EU’s neighbourhood policy has to include Russia

In 2003 the EU put in place a neighbourhood policy in preparation for its enlargement in 2004 to include ten additional members extending its new border eastwards. It was realised that by including those countries accepted as members into the EU, a new dividing line across the European continent could emerge between countries that as communist and then transition economies had previously had fairly close relations. The neighbourhood policy was designed to mitigate the new border by means of trade policies and a reasonably open visa regime and also to promote some of the political, legal and economic reforms which had been set as criteria for EU accession. It was not applied to Russia which would not have agreed to being monitored for progress towards standards set by the EU.

In theory pre-existing policies towards southern Mediterranean countries were incorporated into the neighbourhood policy but in practice they have remained different and this post is about the eastern neighbourhood and specifically Ukraine. Armenia, Azerbaijan and Georgia are important but do not border the EU. Belarus has been permanently under the grip of its dictator, Aleksander Lukashenko, who has not been interested in closer relations with the EU except on his own terms. Moldova is a small, albeit complicated, country.

With the Orange Revolution of 2004 which saw the election of Viktor Yevtushenko, who favoured liberalising reforms, as president defeating Viktor Yanukovych who resisted such changes. However President Yevtushenko was not a successful president and Yanukovych, after serving a period as prime minister,r was elected president six years later. Nevertheless Yanukovych did seem amenable to negotiating with the EU on its proposed Deep and Comprehensive Free Trade Agreement in 2013 and the outline of such an agreement was concluded in late 2013. Unfortunately this coincided with an attempt by President Putin to expand and deepen a Eurasian economic  and customs union between former Soviet countries, of which Ukraine was intended to be a key part. Both the EU and Russia considered that Ukraine had to choose rather than pursue a balanced policy of deepening economic relations with both its neighbours and Putin put pressure on Yanukovych to abandon the EU agreement in favour of the Eurasian economic customs union. Doing so angered much of civil society and led to the occupation of central Kiev by protestors and after violent confrontations in March 2014 Yanukovych fled to Russia. This was a deep humiliation to President Putin and Russia, which led to the reaction that has followed.

EU policy stumbled partly due to bad luck but also a flawed strategy

The ensuing conflict was to some extent bad luck as the unexpectedly strong support by much of the Ukrainian public for the EU agreement coincided with precisely opposite plans by President Putin. But there was also a flaw in the EU strategy. It had rightly looked at how to tackle the impact of EU enlargement on the EU’s new neighbours as a consequence of the enlargement but then failed to prepare for the impact of closer relations with the new neighbour Ukraine with that country’s own neighbour, Russia. It is possible that the democratic will of the majority of the Ukrainian people would have anyway brought it into conflict with Russi, and a minority of its population who feel themselves Russians, but the EU did not by any means do as much as it could have to make its agreement compatible with ongoing close economic relations between Ukraine, especially eastern Ukraine, with Russia. For example, the agreement provided for symmetrical opening of the Ukraine market to EU companies in relation to EU markets to Ukrainian companies, despite the much greater strength of the EU economy. This not only would be very tough for Ukrainian companies in trying to hold onto domestic markets but also make it more difficult for Russian companies to compete.

This is not to excuse the Russian response, which was effectively to annexe Crimea and then provoke a rebellion helped by Russian troops in the Donetsk and Lugansk regions of eastern Ukraine. However, the Russia led by Putin is the reality that the EU has to deal with and it now has to deal with a Ukraine whose territorial integrity has been violated and the best prospect in the medium term would seem to be that the Minsk agreement of February 2015 holds, and that the ongoing reduced level conflict since then reduces further rather than flares up again. For that to happen requires Ukraine to observe its side of the agreement as near perfectly as possible despite the fact that the other side is not doing so, so as not to provide any excuse for a major new conflict, and that it the government leans over backward to conciliate any sections of the population in the territory under its control that might be tempted to sympathise with the rebels. Rightly the EU is now including a Russian representative in ongoing discussions on the proposed trade agreement between Ukraine and the EU, whose implementation has been postponed.

At the same time, the EU should do much more through debt write-offs[1] and economic support to enable the government of Ukraine to put in place the reforms needed to create the kind of country that the electorate voted for in the 2014 elections, one where all, including powerful oligarchs, are equal before the law, there is a level playing field new businesses to grow and where trade with both the EU and wider world economy can expand.



[1] Writing in the Financial Times on May 18th, the former US Treasury secretary, Lawrence Summers, argued that the case for a debt reduction was as strong as any he had encountered in the last 25 years.

Immigration risks British exit

John Major speaking to the Konrad Adenauer Stiftung in Berlin said on November 13 that he considered there was a near 50% chance of the UK leaving the EU, the main reason being the allegedly excessive level of immigration. If the chances of the Conservative Party doing well enough in the May 2015 UK election to form a new government and carry out its promise to hold a 2017 referendum on EU membership are 50% then the implication is that if the referendum is held there is a near 100% of it leading to exit. This would be surprising given that an Ipsos-Mori poll on showed a large majority in favour of staying in. However, John Major’s assessment could prove right. In late November David Cameron came close to making demands that were self-contradictory. On the one hand he seemed about to demands a reform of the priniciple of free movement of labour to the extent of applying and the other hand he rightly called in his speech to the CBI on November 10th for the “safeguarding the internal market” amongst all 28 members at a time when the majority euro zone countries are developing closer integration amongst themselves.

The internal market which was designed in 1985 and 1986 by the commissioner appointed by the then British prime minister, Margaret Thatcher, Lord Cockfield, has four pillars, the free movement of goods, services, capital and labour. If quotas can be introduced on the free movement of labour one of the four pillars is fundamentally weakened and the precedent set for a member state (or the whole euro zone towards countries outside the euro zone) to introduce quotas on the movement of capital, services or goods.

