Europe: No Longer a Commonwealth

In 2008 the historian, Mark Mazower, gave a lecture at Columbia University on Greek Ideals and the World Order in the Twentieth Century, charting the thinking of the Oxford Classicist and foreign office minister Alfred Zimmern.

Zimmern was forced to confront the reality of the international political order in the wake of the Boer War, when the British Empire showed the first alarming signs of disintegration and the mercantilist ‘scramble for Africa’ was widely derided. His response was to turn to the concept of the commonwealth as pioneered by Ancient Athens – to allow for the supra-national body with teeth promoted by Woodrow Wilson or the world government of HG Wells’ imagination would be to paper over the cracks of ethnic differences – only by adopting the spirit of commonwealth would nations be able to put the First World War behind them.

Just as intellectuals in the twentieth century had to face the unfortunate truth that the Germans, pioneers through Kant of intellectual ethics and romanticism in place of inhuman liberal enlightenment, had produced Hitler, Europe now faces a crisis of identity with Greece on the edge of not merely exiting the Euro but the EU.

The past three years, during which Greece has occupied ever greater amounts of time and effort, have been a disaster. Germany, thrust into a steering role which it has consciously shunned for the past fifty years, has become a symbol of priggishness to Greeks as ill-disciplined and tactless officials sought to sell austerity by hinting that those who could not pay their way were lazy, tax-dodging and ultimately feckless. Some Greeks, in turn, derided German leaders as Nazis. Governments in Greece and Italy collapsed after losing the confidence of Angela Merkel and Nicholas Sarkozy and a referendum in Greece on a bailout package was cancelled, giving an untrue impression of a democratic deficit (though Ireland is holding a referendum soon on a new fiscal treaty).

Greece may or may not now exit the Euro. Privatisation at a time of global deleveraging has failed to produce the hoped-for results, attempts to cut spending have made little headway and what political will existed behind pursuing austerity appears to be fast evaporating. Nonetheless, it would be foolish to pretend that the results will not be horrible. Greece’s major banks will collapse as depositors withdraw their remaining savings (banks were already 30% more under-resourced before €700m were withdrawn on Monday); the new currency will plummet, making debts formally unmanageable and default will follow.

Unlike Russia and Argentina, which were able to rely on an upsurge in the global climate and raw material stocks after defaults in the 1990s, Greece has few prospects for growth. To cut Greece out of the EU entirely, including access to the single market and cohesion policy expenditure would be to invite disaster. EU leaders should not underestimate the capacity of Europe to return to the place it was when the Coal and Steel Community was merely germinating in the mind of Jean Monnet. Abandoned, Greece is highly likely to drift towards extremism.

It is worth noting that the PIIGS which are the supposed cause of the crisis are not merely Mediterranean countries (with the exception of Ireland) as the casually racist insinuation has it. Rather, with the exception of Italy, they all became EU Members in the 1970s and 1980s and immediately set about pursuing growth by any means necessary. In 2004 the accession of ten former Soviet states benefitting from much lower labour costs and tax rates as part of the shock therapy liberalisation of their economies saw a flood of investment East, which the PIIGS could counteract only through access to credit – the same credit which in the case of Ireland and Portugal now exceeds 120% GDP. This comparative advantage and the redirection of EU Commission investment has sown mistrust, which will need to be repaired.

Britain’s financial markets are condemned for allowing the shorting of the Euro, Germany for failing to allow the auctioning of Eurobonds and France for either keeling over in the face of German pressure or for electing a dangerous left-wing loony, depending on the perception of the viewer. Europe is no longer attractive to its neighbours, who have been forced either to wait too long, partly because they see the EU as merely meddling in their internal politics without understanding the reasons why things are as they are. In Belarus, the dictatorship may be the antithesis of the people. In Ukraine, apathy is more widespread. Finally there is Hungary, partly disowned as an economic problem (since it lies outside of the EU) and partly offloaded onto the IMF, but with the EU specifying the political criteria of aid.

The idea of an elected European President is absurd. Presidents with few executive powers are common enough in Europe, but even a directly elected figure would struggle to represent such diverse interests and cultures. He would be either embarrassingly weak or disastrously strong. What is needed is rather for European leaders to work together with a sense of urgency and solidarity, before the resentments created by the Eurozone crisis are allowed to stiffen. Europe will have to reinvent itself. Unfortunately, there are no classicists in government and few Greeks working on that.

Europe’s Outliers; Too Little Too Late?

