Category Archives: The European Union

Point Counterpoint in the Italian Campaign

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Let’s forget about the Pope’s retirement, OK? Not that it doesn’t have huge implications for the theology of the Church and the role of future tenants of St. Peter’s see, but none of that is an electoral matter. And please, let’s pay no further attention to the antics of Silvio Berlusconi, that bad little boy who wants all our attention, all the time. Just ignore him. Let’s notice instead where the Italian electoral campaign is really happening, where it has always been happening, and where in the aftermath of next Sunday’s vote all the political action will be concentrated. Let’s look at the wonderful triangulation between Pier Luigi Bersani, Nichi Vendola, and Mario Monti.

For background, recall that Bersani and Vendola both came of age in the old Italian Communist Party, both participated in the Rifondazione movement in the ’90s, and both retain a fondness for working people and the venerable culture of the Left that comes with that territory. When Bersani was consolidating his hold on the big-tent Democratic Party a half-decade ago, Vendola still held on to his Left purism, enough so, some say, that he helped bring down Romano Prodi’s center-leaning government in 2008. Since then his SEL (Left Ecologist Freedom) Party has governed Puglia with a red/green slant, but has embraced as well the business growth and market logic that have made Puglia a rare success story in Italy’s Mezzogiorno.

What does any of this have to do with the technocratic Monti, the former EU Commissioner, professor at an elite business school, unelected premier in the ‘government of the professors’ that made Italy take its austerity medicine for the last year? Well, all parties declare a grudging mutual respect, and indeed Bersani’s PD was a solid if reluctant pillar of Monti’s reformist government until Berlusconi chose to kick out the props and make it fall. More to the point right now, though Bersani still polls well ahead in the race for the lower house, and thus the premiership, his alliance seems unlikely to pick up enough seats in the regionally skewed Senate to control it. He can’t govern without it. SEL’s seats won’t do it–he’ll need the centrist senators controlled by Monti. Which may explain that grudging but persistent respect.

Meanwhile day after day Vendola and Monti go at each other, like rival siblings competing for the attentions of a fond but slightly absent-minded father. Except of course for a few things: Bersani’s aloofness is anything but accidental, Monti HATES being bracketed with a leftist politican, and the differences they are flourishing are the essential policy questions that will determine Italy’s future. Such as:

  • On Monday Monti declared he could sit in the same government with Vendola as long as it was ‘reformist’; Vendola quickly noted that for Monti ‘reform’ means rolling back workers’ rights, while for his part those rights are the cornerstone of any reform.
  • Vendola has consistently deplored the benefit reductions Monti has imposed at the behest of the ECB, referring yesterday to his austerity measures as the “same old conservative ideology.” Bersani meanwhile lamented Monti’s “lack of gratitude” for the support his government received from Bersani’s Democrats.
And so forth. What is playing out is a classic competition between management strategies, as Vendola advocates for activist stimulus and Monti calls on Italians to tighten their belts for one more round. Bersani meanwhile tries to walk a fine line he calls “austerity with justice,” whatever that turns out to mean. But as Hollande waffles along the same line, and Merkel prepares to defend her mercantilist fundamentalism this fall, Italy–for all its woes, still the Eurozone’s 3rd biggest economy–will be helping to arbitrate the larger EU’s path through this intractable crisis. And it is Vendola and Monti who are waging that struggle day by day.
Sadly, American readers are at risk to miss the whole show. Rachel Donadio, the Times’s estimable Rome correspondent, managed to write a whole story about the election last Friday without mentioning Vendola’s name. But that’s OK–as I noted at the time she wrote a similar article a month ago that lovingly catalogued Berlusconi’s clown acts but failed to even mention Bersani, the clear front-runner. With the EU leadership openly campaigning for Monti, along with David Axelrod (hired by Monti’s campaign) and maybe President Obama himself (Gianluca Luzi in today’s Repubblica calls the President’s support for continued reform “a sort of endorsement for Monti”), one might almost suspect an aversion to the ex-Communists of the center-left. But like ‘em or not, they are poised to take over Italy’s government, though on what terms is precisely the contested terrain of this election.