On November 28th Cameron stepped back for calling for immigration quotas calling instead for more reasonable limits to in-work benefits but he could yet be persuaded into making such a demand.

The issue is linked to other government policies

How has immigration, particularly from other European countries, become such a concern in the UK? Germany has had similarly large numbers of immigrants from other EU countries in recent years and as a relatively strong economy is also likely to remain a magnet for immigrants. But immigration in Germany is not now a major political issue, although the leading governing party, the Christian Democratic Union used to insist that Germany was not an “immigration country”.

There are a number of reasons that those concerned about immigration put forward as reasons for their concern, of which the most substantial are that it puts a strain on health and social services, it reduces job opportunities for existing British citizens especially young people and reduces wages, and that adds to the problems caused by the shortage of housing in parts of the country, especially the south-east. The first concern, though possibly true in particular localities, does not stand up to evidence overall. As a recent study by University College, London, has shown EU immigrants put more into tax to fund social services than they take from them and from welfare benefits. Moreover many of those working in the health and care sectors are immigrants, both from in and outside of the EU. With regard to schools, it has been noted that schools with large immigrant intakes as in London or other inner cities are performing better than those in rural areas with low immigrant intakes.

Arguments that immigration depresses wages for the lower paid and that it puts pressure on housing cannot be so easily refuted. In both cases, however, the problems are also linked to longstanding aspects of UK government policy.

Although the UK has done well, compared with many EU counterparts, in increasing the number of jobs and so in limiting unemployment, it is being increasingly noted that the wages and conditions of these jobs is often low and may be deteriorating. The UK has prided itself on a very flexible labour market and there is little doubt that this leads to lower unemployment, especially of young people, than countries in southern Europe. Certainly the UK does not want to copy the labour market conditions of southern Europe which have resulted in low employment rates and high youth unemployment.

However, the extent to which the scales are weighed in favour of employers in relation to employees, and the behaviour of employers in boosting profits, and pay for higher management, at the expense of wages and conditions for most employees, especially those at the bottom, has gone too far. This means not only that wages are often very low, and subsidized by tax and welfare benefits provided by the UK taxpayer, but also that other conditions, such as the reliability of income as a result of the prevalence of zero hours or very short term contracts, and the provision of training, are now very poor and despite government efforts to squeeze welfare benefits for unemployed, are very unattractive to British citizens. They are more attractive to people from eastern Europe because they send money back to their own countries where living costs are much lower and when they see themselves as only temporarily based in the UK are willing to live in crowded or low standard accommodation.

One example is given by the road haulage sector. With EU rules on working hours coming into force after a period of exemption for the UK, representatives of the sector complain they do not have sufficient numbers of trained drivers. But this is because they have failed to invest in their staff by providing adequate conditions and training to attract British citizens, relying instead on the use of agencies providing temporary work often to foreigners. It is not just a matter of wages, but the lack of a reasonable degree of job security (it is accepted that jobs for life are a thing of the past, but employees should be able to look forward in normal circumstances to staying in the same place for at least 12 months unless the company they work for is in acute difficulty); training; and other conditions such as pressure to work excessive overtime at the expense of long-term health and family life.

This is not a call for massive new regulations. Legal changes such as the imposition of a minimum wage can be successful in achieving modest improvements in conditions without reducing employment opportunities, but they need to be carefully thought and can only achieve limited improvements. They cannot change the labour market culture to one like Germany where employers feel that providing good training, working under a meister (mentor) and time off to study, are a part of being respected in the locality to which they belong, where works councils are considered a normal part of governance which helps to overcome difficulties and seize opportunities and where unions are seen as part of a “social partnership”. The latter certainly looks far-fetched in the UK but improvements are possible. The government does have a role for example in the message it sends by the way it treats its own employees. The practice of outsourcing public services which do the same as previous government agencies but save money purely by reducing the wages and conditions of employees carries a lot of responsibility for sending the message that poor employment conditions is good business practice.

Another element of government policy which links with the concerns of those who claim that immigration is too high is housing. Since the 1980s social housing has been sold without the proceeds of sales being used to replace the stock so that social housing provision is inadequate. Instead a large part of public money spent on housing goes on subsidizing the rents of those on low to moderate incomes. Whereas no-one would expect immigrants to jump the queue for social housing they have been entitled to the rent subsidies. Given that these subsidies are part of government policy to provide housing to those already resident but inadequately housed the government ought to be able to justify requiring a substantial delay before providing such subsidies to new immigrants, but it should also do more to boost the availability of social housing in areas of need.

Juncker’s proposed Commission includes two surprises

The two most surprising things about the proposed college of commissioners presented by Jean-Claude Juncker on September 10th and to take office–if endorsed by the European Parliament–0n November 1st, are: first, its structure, a structure which is likely to have consequences for not only the internal working of the Commission but how it appears to the outside world; and second, how far the appointments go to meeting British aims (of which the appointment of the British commissioner, Lord Hill, to be responsible for financial services, is only one aspect).

 

New structure aims to remove silo-mentalities

Mr Juncker has said that it is intended to remove “silo-mentalities” and at least for some aspects of the Commission’s work this is likely to be the case. Apart from the foreign policy representative much of whose work is outside that of the Commission, and Kristilina Georgieva, who is to become vice-president for budget and human resources, there will be five other vice-presidents who, unlike previous vice-presidents who usually had major portfolios, will not have specific departmental responsibilities but instead will be tasked with co-ordinating policy under different, but overlapping fields, namely:

Better Regulation—Frans Timmermans (outgoing Netherlands foreign minister);

The Digital Single Market—Andrus Ansip (resigned in March 2014 after nine years as prime minister of Estonia);

Energy Union—Alenka Bratusek (was  forced to resign in May 2014 as prime minister of Slovenia after 13 months in the post);

The Euro and Social Dialogue—Valdis Dombrovskis (resigned after five years as prime minister of Latvia in November 2013); and

Jobs, Growth, Investment and Competitiveness—Jyrki Katainen (resigned as prime minister of Finland in June 2014 after three years in office to join Commission).