Not so long ago, in the wake of David Cameron’s decision to leave talks on deepening EU governance, I accused the British Prime Minister of forgoing willing allies in Central Europe in order to advance narrow interests. Europe had a unique opportunity to grasp a desperate situation and reform the institutions of the European Union. After all, Britain’s austerity drive should not render her opposed to an EU keen to control the spending of others, particularly when the instability of the Eurozone has been a key factor in her lack of growth.

Well, incomprehension of Britain’s position did not last as long as might have been expected. The German Chancellor, Angela Merkel, stated that she wanted Britain to play a role in the Union’s economic governance, while even Nicholas Sarkozy has been able to do business on defence integration in the past weeks. Now Britain is engaging again. On the eve of a summit to discuss progress on Greece, twelve heads of government have written to the EU Presidents to lay out their plans for promoting growth.

Letter of 12 EU states on growth is here. db.tt/SBch95IE—
EconomistCharlemagne (@EconCharlemagne) February 20, 2012

A good selection of ideas and personalities are represented; the Poles, Czechs, Balts and Slovaks are represented in a drive for energy integration, in order to prevent the threat of bilateral deals such as that between former German Chancellor Schroeder and Vladimir Putin or the Gas Wars between Ukraine and Russia that effectively shut off supply to Eastern Europe in the winter of 2009. A Swedish-British drive to remove barriers to green technology is attached to that.

Much of the letter concerns liberalisation of one form or another; the deepening of a common market in services, common copyright laws and the removal of regulations. The group also want the EU Commission to “publish an annual statement identifying and explaining the total net cost to business of regulatory proposals issued in the preceding year.” An anti-banking thrust, of sorts, is also present, with calls to increase liquidity and capital standards. Given that Britain, Italy and much of Central & Eastern Europe (the Vienna Group) are the most afflicted by banks in need of bailouts, these proposals are coming from the right quarters.

What the letter is silent on, however, are the very issues that are most pressing; debt and Greece. While Eurozone Nations are struggling to borrow, and this applies also to those tied to the Eurozone as much as those in it, imports are going to be harder to come by and more expensive, whatever the results of the proposed “deepening economic integration with the US, trade and investment relations with Russia and a strategic consideration of China.”

The twelve outliers, basically anyone but Merkozy, are constrained by a lack of money and the inevitable political battles that will delay and follow any decision. Rolling out broadband, one of the few spending proposals, is in danger of entanglement with proposals to introduce the controversial Anti-Counterfeiting Trade Agreement (ACTA), which has already brought thousands onto German and Polish streets, much to the surprise of its writers.

Convincing Germany of the benefits of a deregulating European Union would cement a coup for the twelve signatories to this letter, but that looks far away. As a piece of political theatre, it is neutered in comparison to Radek Sikorski’s famous speech in Berlin last year. All in all, Britain’s return to the fray does not give it the appearance of having any more heft.

Signatories to the Letter to Barroso and van Rompuy

David Cameron, Prime Minister of the United Kingdom

Mark Rutte, Prime Minister of the Netherlands

Mario Monti, Prime Minister of Italy

Andrus Ansip, Prime Minister of Estonia

Valdis Dombrovskis, Prime Minister of Latvia

Jyrki Katainen, Prime Minister of Finland

Enda Kenny, Taoiseach, Republic of Ireland

Petr Nečas, Prime Minister of the Czech Republic

Iveta Radičová, Prime Minister of Slovakia

Mariano Rajoy, Prime Minister of Spain

Fredrik Reinfeldt, Prime Minister of Sweden

Donald Tusk, Prime Minister of Poland

Poland’s Vision for the Euro

Well worth reading – and reflecting on – Polish FM Radek Sikorski's speech in Berlin yesterday. mfa.gov.pl/files/docs/kom…—
Carl Bildt (@carlbildt) November 29, 2011

Radek Sikorkski’s speech in Berlin on European integration yesterday was too good to go unmentioned, even though it has already been picked over by newspapers as good as The Economist and the Financial Times. The Polish Foreign Minister is erudite and has a sound grasp of history, but it is the content of the speech, as much as it’s jokes and examples that makes it compelling.

The thrust of the argument is that the model on which the EU is based is flawed. It is singularly ambitious, but lacks the raw instruments of power. In place of the current hotch potch, the EU should be able to review national budgets and sanction governments that break the rules in a way that threatens growth. The Commission would be hacked back, to make policy making more effective, the Parliament fixed in one location to increase accountability and a large amount of discretion reserved for individual treasuries to maintain sovereignty over the means of growth.

That said, the move would entail a huge loss of sovereignty and could take years to execute. That does not make it worthless, but since the EU’s baby steps have failed to remove it from the rapidly approaching danger, it is an interesting signpost that will be acceptable to smaller countries because it is within the framework of the EU (though the Polish opposition have already called it more or less treasonous) and to Germany so long as it is robust.

