English - Europe's World

Europe’sWorld
SPRING 2008 | #8 | 12
THE ONLY EUROPE-WIDE POLICY JOURNAL
Climate change Anders Fogh Rasmussen
EU-Russia Mark Leonard | Jacques Andréani |
Andreas Goldthau | Igor Yurgens Cyprus David Hannay
Balkans Finance Wolfgang Petritsch Gérard de
Equity funds la Martinière | Christian Noyer Poul
Soft Power Nyrup Rasmussen Adam Daniel Rotfeld
Lobbying NGOs Alexander Stubb Robert Glasser
Special
Dossier
BANKING & FINANCE
OTHER AUTHORS: MARK ALMOND, KRZYSZTOF BOBINSKI, HERBERT BÖSCH, MICHAEL BRENNER, MARIE-
JANINE CALIC, ARMAND CLESSE, FRANÇOIS COLLING, NATHALIE DELAPALME, MICHAEL HAMMER,
ANDREAS HEINRICH, HENRIK ISAKSON, MARC LAFFINEUR, YIORGOS LILLIKAS, JEAN-PAUL MARTHOZ,
MARKKU POHJOLA, NICU POPESCU, CARLO SECCHI, FEDERICO STEINBERG, LOUKAS TSOUKALIS, PER UNCKEL,
LUK VAN LANGENHOVE, RINUS VAN SCHENDELEN, NICOLAS VÉRON, SEBASTIAN F.A. VOS, MANFRED WEBER

HOW EUROPE'S WORLD HARNESSES THE INTERNET
It was a distinguished and very experienced
Agence France Presse journalist who first
described as “highly original” the Europe’s
World policy of combining the printed version of
the journal with an electronic one that is sent to a
few hundred thousands of people. More recently,
our idea of making its entire content available
free on-line to as many potential readers as
possible was greeted by Carlo De Benedetti, the
Italian industrialist-turned-publishing tycoon as
“intelligent and interesting”.
Debate still rages as fiercely as ever in the
world of media and journalism over how best
to reconcile the information revolution with the
hard commercial realities of publishing. It’s a
real headache for newspapers and magazines to
know how to make money out of the internet.
But for newcomers like Europe’s World it’s been
a no-brainer. Because this journal is published
on behalf of a large coalition of think-tanks
with the aim of creating a Europe-wide debate
on key issues, the internet has offered us an
unparalleled opportunity to reach out to the
political elites of some 171 countries, both
within the EU and further afield.
The 60-plus think-tanks and civil society bodies
that make up this journal’s Advisory Board are
all closely connected to the political movers
and shakers in their own country. That is why
Europe’s World is able to count a readership of
over 100,000, and still climbing!
Hard-nosed commercial publishers continue
to have major problems with free on-line
readerships. But for this journal, with its ambition
of becoming the pre-eminent European platform
for new thinking and original policy ideas, the
goal is to add as many more readers as we can.
In line with this, we want to issue the following
invitation to universities and other interested
parties: Get in touch with us and we’ll send
electronic copies of Europe’s World to as many
potential readers as you wish. Once we have
the e-mail details of students, faculty members
and other contacts with a strong interest in
policymaking, we’ll ensure that they receive each
issue as soon as it’s published.
In the 30 months since its launch, Europe’s
World has surpassed all expectations. It attracts
thoughtful contributions from some of Europe’s
foremost politicians – in this issue we not
only feature an article by Denmark’s current
prime minister, but also one by his immediate
predecessor – and by acknowledged experts
from around the world.
The breadth of issues dealt with in our pages
reflects the widening reach of EU-level decisionmaking.
It seems to us, as Editor and Publisher of
Europe’s World, that it is more essential than ever
that we should strive towards creating Europewide
consensus on so many different topics. We
hope this journal makes a useful contribution to
this process.
Giles Merritt
Editor
Geert Cami
Publisher
Spring 2008 Europe’s World | 1

2 | Europe’s World Spring 2008

TABLE OF CONTENTS
Section
1 INTERNATIONAL
■ Europe’s chance to become a global climate champion
by Anders Fogh Rasmussen .................................................. 10
■ How Europe is starting to set global rules by Adam Daniel Rotfeld ............. 15
■ A five-point strategy for EU-Russia relations by Mark Leonard and Nicu Popescu .. 20
■ The reasons Europe has so disappointed Putin’s Russia by Jacques Andréani .... 31
■ Russia’s energy weapon is a fiction by Andreas Goldthau
Commentary by Andreas Heinrich. ............................................. 36
■ Forget politics; What Russia and the EU need is a shared economic space
by Igor Yurgens ............................................................ 43
■ Latin America is Europe’s next big missed business opportunity by Carlo Secchi
Commentary by Federico Steinberg ............................................ 48
■ While America electioneers, Europe has a Middle East role to play
by Michael Brenner. ........................................................ 55
■ European foreign policy begins with the neighbours by Loukas Tsoukalis ....... 59
Further contributions to this section by Bernd Kaussler (Iran), Christa Meindersma (Afghanistan), Alexandros
Petersen and James Rogers (Atlantic pact), can be found on www.europesworld.org
Section
2 EUROPE
■ The case for urgently re-starting talks on Cyprus by David Hannay
Commentary by Yiorgos Lillikas ............................................... 66
■ Why the EU may never get its accounts straight by François Colling
Commentary by Herbert Bösch ................................................ 72
■ The EU must speed-up its Western Balkans enlargement by Wolfgang Petritsch
Commentary by Marie-Janine Calic. ............................................ 80
■ Why Turkey may turn its back on Europe by Mark Almond..................... 87
■ The dangers to the EU of condemning Ukraine and Belarus to political limbo
by Krzysztof Bobinski ....................................................... 92
■ Europe badly needs a Nordic-style “knowledge policy” by Per Unckel.......... 97
■ Finding a new EU Budget mechanism won’t be easy by Marc Laffineur ........ 103
■ It’s time Europe stopped crying “foul” to justify its protectionism
by Henrik Isakson ......................................................... 107
■ This enlargement mess by Armand Clesse ................................... 110
■ Power to the regions, but not yet farewell to the nation state
by Luk Van Langenhove .................................................... 113
Further contributions to this section by Simon Anholt (Europe’s image), Maria Dunin–W sowicz (eurozone), Derek
Marshall and Tim Williams (defence industry), Jozias van Aartsen (energy policy), can be found on www.europesworld.org
POLICY DOSSIER: BANKING AND FINANCE ......................... 117
■ Taming the private equity fund “locusts” by Poul Nyrup Rasmussen
Commentary by Sebastian F.A. Vos ....................................... 130
■ How the EU is banking on decentralisation by Christian Noyer .......... 133
■ Credit crunch pushes cross-border watchdogs high on EU agenda
by Nicolas Véron ..................................................... 135
Spring 2008 Europe’s World | 3