Each of the above will be asked to coordinate the work of several of the other commissioners who do have specific departments (Directorates-General). Given that four of the five co-ordinating commissioners are former prime ministers, all who have chosen to leave active careers in domestic politics to make contributions at the EU level, it can be expected that they will want to wield power and in so doing are likely to cause tensions or even come into open conflict with the commissioners they are supervising. In particular, Mr Katainen who decided to step down as prime minister of Finland to go to the Commission, and Mr Dombrovskis will expect to have a major influence on economic policy matters in the euro zone. As they both have been associated with fiscal discipline in their own countries and, in the case of Mr Katainen with regard to other euro zone countries, they are likely to come into conflict with Pierre Moscovici, the former Socialist French finance minister, who judged by his past record will want to emphasise a “flexible” interpretation of the euro zone’s fiscal rules. Both Mr Katainen and Mr Dombrovskis will also have a strong interest in the employment portfolio which will be taken by Marianne Thyssen, A Belgian Christian Democrat.

Other policy domains where tensions are likely include: the controversial energy field between Ms Bratusek and Miguel Arias Canete, the Spanish commissioner who will be in charge of DG Climate Action and DG Energy; and the digital economy between Ansip and Gunther Oettinger, the German outgoing energy commissioner who will take charge of DG for Communications Networks, Content and Technology and DG Informatics.

 

Hopes for drive for better regulation enhanced by choice of Timmermans

Two key players operating hopefully with a reasonable degree of harmony will be Mr Timmermans in charge of co-ordinating policy related  Better Regulation,as well as the Rule of Law and Charter of Fundamental Rights, and Elzbieta Bienkowska in charge of the departments for the internal market, industry, entrepreneurship and SMEs. The EU is held together largely by its body of legislation, and the majority of that legislation is designed to facilitate the internal market. The legislation attracts much criticism for its allegedly onerous and intrusive impact on businesses.  If one were to judge by almost all the examples given in the UK’s tabloid press of such excess, the criticism would appear to be largely based on inaccurate reporting. However, given the fact that the legislative acquis over 60 years has reached 100,000 pages it would indeed seem likely that there is huge scope for streamlining and where appropriate eliminating legislation with the aim of reducing regulation to the minimum necessary to achieve the key objective of free movement while safeguarding the health and safety of workers and consumers maintaining environmental standards and saving energy.

In a speech as the Netherlands foreign minister in February 2014 Mr Timmermans said that “the European Union needs to be modest and understand that there is no Union without the member states…The EU exists by the grace of the member states and their democratic institutions. The EU would do well to secure greater involvement in Brussels decision-making by those democratic institutions, governments and parliaments.

We are making proposals to bolster the role of national parliaments, and favour a smaller European Commission focusing on core tasks.”

On the basis of this and other declarations, we can expect that Mr Timmermans will launch a drive to improve the quality of regulation and to steer it away from activity in areas, which are not the EU’s core tasks, such as the internal market and legislation to protect the environment. He should be able to work closely with Ms Bienkowska who, having been deputy prime in the present centre-right government in Poland, is likely to have similar ideas to Mr Timmermans and want to meet the legitimate calls of the British government, with which Poland has a good and close rapport, for reform. She will no doubt retain close relations with Donald Tusk, the outgoing prime minister of Poland under whom she has served, who is also on Noevember 1st, to become president of the European Council, representing heads of government. Mr Tusk has stated that the task of trying to prevent the UK leaving the EU is one of his three top priorities along with resolving the conflict between Ukraine and Russia and reviving the EU economy.

Mr Timmermans and Ms Bienkowska will not be able to deal with everything the UK wants to change. The 48-hour week (although it is not in practice applied) and other pieces of social legislation are disliked by the UK Conservatives but their abolition would be politically controversial in other countries, and will therefore have to be dealt with in the European Council not the Commission, as will UK requests for treaty changes. It may well, however, be possible to make substantial changes to reduce the impact of EU regulation without major political controversy.

 

Can next Commission revive the euro zone economy?

Reforms to EU regulation are highly important to the UK, the Netherlands and some other countries in northern Europe, but are of little interest in France or southern Europe, where all the concern is on what can be done to revive the euro zone economy. As discussed above, the allocation of posts should lead to a lively debate within the next Commission and it would not necessarily be a bad thing if such debate proves to be reported rather than interpreting collective responsibility to strictly.

However, whether the Commission can actually do very much on its own to stimulate the euro zone economy is open to doubt. There will be a lot of debate over what degree of flexibility can be allowed in relation to the constraints on budget deficits given the weak state of many euro zone countries’ economies, but realistically the scope for such flexibility without driving a coach and horses through both the letter and spirit of the Maastricht Treaty which would not be tolerated by Germany, the Netherlands of Finland, is little more than marginal. Something may be achieved by promoting an EU-wide public sector investment programme as proposed by Mr Juncker with extra funding achieved by expanding the European Investment Bank, but the size of such a programme will still be modest. The best hope would be to help support the European Central Bank’s moves to make more money available to banks that on-lend to businesses and to purchase Asset-Backed Securities consisting of investments in businesses, for example by directing EU regional funds towards grants and loans to small and medium enterprises and putting pressure on government to remove administrative obstacles to business start-ups and expansion which in some countries like Italy remain substantial. That could in turn link back with any Commission drive to improve EU regulation, which could be combined with pressure on member states’ administrations to implement EU directives (which leave large scope for national interpretation) in a simple and efficient way.