The urgency within the EU is, or rather should be, increasing day by day. The latest piece of bad news is that Germany has now outstripped Italy and France in the market for credit default swaps, while borrowing on the back of national bonds has been affected by low take up (Germany) and high rates of interest (Italy). Credit default swaps are relatively new, poorly understood and even more badly regulated – they may not cause defaults, save in extreme cases such as when insurers go bust on the back of huge market shifts (AIG), but they increase the attractiveness of a default to unpatriotic fund managers (of the kind in this BBC video) and are dangerous for those entities being speculated on because:

a) They appear safer than useful creditors, such as industry or national governments;
b) They reward investors for spotting over-extended creditors, rather than growth areas; and
c) They can become a self-fulfilling prophecy.

As such, Europe would be well advised to understand, and most likely crack down on these financial instruments (as Nicholas Sarkozy has proposed and Angela Merkel appears to be considering – in the case of naked shorting only). This will not be popular and may limit the Eurozone’s ability to finance itself, as fund managers will not be able to hedge their bets. Hence the need for a new, credible financial instrument, the Eurobond while institutional reform gets off the ground.

Central Europe: A Forgotten Ally for Britain

When David Cameron was undiplomatically told, in comments that were crafted to be reported, to butt out of negotiations over the Eurozone by Nicholas Sarkozy, both he and the French President would have been pleased by the impression given to their domestic constituencies. As a political manoeuvre it is not quite on the scale of the war of Jenkins’ Ear or the Ems Despatch, but it served to remind concerned followers of the Prime Minister that he was not going to refrain from speaking his mind or advancing British interests in the notoriously closed-minded European Union.

Offending the EU and its members for the sake of domestic consumption has been Mr Cameron’s strategy ever since he took his party out of the European Conservatives grouping and set up a new, eurosceptic grouping in the European Parliament. The affair earned him a tongue-lashing from David Miliband, but if that was the worst of it, no more senior member of the Shadow Cabinet need retort than Baroness Warsi – keen as ever to go to war.

Yet the strategy of carping at the margins has failed, and embarrassingly so. France, an awkward partner, aside, the effect on Mr Cameron’s relationship with Angela Merkel has been disastrous. Last week the German Chancellor, undoubtedly the political centre of gravity in the EU at present, warned Britain to avoid substantial amendments to any new treaty to regulate the Eurozone. Mr Cameron could claim, with well-worn earnestness that ‘they started it’ but Ms Merkel could as easily repeat the claims of the British Labour Party, that is not a time to play politics in the midst of a serious crisis.

That Mr Cameron went alone to the meeting with Angela Merkel, as well as to see Jose Manueline Barroso and Herman van Rompuy, is revealing. Moreover, he did so at a point when the figureheads of Central European countries are substantially parroting his own agenda.

First, there is Slovakia, the most reluctant contributor to the bailout of Greece. As the second poorest member of the Eurozone, it is not hard to see why, especially as the financial crisis has already claimed one government.

Second; Poland, whose Prime Minister, Donald Tusk has just accomplished the unique feat in post-Cold War Polish politics of being reelected. Moreover, Poland has the honour of being the only economy in the EU not to go into recession in the past four years. In an eloquent and wide-ranging speech to Parliament, Mr Tusk set out his plans to tackle a looming pension gap, reform farmers’ national insurance and promote growth through the tax system. In practically the same week, the Polish EU Presidency settled on a 2% rise in the EU budget to keep pace with inflation, contrary to the more profligate demands of the European Parliament, which wanted 5%.

Third; Hungary, whose Prime Minister, Victor Orban recently spoke at the London School of Economics. Mr Orban admitted, in Steve Hilton-esque terms, that his country had a ‘growth problem,’ but that it was well poised for investment nonetheless through its renewed infrastructure and culture.

Finally, Romania, who alone in the EU seem to be speeding towards some form of growth.

The thread linking these countries is a wariness of the Eurozone, of which only Slovakia is a part. Hungary, which is threatened with a downgrade to ‘junk’ status by the ratings agencies (and a politically unreliable government), may be the hardest to believe when they call for stringent benchmarks (Mr Orban specifically questioned the timing of the higher capital quotas for banks, now 9%), but it is nonetheless in the interests of these countries, as of all, that the Euro is maintained by common standards of solvency to avoid devaluation or the attentions of short sellers.

Poor countries largely, they are understandably keen to see investment in infrastructure and their economies continue. Having caught up to some extent with the established EU members, that could be either focused in key areas or come from the private sector, so long as there are credible markets to their east.

