After all the excitement of an amazing US presidential election, here we stand in the cold light of dawn, wondering what happens next. What can we Europeans expect of President Barack Obama? As others have pointed out, his first duty will be to serve the interests of those who elected him and not the political priorities of friends and neighbours, so we should not raise our hopes too high.

Yet things do seem very different this time. All the evidence suggests that Senator Obama will be a president who is deeply committed to a multilateral approach and who perceives international co-operation as fundamental to meeting the challenges which the US faces. His July trip around Europe gave a strong indication of his global perspective. The deeply unpopular image of America across the world causes him real distress.

Obama was careful during his campaign to avoid giving too many hostages to fortune, but trade was one exception, as the candidate argued that free trade agreements such as NAFTA were responsible for job losses and that outsourcing of production benefited businesses while damaging the interests of their workers.

A strengthened Democrat majority in Congress will not make it any easier to resist protectionist sentiment and no doubt we can expect some early measures such as support for the US auto industry – a distant echo of President Bush’s support to steel and farming in the early days of his first term. There may well be tax changes as well, which make outward investment less attractive to US firms.

There is a small window of opportunity. Over the coming weeks people will seek to breathe new life into global trade negotiations. The new trade commissioner Baroness Ashton has raised the hope of progress for the Doha Round in what I thought a rather convincing BBC interview and Pascal Lamy has offered to stay on at the WTO in pursuit of an agreement.

So will the November 15 summit in Washington open the way for trade talks as the Brazilians hope, I wonder? And will President Sarkozy speak for free trade during the meeting? Maybe it will be easier in the absence of ex-Commissioner Mandelson!

Climate change is an issue where we can confidently assume that the new president will chart a new course. Take a look at his manifesto on energy and climate change. He espouses emissions trading, wants renewables to provide 25 per cent of energy needs by 2025 and sees further investment in biofuels and new technologies. Nuclear power and energy saving also feature on his wishlist.

Europe should feel comfortable with this agenda, but faces some fundamental challenges of its own, in particular whether it can deliver on the commitments already made, without which its current position of leadership will melt away. The broader challenge is to bring China, India and similar economies more directly into global decisions. Real progress by Europe and the US will be an essential precursor of movement here.

The evolution of US policy towards Russia will be of special interest to Europe, intertwined as it is with the issue of Star Wars missile defence.

Medvedev’s clumsy reference to Russia’s anti-missile missiles in Kaliningrad (or are they anti-anti-missile-missiles?) is hardly likely to change US policy, but I suppose was intended to put pressure on the EU and to drive in deeper any wedge between the US and Europe. After all, Russia already has such armaments in situ. For Polish prime minister Donald Tusk Medvedev’s statement was political and not military.

Obama is a man who will take his time. Once in office he will no doubt weigh up the efficacy of the anti-ballistic missile system, its budgetary cost and its political implications. The Pentagon is asking for $65.5 billion for development at a time of severe budgetary pressures. Any improvements in US-Iran relations would also come into the picture. If there is a change in US policy it will be rationally thought through and set in a wider context than just providing comfort for Russia.

The Europeans are keen to seize the initiative on a reform of global economic management at the November 15 Washington summit and produced a detailed set of proposals when they met in Brussels on November 7.  The current mood in the US will certainly be responsive to tougher regulation, maybe going further than the European Commission, for instance, would want. How far a new president will respond to giving more power to international organisations such as the IMF remains to be seen. Once again the Democratic dominance in Congress will be an important factor.

Finally there are those issues such as the Middle East conflict and the war in Afghanistan. While Europeans hope for a more proactive US role in the peace process they can also expect the new president to demand greater support against Al-Qaeda. This may be the most challenging element in transatlantic relations over what promises to be a period of far-reaching change.

The surge in world food prices, oil prices at well over $110 a barrel and measures to boost the use of biofuels in the US and Europe are putting policy-makers into crisis mode.
 
It is extraordinary how this situation has taken fire in just a few months and how intertwined the different factors are. A perfect storm, indeed. International organisations warn that the rising cost of food will threaten the stability of nations, especially developing countries. Even for a country like China food inflation is a major threat to the government.  A “silent tsunami” is how the head of the World Food Programme has described the global situation.
 