 

 

 

The Junckernaut is no federalist juggernaut

The move to choose the former Luxembourgeois prime minister, Jean-Claude Juncker, as the next president of the European Commission has received an enormous boost from David Cameron’s cack-handed diplomacy but fears that he represents a federalist drive in the EU are entirely misplaced. For most people in the core EU countries, and especially Belgium and Luxembourg, homage to pro-integration rhetoric is almost like that of Christians to the creed or of British Conservatives to resisting the alleged onslaught of legislative red tape emanating from Brussels (even for those who would be hard-pressed to think of a single example which actually affects their lives). That it should be such an article of faith is unsurprising from citizens of countries that have been overrun by invading armies twice in the last century. In practice, however, Mr Juncker is highly pragmatic.

What is federalism?

The word federalism needs to be defined. In a technical sense, it means that there are different powers for different layers of authority. In that sense the EU and its forerunners have been federalist since the setting of the European Coal and Steel Community in 1951, for which the pooling of sovereignty was the fundamental basis of the French initiative to set up the ECSC and was the reason why the UK stayed out, why it attempted the alternative European Free Trade Area and why when the UK did accede to the European Economic Community and ECSC in 1973, it was so controversial as to provoke a referendum in 1975.

In practice, the term federalism has been used both by its proponents and its opponents to mean a much more integrated political body, comparable in some degree to existing federations such as the US and the Federal Republic of Germany. It is hard to imagine a serious move in this direction without a major impact on taxation or expenditure. At present EU expenditure is limited to 1% of GDP which is less than a fortieth of average public expenditure in member states, compared to more like half in the US or Germany. From the point of view of taxation, the only important unifying factors originally were external customs duties and the fact that all member states are required to impose value added tax, though at rates and coverage which they could choose. Some harmonisation of VAT rates was agreed as part of the 1992 Single Market Programme, but with the sole purpose of eliminating the need for varying rates to result in member states keeping border controls on the movement of goods and services. The single market programme did also in other ways result in some more authority moving up to the EU level. Such powers were drawn up by the British internal market commissioner at the time, Lord Cockfield, who had been appointed by Mrs Thatcher, who fully supported the changes.

Juncker resisted tax harmonisation

Apart from VAT, any moves to harmonise taxation across the EU require unanimity. This has remained the case as a result of the opposition to harmonising tax from a number of countries, including Luxembourg. Under the leadership of Juncker, Luxembourg  strenuously resisted moves which would limit its ability to attract investment and otherwise benefit from low corporate and other tax rates. Indeed it was only very reluctantly and after many years of resistance that Luxembourg agreed to comply with measures to limit its provisions for bank secrecy which were obviously designed to enable depositors to evade taxation in the EU countries to which they belonged.

On the EU expenditure side, there is no possibility that it could rise even slightly above 1% of GDP during the term of the next Commission because it is so limited by the Framework Budget for 2014-20 which has been enacted by the Council and Parliament.

UK arguments cut no ice

The main reason why Juncker was being pushed by the European Parliament is as an answer to the EU’s alleged democratic deficit, since he had the backing of the largest party emerging from the May 22-25 EP elections, the European Peoples’ Party. As a way to increase democracy in the EU, the move is deeply flawed (not least because at the time of the Parliament elections at the end of May less than 10% of the electorate had actually heard of Juncker). The case against the justification of Juncker by the argument that it would make the EU more dramatic has been made by almost all UK commentators including highly pro-EU ones, in the British press. The fact remains that, however cogent these arguments may seem to the British, opinion in other EU countries especially Germany is very different. There are a number of reasons for the different German view, but they have been given a decisive push by Cameron’s attempt to veto Juncker. When asked whether they would agree with Cameron that the European Parliament should not impose its own choice as Commission president, 60% of Germans disagree (ie 60% support Juncker). This answer clearly relates to how the question was put, but as a result of Cameron’s public attempt to veto Juncker, the question is now seen in Germany in large part as one of the right of the rest of the EU not to be subjected to a British diktat. In the UK much of public opinion sees the EU debate in terms of whether the UK should be dictated to by “Brussels”. In some EU countries, the UK question is increasingly seen as whether the UK should dictate to the rest of the EU. Most opinion in these countries would like the UK to remain in the EU–but not at the cost of being told what to do by the UK.

A UK right of opt-out from any substantive further powers being given to the EU is acceptable to its partners. But the UK may have to accept a Juncker Commission, particularly following Cameron’s faux-pas. Juncker is probably not the best candidate for the job but whether or not he is chosen will not have much impact on whether other member states want to move further down the path of integration and will have no impact whatever on the UK’s right to opt out of any such moves. In regard to whether a Juncker Commission might be unsympathetic to the UK, the British government has dug itself into a whole. It had better stop digging.

 

 

European Parliament election results, outside of France and UK, are positive for EU and euro

The European Parliament election results were much better in most countries than expected from the point of view of those who favour the survival of the EU, and also the survival of the euro. The only two, admittedly important, exceptions were the UK and France where anti-EU, anti-immigration parties won the most MEPs, as had seemed likely. In two euro area countries, the Netherlands and Finland, there were significant setbacks for similar parties. In Austria the Freedom Party which has stirred controversy for decades remained stable with 20% and in Hungary right wing nationalist parties did well but not more so than in previous elections. Elsewhere in central and eastern Europe the great majority of seats continued to be won by strongly pro-EU parties, although this was also in line with expectations.