 

All the things Olli said

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It’s probably a good sign for the influence of the European Parliament that remarks made to it by a European Commissioner can cause a row. So it is with Economic and Monetary Affairs Commissioner Olli Rehn who presented a narrative of Italy’s flirtation with bond market shutdown during October and November 2011 that seemed too favourably disposed to the arrival of Mario Monti as the game-changer — in the context of an election featuring the same set of personalities now:

[the inaction on fiscal policy] led to a drying out of lending which suffocated economic growth and led to a political dead-end in Italy and the formation of the new government of Mario Monti, which then later on was able to stabilize the situation,” Rehn told the European Parliament on Tuesday. “This is clearly an example of the confidence effect in play.”

In what amounts to a contrite statement by Brussels standards, Rehn’s spokesman later clarified:

Neither Vice-President Rehn nor the European Commission comment on issues in the context of a national election campaign, in Italy, or any other Member State. Vice-President Rehn is responsible for fiscal and economic surveillance within the European Commission and his recounting in the European Parliament this morning of the events of the autumn of 2011 should be seen in this context.

and then outlines a set of dates which shows that the Commission at the time was reacting both to an enhanced reform proposal of the Berlusconi government plus additional elements added by Monti as its attitude to the country improved over the course of November.

It’s nonetheless tough to erase the impression that the EU establishment was much happier with Monti as PM; he was after all, one of their own. But the Eurogroup statement of 25 November 2011 which was the welcome to the new government warrants a 2nd look:

On his visit to Rome on 25 November, Vice President Rehn welcomed the economic programme of the new Government and its broad based support in the Parliament. He emphasized that “the priorities set by Prime Minister Monti are the right ones and I fully endorse them: step-up fiscal consolidation, adopt bold measures to re-launch growth, and ensure social fairness.” And he added: “Italy needs a comprehensive and wide-ranging package of reforms to kick-start growth again and offer its young people the perspective of more but also better jobs. I underline – and this is particularly relevant in this country – this is not only about fiscal consolidation but also, and I even say first and foremost, about economic reforms that can lift the potential for growth and jobs. The strong mandate for reform and the shared sense of urgency will certainly help in this regard.” 

Given the widespread view that Monti delivered much more on the austerity part of his intent than the growth part, Rehn’s opening standard for the new government nicely makes clear the jobs and growth part was not just something that Monti’s critics grafted on to his assessment later. If Rehn provided a fuller evaluation of Monti’s government to the European Parliament yesterday, using his own standard of 14 months ago, there might not be as much of a row.

Central European Links

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Here’s a depressing but interesting story. More and more Jews are moving to Vienna, which sounds rather hopeful…except that they’re coming from Hungary, to get away from anti-Semitism and people like piece o’work Zsolt Bayer.

Jonathan Freedland, meanwhile, asks his American friends to stop worrying about pogroms in London and to worry more about Hungarian and Polish politicians they find politically congenial.

You’d be surprised how often my fellow British Jews are required to disabuse U.S. friends of such delusions. One leading communal professional recalls a London meeting with an American counterpart, the latter first insisting on a tearful embrace: “You’re going through what my grandmother went through in Russia, with the pogroms,” he sniffed.

Nobody in the UK appears to have noticed that our aerospace/defence national champion is involved in a massive corruption scandal in Austria. A neat use of the radial graph visualisation explains exactly how BAE’s money was distributed around the Austrian political class to help sell Eurofighters.

Remember when the accession states were the happy hunting grounds of the libertarian blogger? Only too well. Slovakia’s prime minister thinks the privatisations were a terrible mistake and the flat tax was a sacred cow that had to die. Further, being a small and highly open economy/a branch of VW-Audi is less fun than it used to be.

And a Bulgarian politician is the target of a fake assassination attempt.

Europe’s capital strike, Central European edition

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Even if Monti seems to have succeeded in dragging the spreads closer together, there are plenty of problems around the European economy. Bloomberg reports on central and eastern Europe’s economies in search of a growth model. So far, some of them chose export-led growth and integration into (basically) German automotive supply chains, and others had a credit and property boom.

Well, it’s pretty easy to work out which was the better idea, but the problem is that with demand (especially for cars) across Europe in the toilet, the export plan isn’t looking too great either. Worse, some of the exporters are seeing their exchange rates rising fast. Poland, which is the paradigm case of an EU accession state that specialised in exporting into the German automotive supply chain, saw its currency rise 9.4% in 2012.

