There are tentative signs that the dust is beginning to settle after the last few hyperactive weeks, with signs that world leaders have mounted an effective response to the credit crisis. Inter-bank lending seems to be recovering, stock markets appear more stable and the outline of a global approach is beginning to show, following three weeks of frantic decision-making at national, European and at global levels.

As so often happens, it is the force of this crisis which is driving Europe forward. The EU landscape has changed in many ways in the last three weeks.  Its political position has been strengthened. There is no question that President Bush’s invitation to Presidents Sarkozy and Barroso to dine with him in Washington last weekend and their joint commitment to a series of global summits must mean that the EU can now claim a real voice in international monetary affairs.

The crisis may be labelled “Made in America”, but its repercussions across the world have made a pan-European approach essential.  Never have the implications of globalisation been so clearly demonstrated. Any unilateral country-by-country response, such as the Irish and German proposals on deposit protection, met with a storm of protest.

One curious consequence of the crisis is the transformed relationship between the eurozone and the UK. We used to argue that Britain should adopt the euro lest the UK be excluded from the Eurogroup of countries and so lose influence.  How ironical, then, that Gordon Brown should be invited to attend the euro summit on October 12 and become the hero of the hour, transformed into Flash Gordon with his (or rather Chancellor Darling’s) three point model for underwriting inter-bank lending, recapitalising the banks and protecting savers. Brown even takes his place in the family photo of the 15 eurozone ministers!

You could argue that it was precisely the UK’s independence of the euro which made the UK’s actions possible, but taking these drastic measures if everyone else was doing nothing would have been highly risky for the Brits. Incidentally, I wonder how much liquidity the UK’s major banks have received from the ECB since this crisis began. There’s even more interdependence here than meets the eye.

Of course the eurozone’s response to the Brown plan had to be political rather than legal, relying on common commitments and national measures rather than new EU legislation. It is only national governments which have the resources and the legal power to underpin their banks’ capital base.

The attention must now shift to the legislation to be adopted across various institutions to avoid any repetition of the crisis.

The Commission has already put forward a new proposal to safeguard depositors up to €100,000 per person, replacing the current €20,000 limit. Will this apply in Iceland, I wonder, under EEA rules?  Stronger regulatory measures have been proposed for banks and insurance companies and guidelines on state aid for guaranteeing deposits and bailing out banks have been issued by the Commission. President Barroso is emerging from the crisis with much credit – I would think his place is secure if he wants to serve a second term as Commission President.

The issue of bank regulation will be hotting up. Will central banks be given more responsibility? The British are certainly talking about it in relation to the Bank of England, and the subject will be on the agenda of the coming summit meetings in the context of post-Bretton Woods. For the eurozone, that must mean more responsibility for the ECB.
The crisis has triggered some interesting political developments. Take the Lisbon Treaty, for instance. Brian Cowen, The Irish Taoiseach, is committed to presenting the December EU summit with proposals to reverse Ireland’s rejection of the draft Treaty.

Mr Cowen argues that the EU has saved Ireland from a financial meltdown similar to Iceland’s and hopes that the Irish voters will appreciate this. He says that had his country not been part of the EU and the eurozone and without the support from the European Central Bank (about €70bn apparently) it could never have weathered the storm.

The Irish leader clearly hopes that this experience, plus reassurances on sensitive issues such as abortion and defence, will be enough to obtain a “yes” vote in a second referendum. The pressure is certainly mounting as the June deadline for European elections comes closer.

This will coincide with more straitened economic times as recession bites, public spending rises and jobs are lost across Europe. Things are far from returning to normal, and as someone said, the new normal will not be the old normal.

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.

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.

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.

We used to describe European integration as “journey to an unknown destination”, which was an easy get-out when everyone had different ideas and nobody was sure of the direction of travel. It was comforting and frustrating at the same time.

Taking stock after the Lisbon European Council of October 18-19 and the approval of the draft reform treaty, I think we can say that at last we have arrived at an actual destination. There are certainly hurdles to jump before the new treaty is ratified, but we now have a blueprint for the functioning of the EU which should serve at least for ten years and maybe for longer. The years of crisis since the Convention began its deliberations in 2002 have been so cumbersome and fraught that I doubt whether anything similar could be undertaken for at least a generation.