Encouraging results were recorded in most of the countries at the centre of the euro zone crisis of the last five years. Germany voted overwhelmingly for parties that support its membership of both the euro, highly controversial both at the beginning and, more recently, over supporting measures to bail-out weaker members and particularly the European Central Bank’s preparedness if necessary to save the euro to make unlimited purchases of their government debt. The anti-euro (but not extreme and not anti-EU) party Alternative fur Deutschland won a very modes 6.7% of the vote, while the extreme NPD won %.

In Greece, Italy, Spain and Portugal, all of which have suffered severe losses of living standards and high unemployment during the last five years, there were overwhelming majorities in favour of parties committed to remaining in the euro and the EU. The highest anti-euro vote was in Italy, for Beppe Grillo’s Five Star Movement which has called for a referendum in euro membership and is anti the whole of the rest of Italy’s political establishment received 20% of the vote, but while a year ago it came close to the vote of the largest established party the left-of-centre Partito Democratico,this time the PD, led by the young new prime minister, Matteo Renzi won double the vote of Grillo’s party with just over 40%, well above that achieved by any left-of-centre party in the history of the Italian Republic. In Greece, the leading party in the EP election was the more left wing Syriza, led by Alexis Tsipiras, which calls for an end to austerity but not for leaving the euro area or EU. The governing New Democracy still held on as the second largest party despite direct responsibility for draconian economic measures needed to cut the public sector deficit. The extreme and sometimes violent right wing New Dawn won 9.6% of the vote which is disturbing but not an increase on previous elections. In Spain there was virtually no votes for parties against membership of the euro or EU despite one of the deepest economic depressions after Greece and unemployment of young people over 50% according to official figures. The two parties which have governed Spain since its entry into the EU in 1992 and into the euro in 1999, and were responsible therefore together and in roughly equal measure both for the austerity policies of the last five years and the mistakes in earlier years that contributed to the crisis, the Popular Party (PP) and the Socialist Party (PSOE) together won 49% of the vote which in the circumstances was a reasonable performance, although it led the leader of the PSOE which came behind the PP to resign. The rest of the vote was widely divided. Not at all surprisingly the established party to the left of the PSOE the United Left (IU) increased their vote somewhat to 10%. More interestingly a new party, Podemos, formed out of the Indignados movement of peaceful city centre protests by young people won 7%. Podemos like the Greek Syriza wants an end to austerity policies but does not call for exit from the euro. Another new party is the centrist Union for Progress and Democracy which won 4.7%. There were increased votes for regional parties, which in Catalonia and the Basque Country are calling for full independence within the euro and the EU. These do represent something of a problem since a fragmentation of the already large number of member states would make EU governance more difficult and there would be controversy over admitting new countries formed out of member states as EU member states. In Portugal there was also an increase in opposition to austerity policies but not towards the euro and EU.

There clearly was a move against existing economic policies in southern Europe but that is part of a healthy democracy. The question is whether their voice will be heard. The southern member states have had little choice over the last five years because of the need to either keep the support of bond markets or, where these are lost, to meet the conditions for loans managed by the troika of the IMF, ECB and European Commission. With government accounts now moving into primary surplus (income less expenditure excluding debt servicing) which gives a little more room for manoevre at a domestic level but policies at the EU level remain important for them. Given his strong position domestically and the fact that Italy will take on the presidency of EU Council of Ministers’ meetings in the second half of 2014, Renzi is likely to try to push for more expansionist policies. However, fiscal policies of countries without difficulties in borrowing are decided at a domestic level, while monetary policy is conducted by the ECB, which is strictly independent of governments. Nevertheless the ECB is now considering the controversial idea of quantitative easing and doing so by encouraging banks to lend more at reasonable interest rates to small and medium enterprises, given the huge imbalance in lending conditions between the member states of the supposedly single monetary area, the euro zone. Renzi or others could risk a backlash if they try to push the ECB in this direction but they are entitled to argue against any efforts at the political level to support the Bundesbank which may resist monetary loosening but be outvoted on the ECB board. No-one should be complacent over the situation in euro zone states with high unemployment, but the euro zone does at present look to be a going concern, and to have political legitimacy in most of its member states.

EP elections are likely to indicate disenchantment despite recovery in support for EU

Public opinion becomes more favourable to EU

European Parliament elections to take place across the EU between May 22nd and 25th are likely to suggest weak support for the European project both from low turnouts and because of strong gains by anti-EU parties especially in France, the UK, the Netherlands and Italy. Just before, on May 12th, the independent Washington DC-based Pew Research Center released a survey of public opinion towards the EU in seven mostly large member countries. The survey is encouraging to those who hope that the EU has good survival prospects in that opinion towards the EU has become, for no very obvious reason, significantly more favourable in the 12 months before the survey was conducted in March-April 2014. The median of countries favourable to the EU moved up from 46% in 2013 to 52% (although it was 60% as recently as 2012). The survey does not ask how many were hostile to the EU but since the remaining 48% must include those with or neutral opinion and don’t-knows, it is reasonable to assume that the margin of those favourable to the EU in relation to those with hostile opinions has moved towards a comfortable margin. Moreover, the UK generally assumed to be the country most hostile to the EU was in fact the median country with 52% favourable (up from 43%) while opinion in France, the country which took the lead in founding the EU’s first precursor in 1951, rose from a poor 41% to a respectable 54%. Opinions in two important countries Poland (up from 68 to 72%) and Germany (up from 60 to 66%) were massively favourable. While Polish views might be partly linked to the inflow of EU funds and the outflow of Polish labour, German taxpayers are in contrast the EU’s largest net contributors and it is a recipient of immigration, now fully free from 27 of 28 member states.

