Is the EU Ready for a G3 World ?

 April 10, 2012

One of the key issues in IR & geopolitics is that of hegemonic transition. In the space of only thirty years, the world as we knew it has gone from bi-polar (international affairs dominated by the USA and the USSR) to unipolar (with the US as the only superpower left), to what is now a disorganised and anarchic state of affairs most commonly known under the label of G-zero.

As much as we would like to see a multi-polar world order emerging, the most touted options in IR to date are that of a G-2 order (“Chimerica”), or a G-3 world with the USA, China and the European Union in charge of global governance.

The G-2 formula was first advanced in US academic circles in 2006 by Jimmy Carter’s former national security adviser Zbigniew Brzezinski. In his view – and that of many IR specialists or diplomats like Henry Kissinger – the US and China should cooperate in order to reduce the threat of nuclear proliferation and to address together global problems such as trade surpluses, world hunger or climate change. The idea of a G-2 world order, however, has left both Washington and Beijing unimpressed. Its echoes were found only within some EU policy-making circles.

Thus in 2009, during a Sino-EU summit in Prague, the Chinese premier Wen Jiabao has stated that

“it is totally ungrounded and wrong to talk about the dominance of two countries in international affairs”. Indeed, as professor Jian Junbo from Shanghai comments in an article on this issue, “the responsibility of a G-2 member to jointly shape the world’s economy and international affairs is too far beyond China’s ability and ambitions”.

As he rightly points out, China is still a developing country with huge under-development problems, low per capita income and inferior military strength if compared to that of the United States.

China’s refusal to endorse a G-2 formula does not mean, according to ECFR specialists, that it would be adverse to the emergence of a G-3 order which would include the EU as well. As Mark Leonard and Parag Khanna argue in an article originally published in the New York Times, we are already living in a G-3 world,

“one that combines US military power and consumption, Chinese capital and labour and European rules and technology. The United States, the European Union and China are the three largest actors in the world, together representing approximately 60 percent of the world economy – with the EU being the largest of the three”.

Unfortunately, the EU’s strengths – the largest trade bloc, foreign investor and aid donor in the world – are constantly being undermined by an irresolute common foreign policy, or as former UK foreign secretary David Miliband put it, “confused messages, patchy coordination and relationships with global powers that lacked clarity, strategy or purpose”. (sources: Asia Times, Financial Times, Foreign Affairs, NYT)

The ASEAN Summit Prepares for Economic Downturn

 The 20th ASEAN summit took place last week in Cambodia. It ended after two days with a Phnom Penh Declaration, which basically reiterates the members’ commitment to establishing the ASEAN Economic Community by 2015. The summiteers were greeted in the capital’s Peace Palace by huge billboards depicting the smiling faces of the Chinese president Hu Jintao and that of the king of Cambodia. The official Chinese visit took place only two days before the opening of the ASEAN summit, leaving participants in no doubt as to the political allegiance of premier Hun Sen.

Thus during the summit Hun Sen insisted that China should be involved in the drafting of the Declaration of Conduct, a code of conduct meant to settle territorial disputes peacefully in the South China Sea. Given the reluctance of some of the participants, the drafting was not finalised on this occasion.

One of the most important decisions reached was that of increasing the emergency funding available to member countries in case of an economic downturn, from 120 billion to 240 billion US dollars, mirroring similar efforts undertaken by the EU’s political leaders with regard to the ESP. The so-called Chang Mai Initiative (CMIM) sets the rules for bilateral swap arrangements established in 2009 between the ten ASEAN members plus China, Japan and South Korea. The biggest contributors to the pool of money are obviously China and Japan, followed by Indonesia, Singapore, Malaysia, the Philippines and so on. The initiative’s authors were careful to point out that this was not meant to replace the IMF’s role in Asia – as much as they’d probably like it to – but rather to supplement it. (sources: Singapore Institute of International Affairs, Jakarta Post, Xinhua News, Huffington Post)

Development Eurobonds and Economic Growth

 March 31, 2012

The harsh austerity measures afflicting southern EU members like Greece, Spain, Portugal or Ireland are generating massive unemployment and negative economic growth, not to mention the type of social turmoil that can conceivably degenerate into civil war. As the European Union is far from a truly federal structure, fiscal transfers from economically viable member-states to distressed areas of the Union are currently out of the question. Still, policy measures aimed at reversing the negative trends in economic activity and employment should become the top priority both for Brussels and EU national governments, if the deterioration of economic conditions is to be prevented from spreading.