4 | Europe’s World Spring 2008

Section
TABLE OF CONTENTS
■ We’ve got to do something about Europe’s crazy patchwork of
bank supervisors by Markku Pohjola ................................... 139
■ Pitfalls that Europe’s booming insurance industry must sidestep
by Gérard de la Martinière ............................................. 142
■ What Europe’s future financial marketplace will look like
by Manfred Weber .................................................... 144
A further contribution to this section by Manfred Jäger (ECB), can be found on www.europesworld.org
3 THE DEVELOPING WORLD
■ Why we need to look hard at the NGOs’ flaws by Robert Glasser
Commentary by Michael Hammer ............................................. 150
■ Regulating Brussels’ legion of lobbyists by Alexander Stubb
Commentary by Rinus van Schendelen. ........................................ 156
■ Bush's legacy will be NGOs with a truly global vision by Jean-Paul Marthoz.... 162
■ Developing a new Euro-Africa partnership by Nathalie Delapalme............. 169
Section
4 VIEWS FROM THE CAPITALS
Disgruntled Austrians ignore EU’s economic benefits by Sonja Puntscher Riekmann . . 175
How the EU underpinned peace in Ireland by Etain Tannam .................... 176
Nostalgia appeal could brighten Lithuania’s dismal political landscape
by Mantas Adom nas ........................................................ 178
Portugal’s EU presidency success masks worsening domestic unease
by António Figueiredo Lopes .................................................. 179
One year after EU accession, Romanians still resist anti-corruption efforts
by Sabina Fati. .............................................................. 182
Reciprocal respect could calm the troubled waters of EU-Russia relations
by Fyodor Lukyanov ......................................................... 186
Fickle Swedes are turning on their government – again by Anders Mellbourn.... 187
Despite EU reverses, Turkey’s AK Party walks tall by Beril Dedeo lu............. 189
Iron law of EU politics makes Britain a poor European by John Peterson ........ 191
LETTERS TO THE EDITOR
From Adam Ficsor, Marija Pej inovi Buri , Helga Trüpel, Marko Mihkelson, Arjen Berkvens,
Alan Dukes, Angelika Beer, Jamila Madeira, Ruth Thompson, Romana Jordan Cizelj, Anneli
Jäätteenmäki, Cem Özdemir, Lena Ek, Hans van Baalen .......................... 194
FORUM FOR DEBATE
From Constantinos Eliades, Emma Nicholson .................................... 214
Spring 2008 Europe’s World | 5

EUROPE’S WORLD EDITORIAL BOARD
The Editorial Board of Europe’s World gives the journal a truly European breadth and balance.
Its ranks include senior journalists and political and business figures.
MIGUEL ANGEL AGUILAR
El País columnist
BARON DANIEL JANSSEN
Former Chairman of the Board of Solvay
GIAMPIERO ALHADEFF
Secretary General of the European Parliamentary
Labour Party
CARL BILDT
Swedish Foreign Minister
JORGO CHATZIMARKAKIS MEP
Member of the European Parliament’s Committee
on Industry, Research and Energy
PAT COX
Former President of the European Parliament
JOSEF JOFFE
Publisher-Editor of the German weekly newspaper
Die Zeit
SANDRA KALNIETE
Former Latvian Minister of Foreign Affairs and
a former EU Commissioner for Agriculture and
Fisheries
GLENYS KINNOCK MEP
Member of the European Parliament’s Committee
on Development
PASCAL LAMY
Director General of the World Trade Organization
VICOMTE ETIENNE DAVIGNON
Vice President of Suez-Tractebel and President of
Friends of Europe
PHILIPPE LE CORRE
Lecturer at the Institut d'Etudes Politiques and the
Institute of Oriental Studies in Paris.
JEAN-LUC DEHAENE MEP
Former Belgian Prime Minister
ANNA DIAMANTOPOULOU
Member of the Greek National Parliament and a
former EU Commissioner for Employment and
Social Affairs
MIA DOORNAERT
Diplomatic Editor of the Belgian daily newspaper
De Standaard
MONICA FRASSONI MEP
Co-President of the Green Group in the European
Parliament
JEAN-DOMINIQUE GIULIANI
President of the Robert Schuman Foundation
BRONISLAW GEREMEK MEP
Former Polish Foreign Minister
MIKE GONZALEZ
Editor of the Wall Street Journal-Asia
ROBERT GRAHAM
Ambassador-at-large of the Financial Times
TOOMAS HENDRIK ILVES
President of the Republic of Estonia
ROBERT MANCHIN
Founder and Managing Director of the Gallup
Organisation Europe
PASQUAL MARAGALL I MIRA
Former President of the Generalitat de Catalunya
JOHN MONKS
General Secretary of the European Trade Union
Confederation (ETUC)
MARIO MONTI
President of the Università Bocconi and a former
EU Commissioner for Competition
DORIS PACK MEP
Chairwoman of the European Parliament’s
Delegation for relations with the countries of
south-east Europe
CHRIS PATTEN
Chancellor of Oxford University and a former EU
Commissioner for External Relations
ANTÓNIO VITORINO
Former EU Commissioner for Justice and Home
Affairs
JORIS VOS
President, European Union and NATO Relations at
Boeing International
GILES MERRITT
Editorial Board Chairman and Secretary General
of Friends of Europe
6 | Europe’s World Spring 2008

Europe’s World is published three times yearly in partnership with Friends of Europe, Gallup and the Robert
Schuman Foundation / Editor: Giles Merritt / Sub-editors: Keith Colquhoun, Rowena House / Matters of opinion
Editor: Katharine Mill / Publisher: Geert Cami / Publication Manager: Julie Bolle / Editorial Coordinator:
Hendrik Roggen / Advertising:Design & Production: Brief-Ink
/ Address:
E-mails: For suggestions of topics and authors or for letters to the Editor: editorial@europesworld.org; for advertising rates
and bookings: advertise@europesworld.org; to get a subscription to the printed version: subscriptions@europesworld.org.
Europe’s World is available free online: http://www.europesworld.org
Index to Partners and Advertisers:
Alstom p.4
Belgian Ministry of Foreign Affairs p.212
Boeing
Inside front cover
Brussels Airlines p.34
Chamber of Commerce and Industry
EFG Eurobank p.116
Generalitat de Catalunya p.200-201
Government of the Republic
Invest Macedonia
p.100-102
La Poste, International Mail Activities p.174
Polish Oil and Gas Company PGNiG p.2
Robert Schuman Foundation p.46
Slovenia’s Ministry of the Environment
Volvo
p.166-167
Europe’s World authors contribute in their personal capacities, and their views do not necessarily reflect those
of the institutions they represent or of Europe’s World and its Advisory Board and Editorial Board members.
Reproduction in whole or in part is permitted, provided that full attribution is made to Europe’s World
(including mention of our website: www.europesworld.org) and to the author(s).
Spring 2008 Europe’s World | 7

1
Section
INTERNATIONAL
Europe’s chance to become
a global climate champion
With less than two years to go until the crucially
important UN climate change talks in Copenhagen in
late 2009, Denmark’s Prime Minister Anders Fogh
Rasmussen assesses Europe’s chances of making a real
difference on global warming
The Kyoto Protocol was a landmark
in the global fight against climate
change and it has been the main
reference point for international debate
on the subject for years. However, the
first commitment period to fulfil pledges
to cut greenhouse gas emissions between
2008 and 2012 only came into force a few
months ago. For the next four years, those
countries that ratified the protocol will be
busy delivering on their binding promises.
Meanwhile, the political debate has moved
on – and rightly so. Kyoto was crucial, but it
was only a first step. According to scientific
evidence compiled by the International Panel
on Climate Change, it will require strenuous
efforts well beyond the Kyoto horizon of
2012 to limit temperature increases to 2o
Celsius. This is now widely recognised. With
Europe promising to lead the way beyond
Kyoto, the eyes of the world will be on the
Europe Union in 2008 to see how effective a
lead we will take.
It is right that the world should be looking
to the EU for leadership. Europe shares
responsibility for the world’s current climate
problems, accounting for approximately
14% of global carbon dioxide emissions.
Cutting European emissions will make a
substantial contribution towards worldwide
efforts to reduce carbon levels – even
10 | Europe’s World Spring 2008

