ft.com/brusselsblog

As the clock ticks towards the Czech Republic’s takeover of the European Union’s six-month rotating presidency on January 1, there are signs of distinct nervousness in Brussels and some EU capitals over how Prague will cope with the challenge.

For most EU governments, the global financial crisis, economic recession, the fate of the Lisbon institutional reform treaty and relations with Russia will be the top priorities for the first half of next year. And they are not sure the Czechs see things quite the same way or, if they do, will be able to provide effective leadership at a time when the government of Prime Minister Mirek Topolanek has scarcely looked weaker.

The Czechs will be the second former communist country to assume the EU presidency. Slovenia’s spell in the hot seat in the first half of this year was generally considered successful. But some EU diplomats make the point that the Slovenes did not have to confront the full-scale emergency that erupted in the world financial system or handle the Russian invasion of Georgia in August. What a relief that France, an experienced and powerful member-state, was at the controls during these crises - so the argument runs.

Continue reading "An unnerving Czech EU presidency"

To get an idea of how the global financial crisis is testing the stability of the eurozone, look at the ever-widening spread between the yields on German and Italian 10-year government bonds: 25.8 basis points one year ago, 69.6 one month ago, 72.3 one week ago and 95.6 today.

With Greece the situation is even more acute: the spread between German and Greek bonds shot above 100 basis points last week for the first time since Greece adopted the euro in 2001. It is now close to 120 basis points. Portuguese, Spanish, Belgian and even Austrian and Dutch yield spreads are also wider than at any time since Europe’s monetary union started in 1999.

A widening spread means that investors judge it riskier to buy the debt of, say, Greece and Italy than the debt of Germany. Accordingly, they demand a higher premium.

For sure, it would be an exaggeration to say that spreads on today’s scale imply serious doubts among investors about the ability of Greece and Italy to honour their debts. But they do imply that investors lack full confidence in Greek and Italian fiscal policies.

They also serve as a reminder about the uncomfortably high levels of Greek and Italian public debt. Finally, they hint at a degree of uncertainty among investors about the cohesion of the 15-nation eurozone itself - namely, whether Greece and Italy are economically strong and fiscally disciplined enough to share the same currency with Germany over the long term.

This would not be an issue, of course, if the eurozone were like the US and had a central fiscal authority to transfer revenues between flourishing states and states suffering an economic shock. But you cannot have a central fiscal authority without a much greater shift in the direction of European political union than most politicians, taxpayers and voters appear ready to contemplate.

Even appeals for closer co-ordination of macroeconomic policies among eurozone governments meet resistance. This was was seen last week in the response to President Nicolas Sarkozy’s call for new and stronger arrangements for joint policymaking in the euro area.

Sarkozy’s proposal had its flaws and, in any case, such appeals coming from France are always liable to be interpreted as an attempt to place the European Central Bank under political control. Nonetheless, Sarkozy put his finger on the problem.

The global financial crisis is beginning to test Europe’s ability to operate a multinational monetary union without closer political and institutional integration. Since 1999, Europe has had its cake and eaten it: the pleasure of a single currency that symbolises European unity, without the pain of a political union unpalatable to so many of its policymakers and citizens.

But as the bond yield spreads show, if the financial crisis gets any worse, Europe will find itself facing some extremely difficult choices.

By common consent, Nicolas Sarkozy has had, for the most part, a good financial crisis. But he slipped up this week when he suggested European Union member-states should create their own sovereign wealth funds to invest in European companies and stop foreigners from buying up “strategic assets” on the cheap.

This proposal was flawed on so many counts that it is hard to know where to begin. But here we go. First, there is no evidence that non-European sovereign wealth funds are trying to seize control of strategic or even non-strategic European assets, least of all by means of hostile takeovers. Dark hints to the contrary do nothing but harm the EU’s relations with the countries where the funds are based. In fact, they risk deterring the funds from making benign investments in Europe.