The input from the southern European countries selected, Italy, Spain and Greece, was much less favourable. Most notably Italy where opinion for much of the period since the founding of the EU’s first predecessor in 1951 had been strongly pro-EU saw a severe decline in favourable sentiment over the 12 months from 58 to 46%. Greek pro-EU opinion not surprisingly in view of the uniquely severe economic depression it has been through was weakest at 34%, marginally up from 33%. But Spain which has also suffered economic conditions that can appropriately be described as depression saw an improvement in favourable opinion from 46 to 50%. A notable factor is that young people (18 to 29) are significantly more favourable, the median country being in this case France at 63%.

 

but not its Parliament or Commission

Other aspects of the poll should be deeply worrying to policy-makers in both Brussels and member states. Support for the main EU insitutions, the European Parliament (the median country being the UK at 36%) and the European Commission (also the UK together with Italy at 34%) is low. A median of 65% say that “the EU” (probably here closely identified with the above-mentioned institutions rather that the Council of member governments) does not understand the needs of its citizens, 57% that it is inefficient and 63% that it is intrusive.

 

Parliament will push for one of lead candidates to be Commission president

For better or worse, the European Parliament, one of the two institutions which EU citizens feel are distant from them, wants to have more influence on the other, the European Commission, by linking the EP elections to the choice of Commission president. This has led to a series of lively televised debates between the candidates of five political groupings. All five agreed that the next president of the Commission should come from their number and win the backing of a majority of the EP which is elected over May 22-25. The new EP itself is likely to take the same position. The first choice would be the member of the largest party emerging from the election, which polls indicate will be the centre-right European Peoples’ Party is Jean-Claude Juncker, who has far from outshone his four rivals in the debates. Another possibility if the choice were purely up to the EU would be that some or all of the four parties of  the Liberals, the Socialists, the Left and the Greens vote for an agreed candidate, most likely Martin Schulz the Socialist candidate, who would be able to obtain more votes than Juncker. However, it is very unlikely that the heads of government, who in Germany, Spain, the UK and Poland are from the centre-right would agree to appoint Schulz.

 

but may come into confrontation with governments

Juncker has asserted that the next president should for “democratic” reasons be chosen from amongst the five and that to do otherwise would be a travesty of democracy. But it is unlikely that many even among those who vote for the Peoples’ Party will feel strongly. Taking this election in isolation the democratic argument is a weak one. A stronger argument in favour of choosing one of the five would be that if the precedent is set next time more attention will be paid to the debates and there will be more incentive for good candidates to stand, whereas if someone else is chosen no-one will believe that the same will not happen next time and there will be little motivation for strong candidates to stand or for voters to take an interest in them.

The probability seems to be that the European Council of heads of government which meets on May 27th will want to choose someone other than one of the five debaters, with the current director of the IMF, Christine Lagarde, who would be the first female president, being the favourite. What is not clear is how it will set about persuading the European Parliament to accept her. A deadlock between the two institutions is very possible. This will be a particular challenge for Angela Merkel, who as the leading Christian Democrat (Christian Democrats or related parties form the majority of the European Peoples’ Party) was influential in choosing Juncker to represent the EPP and would have to explain to members of the European Parliament why she and other heads of government want to pass over him.

Ukraine: all sides, inside and outside the country, should strive for de-escalation

The more emollient tone adopted by Russia’s President Putin on May 7th in particular his apparent support for Ukraine’s election on May 25th, should be reciprocated by the EU. The rapid escalation in recent weeks to a state of near civil war in Ukraine is disastrous for all sides in and outside Ukraine. It represents a major disaster for the EU’s neighbourhood policy whose objective is to bring stability. It has suffered a major reverse from events in North Africa and Syria. Although developments across the Mediterranean have little do with any EU policies, this cannot be said of Ukraine, where the EU’s attempts to negotiate an association agreement have, albeit inadvertently, led to conflict. One mistake was to have presented the former Ukraine president, Victor Yanukovich with too sharp a choice between closer relations with the EU and closer relations with Russia. An imaginative approach could be to find away in which closer economic relations with the EU could be made compatible with closer relations between Ukraine and Russia (and indeed other ex-Soviet countries). If the outcome were to let Russia and other countries have more access to the EU market that would be no bad thing the only proviso being that Russian companies competing in the EU be subject to EU competition rules. This is in any case already an issue particularly in relation to Gazprom.

The EU should try to persuade the interim Ukraine government to hold back from further confrontation, to try tackle the Right Sector and other Ukrainian nationalist extremists more effectively, to promise full and guaranteed rights for Russian as a second language and ensure non-discrimination against Russian speakers and to be willing to enter a dialogue over increased local autonomy as a response to Russian demands for federalisation. The latter is the most difficult issue and there is concern about one country making demands on how another country should conduct its internal affairs. But a de-escalation now requires both sides to make conciliatory moves.

It is possible that Putin’s apparently conciliatory tone is a ruse and that possibility should prepared for. That said, it is hard to see what aim he would be looking to achieve if he is not sincere. It cannot be in his or Russia’s interest to have a failed state the majority of whose population is hostile to Russia as a neighbour. In the 100th anniversary of the start of the First World War it is worth remembering that a series of belligerent responses to the situation led to an outcome which was disastrous for all concerned, particularly Austro-Hungary, Russia and Germany but also the eventual victors, Britain and France.

TV debate ahead of EP elections is contribution to EU democracy

On April 28th a televised debate took place between four candidates for the European Commission presidency, the first such debate that has ever taken place. The participants were Jean-Claude Juncker, a former prime minister of Luxembourg and chair of the euro group of finance ministers, for the European Peoples Party (centre-right), Martin Schulz, current leader of the Socialists and Democrats in the European Parliament and also president of the EP, Guy Verhofstadt, leader of the Alliance of Liberals and Democrats in Europe (ALDE) in the EP and former prime minister of Belgium, and the young Ska Keller from eastern Germany for the Greens (she is actually joint Green candidate with the French famers representative José Bové, known for his anti-McDonalds campaigns).