though it cannot reverse global warming by
itself. The EU also has good reason to act.
Not only have we made commitments to
the rest of the world, but we have a strong
self-interest in combating climate change.
Europeans are no strangers to extreme
weather phenomena such as drought, forest
fires and floods.
What, then, will the EU’s role
be post-Kyoto? First, we need
to ensure broader international
participation in efforts to
reduce carbon emissions. Kyoto
was ratified by 175 countries,
but this apparently impressive
figure tends to exaggerate the
impact of the protocol. Only
31 of the countries (Annex 1
Parties to the United Nations
Framework Convention on
Climate Change) that ratified
it are committed to cutting
greenhouse gases by some 5% below 1990
levels by 2012. These 31 countries together
represented less than 25% of global CO 2
emissions from fuel combustion in 2005.
The Kyoto Protocol was not ratified by the
US, until recently the largest carbon-emitting
country in the world. Nor does the protocol
bind certain major emerging economies –
including China, India and Brazil – to any
specific reductions. In reality, therefore, Kyoto
only addressed a limited part of the problem,
despite its great political significance.
This fundamental limitation is aggravated
still further when projections about future
carbon emissions are taken into account.
The 31 countries that accepted CO 2 targets
under Kyoto are projected to account
The people of
Europe will expect
the EU to deliver on
its promises. Failure
would risk alienating
EU citizens from
European institutions
and may even harm
the very concept of
the Union
for less than 15% of the world’s fuelcombustion
carbon dioxide emissions by
2030. The first requirement of a post-Kyoto
agreement, therefore, is to make sure it is
truly global, with participation of all major
emitting economies.
Winning the battle against climate change
will require all major industrialised countries
to share a vision about the
need for deep emission cuts
and a global understanding
that everyone will be made
to contribute; the world
has a responsibility to
act in common. However,
it is equally clear that
different countries will
have different degrees of
responsibility, according
to their respective levels
of economic development.
The 1992 United Nations
Framework Convention on Climate Change,
for example, talked about a “common but
differentiated responsibility” for combating
global warming. This principle remains
fundamental to the process of reaching a
new global consensus.
In the struggle against global warming,
the people of Europe will expect the EU to
take a lead and to deliver on its promises.
Failure would risk alienating EU citizens from
European institutions and may even harm
the very concept of the Union. Likewise,
the world will look to Europe to push
the international agenda forward and to
demonstrate that it is possible to cut carbon
emissions while also maintaining welfare
spending and economic growth.
Spring 2008 Europe’s World | 11

Time is short. According to the timetable
confirmed at the UN climate conference in
Bali in December 2007, efforts to agree a new
ambitious global accord will reach an initial
peak in Poznan, Poland, next December and
will culminate at the scheduled
Copenhagen UN Climate
Change Conference one year
later. Thus December 2009
is the deadline for reaching
a post-Kyoto arrangement
that will effectively engage all
major emitting countries in
the global effort to combat
man-made climate change. Europe is deeply
involved in this process and has already
set the world an example by agreeing post-
Kyoto carbon reduction targets. In March
2007, the European Council agreed EU
emissions would be cut by 30% below 1990
levels by 2020 as its contribution to a global
and comprehensive agreement.
However, Europe’s legitimacy as a global
leader on climate change will simply not
depend on setting targets; the EU will have
to deliver on them too. This year will witness
painful negotiations on the Commission’s
proposal for burden sharing, hopefully
with an agreement in place later this year.
Europe will also explore and develop flexible
market instruments to widen the potential
for emission reductions. The EU is ideally
placed to push market mechanism forward;
we are currently embarking on a second
generation carbon emission trading scheme.
Much was learnt from the first phase and the
second-stage centralised scheme should
both improve market efficiency in the EU and
pave the way for global emission trading.
This year will witness
painful negotiations
on the Commission’s
proposal for burden
sharing
The EU should also demonstrate to the
world that tackling climate change is not just
about making negative choices. Global warming
creates opportunities too, with new lowcarbon
technologies and production methods
able to increase industrial
competitiveness and economic
growth. Denmark, for example,
has achieved 70% growth
since the early 1980s without
increasing energy consumption
and while transferring 15% of
overall energy production to
renewable sources. During this
period, Denmark has created one of the most
competitive economies in the world. Thus
the development of eco-friendly technologies,
renewable energy and energy efficiency
technology is not only part of the answer to
the climate challenge, it is also an important
source of jobs and wealth creation. This
positive outlook is shared at the European
level, where climate and energy are one of
four priority areas for the EU’s growth and
employment strategy. We must continue to
set the world an example and show that
climate change is not an obstacle to economic
expansion but also a part of the solution
Making an economic success out of
the climate challenge will, however, require
continued investments in research and
development and a sustained push for
innovation. Also, if we are to ensure the
necessary up-take of new climate-friendly
technologies, we will have to promote and
invest in energy-efficient buildings, make the
right long-term investment decisions about
transport and energy and develop the right
mix of green instruments. This will require
12 | Europe’s World Spring 2008

an effective and ambitious framework. This
framework must strive to make Europe
the world’s testing ground for the green,
market-based energy solutions of tomorrow.
Member states do not lack imagination in
this regard; lots of initiatives are already
being taken in the pursuit of greener energy.
We need to tap into each other’s best ideas
and turn them into winning solutions for us
all. Thus we need to increase cooperation
on technology, research and development,
diffusion and transfer of technologies.
While the EU must set the pace on clean
technologies and market instruments, we
should also make sure that we adapt our
policies towards third countries. The EU
is already a world leader in development
assistance and in funding the Clean
Development Mechanism under the Kyoto
Protocol; this is one area we will have
to pay particular attention to in future.
Most developing countries only contribute
marginally to greenhouse gas emissions,
but they are particularly vulnerable to
MATTERS OF OPINION
In the South, EU public opinion is hotting up on climate change
The plethora of news reports concerning, what
weather events around the world have propelled the
issue of climate change high up the agenda. In a
recent Eurobarometer survey, carried out by The
Gallup Organization, nearly nine out of 10 Europeans
admitted that they were worried about climate
change and global warming. Fifty percent said they
“some degree” of concern.
Interestingly, some of the countries in southern Europe
– Greece, Spain, Cyprus and Malta – were the most
concerned; the Scandinavians, Poles, Latvians and
Estonians were the least worried. Somewhat surprisingly,
given their low-lying situation, Dutch people were one of
the least likely EU countries to be “very concerned”.
Most Europeans say
EU should take the lead and
promote clean energy
Twice as many people believed that measures to deal
with energy issues should be decided at the EU rather
Europe setting minimum targets for the share of
renewable energy in Member States. Twice as many
should be reduced from its current one-third share of
energy supply, compared to those who believed it
ARE YOU CONCERNED ABOUT CLIMATE
CHANGE?
% answering yes
> 50%
24%
31% - 50%
< 31%
30% 20%
24%
50%
48% 28% 32%
40% 47%
53%
48% 41%
55%
45%
51% 64%
58% 53%
40%
65% 70%
68%
37% 34%
Source: Eurobarometer 2007
68%
70%
Spring 2008 Europe’s World | 13

