According to latest reports, the likelihood of former British prime minister Tony Blair taking over as EU President in 2009 seems to be fading. The Independent newspaper reports a “secret” agreement between the big three, Brown, Sarkozy and Merkel, not to support any candidate for the job who does not have wholehearted approval of the other two.

Merkel is said to have reservations about Blair given Britain’s abstinence from the euro, from Schengen and from various Lisbon provisions. That does make sense when appointing a person who would be responsible for managing the agenda of European Councils for a renewable 2 ½  year term and with top-level global representative functions.
 
On the other hand the trio will want someone who is one of their own, so Prime Minister Juncker of Luxembourg would fit the bill, with the added bonus of coming from a small member country.

What kind of job will the EU President have anyway, given that the post relates only to the quarterly European summits and not the specialised councils? It is difficult to see the appointee as a major driver of policy – indeed the President of the Commission would be a convincing rival in many policy areas. More important will be the continuity role, avoiding the twice-yearly turmoil of transferring presidency between national leaders.
 
In practice the revamped Solana job of High Representative could be much more interesting and influential than of EU President. A seat in both Commission and Council, a budget of €10 billion, a clear mandate for international negotiations. Now that’s a job description which Blair could find extremely attractive.

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.

I see that the corporate status of Volkswagen is in the spotlight again.  Last year the European Court ruled that limitations on voting rights in VW’s statutes infringed EU rules on freedom of capital movement, so the German government has now notified Brussels of proposed legislative changes to satisfy the Court judgment.

For Commissioner Charlie McCreevy these changes are not enough and letters have been exchanged.
 
It’s another of those battles where a member country wants to protect a national champion,  except that in this case the predator is also German: family-owned Porsche AG, which already holds 30.9 per cent of VW’s shares and is determined to push its holding above 50 per cent, which in most companies would mean a takeover. However, the VW law requires an 80 per cent vote in favour to adopt major decisions. That, I suppose, is the sticking point for the Commission.

The German government relinquished its own shareholding some years ago, but the Land of Lower Saxony still holds 20.3 per cent, and is thus able to block any takeover – and resist any moves to transfer the business away from Wolfsburg.
 
So what is Porsche’s interest? To bring all VW and Porsche models as it were into the same corporate garage, ensuring that VW remains German and, by the way, using the fuel-efficient Golfs to balance out the turbo-charged 911s when EU vehicle emission rules are tightened up under climate change legislation.

VW has survived attempts in the past to break up its voting structure, as when former Commissioner Frits Bolkenstein tried to push through a radical takeover directive and had to abandon his objectives in the face of widespread opposition. His successor McCreevy decided last year not to press ahead with one-share-one-vote legislation, but the VW case raises different issues of government control and the Commission is bound to pursue this one.
 
The Commission has another challenge on its plate, which is the bid by Austria’s OMV (30 per cent government owned) for Hungary’s MOL (independent quoted company). The Hungarian parliament last year adopted the so-called Lex MOL, a measure which would allow directors to block a bid for any utility company of national strategic importance.
 
This might seem a simple case of blocking capital movement within the EU, just like the VW case. Mr McCreevy is currently examining the legislation under this heading. But the closer you look, the more complex the issues become, enmeshed in the manoeuvring for control of energy markets across central and south-eastern Europe and the Balkans.

Heaven knows who is on whose side! Russia’s Gazprom was said to support OMV’s bid, and a Russian businessman bought a substantial slice of MOL stock on the Budapest stock exchange last summer which he then obligingly passed to OMV, yet OMV portrays itself as Gazprom’s competitor in the region and supporter of the Nabucco pipeline project, a gas transit route from central Asia through Turkey to Europe which would bypass Russia and offer an alternative to Gazprom’s South Stream pipeline.
 
Nabucco is a favourite project of the EU, as Commissioner Piebalgs has confirmed and is enthusiastically supported by the US, although ironically it would seem to depend on tapping Iranian gas supplies to become viable, which of course does not go down well with the Americans.
 
Needless to say, Russia is no enthusiast for Nabucco, but no doubt delighted that Hungarian prime minister Gyurcsany recently signed an agreement in Moscow supporting the South Stream pipeline – a move which cynics said was designed to boost his pension following defeat in the recent referendum in Hungary, rather in the style of a former German Chancellor who became a Gazprom executive.
 