The European Commission has responded with an increase in emergency food aid, just as it should, but we are witnessing more than a short-term crisis. Commissioner Louis Michel pulled no punches when he spoke to the European Parliament recently. While announcing an increase in EU food aid spending to nearly €300m so far this year, he also warned just how dangerous the international situation was becoming.

The current food price situation focuses attention on the future of the common agricultural policy. You might think that high market prices for cereals (somewhat mitigated by the strength of the euro) would reduce the need to spend European taxpayers’ money on expensive support arrangements for EU agriculture, but that’s not how French farm minister Michel Barnier sees it.
 
For him the present situation proves the need for an expensive protectionist policy. He even urges other countries to follow suit and build their own c.a.p., so everyone would aim for autarkic self-sufficiency. His German counterpart Horst Seehofer is walking in the same direction. On the other hand this particular view was swiftly rebutted by Agriculture Commissioner Mariann Fischer Boel who took a pro-trade stance, just one month before her proposed overhaul of the CAP.
 
Of course agricultural ministers always resist change, but these interventions suggest that longer term moves to review the future of the c.a.p. will run into stiff opposition. We can probably kiss goodbye to any hope of completing the Doha Round before the US elections. Interestingly, Brazil is making tariffs on biofuels a key aspect of its position on Doha.
 
Pressure on the EU biofuels commitment continues to build. Commission President Barroso has asked for an assessment of the impact of biofuel production on food prices and on development. The Commission press room is thick with rumours of division in the college. Some officials are briefing that the 10 per cent commitment for biofuels in transport fuel by 2020 has been sidelined, while others dismiss any such talk.
 
Among member states the British appear to be reconsidering their biofuels commitment after a national 2.5 per cent obligation came into effect. Prime Minister Gordon Brown is concerned that some biofuels do not meet the necessary sustainability criteria and may call for changes in the EU targets.

The fact is that European and American subsidies for biofuels, which were designed to prime the pump until the industry could become viable in its own right, have produced a host of unpredictable and positively absurd consequences.
 
For instance, it seems that a big chunk of Europe’s biofuel industry has been put out of action because of the imports of “splash and dash” biodiesel from the US. All you need is a tanker load of biodiesel, maybe exported from the EU or South America, add 1 per cent of mineral oil, collect a subsidy of €200 per tonne from the US administration and then ship it back to Europe where you collect further subsidy. The EU companies have now lodged a formal anti-subsidy and anti-dumping complaint.
 
The debate over GMOs is going to hot up as well. It takes on a new urgency as world food prices continue to soar and is bound to provoke some intense debate in Commission, Council and in the member states. No doubt there are risks to be analysed and assessed, but I wonder how the arguments against the use of genetically modified crops could stand up in the face of a major world food crisis and massive malnutrition in developing countries.

Never underestimate the intensity of the battles which can rage inside the European Commission as different policy interests and personalities clash over new EU proposals. There was no doubt some bitter argument and tough bargaining in the Commission’s Berlaymont headquarters when January’s climate change package was being threshed out.

And quite right too, because rarely has the Commission faced so difficult a policy challenge, with such far-reaching implications for Europe’s future.

Just think of the Commission portfolios involved. You can imagine the tensions between Verheugen, worried about global competition and Dimas defending the Bali commitments, between Pielbalgs, Dimas and Fischer-Boel over biofuels, with Kroes concerned about state aid, Mandelson fighting off the threat to penalise imports from countries refusing to act on climate change and Potočnik pushing for a strong research component.

President Barroso seems to have managed the storm effectively, no doubt with strong support from Catherine Day, Commission Secretary General and key co-ordinator of Commission policy.

Barroso presented the Commission’s proposals to the European Parliament on January 23. The MEPs’ response seems to have been rather muted, although as Mark Mardell reported in his blog, the UK Independence Party member Graham Booth poured cold water on the whole idea of global warming and spoke of the inevitable ice age to come. I guess he sees the whole thing as a conspiracy to hoodwink the gullible – just as he does the EU itself.

Subject to Council and Parliament approval, the Commission proposals will shape the direction of the European economy and the conditions of modern living in Europe out to 2020 and beyond. And let’s bear in mind the long-term aim: for Europe to lead the way to a halving of the world’s CO2 emissions by 2050 in order to combat global warming.