Diversifying trading partners away from the euro region should also “help at the margins,” Ulgen [HSBC chief economist for the region] wrote, adding that Poland and the Czech Republic have already managed to increase trade with countries from the former Soviet Union. Polish exports to the Commonwealth of Independent States rose 21 percent in the first nine months of last year and Czech exports increased 42 percent, according to HSBC.

While fiscal stimulus is not an option, there’s also further room for monetary easing in Poland and Hungary, while the Czech Republic, with the policy rate near zero, may need to resort to currency intervention, Ulgen wrote.

The problem here is that the plan is now, apparently, “export to countries that are poorer than we are”. This being Bloomberg we get a ritual reminder that “labor and pension rules” must change. But the Czechs’ GDP per capita at purchasing power parity is 123% of Russia’s.

The Austrian central bank governor, Ewald Nowotny, is apparently a leader in this effort and if anyone ought to be batting for Central Europe it’s the Austrians. However, out of the three banks who have cut their lending in the region the most, two of them are Erste and Raffeisen.

The problem is not trivial. McKinsey estimates that private investment in Europe has fallen by €354bn since 2007, while the corporate sector has about €450bn in cash on its balance sheet. Being who they are, it’s all about “regulatory barriers” and such. But look at this chart.

What on earth are European governments doing contributing to the problem here?

Tories accidentally sell the EU to Britain

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So, we’re still waiting for Cameron’s big speech on Europe, which has grown a Twitter hashtag (#TheSpeech) during its repeated postponements. Curiously, if the prime minister had set out to make the case for the European Union, he couldn’t have done better. As the dithering continues, the polls are shifting steadily towards more support for staying in the EU.

This is in the context of a longer-term swing back. In May, YouGov’s polling found that 51% of those polled would vote to leave. By the end of the year, this was down to 46%, and a week ago, 42%, with a matching increase in the vote to stay in. As the chart above shows, the lines have now crossed over. Even before the cross-over, more people thought that things would be worse outside the EU on the economy, on jobs, on their own personal interest, on the UK’s relationship with the US, and on UK foreign policy in general.

Meanwhile, there’s been something of an elite mobilisation, with the newly deployed psuedo-thinktank the Centre for British Influence rounding up 16 Tory MPs to write to the prime minister (I was surprised they found so many) and managing to place a succession of “pro-European thinks Cameron is wrong” headlines in the papers.

One of the most surprising discoveries of this latest go-round of the Tories’ conflicts on Europe is that UKIP has stopped being a party that is primarily about the EU, in the sense that its voters don’t care about it. In general, British electors rank Europe relatively low among their priorities. For normal people, it tends to be a strong opinion but weakly held. Astonishingly, it turns out that UKIP voters are no different – their polling profile is basically identical to that of Tories.

This is important and interesting. It shows up that both the Tories and UKIP have a problem. The Tories’ problems are as follows – they’re competing for votes on both flanks, to the centre and to the extreme right (the polling is clear that UKIP wins votes from Tories), and they’re forced by their internal politics to spend time and effort making speeches about Europe and the nature of Britishness, which isn’t a productive activity. UKIP’s problem is more subtle; its leaders are fascinated by the EU. It’s why they do it. But their voters aren’t – only 27% of them rate the EU among their top three issues.

Over time, UKIP has evolved in a libertarian direction. Its leadership basically believe two things: we should get out of the EU, in order to be more neoliberal. The problem here is that libertarianism is very much a minority opinion. Most British people don’t want it or anything like it. Polling of UKIP voters shows they are no different. Instead, they seem to be Tories, but more so. They vote UKIP to register protest against the Tory leadership for compromising with the electorate and the Lib Dems.

For their part, the Tory Eurosceptics are trying to compete with UKIP in Euroscepticism and libertarianism. Therefore, the “Fresh Start” group wants David Cameron to demand three policies: an opt-out from the working time directive, and another from financial services policy. This is apparently meant to be popular. The Fresh Starters say some remarkable things – apparently the EU wants to “shut down financial services” – but it seems unlikely that the British people are desperate to avoid regulating the banks, and it is actually the declared policy of the government that the economy should be rebalanced to rely less on the City. (And they want to stop sending the European Parliament to Strasbourg, but then everybody wants that bar the mayor of Strasbourg.)

But this speaks to an important point. It’s meant to be about sovereignty, no less, and this is all they can think of to do with it?