OMV’s bid was notified to the European Commission under the Merger Regulation in January 2008. An in-depth investigation was announced in March, with a decision currently foreseen for July 22. Separating the economic from the geopolitical aspects of this case will be no easy task for the Commission’s competition team and you can be sure that colleagues from DGs for energy and external relations will have plenty to say.

It seems so different from the old days, when the Franco–German alliance was the central core of European integration. With new leaders come new perspectives. President Sarkozy used his March visit to London to woo the British, with a speech to the British Parliament where he paid unheard-of tributes to Britain’s qualities and set out a detailed agenda for Anglo-French co-operation.

The elegance of Mme Carla Sarkozy gave extra media colour to what was a highly successful state visit. If he wooed, she certainly wowed. The Entente Cordiale, signed in 1904 between Britain and France, has a new lease of life.
 
The President’s message was, to coin a phrase once much loved of some British politicians, that the UK should be at the heart of Europe, even implying that an Anglo-French partnership could be the new driver for the EU. One practical initiative is that ministers from the two countries will meet on a quarterly basis – presumably matching the bilateral sessions between Paris and Berlin. Thirteen French ministers accompanied the President to London.

Almost everything in the President’s agenda involved bilateral initiatives, but mostly set in an EU context. On the other hand there was little rhetoric from Gordon Brown which indicated any new enthusiasm for Europe.
 
Still, it’s a reflection of how EU priorities are changing, that even the most sceptical journalists were hard put to identify subjects of disagreement. Not even the common agricultural policy was much of a bone of contention (after all, we must learn to love the CAP in the face of soaring world prices!). Whether or not to boycott the Beijing Olympics opening ceremony seems about the only discordant item. No indication that energy liberalisation was discussed.
 
Especially interesting would be to know what was said behind the scenes about defence. Sarkozy has already indicated that France may wish to rejoin the integrated command structure of NATO, abandoned by De Gaulle in 1966, and will provide additional forces for Afghanistan, but nothing was said publicly about strengthening the European Security and Defence Policy and France’s wish for a stronger ESDP planning capability.
 
A stronger European identity in NATO may be France’s price for rejoining the alliance. This remains highly contentious for the US and probably for the British too.

On the other hand there was agreement on an Anglo-French maintenance contract for the A400M transport aircraft when this comes into service, leaving the Germans to their own devices, and reinforced arrangements for joint procurement and for pooling of helicopters, aircraft carriers and maritime aircraft in joint missions under EU or NATO auspices.
 
Certainly Sarkozy feels temperamentally closer to the UK than to Germany. There is no evidence of a close personal rapport with Angela Merkel of the sort which he seems to have with Gordon Brown and there have been specific problems, notably over vehicle emissions, over the independence of the ECB and over his idea for a Mediterranean Union (resolved in advance of the March EU summit – see Annex 1). Nor is Germany a natural partner on defence issues as Berlin faces politically painful challenges in putting German troops into combat zones.
     
In the end, though, the demands of realpolitik will determine alliances. The Franco-German understanding in not dead.

Talking of which, I note that Angela Merkel said that her CDU party agreed with Sarkozy’s UMP that Turkey should have a privileged partnership rather than full EU membership. This promises interesting enlargement negotiations when France takes over the EU presidency in July and certainly marks a fundamental difference with British policy. Another issue which failed to feature in the public pronouncements in London!

France and the UK both have relatively new leaders who could change Europe, but so do others. In Cyprus, for instance, there are signs of movement following the election of President Christofias, including demolishing barriers in Nicosia’s main shopping street. A symbol of hope, even though there’s a long way to go to unification.

I see that the new Polish Prime Minister Donald Tusk is threatening a referendum on the Lisbon Treaty unless President Kaczynski’s party supports ratification in Parliament. The party withdrew its support, demanding the same opt-out from the Charter of Fundamental Rights as secured by the UK.

It seems that June 12 has been set as the date for the Lisbon referendum in Ireland, the only country to hold such a vote (unless Tusk has to make good his threat). The Irish vote will not be a walkover  Sinn Fein will campaign for a no vote; Jean-Marie Le Pen has announced that he will also participate. It promises a fascinating contest where turnout will be crucial. A no vote would of course block ratification of the Treaty: back to the drawing board.

The Germans paid €5 million for a disk detailing trust accounts which had been lifted six years ago from Lichtenstein’s LGT bank. Former head of Deutsche Post Klaus Zumwinkel is having to pay the price (about €1 million according to some reports), as no doubt will many other wealthy Germans.