the impact of climate change. Severe
weather threatens food production, fragile
ecosystems and scarce water resources,
and therefore jeopardises our efforts to
alleviate poverty and reach the millennium
development goals. These dangers need
to be systematically reflected in our choice
of policies and programmes, and efforts to
mitigate climate effects must be given much
more prominence.
The post-Kyoto period is already well
underway. The EU has set itself an immense
challenge as a world leader in the fight
against climate change. Together with the
US and other advanced economies, the EU
will have to shoulder responsibility for a
significant slice of the necessary carbon
reductions while also maintaining economic
growth. We will also have to assist developing
countries to play their part and help them to
adapt to the adverse effects of climate
change which are already under way. This
will be one of the greatest challenges for the
EU in the years to come – one that will have
a direct bearing on perceptions of the EU,
both among Europe’s citizens and worldwide.
We have the means and the responsibility to
act. In the months and years ahead, we in
the EU must demonstrate that we are up to
the task.
Anders Fogh Rasmussen is Denmark’s Prime Minister.
E.W. ADVISORY BOARD MEMBERS
Confrontations Europe is a
European “think-tank” that brings
together people of different
political leanings and experiences:
company managers, trade
unionists, politicians, academics,
students, key players from associations and the political scene.
Its main objective is to revive public debate and to contribute to
better citizen information. Its members endeavour to share an
analysis of globalisation and major changes, and on this basis,
to better imagine the possible options available for necessary
reforms in France and in Europe. In order to share our analysis
and better understand the European construction, you can
subscribe for 38 euros to our publications : a monthly newsletter
(Interface), a trimestrial magazine (La Lettre de Confrontations
Europe) and bi-yearly (The Option).
For more information : confrontations@wanadoo.fr;
www.confrontations.orgu
14 | Europe’s World Spring 2008

How Europe is starting to set
global rules
With its Reform Treaty, the European Union becomes
a new animal, more than an organisation but less
than a state, says Adam Daniel Rotfeld, a former
foreign minister of Poland. He argues that its soft
power strategy has helped to make Europe secure and
prosperous, but asks how it should develop
The European Union is a success story.
Europe’s achievements have to be
seen not as a single act or chain of
spectacular consecutive EU summits, but as
a historical process. Almost 50 years ago,
the political scientist Karl Deutsch defined a
concept of a pluralistic security community
based on the following principles: the
sovereignty and legal independence of
states; the compatibility of core values
derived from common institutions; mutual
responsiveness, identity and loyalty;
integration to the point that states entertain
“dependable expectations of peaceful
change” and communication cementing
political communities. As it turns out,
the EU today reflects these elements of
a universal pluralistic security community
much more than any other international
and multilateral security institution.
A few months ago the College of Europe
in Natolin, near Warsaw, Sweden’s foreign
minister Carl Bildt rightly said: “Our Europe
has never been as free, as prosperous or as
secure as it is today. And never really means
never – never in its entire history.”
Recognition of this simple fact has
to be our point of departure for further
deliberation on the adequacy of “soft”
security instruments when confronting
Europe’s contemporary requirements and
risks. Since Europe is now more secure than
in its entire history, it seems legitimate to
ask: “If so, why have so many Europeans
been so disappointed for so many
years?” One could perhaps argue that the
higher their expectations, the deeper the
disappointment. But the reality has been,
as we know, that each successive round
of EU-level reform has without exception
generated tension and frustration.
Former Italian prime minister Lamberto
Dini, in his foreword to MEP Andrew Duff’s
1997 book on the Amsterdam treaty, said
that “the long night of Amsterdam closed on
a note of bitter disappointment”. He went on
to explain: “We could have blocked everything
Spring 2008 Europe’s World | 15

in Amsterdam. We refrained from doing so
because a pause for reflection would not have
sufficed to overcome the stalemate… Better
to adopt the disappointed but lucid attitude
suggested by Altiero Spinelli after the Single
Act – to consolidate what we have obtained
and set sail again for the next
objective.” Europe’s security
and defence culture is much
better suited to soft rather
than hard security issues.
For the past two decades,
institutional reforms have
worked better than they
are given credit for. The EU
has gradually enhanced its
decision-making mechanisms by moving more
areas to qualified majority voting (QMV), and by
streamlining its institutions. New mechanisms
have emerged in such areas as a common
foreign and security policy (CFSP), and have
gradually created space for themselves in
the Union’s institutional set-up. Failures have
had more to do with inadequate political
leadership and the lack of determination to
move more decisively towards QMV, as well as
the EU’s continuing dilemma over how to close
its distance from the citizen. Opportunities for
political leadership have been weakened by
the complexities of the institutional triangle,
and the emphasis on unanimity has slowed
decision-making in such key areas as justice
and home affairs and taxation. Nor have the
citizens always been properly consulted on
draft legislation or on the overall objectives of
the Union, and member states have had very
different track records.
Differentiated integration has come
up against an instinct for uniformity and
The Reform Treaty
is the rejected
constitutional treaty
minus, but the minus
isn’t very big. If it
walks like a dog and
barks like a dog,
then it is a dog
cohesion in the EU. Although the UK retains
its opt-out/opt-in reservations Denmark is
planning to give up its opt-outs. Constructive
abstention over CFSP has not been given the
benefit of the doubt. Flexibility and enhanced
cooperation were the subject of much
attention in the Amsterdam
and Nice intergovernmental
conferences, but not much
has been done to put them
into practice. At the same
time, some initiatives taken
outside the treaty framework
have been successful. Almost
all the recommendations
of the “praline summit” in
November 2003 to discuss
EU states different views on the Iraq war
have been implemented. Provisions of the
Prüm convention on cross-border policing
are now generally accepted. The idea that
some should lead and others follow remains
a source of inspiration for the future.
Now we have the Reform Treaty signed
in Lisbon. This is the rejected constitutional
treaty minus, but the minus isn’t very big. If
it walks like a dog and barks like a dog, then
it is a dog. The treaty aims to transform the
Union into an international organisation
and grant it legal personality. In my view,
the Union is much more than a classical
international organisation; It is a new animal
that is more than an organisation and less
than a state.
The treaty says that the Union will act
only within the limits conferred upon it by
member states. The Union has always acted
on the basis of conferred competence, and
stating that obvious fact more explicitly
16 | Europe’s World Spring 2008

eflects the continuing unease in some states
over the very principle of supranational
integration. Such a statement could wrongly
give the impression of an identity crisis, were
it not for the volume of innovations that
were transferred largely unchanged from the
constitutional treaty.
The role of national
parliaments is enhanced,
the subsidiarity mechanism
reinforced, and the double
majority voting system is
being implemented. The title
“minister of foreign affairs” in
the rejected constitution has
been dropped, so the CFSP
is still in charge of the “high
representative”.
It is an open
question whether
the values shared
by NATO and the
EU, along with
the concept of
soft power, are
compatible with the
ambitions of the
United States
the member state presidencies is another
area where improvements might be needed.
The composition of the Commission, where
traditionally there is a lot of creativity and fresh
thinking, will attract attention. Governance
inside the eurozone will also be the subject of
further discussions if, as seems
likely, it offers a basis for more
advanced integration.
Reducing the scope of
qualified majority voting will
remain a major objective,
possibly focusing on financial
matters. The procedure for
amending a treaty, at present
requiring ratification by all
member states, will also need
to be explored further.
That still leaves the question of how the
EU’s common and security policy will shift
from rhetoric to action? Karl von Wogau,
president of the European Parliament’s subcommittee
on defence, has rightly noted:
“The main challenge we face is not to
rewrite the European security strategy, but to
implement what we have already agreed.”
Looking ahead, governance issues are
likely to be subject of review as the innovations
of the Reform Treaty are tested in practice.
The double-hatted high representative of the
Union for foreign affairs and security policy
could be a model for use elsewhere in the
institutional architecture. A more ambitious
double-hatting exercise would be one in
which the president of the European Council
serves at the same time as the president of
the Commission. Interaction between the
new permanent president of the Council and
The Union is likely to be spared a new wave
of reform in the near future, but from 2010
onwards the pressures will grow for reviewing
the existing provisions. New revision treaties
could deal with selected issues, and hence be
easier to agree on and ratify.
Constructing a new international order
based on multilateralism is neither a choice
nor an alternative, but a necessity. Henry
Kissinger believes that the United States
should be aware of its superiority, yet should
act as if it were functioning in a world where
security depends on numerous other centres
of power. “In such a world”, Kissinger has
written, “the United States will find partners
not only for sharing the psychological
burdens of leadership, but also for shaping an
international order consistent with freedom
and democracy” Such a new centre of power
is constituted by the EU.
Spring 2008 Europe’s World | 17