Another interesting point. Is it really better for the public to believe in “Europe” abstractly by large majorities, and to be convinced that it is basically against their interests on concrete questions of fact, or to be suspicious of the windy speeches and wandering parliaments but to think that it’s probably better than the alternatives on real issues?

FOMC Transcripts Or Why It’s Important to Listen to the Staff

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From the 2007 US Federal Reserve meeting transcripts, Meeting of the Federal Open Market Committee (FOMC) on September 18, 2007, economist Karen Johnson during a discussion of the Northern Rock debacle –

MS. JOHNSON. But, I have to say—as when President Fisher asked that question about
whether we know what we don’t know, to which, of course, the answer is always “no”—
[laughter] five days ago, I wouldn’t have brought up Northern Rock. So, I can’t promise you
that there aren’t—
MR. FISHER. Previously Newcastle, should have been called Sandcastle. [Laughter]
MS. JOHNSON. The Spanish banks, for example, and the Spanish mortgage market are places, if I were going to dig deeper and look for hidden problems, that are a possibility.

That’s a viewpoint that had trouble gaining traction among senior Spanish officials for another 3 years.

Links: Britain and Europe

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Back in December, Anne-Marie Slaughter said she thought an EU-USA trade agreement might happen i 2013, and that the Americans saw the US and Europe pivoting together towards Asia. Art Goldhammer makes the good point that British eurosceptics should look out.

Professional super-Right Tory Peter Oborne catches up, spinning off a statement delivered by the State Department directly. There is no contradiction between the EU and the special relationship.

But there never was. The Americans have repeatedly pressed the UK to engage with the EU. I remember the same story from the Treaty of Nice; all sorts of people promised nightmares, but actual American diplomats and statesmen would repeatedly say that in their view, we ought to be in. Oborne is too partisan to say it, but the 51st state option has never existed. The Americans have never wanted the UK out of the EU. If they did, they’d say it.

It is true that a lot of Tories – Oborne names them – have dreamed that all the problems of leaving the EU would be solved by an appeal to America. The cult of America is part of the Thatcher cult in general. But Thatcher herself was never overawed by the Americans; the 30th anniversary releases on the Falklands War show that she was firm with them to a degree that the French would have considered flinty.

The belief that the Americans really want us out is pathological, relying on any blowhard willing to open the mouth as an alternative to their actual decision makers. The integrated north Atlantic market for bullshit means that internal Tory rows are exported across the sea and reflected back as evidence. As Hopi says, one result is that Thatcher’s Bruges speech would now be considered daringly pro-European.

Finally, Austrian chancellor Werner Faymann:

Mit Merkel habe ich ein gutes persönliches Verhältnis, innerhalb dessen wir inhaltliche Unterschiede haben. Warum ich mir mit David Cameron schwerer tue, vor allem auch im persönlichen Verhältnis und beim Vertrauen, auch wenn die Umgangsformen immer nett sind, liegt darin, weil ich bei ihm das Gefühl habe, dass für ihn besonders gilt, was wir vorher besprochen haben: Er redet im eigenen Land anders als im Europäischen Rat

My translation: “With Merkel, I have a good personal relationship, although we disagree about policy within that relationship. I find David Cameron more difficult, especially in our personal relationship and in terms of confidence [or trust]. Why? Even though his formal manners are always very nice, I have the feeling we discussed earlier but even more than with the others – he doesn’t talk at home like he does in the European Council.”

Some Eurolinks

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Christian Gros gets, I think, to the heart of the matter:

The key to ensuring the future of Europe’s social-security systems, and thus its social model, is faster growth. And, again, it is difficult to see how more Europe would improve the situation. The obstacles to growth are well known, and have existed for a long time without being removed. The reason is quite simple: if there were a politically easy way to generate growth, it would have been implemented already

The question isn’t whether more policy areas are moved to the Commission (or in practice the ECB) or not, it’s what the policy is. Foreign Policy argues that Christine Lagarde has changed it:

She directed her chief economist, Olivier Blanchard, to publish new estimates showing that the fiscal multipliers — a measure of the impact of budgetary tightening on economic growth — on which the IMF had based its financial support programs in Greece, Ireland, and Portugal were excessively low. The new estimates put the fiscal multipliers between 0.9 and 1.7 — up from the 0.5 that had been previously assumed. In other words, the damage done by budget tightening was likely to be two to three times as bad as the IMF had previously estimated.