The amounts needed to kickstart economic growth in the south and to drastically reduce unemployment, to be sure, would have to be in the vicinity of 1 trillion euros. These would fund EU-wide mega-infrastructure projects in transportation, energy generation and the maintenance of adequate provision of education and healthcare services. Unfortunately, most EU governments are now locked in a battle to reduce their fiscal deficits, in a vain effort to appease restless international financial markets and speculators. One of the few solutions advanced by – among others – Jean-Claude Juncker, the president of Ecofin, is that of issuing eurobonds, although the idea was flatly rejected by Germany and France.

The European Commission lacks the financial muscle to undertake such projects. To overcome that, it should, however, be enabled to issue a batch of one-off eurobonds earmarked for financing development and economic growth projects in distressed regions of the EU. Issued over a period of five years and sold exclusively to EU nationals, by a banking system that owes a lot to states and depositors alike, these eurobonds with long maturity dates could be an adequate financial instrument needed to raise large amounts of money in these times of huge economic stress.

By putting the European Commission in charge of the proceeds, the projects to be undertaken will not only benefit the countries most in need, but the European Union as a whole. As matters now stand, the alternative is to use crypto- financial transfers from northern countries to the South, which would result in higher taxation levels affecting the rich as well as the struggling European middle classes. The eurobond solution could also prove instrumental in redeeming the badly tarnished image of EU authorities, who are currently being perceived as a mere conveyor belt of highly unpopular austerity policies dictated by the financial markets.

"It's Economic Growth, Stupid !"

 March 28, 2012

Over the last two weeks, economic discussion among EU leaders has revolved around two main topics: austerity and increasing to 1 trillion euros the money available to the ESP. Few of the current leaders, if any, are concentrating on finding solutions to the real economic challenge facing the Union, that of kickstarting economic growth on the continent. As Barry Eichengreen argues,

“Though no one can say for sure what Tobin would have thought of Europe’s crisis, his priority was always the pursuit of full employment. One suspects that he would have urged European policymakers to dispense with their silly fixation on a financial transactions tax and instead repair their broken banking systems and use all monetary and fiscal means at their disposal to jump-start economic growth”.

With the exception of a few EU members (Germany, Finland, Austria, Denmark), growth is stagnant, or negative (in Greece, Portugal and Ireland, for example) and the average rate of unemployment has crossed the psychological threshold of 10 percent. Whilst countries like China have spent close to 1 trillion USD in 2008-2009 in order to maintain employment and growth, the EU is envisaging to invest a measly 100 billion euros to the scale of the continent, if that. To compound economic woes, aggregate demand in deficit EU countries is about to suffer further shocks as a result of the unwise implementation of draconian austerity measures.

According to Jean-Claude Trichet, former ECB director, the average budget deficit within the EU is 70 percent of the aggregate GDP. That compares very favourably with Japan’s 212 percent or with the US’ 100 percent public debt ratios. Maastricht Treaty “fair weather” provisions notwithstanding, most EU member countries could add a few percentage points to their deficits in order to adequately finance growth and employment investment schemes coordinated by Brussels. To avoid pressure from international financial markets, national governments could – as the Japanese have always done – sell their treasury bonds to their own citizens, vital stakeholders in a solid economic recovery.

Whether our political leaders realise it or not, the only way out of the current crisis is by spending close to 1 trillion euros over the next few years on various development and infrastructure projects. The EU’s energy security, for example, does need the Nabucco project to go ahead in order to diminish our dependence on Russian oil and gas and pipelines. Although the European Commission is trying to allocate money for other much- needed infrastructure projects, the EU budget is at the mercy of member states’ contributions. That brings into question Brussel’s ability to adopt and implement the pan-European growth agenda we need.

And yet, a comprehensive pro-growth strategy is essential, if both the employment and current sovereign debt crises are to be overcome. To get to it, national leaders should, however, do away with their fixation on golden rules and austerity measures, and start investing massively in projects that will slash the current unemployment rate, taming it to the levels experienced by Germany, Austria or Finland. The urgency of such an investment and spending agenda is, unfortunately, recognised only by economists. Unable to deliver the right mix of economic policies, EU politicians have found it more expedient to give in to xenophobia, racism and nationalism, some of them for electoral reasons.