You can see the compromises in the final package: 20 per cent cut instead of 30 per cent unless there is a global agreement, which the green groups see as a climb-down;  emphasis on sustainability for biofuels, outlawing the use of land with “high biodiversity value” such as natural forest;  a commitment to respect WTO rules, which Barroso included in his Parliament speech, so providing “clarification” of his more threatening remarks about imports the previous week; and special provisions for industries forced to relocate outside Europe (“carbon leakage”) because of competition from countries which do not constrain emissions. Steel and aluminium spring to mind.

Most EU countries seem to accept the broad outlines of the package, which do after all reflect commitments made last March by Europe’s leaders. Sweden and Denmark complain that all the progress they’ve achieved up to now has been quite ignored in the share-out of emissions cuts.

Perhaps the most significant feature of the whole package is its timescale. Can you imagine an individual European government setting a comprehensive climate change programme for the next twelve years, in the face of all the domestic pressures which can derail policy? Action at a European level sets the policy at one remove from domestic political demands and so takes the pressure off national politicians.

Technological development will be a key factor in what can be achieved within this timescale and it will be intriguing to see how different national policies evolve, because the spin-off benefits for jobs and economic growth should be considerable.

I see that Germany, for instance, is using the feed-in tariff to stimulate renewables and is being rewarded by a remarkable expansion in solar panel production in former East Germany. The firms which have clustered around Frankfurt (Oder) are confident that the costs of solar power will be dramatically reduced in the coming years, so making it an increasingly viable alternative energy source. The impact on local employment is already impressive.

The Commission’s climate change proposals give the Slovenian presidency a good routine policy issue to get its teeth into. Infinitely more difficult for them to handle is the future of Kosovo. Washington is reported to be putting pressure on Slovenia to accelerate EU recognition of an independent Kosovo, while the Kosovar leadership talks of declaring independence “within days”, which was taken to mean after the February 3 Serbian Presidency election run-off between incumbent Tadic and the more pro-Russian Nikolic. The election was narrowly won by the moderate Tadic by a margin of 50.5 per cent, increasing chances of Serbia’s further involvment with the EU, although the recent decision to send an EU mission to Kosovo remains a serious issue for Prime Minister Vojislav Koštunica’s Democratic Party of Serbia (DSS) . Intense diplomatic activity will continue with Commissioner Olli Rehn struggling to keep the EU show on the road.

Another election in the region holds a special interest: the February 17 Greek Cypriot presidential. The independent International Crisis Group believes that 2008 will offer a final window of opportunity to prevent complete partition of the island and the end of any hopes for a negotiated solution. The last attempt at unification was thwarted by the Greek Cypriots before EU entry.

Let’s hope that there is sufficient political will to settle the issue at last, so removing this poisoned thorn from Europe’s side. I do wonder what would have happened if the British (ex-colonial power with a sovereign base on the island) had intervened in 1974 when the Greek junta triggered a coup against President Makarios and gave Turkey a justification for invasion.

The Slovenian presidency is hoping to see more national ratifications of the Lisbon Treaty during its six-month term. Hungary is there first and you can track the progress on this map.

Portugal has decided not to go for a referendum, while in the UK the parliamentary process has begun. Nick Clegg, the new leader of the 62 Liberal Democrat MPs, has made clear that his party will not vote in favour of a referendum, which makes it most unlikely that the Treaty will be put to the electorate in the UK. This leaves Ireland as the only EU country to hold a referendum and, whilst confidence remains high, there is the risk of a repeat performance of the 2001 Nice treaty campaign, which was quashed by a conservative populist alliance.  

I see that the European Parliament wants more visibility for all the decisions adopted in advance of the end-game of conciliation. Apparently 64 per cent of co-decision dossiers are agreed with the Council in first reading and many more in early second reading, so Dagmar Roth Behrendt’s working party is proposing signing ceremonies and press releases to mark these approvals. Some may say the Parliament wants more profile before the 2009 elections – and why not?
 

So just how dangerous is the credit crisis for the world economy?

The eye-watering sums which the major central banks have transferred into the banking sector in recent weeks suggest that there’s a massive threat out there.

The European Central Bank’s decision to pump €350bn into the market in the week before Christmas at relatively low interest rates was part of a co-ordinated move with the US Federal Reserve, the Bank of England and the Swiss and Canadian central banks to unfreeze inter-bank lending and bring down the rates which banks charge one another.