The British Revenue has paid £100,000 to the thief and hopes to nail 100 people who had allegedly planned to avoid UK tax by setting up trusts in the principality.

Purchasing stolen goods in this way sets quite a precedent. I recall some years back when the disgruntled Luxembourg employee of a major Belgian bank produced a list of all the prominent Belgians who had tucked away their savings in a tax-free environment, but that could be described as whistle-blowing. The Brussels-Luxembourg motorway was always much used, so it was said, by Belgian dentists depositing their earnings.

Payment for stolen information is a grey area from an ethical standpoint, but also a reminder of just how vulnerable we may all be to data theft, not because we are trying to evade tax, but because so much of the personal information which is held on commercial or official databases could have a value to someone else, including blackmailers, fraudsters and phishers.

The only alternative to relying on such dubious methods of intelligence-gathering is for the EU to refine its own systems for tackling tax evasion. I see that Commissioner Laszlo Kovacs has told finance ministers that he intends to publish a report in June which would look at an extension of the 2005 rules to cover bonds, shares, funds and other instruments which are not currently covered by the savings tax provisions.

The dreaded Internal Revenue Service already has a deal with Liechtenstein which obliges the principality’s banks to inform the US of deposits from American citizens and there may be a precedent here. Liechtenstein’s application to join the Schengen area may be a useful lever for the EU to demand greater compliance with EU legislation.   

The big question is whether Kovacs will go for complete disclosure between the tax authorities of member states, and thereby open the way for a parallel procedure with non-member countries.   

Banking secrecy is the key. In 2005 Belgium, Luxembourg and Austria would only agree to the savings directive if they were allowed to impose a withholding tax rather than disclosing information to other tax authorities. We can expect pressure on these three countries to accept the need for change and we can also expect resistance. However, they are by no means the only ones within Europe’s borders who have come under scrutiny.

Luxembourg leader Jean-Claude Juncker, who chairs the Euro Group ministerial meetings, is reported to have said that he looks forward to “many years of fascinating, fundamental discussion”. Quite so.

It’s just like a nest of Russian dolls: lift off the Vladimir Putin doll to reveal Dmitry Medvedev.  Remove Medvedev to reveal  . . . Vladimir Putin. Russia’s March 2 presidential elections went pretty much as predicted and no doubt as planned, although the Communist Gennady Zyuganov polled nearly 18 per cent of the vote, which was more than expected.
 
The Council of Europe observers did not like what they saw, but they remarked that even if the run-up to the election had been more democratically acceptable, the result would have been the same. Indeed, there’s little doubt that the results did reflect the will of the people of Russia.
 
I think we should not underestimate just how deep were the traumas of the Yeltsin period, when the Soviet empire collapsed, the country was plunged into a deep economic crisis and large parts of the economy were handed over to a small coterie of people who became immensely wealthy overnight while much of the population suffered deep poverty.

The eight Putin years were surely a reaction to all that, while the economy was boosted by steadily rising oil and gas revenues. The Novosti Agency has a Russian take on the achievements and failures of the Putin years.

Maybe the Russian elections should not be considered in too negative a light. They do open a new window of opportunity for relations between Russia and the EU and maybe bilaterally with individual EU countries as well. The key question is whether the transfer of the presidency from Putin to Medvedev will mark a new direction of travel for Russian relations with its neighbours.
 
We’ll soon see whether Putin’s sabre-rattling was just pre-election bombast and whether Medvedev will take a different approach after he takes office on May 7.

The new president has said that he will take responsibility for foreign policy. His background is different from Putin’s – he is from the post-KGB generation and is aware of the need to stimulate business and improve social services. As chairman of Gazprom he will also be conscious of Russia’s vulnerability if the flow of foreign investment into the country’s oil and gas industries is not dramatically stepped up over the coming years to meet rising energy demand at home and the increasing dependence of EU consumers on Russian gas exports.
 
The Russians do seem to be treading more carefully these days. Although Gazprom supplies to Ukraine were again hit on March 3 owing to the dispute over unpaid bills, the Russians have been keen to stress that supplies to the EU will not be affected and have kept the Commission informed.
 
But let’s not have any illusions about the link between business and politics. Remember Kosovo? One of Medvedev’s last foreign trips before the elections was to Belgrade on February 25, where  he discussed arrangements with the government whereby Gazprom will build 400km of the South Stream gas pipeline across Serbia and will also acquire a controlling stake in NIS, Serbia’s biggest gas company. Coming hot on the heels of Hungary’s approval of the South Stream project, this is a further boost for Russian access to energy markets in the Balkans and southern Europe.