18 | Europe’s World Spring 2008

It was Kissinger who asked the famous
question about Europe’s phone number. That
was many years ago, but not much has changed
since. Under the rejected constitution, there
would have been a foreign affairs minister.
Javier Solana would probably have got the job,
and under the Reform Treaty could still get it,
though without the title. Zbigniew Brzezinski,
who like Kissinger is a former big wheel in
American foreign policy, wants Europeans to
overcome their “parochialism”. “A genuine
US-EU transatlantic alliance, based on a shared
global perspective, must be derived from a
similarly shared strategic understanding of the
nature of our era, of the central threat that the
world faces, and of the role and mission of the
west as a whole,” he has said.
But it is an open question whether the
values shared by NATO and the EU, along
with the concept of soft power, are compatible
with the ambitions of the United States. In
his book The European Dream, American
author Jeremy Rifkin praises Europe for
offering “diversity, quality of life …
sustainability, universal human rights, the
rights of nature, and peace on Earth.” He
concluded, “We Americans used to say that
the American Dream is worth dying for. The
new European Dream is worth living for”.
Adam Daniel Rotfeld is a former Polish Foreign
Minister.
E.W. ADVISORY BOARD MEMBERS
Luxembourg Institute for
European
and International Studies
21 rue Philippe II
L-2340 Luxembourg
Phone: +352 466580
Fax: +352 466579
E-mail: armand.clesse@ieis.lu
Web: www.ieis.lu
Presided by Javier Solana, the Madariaga European
Foundation was created in 1998 by former students of
the College of Europe to practically develop the potential
represented by the College’s capacity for insightful reflection
and analysis into European issues. The Foundation bears the
name of the College of Europe founder: Spanish writer,
historian, diplomat and philosopher Salvador de Madariaga
(1886-1978).
MEF is an independent operating foundation dedicated to
promoting innovative thinking on the role and responsibilities
of the EU in an era of global challenges. Acting as a platform
for dialogue between public and private actors, civil society
and academia, the Foundation currently specialises in
developing projects on Conflict Prevention. In parallel
to its project-oriented activities, MEF pursues an active
information and communication strategy for a deeper
understanding of major European issues stake.
Spring 2008 Europe’s World | 19

A five-point strategy for
EU-Russia relations
The EU badly needs a new approach
in its dealings with resurgent Russia,
write Mark Leonard (far left) and
Nicu Popescu. They set out the five
broad elements of a fresh European
strategy
Russia’s parliamentary elections
in December not only confirmed
President Vladimir Putin’s position
as the ‘father of the nation’ but further
weakened the European Union’s leverage
over a resurgent and increasingly assertive
Russia. The election also marked a series
of indirect humiliations for the EU, ranging
from the Russian government’s refusal to
grant visas to OSCE election observers
to the successful bid for a Duma seat
(and immunity from prosecution) by Andrei
Lugovoi, the former intelligence officer
suspected by the British authorities of the
poisoning in London of Alexander Litvinenko.
Putin’s crushing victory – together with
the anointment of Gazprom vice-chairman
Dimitri Medvedev as his successor – have
confirmed what most EU officials have long
known: the EU’s strategy for democratising
Russia is now officially dead.
In the 1990s, EU member states coalesced
around a strategy of democratising and
westernising a weak and indebted Russia,
and managed to get the Russians to sign
up to all major international standards on
democracy and human rights. Btu since
then, soaring oil and gas prices have made
the Russian governing elite incredibly
powerful, less cooperative and, above all,
less interested in joining the west. The old
strategy is increasingly out of synch with
the realities of the new Russia. Although
the EU is a far bigger power than Russia
in conventional terms – its population is
three and a half times the size of Russia's,
its military spending ten times bigger, its
economy 15 times the size of Russia’s
– Europeans are increasingly finding that
Russia is setting the terms of the relationship
between the two blocs.
While not reproducing the ideological
divisions of the cold war, Russia seems to be
setting itself up as an ideological alternative
to the EU, with a different approach to
sovereignty, power and world order. Where
the European project is founded on the
rule of law and multilateralism, Moscow
believes that laws are a mere expression
of power, and that when the balance of
power changes, laws should be changed
unilaterally if needed to reflect it. In recent
20 | Europe’s World Spring 2008

years, Moscow has tried to revise the
terms of commercial deals with western
companies, military agreements such as the
Conventional Forces in Europe Treaty, and
even breached diplomatic codes of conduct
like the Vienna Convention.
These trends are not just
a pre-electoral ritual, but a
consolidated and widely
accepted desire in Russia
to revise the whole set of
agreements with the EU.
Moscow is also challenging
another aspect of the EU’s
world view – its belief that
security is built through interdependence.
The Kremlin’s
philosophy of “sovereign
democracy”, however, has
led it to try to decrease its reliance on the
European Union, while trying to increase
the EU’s dependence on Russia. This quest
for “asymmetric inter-dependence” is a tool
of power projection rather than stability.
The Kremlin has deployed a powerful mix
of charm and aggression to divide and rule
EU member states – so that it can deal
with each member state individually from
a position of strength. On the one hand,
it has reached out and flattered several
member states – in particular the big ones
– signing long-term bilateral energy deals
and exchanging state visits. On the other,
Russia has picked bilateral disputes with 11
member states so far on issues ranging from
Polish meat to Finnish timber which have
had an equally adverse impact on EU unity.
The European Union’s response to
December’s parliamentary elections
Although the EU
is far bigger – its
population is three
and a half times
the size, its military
spending ten times
bigger, its economy
15 times the size
– Russia is setting
the terms of the
relationship
EU-RUSSIA
followed a pattern of division and confusion
that have plagued its Russia policy in recent
years. Even though the elections were
denounced by parliamentarians from the
Council of Europe and the OSCE, different
EU governments gave out
very mixed messages. It took
three days for the Portuguese
EU presidency to release a
statement on the arrest of
opposition activists such as
Garry Kasparov – and once
published it was withdrawn
and replaced by a milder
version. After the poll, the
EU issued a mildly-worded
statement about “election
irregularities”, while strong
condemnation by Germany
and Poland was cancelled
out by French President Nicolas Sarkozy’s
congratulatory telephone call to Putin.
The conventional wisdom is that relations
with Russia have deteriorated as a result
of the 2004 enlargement which imported
a hostile, anti-Russian bloc into the EU.
But while it is true that the relationship
with Russia has become the most divisive
factor within the EU since Donald Rumsfeld
divided member states into “new” and “old”
Europe – it is wrong to see the main dividing
line between the EU’s eastern and western
member states.
In a comprehensive “power audit” of
the EU-Russia relationship published last
November, the European Council on Foreign
Relations commissioned experts from all
27 member states to examine the bi-lateral
relationship between their own country and
Spring 2008 Europe’s World | 21