There was evidently an immediate problem as banks anticipated closing their books on December 31, but also a sense that nobody knows what’s yet to crawl out of the woodwork. ECB President Jean-Claude Trichet spoke of “uncertainties surrounding the financial health and liquidity needs of financial institutions” in his speech to the European Parliament’s Economic and Monetary Affairs Committee on December 19.

Trichet’s speech touched on many aspects of the ECB’s role, but I especially liked this section: “More than ever, in these periods of tensions, lucidity in the diagnosis, rapidity in the decision, and absence of complacency are of the essence. This absence of complacency is particularly necessary as regards financial stability”.

I must say, the ECB has displayed an impressive “absence of complacency” and appears to have handled the credit crisis more effectively than the Brits over the last five months, although the ECB was not faced with a crisis such as the run on Northern Rock Bank. This has sorely tested the relationships between the UK government, the financial regulator and the Bank of England.

At least the Commission was quick to approve the rescue package, giving the British government until March 17 to present a long-term solution for Northern Rock.

While the British Government has been sucked deeply into the Northern Rock imbroglio, eurozone governments have been bystanders as the ECB takes action.

The credit crisis rated just one paragraph in the presidency conclusions to the Brussels summit on December 14, including a reference – as did Trichet’s speech – to the role of credit agencies, which are beginning to look like the fall guys for the politicians.

It was just before the Brussels summit that 26 European leaders gathered in Portugal for the ceremonial signing of the Lisbon Treaty.

The 27th, Gordon Brown, was just a bit late because of a prior engagement in the House of Commons – a fine-tuned gesture to downplay the whole process, keep the Treaty off the political agenda and add a touch of Brownite disdain to the proceedings. Commissioner Peter Mandelson was not amused.

Climate change was a major item on the December summit agenda. The European Union seems to have emerged with some credit from the UN Climate Change conference in Bali. The really tough negotiations will now begin, aiming towards a global agreement by the end of 2009, when a new American administration will be in office.

European negotiators decided to play hardball during the negotiations, threatening to boycott President Bush’s January meeting in Hawaii unless the Americans agreed to some target figures, but this threat evaporated as the roadmap for negotiations was agreed, albeit without the detailed targets that the EU and others wanted.

The pace of change does seem to be accelerating as the climate change message sinks in. The US position continues to shift, helped no doubt by Al Gore’s campaign and the initiatives by individual states like California. Business too is becoming a strong advocate of action – see for instance the message to Bali by the Prince of Wales’ Corporate Leaders Group on Climate Change, representing more than 150 global companies.

Words must be translated into action, and action is bound to cause some pain. I note that the motor industry is resisting the European Commission’s proposals for cutting average CO2 emissions to 120g per km by 2012, with fines for manufacturers who fail to meet the standards.

The motor industry has always pressed for an agreed approach to emission standards, whereby industry’s investment timescales can be reflected in the setting of EU standards, but the manufacturers’ hopes are always dashed, if not in the Commission then on the rocks of the European Parliament. Looks as if it’s all happening again, and one has to ask whether the impressive reduction in European vehicle emissions of the last 20 years would ever have happened under voluntary agreements.

The EU seems to be holding its nerve over Kosovo. None of the member states has yet broken ranks despite the passing of the December 11 deadline, although we can expect a declaration of independence shortly. The Brussels summit in effect recognised that independence was inevitable, saying that the status quo was unsustainable, while seeking to exercise control over events and stressing that the status of Kosovo “constitutes a sui generis case that does not set any precedent”. Softly, softly is the watchword.

Every effort is being made to set the whole crisis in the EU context, with encouragement for Serbia to speed its path to membership, the dispatch of 1,800 peacekeepers to the region and an active role for NATO’s 16,000 troops in maintaining peace. When Slovenia takes over the EU presidency on January 1 the Kosovo crisis and the broader Balkans situation will be top of its agenda.

See Michael’s mid-November posting for background and the lead up to the Kosovo decision deadline.

Michael now observes EU affairs from more of a distance and has been invited by Fleishman-Hillard to contribute an occasional commentary on current developments – in other words to do some blogging.

Maybe the time has come to love the common agricultural policy. The world is short of food. In consequence we see an explosion in agricultural commodity prices and a drive to expand production.