As for Russia-EU relations, the most difficult challenge will be to secure Russian ratification of the Energy Charter Treaty.  On the other hand, Commissioner Mandelson has been quite upbeat about negotiations for Russian accession to the WTO.  The Council of Europe is also waiting anxiously for the Russian Duma to approve Protocol 14 of the European Convention of Human Rights, to open the way for a wholesale reform of the procedures of the European Court of Human Rights and so help to clear the backlog of more than 80,000 cases pending. The EU is being urged to take a tough line with the new administration in Moscow.

So Kosovo has effectively become a protectorate of the European Union. This is surely a watershed in the history of the EU and a major test of whether it can make a reality of the European Security and Defence Policy.
  
A decision by the Council of Ministers, published the day before the province’s February 17 declaration of independence, was to establish a Rule of Law Mission consisting of more than 1,800 police, judicial and customs officials who will move into Kosovo over the coming months to join the 16,000 NATO troops which are already there.
 
No beating about the bush: their task will be to create a new country.
 
It’s a daunting prospect, for both political and economic reasons, but of course you can’t separate the two. Kosovo is landlocked, dependent on its neighbours for transport, energy and communications and in the end looking to an effective EU operation to develop into a viable European state.
 
In the years since 1999, when NATO forced Serbia to relinquish control of the province following Milosevic’s catastrophic attack on Kosovo’s ethnic Albanians and the loss of more than 10,000 lives, the Union has exerted increasing influence, working closely with Kosovo’s elected leaders and endorsing the conclusions of the UN Special  Envoy Martti Ahtisaari who proposed supervised independence.
 
Although Russia vetoed the Ahtisaari plan in the Security Council, most EU countries regarded independence as inevitable. Britain, France, Germany, Italy and the United States have now recognised the new country. Russia, Spain, Greece and Slovakia, among others, have refused. It seems as if rather more than half of EU countries will give recognition.
 
What I find fascinating is the way in which all 27 member states have approved the Rule of Law Mission despite the deep reservations about independence expressed by some like Spain and Greece.  The Council of Ministers’ communiqué of February 17 stressed that Kosovo constituted a sui generis case which did not call into question” the principles of the UN Charter such as sovereignty and territorial integrity”, although the Serbs and Russians would argue the exact opposite.

The description of Kosovo as Land of the Living Past could not be more apt. Most Serbians still regard Kosovo as an integral part of Serbia and the monastery of Kosovo, site of the defeat by the Ottomans in 1389, as their holiest place, but it is worth remembering that it was only in 1912 that Serbia reoccupied the province and encouraged Serbians to settle there. Like so much of the Balkans, this is ever-shifting territory.

The challenge for the EU remains highly complex, but so far it seems to be well managed.  Belgrade has been encouraged on the path to EU membership, a policy which was rewarded by the electoral success of the pro-EU Boris Tadic in Serbia’s recent presidential elections. Tadic is committed to a diplomatic approach. He demands a United Nations resolution denouncing the declaration of Kosovo independence, but has made it clear that his absolute priority is progress towards EU membership and although the Serbian ambassador to Washington was recalled following the Kosovo declaration, the mission to Brussels was apparently not affected.
 
Building a peaceful and economically viable Kosovo over the coming years is the greatest test yet for the EU’s combination of  “soft power” and political will, we hope the final step in stabilising a most unstable region.  It is evident that the European Union provides the only framework with a chance of achieving a peaceful outcome.

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?
 

It’s goodbye to the Cypriot pound and the Maltese lira, so who’s next for the eurozone?

What joy for travellers when the euro took over from 11 national currencies just six years ago! Gone was that muddle of francs and deutschmarks and lire and punt in our wallets, and all those old envelopes full of foreign change in the dressing table drawer. Suddenly all we needed were euros and the British pound.

The euro has been a remarkable success story. Its adoption by Cyprus and Malta from January 1 2008 brings the number of member states in the eurozone to 15 – a population of 318 million in a zone stretching from Finland to the mid-Med and from Ireland to Slovenia. It’s goodbye to the Cypriot pound and the Maltese lira.