Of course the earlier version was called a Constitutional Treaty precisely to give a sense of completion and not because it was a genuine constitution, but that’s by the way. By introducing amendments to existing treaties rather than a completely new text consolidating into a single treaty it is easier to see the actual changes which are intended and – by deduction – what was already part of the acquis (flag, anthem etc).

It’s also good to see that “an ever closer union among the peoples of Europe” remains the fundamental purpose and we can forget the heavy verbiage of the constitutional treaty.

The most far-reaching changes relate to Europe’s capacity to relate to the world beyond: the appointment of a Council President for a renewable 2½ year term and the creation of the new High Representative for external relations who will bring together in one person the Council’s Solana figure and the Commissioner responsible for foreign policy. The Definition of a Common Security and Defence Policy in the Treaty could also be a significant step towards a more capable EU (see summary).
Kissinger once said that he didn’t know whom to phone in Europe in times of crisis. At least that should be clearer once a Council President is in office. And a High Representative will bring together the two arms of decision-making in external relations: the political will of the Council (as long as it can be found!) and the policy resources and budget managed by the Commission.

Needless to say, speculation runs rife over who will get the jobs. Sarkozy is said to like the idea of Tony Blair for EU president – but could also favour Luxembourg premier Juncker. Denmark’s Prime Minister Anders Fogh Rasmussen is said to be in the running, as is former Polish President Kwaśniewski. Then there is the High Representative post, where Carl Bildt is tipped. A brief term as Swedish premier nearly 20 years ago launched him on a distinguished career in the Balkans and across European politics.

The name game will run for the next 12 months, the source of endless fun. For a structured argument for having an EU President click here.

The new Europe may not be quite what European federalists dreamed of 50 years ago, but how extraordinary it is to see an operating Union of 27 member states, including countries which were deep in the thrall of communism when the Treaty of Rome was signed.

Talking of which, it was a relief to Lisbon summiteers when Polish prime minister Lech Kaczyński settled for a seven year delay in the population criterion of a revised qualified majority voting system, rather than expressing his party’s anti-German sentiments by blocking agreement.

Poland’s elections a couple of days after the summit seemed to represent a significant generational shift. Turnout was relatively high, at 54 per cent, and Civic Platform, with a distinctly forward-looking agenda, took 208 seats against Kaczyński’s 164. A coalition has since been put together by the Civic Platform leader Donald Tusk which may be strong enough to stand up to President Jaroslaw Kaczyński, twin brother of the outgoing PM, in post as president until 2010.
Tusk’s campaigning took him to the UK and Ireland, where at least 700,000 Poles are now working, to gather the votes of expatriates – now there’s a European dimension for you! This constituency delivered valuable votes which it seems were telling in the final results.

Poland shares an opt-out with the UK on the Charter of Fundamental Rights in the draft reform treaty, but I gather that the new government may well decide to sign up to the Charter as symbolic of the new government’s commitment to European values, leaving the UK as the only member state left outside, with the consequent loss of influence this will entail.

Still, this was deemed a vital “red line” for the Brits, giving Prime Minister Gordon Brown a further justification for refusing a referendum in the face of a ferocious campaign in favour of a referendum in the British press.

Any enthusiasm Brown may have had for calling a general election after the October party conferences were no doubt further cooled by the threat to the 62 Liberal Democrat MPs in Westminster; if a chunk of those seats had gone to the Tories it would have made it all the more difficult to avoid a referendum.

For a recent update, including comments by Giscard d’Estaing on the treaty click here.

Portugal seems to be having a good presidency. The EU-Russia summit in Lisbon on October was described as “constructive” by both sides, maybe helped by the change of government in Warsaw, with the prospect of a deal on Polish meat exports (currently banned by Russia) and further progress towards a partnership agreement between the EU and Russia. There is room for a transformed relationship.

There’s nothing the Russians hated more than the EU’s Neighbourhood Policy, which they saw as deeply demeaning, and the EU seem to be getting away from that patronising approach. Portugal’s long-standing respect for Russia seems to be an important factor. I always did think that the Portuguese tongue sounded just like Russian.