The grain and butter mountains which shamed the C.A.P. have disappeared. Europe has become a net importer of cereals for the first time. Prices of wheat have almost doubled in a year; world stocks of soya, which is essential for animal feed, are headed for zero, with China importing 40 per cent of world tradable supplies; food prices are rising and the impact is being felt in the shops – Germany now has 3 per cent retail price inflation for the first time since 1995.

Things have got so tense that the Commission proposes suspending import duties on cereals to ease the pressure a bit. See this Commission press release for details. Without a strong euro prices would be even higher.

The talk now is of food security. I’m reminded of the early 70s, when the Club of Rome, led by European Commissioner Sicco Mansholt, warned of a Malthusian world shortage of commodities – too many mouths, too little production. Yet in following years the food surpluses returned. Will it be different this time?

It does seem likely. Rising populations and greater prosperity are boosting global food demand from people who this time can pay for it.

At least Europe has the capacity to increase food production after some indifferent harvests and has a policy structure in the c.a.p. which can provide some confidence and continuity for producers, although a shift away from price support to more direct assistance will no doubt be a theme of the review of EU farm policy which has just been launched and will give more scope for producers to respond more quickly to market signals.

But what irony! Just as our farmers were being encouraged and applauded as protectors of Europe’s natural environment, paid to be custodians of the countryside as much as producers of food, the market is taking over.

A farming friend of mine has been maintaining the farm hedges, providing runways for birds such as skylarks (yes, they are called runways) and leaving a good headland of uncultivated land around his arable fields to help wildlife, but now the EU set-aside scheme which kept farmland out of production and encouraged wildlife is being abandoned for the 2008 season. Britain’s Royal Society for the Protection of Birds is seriously worried about this threat to these new habitats. 

Over the years since it was created the common agricultural policy has built one complexity on another, just as all farm policies tend to do, often with quite unforeseen consequences. The latest manifestation is the subsidisation of biofuels.

Of course arresting climate change is an absolute priority, but I do wonder if policy makers take full account of what they do. Take this example of screwed-up policy: the United States gives big subsidies for production of biodiesel, so palm oil is imported to the US from Latin America, processed by the addition of 1 per cent diesel oil and then exported to the EU as biodiesel, where of course it undercuts European prices.

In Europe too we are subsidising ethanol, producing it mainly from rapeseed oil, yet the production of ethanol in this way is reckoned to produce more CO2 than it saves. It is the consequence of setting arbitrary targets such as the 5.75 per cent of transport fuels from biofuels by 2010. I wonder how much impact assessment has been done to look at the whole picture in Europe and beyond.
It’s the knock-on effects which matter. Diversion of land from food to biofuel can pose some real threats. Worse, maybe, from a climate change point of view is the destruction of forest to grow fuel crops.

Even in Europe there is diversion of land from food to fuel production. Commissioner Mariann Fischer Boel says it only amounts to 2 per cent of EU cereal production, but marginal changes can have a major impact on commodity prices and this is presumably only the beginning.

A UN adviser has called the rush for biofuels a “crime against humanity”. These are strong words indeed and I note that it has become a real cause celebre among NGOs, maybe eclipsing the GMO issue.

But surely everything depends on the raw material and the technology used. Sugar cane is apparently four times as efficient as maize as a biofuel feedstock and there is a lot of research and development into alternative crops and by-products which may provide real benefits without the accompanying negatives.

The surge in agricultural prices has meant big savings for the EU budget, so unspent agricultural commitments are being transferred to fund Galileo in a deal approved by ministers on November 30. The Portuguese presidency seems to have used some nimble footwork switching from a budget decision (unanimity required) to a transport vote (qualified majority) in order to isolate the Spanish, who were holding out for their own Galileo ground station. See the Council conclusions here.

Following the Council decision the Commission will now be fully responsible for Galileo, using the European Space Agency as the procurement agent. Let’s hope the project can at last get on track for the stars.

Competition policy has become another impressive contributor to the EU budget. Fines of €490m have just been imposed on the European flat glass manufacturers for price fixing.

This brings EU anti-trust fines imposed so far this year to €3,000m – an extraordinary figure which partly reflects the success of the leniency regime, which offers reprieve or mitigation for any company which blows the whistle on a cartel in which it participated. A favourite question among law firms is: how do you advise your client when he tells you that the CEO of competitor company X failed to turn up to the annual informal golf weekend in Portugal last week?