In a pithy turn of phrase, Mr Tusk pointed out that in the EU, everyone is invited to dinner. However, if you are not at the table, you are most likely on it. This is the distinctive attitude that Britain has taken to the EU, and it is unlikely to be constructive. It has alienated Germany with its defence of finance and has failed to seek new allies amongst the governments of Europe. Having given up a share of the rebate under Tony Blair, it has failed to push for the removal of protectionist subsidies in favour of ones that open up investment and undertaken the same hectoring tone of President Obama over the Greek debt crisis; sort out your mess so I can jolly well carry on blaming you for my own.

Perhaps the only point on which Mr Cameron could conceivably differ from those Central European countries named above is over Russia, where Mr Cameron has recently been touting Britain as open for business. Overturning uneasy British relations with Russia is not a bad decision but it should be recognised that as an emerging market, Russia will naturally look for partners to do business with, if the political costs are not too high. At the moment, pushing for the expansion and reform of the EU would not hurt Mr Cameron’s relationship with Vladimir Putin, and should be strongly considered, if Messrs Tusk, Orban and Radičová still see fit to associate with Britain amidst its own growth problem.

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Postscript: A really good article from MP Denis MacShane on the Conservatives’ EU isolation at Progress makes similar points.

Change They Could Never Believe In

Sunday’s Presidential Election in Ukraine provides another of those salutary reminders that history so rarely progresses in an irreversible, linear fashion.

Amongst the chaos, the disappointment, and the humour of Ukraine’s cathartic Presidential election, in which Victor Yanukovych has all but triumphed, three things stand out. Firstly, Ukraine’s government has become a victim of both the financial crisis and its own unmanageable bureaucracy and will limp back to the clan-based politics that pre-dated the Orange Revolution and survived the collapse of the Soviet Empire. Second, the country will return to being a vassal state of Russia, with all the advantages and disadvantages that will bring. Thirdly, the political career of one of Europe’s most gifted politicians is nearing a tragic end.

‘Absolutely Ungovernable’

In 2004, thousands of people took to the streets of Kiev to protest against corruption, vote-rigging and economic underdevelopment, launching the Yuschenko-Tymoshenko coalition. As so often, the combination of sacrifice and optimism proved contagious – observers talked of a wave of freedom that had spread from Georgia the previous year.

Today, the best that could be said of Ukraine is that the votes are no longer rigged. No one seems better off for it, however. The Orange Revolution brought down a government, but it did not provide a new one. Constitutional reforms increased the role of the regions and power of Parliament (and by extension, the Prime Minister), as well as delivering the current electoral fraud protections that have led international observers to describe this election as ‘impressive.’

The fall-out between the ultimately victorious President Victor Yuschenko and Yulia Tymoshenko (who after being dismissed as Prime Minister led her own coalition to electoral success) has dominated politics in recent years. Last November, when Mr Yuschenko vetoed her anti-flu appropriations, Mrs. Tymoshenko fumed that Ukraine had become ‘absolutely ungovernable’ and challenged her opponents to try governing;

“If someone else comes along who can deal with country’s financial and flu crises simultaneously. I don’t think either Yushchenko or Yanukovych want the job,”

Mr Yuschenko has been criticised for wiping the slate clean of former-president Leonid Kuchma’s cronyism (he refused to call for a re-run of the 2004 election to protect his former-PM, Mr Yanukovych) and failing to replace the system with effective institutions.

Ukraine’s regions also present a political headache. The South and East are staunchly Russian in outlook, as in language and culture. Political polarisation reinforces the provinces as centrifugal forces.

Nonetheless, the real crisis in Ukraine is financial. The country is bankrupt, dependent on an unusually large loan of $16bn from the IMF. Last October, the latest $3.8bn draw-down was rejected as a result of Ukraine’s failure to enact a tough budget (cutting the deficit from 10 to 3-4% of GDP).

Closing down another Cold War front

The second great failure of Mr Yuschenko’s tenure as President was in relations with Russia. There have been three gas crises in the past five years, with supply having been cut twice, and invariably in the harsh winters.

Part of the problem has been Vladimir Putin’s outright hostility to the Orange Revolution, and Gazprom’s tendency to summarily increase prices. But the fact of Ukraine’s dependency and its strategic importance for a quarter of Russian supplies to the EU makes it a desirable target for Russia. Last year, Mrs. Tymoshenko was forced to go begging to Russian Prime Minister Vladimir Putin to renegotiate the terms of their contract. From a position of disastrous weakness, the cost to Ukraine continues to rise, and can sometimes exceed $1bn per month.