Second, the EU is, or aspires to be, an open economy that prospers by investing abroad and accepting inward investment. For sure, the field on which the EU and its commercial partners play must be as level as possible. But if Europe tries to tip the balance in its favour, as Sarkozy is suggesting, it will soon find that others can play at that game, too. Everyone will lose.

Third, the degree of state intervention implied by Sarkozy’s idea goes far beyond anything needed to extricate the EU from financial crisis and economic recession. Fourth, EU governments do not have the spare cash to do what Sarkozy has in mind. Fifth, even if they did, many would not want to. His proposal is inappropriately divisive for a country holding the EU’s rotating presidency and, in particular, has exposed yet another area of disagreement between France and Germany.

Sixth, it would be rank hypocrisy for the EU to complain about the supposed political motives behind the investment strategies of non-European sovereign wealth funds, while European nations set up their own funds for reasons that were transparently political.

Seventh and finally, why does Sarkozy need sovereign wealth funds, anyway? France already has its very own Caisse des Dépôts, the state-controlled financial institution which owns stakes in most big French companies and which describes itself, entirely accurately, as the most important long-term investor in the French stock market.

Believe me, as long as the Caisse des Dépôts exists, no one in Paris need fear that the Saudis, Chinese or Russians are going to get their hands on French car producers, arms manufacturers or makers of delicious yoghurt.

What do Albania, the Marshall Islands, the Federated States of Micronesia, Nauru and Palau have in common with the United States? They were the only countries that supported the US when the United Nations General Assembly voted this month on a Serbian-drafted resolution to seek an opinion from the International Court of Justice on the legality of Kosovo’s declaration of independence in February.

Even though the court’s ruling will have no legal force, Serbia interpreted the UN vote as a diplomatic triumph. Seventy-seven countries, including Serbia itself, backed the resolution. Not one of Washington’s Nato allies supported the US. Seventy-four countries abstained.

The vote was not an unqualified success for Serbia, however. Serbia won support from heavyweights such as Brazil, China, India, Mexico, Russia and South Africa, but it found itself in disagreement with most members of the European Union - the very institution it hopes to join one day.  

Even so, the vote was a pretty poor advertisement for European unity. Most of the European Union’s 27 member-states abstained, but five supported Serbia. They were Cyprus, Greece, Romania, Slovakia and Spain. Each fears that Kosovo’s independence will reinforce separatist or autonomist tendencies in their own countries: Turkish Cypriots in Cyprus, ethnic Hungarians in Romania and Slovakia, Basques in Spain. For these five countries, the integrity of the national territory is self-evidently a superior principle to a united EU foreign policy.

Interestingly, Bosnia-Herzegovina was absent from the UN vote and so did not even manage to cast an abstention. But no one knows better than EU officials on the ground in Bosnia that the handling of the Kosovo issue has made the Bosnian Serbs more difficult to deal with than ever.

Immediately after the UN vote, Macedonia and Montenegro dealt a blow to Serbia by recognising Kosovo’s independence. This prompted thousands of pro-Serbian demonstrators to take to the streets of Podgorica, the Montenegrin capital. Police fired tear gas. The consequences of recognition of Kosovo will be with the Balkans, and the EU, for many years to come.

It was quite a turn-out at Jörg Haider’s memorial service in Klagenfurt on Saturday. About 25,000 people were there. Among them was Muammer Gaddafi’s son, an old friend of the late Austrian politician. So, too, was Alfred Gusenbauer, Austria’s Social Democratic chancellor, whose presence reminded us all - if we needed reminding - that Haider, to Austrians, was never the polecat that he was to the rest of the world.

Much ink has been spilt on explanations of Haider’s popularity among Austrians. Perhaps it was because his mother and father, like many Austrians before 1945, were devoted Nazis. Perhaps it was because Haider likened the expulsion of the Sudeten Germans from Czechoslovakia after the Second World War to the Nazi extermination of Europe’s Jews.