Russia. We identified five distinct policy
approaches to Russia shared by old and
new members alike: “Trojan Horses” (Cyprus
and Greece) who often defend Russian
interests in the EU system, and are willing
to veto common EU positions; “Strategic
Partners” (France, Germany, Italy, Spain)
who enjoy a “special relationship” and
whose governments have built special
bilateral relationships with Russia, which
occasionally cuts against the grain of
common EU objectives in areas such as
energy and the EU Neighbourhood Policy;
“Friendly Pragmatists” (Austria, Belgium,
Bulgaria, Finland, Hungary, Luxembourg,
Malta, Portugal, Slovakia, and Slovenia) who
maintain a close relationship with Russia
and tend to put their business interests
above political goals; “Frosty Pragmatists”
(Czech Republic, Denmark, Estonia, Ireland,
Latvia, the Netherlands, Romania, Sweden
and the United Kingdom) who also focus
on business interests but are less afraid
than others to speak out against Russian
behaviour on human rights or other issues;
“New Cold Warriors” (Lithuania and Poland)
who have an overtly hostile relationship with
Moscow and are willing to use the veto to
block EU negotiations with Russia.
Broadly speaking, the EU is split between
two approaches – and each of the five
groups tends towards one of the main policy
paradigms. At one end of the spectrum
are those who view Russia as a potential
partner that can be drawn into the EU’s orbit
through a process of “creeping integration”.
They favour involving Russia in as many
institutions as possible and encouraging
Russian investment in the EU's energy sector,
even if Russia sometimes breaks the rules.
At the other end are member states who see
and treat Russia as a threat. According to
them, Russian expansionism and contempt
for democracy must be rolled back through
a policy of “soft containment” that involves
excluding Russia from the G-8, expanding
NATO to include Georgia, supporting anti-
Russian regimes in the neighbourhood,
building missile shields, developing an “Energy
NATO”, and excluding Russian investment
from the European energy sector.
Both approaches have obvious
drawbacks, making them unpalatable to
a majority of EU member states. The first
approach would give Russia access to all
the benefits of co-operation with the EU
without demanding that it abides by stable
rules. The other approach – of open hostility
– would make it hard for the EU to draw on
Russia’s help to tackle a host of common
problems in the European neighbourhood
and beyond.
The EU badly needs a new approach to
deal with the new Russia. Ultimately, this
fragmentation of EU power does not serve
the strategic interests of any of these five
groups. No single country can shape the EU’s
Russia policy on their own, and the different
approaches end up cancelling each other
out. No single EU government is influential
enough with Russia to withstand bilateral
pressures, or to push Moscow to implement
existing commitments and deals. This was
shown aptly by Russia’s recent attempt to
revise some of its energy deals with friendly
states, such as Bulgaria and Germany.
While the EU’s long-term goal should still
be to have a liberal democratic Russia as a
22 | Europe’s World Spring 2008

EU-RUSSIA
neighbour, a more realistic mid-term goal
would be to encourage Russia to respect the
rule of law, which would allow it to become
a reliable partner.
The rule of law is central to the European
project, and its weakness in Russia is a concern
for businesses who worry about respect of
contracts, diplomats who fear breaches of
international treaties, human rights activists
concerned about authoritarianism, and defence
establishments who want to avoid military
tensions. If EU leaders manage to unite around
a common strategy, they will be able to use
many points of leverage to reinforce it.
The first element of this would be a
conditional engagement with Russia. This will
MATTERS OF OPINION
Support for Putin not as solid as the recent elections suggest
Russians returned President Putin’s United Russia
party to government last December, with almost
two-thirds of the votes, in elections that were widely
seen as a referendum on Putin’s policies after eight
years in power.
But polls carried out by Gallup before Putin dissolved
the government, in April and May 2007, showed
that Russians were divided over their government’s
performance. While four out of 10 said they approved
of the government’s performance, almost the same
or a good job.
Western observers were critical of irregularities
in the December ballot, with the Organisation
the Council of Europe describing the results as
“unfair”. This would seem to support unease
among Russia’s voters noted by the Gallup survey:
honesty of elections.
However, people were more optimistic in early 2007
about Russia’s future than in 2006: 43% of people
said that they thought economic conditions were
thought conditions were getting worse, compared to
22% the previous year.
ARE ECONOMIC CONDITIONS IN RUSSIA
GETTING BETTER OR WORSE?
43%
33%
35%
27%
22%
15%
2 2
2 2
2 2
0 0
0 0
0 0
0 0
0 0
0 0
6 7
6 7
6 7
Better Same Worse
Gallup WorldPoll Copyright© 2008 The Gallup Organization.
HOW DO YOU RATE THE PERFORMANCE
OF RUSSIA'S LEADERSHIP?
Approve
40% 38%
Gallup WorldPoll Copyright© 2008 The Gallup Organization.
Disapprove
Spring 2008 Europe’s World | 23

allow the EU to escape from the argument
between proponents of “soft containment”
and “creeping integration” over whether
Russia should be excluded from the G-8,
and whether to negotiate a new Partnership
and Co-operation Agreement. Under a new
approach, the EU should adjust the level
of cooperation to Russia’s observance of
the spirit and the letter of common rules
and agreements. If Moscow drags its feet
on given G-8 commitments and policies,
more meetings should be organised at a
junior level under a G-7 format, without
excluding Russia from the G-8. Similarly,
the Union should not be afraid to use the
EU-Russia summit and the negotiation of a
new Partnership and Cooperation Agreement
to highlight issues where Russia is being
unhelpful, such as Kosovo and the conflicts
in Georgia and Moldova.
The second element of this strategy
should be a principled bilateralism. Here
again, the EU needs to find a middle way
between those who see bilateral relations
as a good way to reach out to Russia at a
time of tension, and states who see such
contact as a kind of betrayal (for example,
Polish politicians have compared the deal
on the Nordstream pipeline to the Molotov-
Ribbentrop pact). The goal would be to
ensure that bilateral contacts between Russia
and individual EU member states reinforce
common EU objectives. This would involve
E.W. ADVISORY BOARD MEMBERS
The Think Tanks &
Civil Societies Program-
TTCSP
The Center for International Relations (CIR) is an independent,
non-governmental establishment dedicated to the study of Polish foreign
policy and those issues of international politics, which are of
crucial importance to Poland. The Center’s primary objective is to offer
political counseling, to describe Poland’s current international situation,
and to continuously monitor the government’s foreign policy moves.
The CIR prepares reports and analyses, holds conferences and seminars,
publishes books and articles, carries out research projects and organizes
working groups. We have built up a forum for foreign policy debate
involving politicians, MPs, civil servants, local government officials,
journalists, academics, students and representatives of other NGOs.
Center for International Relations
Emilii Plater 25
00-688 Warsaw, Poland
Tel. +48-22-646-52-67
Fax. +48-22-646-52-58
www.csm.org.pl
“Helping to bridge the gap between knowledge
and policy”
Researching the trends and challenges facing
think tanks, policymakers, and policy-oriented
civil society groups...
Sustaining, strengthening, and building
capacity for think tanks around the world...
Maintaining the largest, most
comprehensive global database of
over 5,000 think tanks...
2007 Global Trends Survey of
Think Tanks is now available.
To request a summary of the
findings send an email to:
James G. McGann, Ph.d.- jm@fpri.org
Senior Fellow and Director of TTCSP
24 | Europe’s World Spring 2008