Armed with these estimates, Lagarde has pushed back against the ECB and EC [ed: we think they mean the Commission], arguing that by deepening the recession, excessive budget tightening can be counterproductive in stabilizing a country’s public finances. This has led her to recommend that Ireland, Portugal, and Spain not be subjected to another round of belt tightening if their economies continue to falter. Instead, she has argued that they should delay meeting their final budget deficit targets to allow domestic economic recovery to take hold.

Corporate Europe lives.

European operators have not talked about creating a single network with competition authorities, according to a Reuters, although they have expressed an interest in greater consolidation.

A Financial Times report earlier this week said leading operators had discussed with Joaquin Almunia, the EU’s competition chief, the idea of creating a pan-European infrastructure. The aim would be to offer better integration between Europe’s national telecoms markets.

However the later report, quoting unnamed sources, says the meeting had focused on whether the number of operators in Europe could shrink through mergers and takeovers, a process requiring regulatory scrutiny…

I can’t really comment on this, but I’m suspicious of the blue and yellow jacket round the bad whisky.

Some French links

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Here’s a really interesting piece about French interior minister Manuel Valls and the network of friends around him from his days as a student activist. They include Alain Bauer, Nicolas Sarkozy’s security adviser and the man who got the contract to install Vitrolles’ CCTV surveillance network for its FN mayor.

Hubert Vedrine, former minister, was asked to prepare a report on NATO and France’s return to the integrated command structure. Olivier Kempf blogs it. The recommendations are that NATO stays very much in its classical form, a military alliance with a nuclear dimension centred in Europe and the North Atlantic, that France assert itself in the alliance more, and that the European Defence Agency and NATO Supreme Allied Command-Transformation, which are both headed by French officers, should coordinate more closely on industrial and scientific issues.

He seems to be more suspicious of the UK than of NATO as such, and is very critical of the EU defence initiatives as mostly creating duplication, committees, and complexity.

History is made at night records the moment when “discotheque” became a word in English.

Political Europe, with rockets.

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Something that has been interesting me recently is the surprising resilience of political Europe. It’s not supposed to work this way – economic integration was meant to pull the continent together into ever-closer union, and the imperatives of economic integration would somehow cause the political sphere to follow along. For years, the criticism was always that the EU was either a boring technocratic project with no zang or zap or anything else with a Z, and that we needed to find a way of getting the public engaged, or else that it was an anti-democratic project imposed on the public.

These days, in many ways, the economic integration has gone into reverse. The simplest index is the gapping-out of every kind of interest rates within the EU. A more sophisticated one is the shift from financial flows between peers to ones mediated via the European Central Bank. This is counter-intuitive, but the point was to facilitate trade and finance among European businesses, not to force everything through a central counter-party.

But the political level endures. People reliably poll strongly in favour of “Europe”, especially in the countries that are suffering the most. And even if the elite consensus seems battered, people are still willing to consider merging the entire European aviation industry.

The failed EADS-BAE merger, however, reflects the limits of the political consensus, and also the changes in it over the last 10 years. People often say that European states are unwilling to touch defence as an issue, because the ultimate attribute of sovereignty is the ability to wage war. But this isn’t quite true. The scale of international integration within NATO is at least as impressive as it is in the EU, especially as it deals with precisely this issue. And it’s not obvious that the obsession with gaining or losing sovereignty is a useful analytical construct, as it tends to obscure the content of policy in favour of meta-arguments.

Why did EADS-BAE not happen? Why did it get as far as it did? It didn’t happen, for one thing, because it was enormously complicated. Both the French and German governments hold shares in EADS, and although the UK government doesn’t own a stake in BAE, it does have reserved powers over it. Further, the French aviation industry outside EADS exists and is a substantial shareholder in it. Sorting all this out implied, among other things, settling the question of whether the French state is more committed to the purely national industry that produced the Rafale or to the European (but heavily French) one that produces the Airbus, something which touches on complex interest politics in France. It implied that the UK government rights in BAE be recognised, which in turn suggested that the British would have to have a stake again.