Perhaps it was because of his hostility to the Slovenian minority in his native province of Carinthia. Perhaps it was because of his campaigns against immigrants in Austria. Or perhaps it was because of his spirited attacks on the European Union.

Especially important, though, was Haider’s assault on the hallowed Austrian spoils system known as “Proporz”. Proporz infested every corner of public life in Austria’s post-war democracy. Every government ministry, every state sector job, every minor post and every perk was allocated to activists and supporters of the Social Democrats and the conservative People’s Party on a proportional basis. It was an intricate, bureaucratically managed patronage system that the great novelist Robert Musil would have recognised as typical of his countrymen’s genius.

When Haider and his far-right Freedom Party denounced Proporz, many Austrians embraced him as an anti-establishment outsider with the potential to destroy a system from which they had not benefited. When he said Proporz had caused the two mainstream parties to lose touch with the people, many Austrians agreed wholeheartedly.

At Saturday’s memorial service, Gusenbauer described Haider as “a man who could leave no one cold, whether in a positive or a negative sense”. There was not a word about how patronage politics, as practised by the Social Democrats and the People’s Party, had contributed to Haider’s rise.

Herbert Gottweis, a political science professor at the University of Vienna, got it absolutely right about Haider. “He simply said what many people in Austria think.”

It was one of the worst kept secrets in Brussels, and now it’s out in the open. On the sidelines of the European Union’s summit in Brussels, centre-right EU political leaders have informally nominated José Manuel Barroso of Portugal to stay in office as European Commission president for a second five-year term.

With the support of President Nicolas Sarkozy of France and German chancellor Angela Merkel, as well as that of Europe’s consummate political fixer, Prime Minister Jean-Claude Juncker of Luxembourg, it was never likely that Barroso would face much opposition on the centre-right.

True, his reappointment is not a foregone conclusion. Many centre-left politicians across Europe are not keen on Barroso. However, his free trade views are music to the ears of Gordon Brown, the UK’s Labour premier. And because the centre-right parties seem likely to remain the largest political group in the European Parliament after next June’s elections, Barroso is in pole position to hang on to the job he likes so much.

Two trends, seemingly contradictory, stand out in Barroso’s presidency so far. On the one hand, the Commission is less powerful and less of a pace-setter, compared to the EU’s national governments, than it was, say, in the 1985-95 era of Jacques Delors. On the other, Barroso himself dominates his fellow commissioners, and sets the tone for the whole Commission, in a way that only Delors has ever really matched.

Truth to tell, the Commission needs forceful leadership now that it has 27 members, one for each EU country. There is a real risk of fragmentation, or drift,  in such a large group. In any case, some commissioners don’t exactly appear to be snowed under with work.

But the EU also needs a strong Commission that can stand up to national governments and powerful business interests when necessary. The Commission must robustly defend the integrity of the EU’s internal market and uphold the principles of fair competition.

This point has been obscured to some extent during the recent tumultous weeks of the global financial crisis.  But it may turn out to be the key issue for a second Barroso term.

Surprises galore at the European Union summit that opened in Brussels on Wednesday. The heroes of the hour are turning out to be Gordon Brown and Nicolas Sarkozy. Angela Merkel and Silvio Berlusconi are still recovering from poor performances in the run-up to the summit. And as for the leaders of Poland … the least said, the better.

First, Brown. Eyes popped out when Brown showed up in Brussels, hours before the summit started, for a conversation with European Commission president José Manuel Barroso and an appearance before the media. Could this really be the same UK prime minister who, less than a year ago, deliberately arrived late for an EU summit so that he wouldn’t be seen signing the bloc’s Lisbon treaty at the same time as the other leaders?

With his poll ratings improving thanks to his bold action in the financial turmoil, carefully co-ordinated with other EU leaders, perhaps Brown sees previously hidden advantages to being a “good European”.