There are no figures available for the number of people watching but they will probably have been disappointingly modest, with most EU citizens probably not even aware that the debate was taking place. The debate was in English (ironically the UK was probably the country with the lowest level of interest) and this meant that most of the audience would have been hearing translations; the language factor is one of the major obstacles to tackling the EU’s democratic deficit. Nevertheless 45,000 Twitter comments from all over the EU during the debate does suggest that many of those who did watch found it worth watching. The next debate between the four (and possibly Alexis Tsipras the Greek leader of Greece’s leftwing coalition Syriza and Commission presidency candidate for the European Left) from Florence will be on May 9th.

A post-debate survey of viewers by Europe Decides, an initiative of Burson Marsteller, produced a possibly surprising clear winner, Guy Verhofstadt, with 53% considering him the best performer, followed by 19% for Martin Schulz, 18% for Ska Keller and 9% of Jean-Claude Juncker. For all participants finding work for the 27m unemployed was the leading challenge. Verhofstadt is the candidate with the most positive belief that policies at a European level could make a difference, notably the integration of capital markets and banking union facilitating the flow of affordable credit to businesses with job-creating investment plans. Shultz also gave emphasis for policies towards the financial sector, but gave too much emphasis to blaming the banks for the crisis and consequent high unemployment rather than providing clear proposals for creating jobs. Keller focused on the scope for the creation of green jobs in renewable energies and energy saving, arguing the case well. There is  huge so far untapped potential for example for solar energy in southern Europe. But the impact on employment creation may only be a modest contribution to providing quality job opportunities for young people. Juncker deliberately refused to raise expectations, saying that there was a limited amount the Commission can do for jobs where the responsibility lay with member states and the private sector, though he did suggest that the EU has a big potential to bring about single digital and services markets which could do much to provide better conditions for job creation.

Juncker’s line may be the most realistic and it is also certainly the one that the British Conservatives who used to be part of the EPP but now form a separate group, should feel most comfortable (or least uncomfortable) with. Politicians have the dilemma that realism is dull and uninspiring while greater ambition may win votes in the short term but runs the risk of subsequent disillusion. But even allowing for this Juncker did not come across as someone able to communicate with the wider European public if he were to be the next president of the Commission. While most EU countries have never provided a Commission president, tiny Luxembourg has already given the Commission two presidents, Gaston Thorn and Jacques Santer, neither of whom were very successful (the Commission led by the latter was forced to resign due to bad publicity over fellow commissioners use of taxpayers’ money).

It could be argued that these debates may prove to be something of a charade since the European Council of the 28 member states has no obligation to put forward any of the participants as the next Commission president (although it will have to present one able to win the approval of the Parliament to be elected on May 22-25th). At present polls indicate that the centre-right EPP will come out as the largest EP party, just ahead of the Socialists (S&D). However, if that is the outcome it is by no means clear that democracy would be served by Juncker becoming Commission president. If forthcoming debates do not change the picture dramatically, he will certainly not have won at a personal level and his experience as prime minister of Luxembourg for many years and of taking the largely diplomatic role of presidency of the euro group of finance ministers, do not obviously qualify him.  Moreover even if the EPP members of the European Parliament are all loyal to him he might not come out ahead in a vote in the European Parliament since Shultz might win the support of Greens and the European Left.

Verhofstadt may or may not repeat his success on April 28th in subsequent debates but however well he does, ALDE have no serious chance of becoming the largest party. In the event that the S&D becomes the largest party, Schulz might have a stronger case than that of Juncker in the event of an EPP victory, in view of Schulz’s distinguished record as an MEP and attempts he has made over a significant period to reach out to countries other than his own, but it would probably not be an overwhelming one.

Nevertheless the TV debates are an important attempt by the personalities involved to project themselves on the EU wide stage and debate leading questions in a manner that has not happened before.

 

 

 

 

EU and US have difficult balancing act vis-à-vis Russia in Ukraine

The dramatic events in Ukraine this year have in much commentary been portrayed as a struggle between Russia and the EU (with backing from the US) for the country with the EU and US criticized for allegedly acting in a pusillanimous manner while Russia under Putin is acting ruthlessly in pursuit if its interests. Although there is no reason for complacency in what remains a very volatile situation, the reality is that Putin’s ruthlessness has lost him influence in Ukraine outside of the Crimea while the hesitancy and muddle of the EU’s policy stance have not prevented its increased standing in the country.

 

Russia has lost support in Ukraine except Crimea

Crimea is an important exception but it was not traditionally part of Ukraine having been given to it by Nikita Krushchev in 1954. Although influenced by Russian propaganda, the majority opinion there favours Moscow over Kiev. In this situation Russia might well have pressed for a fair and open referendum with time for both sides to put their case and the outcome would have been a vote in favour of leaving Ukraine and joining Russia. By insisting on a referendum as early as March 16th under the control of Russian troops, it  ensured that no independent party could regard the referendum as legitimate.

Ukraine has often been described as a country split between those looking westwards (particularly but not only the territory moved from Poland to the Soviet Union by Stalin at Yalta in 1945) and Russian speakers who look towards Russia. This however was always over-simplistic. If it were that simple then the move to split as in the case of the Czech Republic and Slovakia would have been much stronger.