And it implied settling the question of where Germany fits into European defence and into the European aerospace world. This would actually prove to be the breaking point. Germany, as a nation of export-oriented engineering manufacturers, is always keen to expand its technological base. The second world war shut it out of aerospace for many years, first because the Allies simply banned it and many of the people ended up in the US or the Soviet Union, and then because of the lasting impact. German politicians, officials, and industrialists have been trying to make up the lost ground ever since, and European joint projects have played an important role. West Germany was a charter member of Airbus, of the MRCA program, of Eurofighter, of Eurocopter.

Some of the joint projects were Franco-German, others (like Airbus, Tornado, and Eurofighter) were broader. Interestingly, there was never an Anglo-German project, but there were plenty of tripartite ones, especially after the UK joined Airbus in 1977. One thing that marked many of these projects, though, was the tension between the UK and France on one hand, and the Germans on the other. The key issue was workshare, how much of the production would happen in each country, and more interestingly and significantly, what would come from each country. The French, and the British, considered themselves to have a leading role. The Germans were keen to create a base of know-how on subjects their industry hadn’t had the opportunity to master.

This was dramatised by the history of the Eurofighter project. It began with a great deal of optimism, following the successful Anglo-German-Italian Tornado, which it was meant to replace. The French had decided to join. There were the usual problems in defining the requirements, although they were nowhere near as complex as they had been on Tornado (it had to be a fighter for the Brits and then evolve into a bomber, a maritime bomber for the Germans, and a reconnaissance and electronic warfare aircraft for the Italians, and then a different recon variant for the Brits). By 1985, BAE Warton had a technology demonstrator flying.

Then, things went wrong. The German side wanted to take responsibility for much more of the fuel system and the flight control system. Not only did the British and French consider these to be the crown jewels of their aviation technology, but they also suspected that the Germans were overconfident about how long it would take to create such a capability in Germany. The British were ideologically suspicious of government industrial policy in general, while the French and Italians understood it all too well and accused the Germans of trying to build a competitor industry at their expense. Eventually the French quit and started a unilateral project at Dassault, which to the enormous embarrassment of everyone else would arrive in operational service years before the Eurofighter. The Germans did get the flight controls, and as predicted the project ran enormously late and over budget, before the control system was eventually given back to the UK.

The delays and the cost overruns brought their own problems. By the time the prototype was flying, the cold war was over, and everyone wanted to reduce the production run, especially as the planes were so much more expensive than projected. The cuts to the run meant that the unit price went up. That induced more wrangling. And by the time the planes were finally being delivered, the customers’ requirements had changed.

With the EADS-BAE merger, many of the same patterns emerged. The price of accepting the deal included moving the HQ to Germany, something the French saw as positively offensive. This wasn’t quite as fair as it might have been 20 years ago. In the meantime, the Airbus narrow-body line at Hamburg-Finkenwerder has produced vast numbers of Airbus A320s with success, and developed a speciality in reworking A300s and 310s. (The British could have had it back in the 80s if they had been willing to pay, but they really didn’t believe in industrial policy.) In that sense, Germany is a much bigger contributor to Airbus than it used to be.

The British and French were able to settle their own differences surprisingly easily, reflecting ten years’ effort to mend relations after Iraq, and cooperation on big aerospace projects as far back as the 1950s (for deep historians, the first world war, when the British made the airframes and the French the engines). That was one of the reasons the deal got as far as it did.

Another was that BAE’s decade-long acquisition spree in the US is running down. Careful arrangements were planned to avoid annoying the Americans, but the background fact is that most of BAE’s assets in the US are very much about building the requirements of the War on Terror. If you associate the company with aircraft, it looks deeply odd that it owns quite so many factories making the armoured patrol vehicles the US army bought in vast numbers for Iraq, making explosives detectors, making all the icons of the Bush era.

Further, neither the US or the UK procurement bureaucracies are at all keen on the “prime contractor” business model that helped Lockheed Martin, Northrop-Grumman, Boeing, and indeed BAE waste so much taxpayers’ money in the 2000s.

What does this all tell us? Political Europe is still kicking. The limits of it, though, are still what they were, even if they are very often drawn between different office blocks in Paris as well as along the Channel or the Alps. The EU is troubled, but the Special Relationship isn’t what it was either, although the entente cordiale is surprisingly strong. German corporate ambition is a powerful force, and one that tends to blind the people involved to the fact that there are engineers in Italy.