As for Sarkozy, his habit of summoning summit after summit to address the EU’s various problems  is starting to pay dividends. First there was the September 1 summit to tackle the EU’s response to Russia’s invasion of Georgia. Then there was last Sunday’s summit of eurozone leaders - plus Brown - to address the threatening financial catastrophe. Both were pretty successful. Four months ago, other EU leaders were fretting about Sarkozy’s “hyper-activity” and “unpredictability”. He’s made them look rather foolish.

Merkel is a puzzle. Brussels is still in shock at the way she unilaterally announced a blanket guarantee for German savers’ deposits 10 days ago, without apparently forewarning any of her EU partners. She’s making up ground now, though, by backing the calls for a grand redesign of the world’s financial institutions.

Berlusconi has never been fully at home in EU circles - and even less so after a bizarre episode last week, when he suggested all the world’s financial markets might be temporarily closed. He withdrew that statement pretty fast, but now he’s haring down another unhelpful track by saying Russia should join the EU.

What about Donald Tusk and Lech Kaczynski, Poland’s prime minister and president? It seems too farcical for words, but Kaczynski is arriving for the summit separately because Tusk wouldn’t let him use a government aircraft.  While the world has been teetering on the edge of the financial abyss, the two Polish rivals can’t agree on anything, even on who should represent Poland at an EU summit.

So, in the spirit of the times, it’s sell Tusk, Kaczynski and Berlusconi, hold Merkel, and buy Brown and Sarko!

As the Asian financial crisis deepened in 1997, the then Japanese prime minister Ryutaro Hashimoto made the memorable remark: “Japan cannot save Asia, it can only save itself.”

Until Sunday, it looked as if most of the European Union’s national leaders were falling over themselves to take a leaf out of Hashimoto’s book.

Unilateral steps on everything from deposit guarantee schemes to emergency bank bail-outs were the order of the day. Government ministers were also falling prey to the temptation of diverting voters’ attention to issues, such as excessive pay for bank executives, that had no relevance to overcoming the immediate crisis.

Now a more comprehensive plan is in place, focusing on the right questions - the vulnerability of many of Europe’s internationally active banks because of their high leverage; the intricate interdependence of these and other Europe-based banks; and the need to restart interbank lending.

Once the storm swept into Europe in September, recapitalisation of the banking sector through the injection of public equity was always going to be part of the answer to Europe’s financial crisis. That was clear to anyone familiar with the situation of European banks over at least the past five years.

Even in good times they had, on aggregrate, lower profits and lower interest margins than their US counterparts. Consequently, as a team of analysts at Citigroup noted in late September, the European banks had less of “a cushion to absorb the strains and losses” of a full-blown crisis in the financial markets.

The problem during the past month hasn’t been a lack of understanding of what caused the financial crisis and how to tackle the European end of it. It has been a lack of courage in political circles, in particular to take measures that may involve acting on a pan-European scale. This explains the haste with which German officials shot down a French- and Dutch-inspired idea for a common EU bank bail-out fund.

Even now, what we’re looking at is a bundle of co-ordinated national plans to rescue the banking system. Conveniently for governments that have never exactly shone at balancing their budgets, we’re also looking at the slide into irrelevance for years to come of the EU’s fiscal rules, enshrined in the Stability and Growth Pact.

The emergency measures may work, but it is by no means clear that Europeans have yet cured themselves of the Hashimoto habit.

It was seven months ago that Javier Solana, the European Union’s foreign policy chief, warned about the risks to international stability from the intensifying competition among countries in the Arctic region. Today the European Parliament drew attention to the issue again by passing a resolution that called on EU policymakers to push for an international treaty for the protection of the Arctic.

Legislators adopted the resolution by 597 votes to 23 with 41 abstentions, demonstrating that it had overwhelming cross-party support. Soon the European Commission will publish a long-awaited report that for the first time will put flesh on the bones of the EU’s Arctic policy.

