people requires a vision, and there was little sign of that in the Irish campaign.

When French and Dutch voters rejected the Constitutional Treaty in 2005 enormous efforts were made by Sarkozy, Merkel and others to get the reform process back on track. It will be difficult to find the political will to repeat such a massive exercise, especially in a period when public opinion across Europe is increasingly preoccupied with prices, jobs and immigration. Two-speed Europe, referendum by-pass, Irish opt-out: none of them seems to provide an answer.

Most likely is that the treaty will be put to sleep for the time being and with it the next phase of enlargement. Business can continue as usual (the EU has been functioning pretty well since the 2004 enlargement) and efforts will be made to strengthen common positions on global issues like climate change, energy and foreign affairs, but it could be quite a while before there is a president of the European Council and a foreign affairs supremo bestriding the rue Charlemagne between the Commission and the Council.

We can expect the European Council on June 19-20 to call for ratification to continue, but the Czechs have already hinted that they want to suspend their ratification process.

Without the institutional streamlining provided by the Lisbon Treaty we can expect membership for the Balkan countries and Turkey to be seriously delayed and even put in further doubt. The painful challenge of setting a course for the EU in the aftermath of the Irish vote will fall to the French presidency, which takes office on July 1. Although the French will be frantically seeking a solution, putting enlargement on the back burner might not go down so badly in Paris.

Posted in European politics | No Comments »

ECB record surpasses expectations, but where’s the Euro Group?

Monday, June 9th, 2008

“That’s the only cut this year!” quipped a council member when European Central Bank president Jean-Claude Trichet took the knife to the ECB’s birthday cake in Frankfurt on June 2. The occasion was the tenth anniversary of the Bank’s establishment. Apparently the mood in Frankfurt was of genuine celebration tempered by concern at the conflicting challenges which the Bank currently faces over inflation and growth.

It has been a long journey since June 1998. It’s strange to think that the decisions on who would join the euro zone were taken under British presidency in May ‘98. In the chair was Prime Minister Tony Blair, who had won a landslide election just twelve months earlier. He had to praise the significance of the euro, although he had decided against taking Britain into the new currency, a decision regarded by many people as one of his biggest failures given the strength of his position, and no doubt strongly influenced by Gordon Brown at the Treasury.

The most interesting drama at the time was over the ECB presidency. President Chirac demanded that Trichet, who was then governor of the Bank of France, should be ECB president, whereas Wim Duisenberg from the Netherlands was the consensus candidate.

The crisis was resolved with a classic fudge. I will be far too old to serve two terms as ECB president, said Duisenberg, but any decision to resign “will be my decision alone”. There was, however, an understanding that Trichet would take over once Wim had taken that his solitary decision. Chirac conceded. Relief all round.

When the French president pressed for Trichet’s appointment in 1998 he no doubt hoped that a more relaxed French regime would prevail over Germanic discipline, setting interest rates with an eye to boosting growth. In the event Trichet has staunchly defended ECB independence and its key mission: to fight inflation.  Trichet’s own appreciation of the ECB’s role, its record and the tasks ahead was summarised in his Frankfurt birthday speech.

The record of the ECB has surpassed expectations. Its handling of the sub-prime crisis since last August has impressed everyone and the euro continues to strengthen its position in global markets – as well as appreciating in value. It now accounts for around 25 per cent of foreign currency reserves across the globe and we can expect that to rise steadily. China, for one, is keen to increase its euro holdings.

May 1998 marked the creation of the Euro Group of ministers.  This group of 11 countries was expected to become a potent force in European politics and it was Britain’s exclusion from the club which many of us thought would be the biggest penalty for not joining the euro zone.

I can’t say it has turned out like that. For a start, total disregard of the Stability and Growth Pact by some of the biggest members caused deep divisions within the group. Not much solidarity there!

There has also been real divergence in the performance of the euro zone economies, both in terms of their growth rates and their inflation. Maybe the interests of the euro zone countries (15 of them now) are so varied that they will never be able to take common decisions on such issues as international exchange rates and the value of the euro, economic management or taxation policy. President Sarkozy, for instance, has called for a cut in certain VAT rates across the EU to put the brake on rising prices, but his finance minister Mme Lagarde got short shrift from colleagues when she put forward the idea at the recent Frankfurt meeting.

On the international front the Euro Group president, Luxembourg’s Juncker, has bemoaned Europe’s failure to speak with one voice in the IMF. The question is, what should the voice say? A high level delegation to China was hyped as a first example of euro diplomacy, but it does not seem to have amounted to much. Maybe that could be a role for the soon-to-be-named Council president – provided he/she comes from a member of the Euro Group. 

I see that Slovakia will be the next country to adopt the euro, as of January 1 2009, when it abandons the koruna. It has revalued its currency in advance as an anti-inflationary move. Political opinion in Denmark continues to move in favour of membership. A referendum would of course be needed, and Sweden is publicly stating that a positive Danish vote would open the way for Sweden to consult the people as well, at the earliest in 2011.

Which leaves the United Kingdom. Willem Buiter, former member of the Bank of England’s Monetary Policy Committee is in no doubt. In his view Britain should join now. The FT’s Martin Woolf strongly disagrees.

Buiter refers to the enormous external liabilities of the UK’s financial services industry – €400bn in foreign currencies in his estimate, which is four times the country’s GDP. The Bank of England, he maintains, could never act as lender of last resort for such liabilities. Joining the euro and depending on the resources of the European Central Bank is for him the only way to defend the UK from an Iceland situation, where vast liabilities have accumulated in proportion to the size of the domestic economy.

It’s a bit tough being compared with Iceland, but it does focus on some of the issues raised by the sub-prime banking crisis and the new perceptions of risk that we have to live with. But probably the biggest test for the ECB over the next 10 years will be how far the euro zone can handle its own internal tensions and the divergence of its national economies.

Posted in European politics, Eurozone, Finance | No Comments »