Whilst populist discourse might in normal times prove helpful in winning elections, in the current economic climate it could only aggravate matters and prolong the crisis. In fact, voters in major European countries are more concerned with their diminished purchasing power and job prospects than with illegal immigration and/or security issues. Any politician or their advisers who fail to grasp that should make an exit from the political game. (sources: Project Syndicate, Le Monde, Reuters, Deutsche Welle, Xinhua)

The Eurasian Union: Two Competing Geopolitical Visions

 March 21, 2012

The implosion of the Soviet Union has in many ways adversely affected the stability of the Central Asian republics like Kazakhstan, Kyrgyzstan, Turkmenistan or Uzbekistan. Since 1991, a loose alliance of 11 former Soviet republics, the Commonwealth of Independent States (CIS), was formed in order to preserve, at least in part, the Soviet-era heritage in regional economic integration.

The geopolitical competition for influence in Central Asia has ceased to be a Russia-only affair, however. China is rapidly becoming a big player in the energy sweepstakes, if its direct dealings with Turkmenistan and others are any guide. Closer to Europe, Turkey has also been willing to take the lead in promoting Eurasian integration. Thus, on the 5th of February 2010, Turkish foreign minister Ahmet Davutoglu has stated during a business conference that “there is a need to embark on a new vision in order to have the Eurasia region regain its historical importance”. Assembling the five “stans” into an Eurasian common structure would, in Davutoglu’s view, be useful to establish “a link between energy-supplying countries and energy-receiving countries”.

Turkey’s ability to foster Eurasian regional integration is based on common cultural and religious roots of the inhabitants of the Central Asian republics. To further its diplomatic aims, Turkey has founded TURKSOY in 1993 in Alma Aty (Kazakhstan), as an international organisation for the promotion of Turkish culture abroad.

As the Arab revolutions have forced Turkey’s diplomats to put the Eurasian project on the back-burner, the opportunity has astutely been seized by Vladimir Putin. In an article entitled “A New Integration Project for Eurasia: The Future in the Making” published by Izvestia on the 4th of October 2011, Vladimir Putin has outlined his vision for the creation of an Eurasian Union larger in size than the European Union. Putin argues that the objective is to build “a new, strong, supranational union that could become one of the poles of the modern world, and could play the role of an effective bridge between Europe and the dynamic Asia-Pacific region”.

His proposed union would be much more than a mere customs union and would include such common institutions as an Eurasian Commission, similar to the one in Brussels, an Eurasian parliament, as well as an Eurasian common currency. To foster regional integration, the Eurasian union “should be built on the inheritance of the Soviet Union: infrastructure, a developed system of regional production specialisation, and a common space of language, science and culture” (V.Putin).

Putin claims that the impetus for the regional integration plans was provided by the financial crisis – a reason invoked by the Chinese, as well, in plans to build their own trade bloc together with the ASEAN countries.

According to Mars Sariev, a Kyrgyz political scientist, Putin and the Russian foreign policy elite have had little choice but to come up with a blueprint for integrating the former Soviet republics into a regional bloc. The alternative, he claims, would be for Russia to become a mere supplier of raw materials for the EU and China. Recently, during an Eurasian Economic Community summit involving Belarus, Kazakhstan, Kyrgyzstan and Tajikistan, their leaders have decided to postpone the creation of the Eurasian Union until 2015. Curiously enough, the project’s most vocal opponent was Belarus’ president Lukashenko, although Ukraine’s president Yanukovich, whose country was present at the summit as an observer, also expressed serious reservations regarding Putin’s plans.

Professor Gerhard Simon of the University of Cologne assesses the chances of success for the proposed Eurasian Union project as “slim to none”. The president of Georgia, Mikhail Saakashvili, considers the project as being the blueprint for “a new Soviet Union”, a charge vehemently denied in his Izvestia article by Vladimir Putin.

The biggest misgivings concerning the Eurasian project come from countries like Azerbaijan and Georgia, which together with Turkey have already formed a geopolitical team that benefits from US assistance. Both countries experience ethnic turmoil, Azerbaijan in the Nagorno-Karabakh region and Georgia in South Ossetia. Azerbaijan would rather export its oil and gas directly to Europe, through the Baku-Tbilisi-Ceyhan pipeline. SOCAR, the Azeri state oil company has invested 1 billion US dollars in Georgia and controls 80 percent of the latter’s fuel stations. Georgia, meanwhile, is strongly courting NATO and EU membership and is complaining about Brussels’ foot-dragging regarding its accession hopes.