I do like the design of the new coins – a beautiful Maltese cross, a shield and a prehistoric temple for Malta; and for Cyprus a 3,000 year old figure looking curiously like a Christian symbol one thousand years before its time, a 4th century BC sailing vessel and a pair of moufflon sheep. Cyprus’s coins have the island’s name in both Greek and Turkish. Maybe that will open doors on that divided island!

So who’s next for the eurozone? Slovakia is aiming for January 2009. Of the other non-euro outliers I could imagine the Danes joining within two or three years following their recent elections. Sweden is more doubtful and for the Brits we must be talking at least 10 years, if ever, given the state of British public and political opinion (see below).

Others are lining up: Estonia, Latvia and Lithuania are in the ERM; Bulgaria, Hungary, the Czech Republic, Poland and Romania are still working to get their economies in order.

For general background on the euro area see this page of the Commission’s website.

This year will be a testing one for the euro. As the economic background becomes more difficult, so politicians will want lower interest rates and a weaker currency, but the ECB is more concerned with inflationary pressures as rising oil and commodity prices push up costs.

ECB President Trichet has made it clear that fighting inflation is the priority for Europe’s central bank even if the Americans cut their rates to support the US economy. And of course a strong currency does help to contain dollar-denominated price increases.

The impact of a strong euro on particular industries is dramatically illustrated by the plight of Airbus, faced with direct competition from Boeing. Back in November CEO Tom Enders didn’t mince his words when he talked of “tremendous losses” for the company as the dollar continued to fall.

The situation has not improved since then. By the way, I thought it interesting that the Airbus boss was not complaining about the level of the euro, but underlining how the business itself must adapt.

Divergence between national economies may well put more strain on the eurozone, as the collapse of the housing market in Spain and mounting public debt in Italy threaten serious tensions. Indeed one major French bank warns that the interest rate spread for euro bonds might diverge significantly according to the country of issue, with the Italian and Spanish governments penalised by the market by having to pay much more for their borrowing.

We’re back to the old question: can the eurozone survive on the basis of “one policy fits all”? It has done so up to now, but there may well be speculation of members being forced to quit the euro. “No coincidence that all failed currency unions were abandoned during times of economic stress” says BNP-Paribas.

The estimates of growth for Europe’s economy are being revised down but there are reasons for some optimism. I’ve seen a timely reminder of just how important the member countries of central and eastern Europe, together with Turkey, the Middle East and Africa have become in maintaining momentum in the EU15’s economy. “Europe’s got its own China next door” says the author, Joe Quinlan from Bank of America. He sees the buoyancy of these emerging economies, both inside and outside the EU, acting as a powerful driver for Europe’s economy.

Talking of China, London’s Chatham House and the Robert Schuman Foundation have undertaken an audit of the views of Chinese policy-makers towards the EU. It is on the whole positive, but set in a long-term strategic context. One is reminded of Mao’s comment when asked what he thought of the French Revolution. “Too early to tell” he replied.

The latest Eurobarometer results give an idea of what Europeans think of the EU. It’s striking that across 27 member countries support for membership remains at its highest level since 1994, with 58 per cent seeing it as “a good thing”, against 13 per cent seeing it as bad. .

The Netherlands is way up – 79 per cent of the Dutch approve of membership, just three years after that negative referendum vote, as do 74 per cent of the Belgians and the Irish. The UK is bottom, at 34 per cent approval, with the Austrians at 38 per cent and the Latvians on 37 per cent. Nowhere do those who disapprove of membership outnumber those who approve.

Some of the most intriguing findings relate to trust. The pollsters asked respondents whether they “tend to trust” the European Commission. Across the EU one in two said yes, 26 per cent no, and 24 per cent were undecided. The Greeks at 69 per cent and the Belgians at 67 per cent felt especially trusting. France and Germany are around the EU average.

In the UK, on the other hand, only 22 per cent said they tended to trust the Commission and 47 per cent did not – far more negative then anywhere else. I can only suppose that this reflects the europhobe hostility of much of Britain’s national press.

But just as intriguing is the view that people take of their national politicians. Across the EU only 34 per cent say that they tend to trust their own governments, while 59 per cent do not trust them. In the UK 30 per cent trust their government and 34 per cent their Parliament, from which you might conclude that the British do not trust political structures wherever they may be.

For some eastern European countries like Bulgaria, Czech Republic and Romania the level of trust for EU institutions is around 60 per cent or more; for their own governments and parliaments around 20 per cent or less. The national political class is certainly finding it difficult to build confidence among voters in many parts of Europe.

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.