The pressure that Russia put on former president Yanukovich to crack down on the people occupying central Kiev in protest at Yanukovich’s decision to abandon the offer by the EU of closer links in favour of joining a post-Soviet customs union has led to the discrediting of both Yanukovich and Russia in the opinion of the majority of Ukrainians across the whole country other than Crimea. Although there have been demonstrations by Russian speakers in eastern Ukraine against the new government in Kiev and in favour of closer relations with Russia, they have been relatively small. The majority of Russian speakers seem at the moment to prefer living in an independent Ukraine to being in a client state to Russia. This is certainly what the majority of Ukrainians as a whole prefer. As a result for a long time in the future  Russia will have to live with a neighbour which is at best distrusting and at worst hostile.

 

Most of EU is reluctant to bring in Ukraine

Most countries in the EU are not keen on expanding to bring in Ukraine and this therefore is at best a long term prospect. In the event of Ukrainian accession other EU members would face the budgetary costs of supporting a country which is much poorer than most EU countries and the likelihood of strong migration flows if Ukraine was given the same right of free movement as accorded to existing member states. EU policy is motivated partly by its own founding treaties, which envisage the possibility of accession to all European countries, and partly by its interest in having a stable democratic neighbour. Because of its longstanding principles of conditionality to association agreements and eventual accession, it has come to be regarded in Ukraine as representing hopes for entrenching democracy, ending the imprisonment of major politicians by their opponents, reducing corruption and improving human and minority rights.

Relations between the EU and Russia will suffer as a result of Russia’s illegal annexation of Crimea. If Russia were to try to annex other parts of Ukraine, however, relations would deteriorate dramatically further.  For the moment Russia is insisting it will not intervene elsewhere in Ukraine but large numbers of troops and equipment near the border do not seem intended to reassure Ukraine or its friends in the EU or US.

What are Russia’s legitimate interests?

Substantial discussions took place on March 30th between the Russian foreign minister, Sergei Lavrov and the US secretary of state, John Kerry, who was to an extent speaking on behalf of the EU as well as the US. The dilemma is to what extent Russia  (or the EU and US) should be considered to have a legitimate interest in what happens in Ukraine. If the EU wants to have a stable and friendly so can Russia. Moreover it is reasonable to want the wellbeing of those who consider themselves to be Russians to be protected. But there comes a point whereby telling Ukraine how it should run its own affairs amounts to trying to undermine its independence. That point is crossed when Russia says it wants Ukraine to be reorganised on a federal basis. On the other hand a request that Russian be one of the official languages is reasonable. It is also reasonable to demand that if Ukraine does develop closer links with the EU, they do not weaken economic links between Ukraine and Russia.

Longer term aim for EU and US should not be “winning” against Russia

In the longer term the interests of the EU of US should not be to win a new zero sum conflict with Russia but to provide it with a way to return to normal relations with the rest of the world. After all Russia does not have to expand to become one of the world’s largest countries in both area and natural resources. It was recently seen as one of the BRICS of countries on the rise. Somehow Russia’s leader and population need to be persuaded that a return to nineteenth century power politics is not in their interest.

The EU should build carefully on popular support in Ukraine for EU association

The impact of EU policy towards Ukraine must be encouraging to EU policy makers. While inside the EU those wanting to leave the EU and/or the euro are still in minorities, the enthusiasm of the public in present circumstances is distinctly lacklustre, and it is hard to imagine hundreds of thousands of people encamped in EU capitals to demonstrate in favour of the EU as is happening in Kiev in favour of only an association agreement with the EU which does not yet offer a clear path to EU membership. What will happen in Ukraine remains unknown and the latest development is an agreement between Ukraine’s Yanukovych regime and Putin’s regime in Russia to buy Ukrainian bond and provisionally reduce prices of Russian gas — a respite from previous demands for higher prices backed by threats of cutting off supplies–provided that the Yanukovych regime remains in place and does not bow to popular demands to go ahead with the proposed EU association. However Yanukovych has alienated many of those who voted for him as well facing increasingly determined opposition from those who have always opposed him. Russia’s record of bullying appears to have reduced the percentage of the Ukrainian population who want to be closer to mother Russia and even Yanukovych himself who has always represented the eastward looking segment of the population has at times been hesitant about putting all his eggs in the Russian basket. The latest agreement does not include the Russian aim to establish a customs’ union together with a number of other ex-Soviet republics.

The EU has rightly not tried to present the struggles taking place in Ukraine as a proxy power competition between Russia and the EU for influence, although that is how it has sometimes been interpreted by the press. The whole purpose of the EU would be contradicted by participating in an old fashioned competition of great powers. The EU’s enlightened self-interest lies in achieving friendly relations with Ukraine and Ukraine, both of which are neighbours, without sacrificing its core values to do so. Doing so requires careful choices. On balance, the line of refusing an association agreement with Ukraine as long as Yulia Tyomoshenko, the former prime minister, is held in prison for evidently political reasons thinly disguised by a politically influenced legal process is right but so is the willingness under this condition to sign an agreement with Yanukovych government despite the likelihood  that it has corruptly used political power to advance the personal economic interests of Yanukovych and his family. As regards Russia, it should not have the right of veto of a Ukraine-EU association agreement, but it should be acknowledged that Russia has a legitimate interest in  aspects of such an agreement which would affect the close trading relations between Ukraine and Russia should be discussed and, in so far as possible, Russian concerns should be accommodated. The EU should wherever possible break down trading barriers and should do everything possible to avoid building new ones.

It is ironic that the release by Russia of Mikhail Khodorkhovsky, members of the Pussy Riot band and Greenpeace protestors in December indicates that the Putin regime is at present more concerned at its image at home and abroad that the Yanukovych regime. But there is reason to hope that ultimately Yanukovych will have to take note of the feelings of what is probably now a majority of the Ukrainian population that his policies are not serving their aspirations.