the creation of an early warning system which
would allow both upcoming crises and deals
to be discussed internally within the EU.
Third, the EU should work harder to
integrate its Eastern Neighbourhood.
While some member states want to avoid
competition for influence with Russia in
Europe’s neighbourhood, and
others want an “anti-Russian”
neighbourhood policy, we
believe that the EU should focus
on encouraging its neighbours
to adopt European norms and
regulations and thus integrate
them into the European project.
The EU could could also invest
in electricity interconnections
with some neighbouring
countries, give them access to
the Nabucco pipeline, extend
the European Energy Community and seek
the full application the energy acquis in
Turkey, Ukraine and Moldova. Equally, the EU
should explore the possibility of giving the
Trade Commissioner a mandate to fast-track
access to the EU market for selected products
in case of any more politically motivated
Russian embargoes such as those imposed on
Georgian and Moldovan wines.
Fourth, the EU should insist on the
implementation of contractual obligations
and international commitments by Russia. The
European Commission should, for instance,
be given more political support to apply
competition policy in the energy sector, and to
investigate the more dubious deals between
Russian and EU companies. More generally,
the EU should demand the enforcement of
the growing number of agreements which
To avoid further
partitioning of the
EU energy market,
the Commission
could pre-approve
big energy deals
between European
and foreign energy
companies
EU-RUSSIA
have not been implemented – the PCA, the
four Common Spaces and the European
Energy Charter. Ignoring Russian foot-dragging
undermines the very principle of a rules-based
relationship with Russia.
Finally, the EU needs to work hard on
rebalancing the relationship with Russia. To
achieve this, the EU needs
to adopt an internal code
of conduct on energy deals
and guidelines on long-term
contracts and forthcoming
mergers. In order to avoid
further monopolisation
and partitioning of the EU
energy market, the European
Commission could be granted
the right to pre-approve big
energy deals on long-term
contracts and pipelines
concluded between European and foreign
energy companies. The practical goals should
be open competition, the rule of law and an
integrated and flexible gas market.
If the EU wants the new Russia to be a
predictable and viable neighbour, it must build
its partnership with Russia on the same
foundations that made European integration a
success – interdependence based on stable
rules, transparency and consensus. But these
foundations will not build themselves. The
Union must be much more determined about
agreeing rules of engagement with Russia, and
then defending them.
Mark Leonard is Executive Director of the new
pan-European think-tank the European Council on
Foreign Relations, where Nicu Popescu is a Policy
Fellow.
Spring 2008 Europe’s World | 25

VIEW FROM SLOVENIA
SLOVENIA TAKES TO THE WORLD STAGE AS
EU PRESIDENT FOR THE FIRST TIME
By Janez Podobnik, Minister of the Environment and Spatial Planning
of the Republic of Slovenia
5.7% and 54% of households had access to
the internet. In 2007, Slovenia became the
first of the new EU member states to join
the eurozone and, in 2008, it took on the
presidency of the EU – again, the first new
member state to do so.
When Slovenia emerged as a
sovereign state in 1991, very few
people in western Europe had
any real knowledge of the country. Several
brands, products and services from Slovenia
were familiar, but even these needed to be
repackaged to reflect the country’s new
circumstances. Slovenia is now becoming
increasingly familiar on the world stage,
thanks largely to its recognized scientists,
artists and sportsmen. People in Europe and
even across the globe can today pinpoint
Slovenia on the world map.
Slovenia’s economy has recently passed
several milestones. In 2006, annual per
capita Gross Domestic Product crossed the
psychological mark of 15,000, growth was
However, raw numbers cannot really
illustrate the essence of Slovenia; its
main attraction is the quality of life. Many
people here live in small towns and villages
scattered across the beautiful countryside.
Roughly one third of the entire country
is included in the Natura 2000 network.
Slovenians are still closely connected to
nature and have an almost sentimental
relationship with the natural world; this is
undoubtedly one of the most important
facets of the Slovenian national character.
When Slovenia joined the EU in 2004,
there was some unease in older member
states about possible mass emigration
from the newcomers. One diplomat posted
to Ljubljana reassured Slovenia’s worried
neighbours by joking: “Come on; they won’t
even move to Ljubljana – and they have a
good reason for that.” Slovenians prefer to
stay in their picturesque environment and
live amid untouched nature.
26 | Europe’s World Spring 2008

Unfortunately, this preference is generating
unsustainable behaviour and represents a
serious challenge for the national Ministry of
Environment and Spatial Planning. Slovenia is
currently facing a raft of major environmental
problems, including deforestation, loss of
biodiversity, degraded air and water quality, plus
climate change, drought and desertification.
Saving Europe’s biodiversity a
priority for Slovenia
Germany, Portugal and Slovenia set very ambitous
goals on biodiversity when they drew up their
joint EU presidency programme. The objective
was to make more and more people across
Europe aware of the importance of conservation
– and to improve the implementation of measures
aimed at halting the loss of biodiversity within
the European Union by 2010. So conservation
of European biodiversity is a priority for the
At a conference on business and biodiversity
in Lisbon late last year, top-level delegates
reconfirmed that biodiversity counts. The
conference agreed that Europe needs to improve
the integration of biodiversity objectives into
schemes that are designed to improve corporate
social responsibility, strategic environmental
assessment, social and environmental
accreditation and labelling, plus socially
responsible investment. All these major themes
– and more – were discussed at Lisbon.
Slovenians understand how vital it is to
approach issues about spatial planning and
the sustainable use of natural resources from
the perspective of natural ecosystems. Slovenia
sits at the junction of four major European
ecological regions – the Alpine, Mediterranean,
Dinaric and Panonic areas. So we recognise
that we must respect regional principles when
planning for the future. At the same time, we
know that the development of conservation and
biodiversity policies also depends crucially on the
role of global treaties, including the Convention
on Biological Diversity, as well as the Alpine,
Barcelona and Danube Conventions. This is also
true for the other great global environmental
challenge of our time – climate change – and
when considering the local consequences of
droughts and floods. Thus, countries in our
trans-boundary, regional and global cooperation
and, more and more, they acknowledge the
importance of implementing projects that better
integrate effective and sustainable management
of our natural resources.
Slovenia is already playing its part. By chairing
the Bureau of the Barcelona Convention and
establishing the Adriatic Sea partnership, Slovenia
has actively contributed to implementing the
Mediterranean sustainable development strategy
and the development of the EU maritime policy.
Slovenia’s presidency of the European Union
is a fresh opportunity to make a difference on
biodiversity.
Spring 2008 Europe’s World | 27