To be sure, the geopolitical competition between Turkey and Russia for the creation of an Eurasian union is heating up. Whilst it is hard to envisage an Eurasian union built around Russia, given its enormous size and colonial record, Turkey’s recent policy paralysis does not qualify it as a strong regional leadership contender, either. (sources: EurActiv, Voice of America News, Deutsche Welle, The Atlantic, Izvestia, Today’s Zaman, www.TurkishCentralNews.com)

Military Spending: Less Boots on the Ground for the EU

March 20, 2012

International military analysts have recently pointed out that military spending in Asia has increased to 262 billion euros in 2012. The amount could overtake the EU’s own military spending in the near future, possibly as early as next year. Smaller military budgets, however, are consistent with the EU’s new focus on soft power and diplomacy, as opposed to investment in new weapons systems and more ‘boots on the ground’. Moreover, European countries have had an insignificant military presence in the Middle East or Asia, its former role being filled over the past sixty years by the United States. Naturally, the financial crisis and subsequent austerity measures are also considered responsible for the anaemic military spending by EU members.

In 2012 the US will spend an estimated 739 billion dollars, which, combined with the EU’s own 270 billion euros in military spending, will secure NATO’s position as the world’s most powerful military alliance. The refocusing of the US’ military strategy on Asia, which includes a new base in Australia and more American warships in Singapore, has been recently decried by Middle Eastern kingdoms feeling somewhat abandoned to their fate. Accordingly, they have increased their own military purchases and are intensifying diplomatic pressure on the US to remain engaged in their region. For Arab leaders, these lobbying efforts could not have been undertaken at a worst time, as the Obama administration plans to further reduce military spending to an estimated 500 billion USD per year.

Russia has recently announced that it would spend 775 billion dollars until 2022 for a much-needed refurbishment of its armed forces’ equipment, and for making its troops more professional.

China’s military will receive an estimated 89 billion dollars in 2012. In recent times, the Chinese military expenditure has shown a tendency to double every five years or so. Worries about Chinese hegemony in Asia have prompted other Asian nations, including India, to increase their military spending this year, which is good news for European weapons manufacturers. Fortunately – according to most analysts – the danger of a confrontation between major powers is rather remote at this point in time, as the Chinese military’s might will match America’s only in 15 or 20 years from now. (sources: www.sipri.org, Le Monde, International Institute for Security Studies, Reuters)

The EU's Austerity-induced Recession

 March 1, 2012

The eurozone’s unemployment rate has reached 10.7 percent in January, meaning 16.9 million people out of work, of which 5.5 million young people under 25. If we add to these figures the 2.7 million people unemployed in the UK as well as another few million jobless in the other EU member-states, we can understand why the European Union is now being viewed as the biggest recessionary threat to the world economy. Countries in the eurozone’s southern periphery, like Greece or Spain, are afflicted by 19.9 percent and 23.3 percent unemployment rates respectively. By contrast, Austria, Luxemburg and the Netherlands enjoy a jobless rate of 4 to 5.1 percent according to Eurostat. Even more alarming, the eurozone’s manufacturing sector has entered its seventh month of contraction, pointing to an EU-wide recession for 2012 and possibly beyond.

In denial about the economic consequences of their actions, the eurozone’s leaders will meet in Brussels this weekend for the signing of a new fiscal pact, whose stringent conditions are at the root of the current economic problems. Nobody that’s anybody in the economic profession still supports the view that the austerity measures – as implemented unwisely over the last two to three years – could improve the economy. Draconian austerity measures could only lead to negative growth, mass unemployment and a wave of unprecedented social unrest across Europe.

Aloof German politicians and bankers, however, are currently attacking the ECB for lowering interest rates and for providing fresh liquidities to the banks in order to spur economic activity, even as the German export engine itself is showing signs of sputtering.

Ideologically motivated national leaders from most other European countries are towing the austerity line and cutting expenses in health, education and essential social services to the bone, further depressing aggregate demand in their own countries.

Together, all these policies will in time provide the fuel for social revolutions, as stressed-out wage earners and the working poor can barely tolerate the harshness of the measures aimed at reducing private and public debt in eurozone countries. Meanwhile, labour union leaders have all but given up hope of making politicians gauge the gravity of the mega social crisis unfolding under our own eyes. One thing is certain, however. Brussels’ summitry is not expected to make a significant contribution to improving Europe’s growth prospects or to reducing unemployment anytime soon. (sources: The Guardian, Reuters, Deutsche Welle, Le Monde)