The problem in the Arctic is that there are no comprehensive rules governing how states should behave there. There is no system for managing fish stocks, nothing to regulate the extraction of oil and gas, and not much guidance on how to settle territorial disputes that may flare up as the polar ice recedes.

According to a US Geological Survey report published in July, the Arctic accounts for about 22 per cent of the world’s undiscovered, technically recoverable resources. That includes 13 per cent of the undiscovered oil, 30 per cent of the natural gas and 20 per cent of the natural gas liquids. It is an extraordinary, unrepeatable opportunity.

However, as was shown in August 2007 when Russian explorers planted their flag on the seabed under the North Pole, the Arctic could easily turn into a zone of clashing national interests. Moreover, the boom in shipping activities and energy exploitation may create all sorts of environmental hazards for the Arctic’s vulnerable ice-covered areas.

Joe Borg, the EU fisheries and maritime affairs commissioner, says the Commission’s report will stress three points: safeguarding the Arctic’s ecosystem, promoting the sustainable use of its resources, and putting in place a stronger system of international governance. The idea is to build on the UN Convention on the Law of the Sea, the international environmental treaties that apply to the Arctic, and the work of various bodies such as the Arctic Council, which includes Canada, Denmark, Finland, Iceland, Norway, Russia, Sweden and the US.

The EU lacks even observer status in the Arctic Council and needs to catch up quickly if it is to defend its interests in the region. Solana’s message is worth repeating: “There is an increasing need to address the growing debate over territorial claims and access to new trade routes by different countries which challenge Europe’s ability to effectively secure its trade and resource interests in the region and may put pressure on its relations with key partners.”

Russia’s invasion and de facto partition of Georgia in August sparked uproar across Europe, or so it is said. In reality, many European Union countries were soon itching to restore relations with the Kremlin to normal as soon as was decently possible. And on a second issue critical to Europe’s security - the future of Bosnia-Herzegovina - many EU capitals have more in common with Moscow than is comfortable for them to admit.

Thirteen years after the US-brokered Dayton agreement ended the 1992-95 civil war, Bosnia is at peace but barely qualifies as a functioning state. Its two halves, the Muslim-Croat federation and the Serb Republic, co-operate as little as possible. Its two main nationalities, the Bosnian Muslims and Bosnian Serbs, are as alienated from each other as ever, a point illustrated by last weekend’s local elections across the country.

The EU’s influence in Bosnia has steadily declined, partly because the bloc has concentrated its regional efforts on Serbia and the Kosovo problem. “The political situation is Bosnia is even worse now than it was two years ago. Our ability to change it has been severely damaged,” says one EU policymaker.

This is where Russia comes in. Moscow, which for its own reasons tends to side with the Bosnian Serbs, is not eager to extend the mandate of the Office of the High Representative (OHR) in Bosnia. Under the 1995 Dayton accord, the OHR is the international authority responsible for overseeing Bosnian affairs.

The High Representative - at present, Miroslav Lajcak of Slovakia - doubles as the EU’s special representative in Bosnia. It is fair to say that, without the OHR, Bosnia would be even more unstable than it is now.

Unlike Moscow, Washington would like to see the OHR stay in place. The US sees Milorad Dodik, the Bosnian Serb leader, as a troublemaker and it is anxious not to see Bosnia descend once more into disorder.

The EU’s 27 countries are divided. But some, such as France, Germany and Italy, think the OHR is a broken instrument beyond hope of repair. Instinctively, they are on the same side of the argument as Russia.

In a month’s time, everyone will have to show their hand at a meeting of the international Steering Board that supervises the Dayton accord. Is it conceivable that the EU will formulate a position that is aligned with Russia and against the US?

Probably not. The UK, and some former communist countries in central and eastern Europe, would surely not allow it. But the Bosnia problem is a reminder of how, even on its own doorstep, the EU finds it excruciatingly hard to run a common foreign policy.