The election of Mr Yanukovych, who will pursue a far less antagonistic foreign policy (the Orange leaders’ enthusiasm for NATO infuriated Russia), is likely to mean a better deal for Ukrainians. If the Russians do seriously favour Mr Yanukovych, they will have to indulge him. Improving Ukraine’s finances will be imperative to the effectiveness of his government.

Mercurial Tymoshenko

Despite the gap being only 3% between the two presidential candidates, Mrs Tymoshenko’s defeat has been comprehensive. Although she commanded considerable influence, her enemies are equally strong and in a state in which patronage plays as big a role as it does in Ukraine, she is well and truly cast into the wilderness. Moreover, she is caught between the reality of the situation and the principles she espoused four years ago. To protest when the results of the election have been lauded as fair would be unthinkable. Finally, the many compromises made necessary by her role as Prime Minister may make her unpalatable to either Russia or the West when it comes to other political stages, No longer, for her, a role in international politics.

All of which I regard as a considerable tragedy. Mrs Tymoshenko is no angel, and has few lasting achievements to her name, but she was a politician of considerable ability, who dominated Ukrainian politics from a not overly strong position.

She began her career holding the energy portfolio under President Kuchma and Prime Minister (at the time) Yuschenko, where she was regarded as a fighter of corruption (though accusations of personal enrichment and corruption, which led to a short jail-sentence have followed her personally). Adroitly building up a support base, she provided the crucial bulwark to leverage Mr Yuschenko into the Presidency in 2004, rallying protestors in Kiev’s Independence Square. Her alliance was short-lived, however, and the fluidity and dissonance of Ukrainian politics saw her ousted as Prime Minister after eight months.

During this period Mrs Tymoshenko endeavoured to be strikingly anti-Russian, refusing to visit her neighbour for most of her premiership, and culminating in early 2007 in an article for Foreign Affairs in which she called for the containment of a revived and expansionist Russia.

Later that year elections strengthened her parliamentary bloc, allowing her to return to the premiership by the slimmest of margins. She began to soften her criticism of Russia, keeping silent during the Georgian war, and compromising in the gas disputes, when the implication was clear, that Ukraine might be next. Her concern about the Russian Question did not cease, however, and in late-2008 she penned an article for The Economist’s The World in 2009 in which she called for an institutional arrangement to maintain dialogue between Russia and the West;

In 2009 the European Union must acknowledge the task of ensuring that the ongoing changes taking place in the lands between the EU and Russia proceed in an orderly, peaceful—and, most important—mutually beneficial fashion. The aim is clear: Russia and Ukraine on the road to becoming two prosperous and friendly neighbours in the manner of today’s France and Germany.

Ironically, 2009 was an annus horribilis for Mrs Tymoshenko, a perfect storm that might have brought down any other government. Ukraine was dashed against the rocks of economic crises, a President vainly electioneering for his political life blocked reform, and the possibility of EU accession in the near future died a death as enlargement fatigue gave way to desperate introspection in light of the Lisbon Treaty.

Of course, Mrs Tymoshenko was not innocent of politics. A quote in the New York Times today gives a good indication of the negative picture she painted of herself;

“She is that psychological type of person who wants to fight and not do anything else,” said Ms. Chetvertnova, 45. “A government should work and not just seek out enemies.”

But the fact remains that from an unpopular government Mrs Tymoshenko ran Mr Yanukovych close. As a battler, she puts Gordon Brown to shame. The hope remains that she exits politics for the time being with dignity and far-sighted patriotism, not recalcitrance. The dawn of 2010 marks dark days, with freedom’s unstoppable march slipping backwards, with Russia ascendant and with government embattled.

It is almost enough to make one balk at liberal values, but on the contrary, it is also the perfect time to bear them in mind. If Mrs Tymoshenko ensures that democracy is not dragged into question, she will do her country a service and perhaps that there is a day when the West will, as the Gideon Rachman says splendidly, right a historical wrong and enclose struggling democracies within its protective embrace.

The Manchester Liberals – Part Two

Something occurred to me this morning, which I should really have included in my article about Daniel Hannan and his Manchester Liberal inspiration at the Tory Party Conference.

I was also doing some sight-spotting in Manchester over the weekend and saw something equally illuminating. In Manchester’s thriving city centre, decimated by the IRA but now universally appraised as handsomely rebuilt, there is a bench with a small, inconspicuous plaque that reads; “regeneration of Manchester City Centre, sponsored by the European Union, 2001.”

Similar plaques adorn towns all over the UK. Perhaps if Mr Hannan is looking for inspiration for regeneration projects, he could look at Britain’s more recent history. He is an MEP after all.

Along with many other instances of Conservative disengagement from Europe, it just makes you wonder what good Tory policy would do.