VIEW FROM SLOVENIA
By chance - but symbolically - Slovenia
made its first international appearance
as a sovereign state at the 1992 United
Nations Conference on Environment and
Development in Rio de Janeiro. From then
on it was actively involved in international
efforts to protect nature, biodiversity and
the environment in general. Initially, Slovenia
concentrated on regional agreements,
such as the Alpine Convention and the
Convention for the Protection of the
Mediterranean Sea. This was largely due to
scarce human capacity. After the conclusion
of the Dayton agreement, which formally
ended the conflict in the western Balkans,
the environment became an important area
of cooperation among the new nations of
south east Europe. The 2002 Framework
Agreement on the Sava River Basin, signed
in Kranjska gora in Slovenia, was formal
confirmation that such cooperation had
been established in the region.
Protection of the environment is, of course,
one of the EU’s top priorities, including
conservation of natural resources through
more efficient usage and consideration of the
environmental aspects of all relevant policies.
Germany, Portugal and Slovenia had already
confirmed that protection of the environment
would be among the main concerns of their
common 18-month Presidency Programme.
In particular, the three countries agreed
to promote and implement measures to
halt biodiversity loss by 2010 and beyond.
Indeed, protection and the sustainable use
of biodiversity was at the top of the joint
presidency agenda for the environment.
28 | Europe’s World Spring 2008

The 9th Conference of the Parties of the
Convention on Biological Diversity to be
held in Germany in May this year will be an
important milestone in this process.
Further development of the European
Climate Change Programme, and its
mitigation measures across sectors, is also
of the utmost importance. This will be
essential to achieve a balanced and fair
regime to combat climate change post-2012
in order to meet the EU's objective of limiting
global temperature rises to 2° Celsius above
pre-industrial levels. In global terms, the EU
is currently taking a leading role on climate
change. It should preserve and reinforce
this role and, based on the conclusions
of the UN climate conference held last
December in Bali, further involve partners
from other parts of the world. The EU alone
cannot halt the global trend in greenhouse
gas emissions; yet it can and must set an
example to the world and be the driving
force behind international action.
While the EU is united at world climate talks,
there are substantial differences among the
member states regarding their starting points
and their investment capabilities to combat
global warming. So the Slovenian presidency
shall strive for a fair agreement within the
EU about binding goals for the reduction of
greenhouse gas emissions. The EU’s climateenergy
package is one of the most important
legislative proposals in the pipeline and its
early adoption ranks highly as an objective
for the entire Union. An effective legal basis
and proper implementation of the climateenergy
package would promote sustainability
and cost effectiveness, and also stimulate
innovation and technological development.
In other words, the Slovenian presidency is
tackling the climate challenge not only as a
problem but as an opportunity as well.
In the past, Europe appeared to be deluding
itself that natural disasters only happened in
other, mostly developing parts of the world.
Recent severe floods, droughts, extreme
temperatures and other intense weather
patterns across Europe put paid to all
that. Now the words of warning about the
interdependence of our world, not least
in Europe, no longer sound like simple
slogans to be trotted out on occasions.
Slovenia shall, therefore, apply itself to the
task of further raising Europe’s awareness
of the needs of planet earth and our own
environment.
In some ways, the position of Slovenia
within the EU resembles the position of
the EU in the world. Neither can provide
solutions on their own, but each can be
the motivating and catalysing force that
accelerates broader action. Both Slovenia
and Europe have the spirit and the energy
to make that move.
This section is sponsored by the Ministry of
the Environment and Spatial Planning of
the Republic of Slovenia
Spring 2008 Europe’s World | 29

30 | Europe’s World Spring 2008

The reasons Europe has so
disappointed Putin’s Russia
EU-RUSSIA
Relations between Europe and Russia, once so
promising, have deteriorated badly. From Paris, veteran
diplomat Jacques Andréani charts the rise of mutual
distrust, much of it a reflection of European disunity
over broader foreign policy issues
The break-up of the Soviet Union
brought with it new hopes of a united
continent. The progressive integration
of the European Union further encouraged
the belief that once the barrier of the Berlin
Wall had been removed,
Europe could work with the
new Russia – so much of which
was anyway in Europe – to
the mutual benefit of both.
But the end of the cold war
failed to remove all the old
antagonisms, and even gave
rise to new misunderstandings:
the frustrations felt by many
Russians after their defeat in the cold war,
the lack of sensitivity shown by its American
victors and the persistence of old fears among
the liberated peoples of eastern Europe.
For several years now we have seen
relations deteriorate between Russia and the
west, and most notably the United States.
There is talk of a new cold war, even though
the disagreements are played out in a strange
and somewhat artificial atmosphere. Verbal
confrontations have often been strident,
yet the military of both camps carry out a
secret programme of mutual inspection in a
perfectly cordial manner. Meanwhile, Russia’s
Vladimir Putin alternates his
The end of the
cold war failed
to remove all the
old antagonisms,
and even gave
rise to new
misunderstandings
normally unexceptionable
comments on United States
policy with denunciations
and threats that are wholly
disproportionate.
The US plan to install
what it insists are purely
defensive missile systems in
Poland and the Czech Republic has produced
a Russian reaction that is so extreme that it
goes far beyond the limits of the dispute.
Russia complains that the US, ever since
Bill Clinton’s presidency, has been keen
to admit the Soviet Union’s former allies
to NATO. It is, Russia says, mainly the US
that has pushed for the expansion of the
alliance to include the three Baltic states,
all of which are former Soviet republics. It
Spring 2008 Europe’s World | 31

was also the US that in 1999 led NATO into
mounting military operations against Serbia
over its province of Kosovo, and which
is now insisting that Kosovo should gain
independence as soon as possible despite
Russia’s call for caution.
rights violations against the Russian-speaking
populations in both countries. Monuments
to Soviet soldiers have been destroyed; for
the Russians, they were liberators, but for the
majority of citizens in all three republics, they
were occupiers.
Europeans are also being blamed. As
westerners, they are lumped in with the
US. And indeed the Europeans and the
Americans act in concert
when criticising human
rights violations in Chechnya
or elsewhere in Russia. But
there are also subjects where
European and American
interests differ. Their concerns
are, for instance, far from
identical on energy. The part
played by Russia in various
European countries’ pursuit
of oil and gas supply control,
reflects a fear of dependency
not felt by Americans. The
Americans have their own concerns: they
have sought to deprive Russia of the
controlling power it would have if all the
gas and oil from the Caspian Sea were
piped through Russian territory. Europeans
and Americans both complain that their
companies have been harmed by Russian
decisions. The Russians claim that they are
only redressing the situation created by the
excessively generous concessions granted
to western interests by Boris Yeltsin.
With its most recent enlargements, the
European Union as a whole has now inherited
the issues that have long existed between
some of its new members and Russia. Russia
has accused Estonia and Latvia of human-
Although Russia
has not resolved
its basic problems
– demographics,
the environment
and corruption –
it has rectified its
economic situation
and re-established its
political presence
Difficulties over Russian gas exports to
the west, and its transit via Belarus and the
Ukraine, raised new fears about the security
of future supplies. Some
western newspapers have
called this type of commercial
disagreement “blackmail”.
But these disputes, all fairly
minor, should be seen in the
context of Russia’s recovery
from a period of recession and
humiliation. Although Russia
has not resolved its basic
problems – demographics, the
environment and corruption
– it has rectified its economic
situation and re-established
its political presence and its capacity to
make itself heard. The increase in the price of
hydrocarbons has strongly contributed to this
recovery. After being close to bankruptcy in
1998, Russia has now repaid all of its external
debt and is feeling very self-confident.
This recovery has gone hand-in-hand
with Vladimir Putin’s efforts to strengthen
central power. Although Putin has not
abolished democratic laws, he has bent
them, favouring political parties that support
him and restricting the independence of
radio, television and other media. Several
journalists have been murdered, yet their
murderers have not been brought to book.
Putin has pandered to the xenophobic feelings
32 | Europe’s World Spring 2008

of Russians by denouncing foreign ‘plots’,
such as the support given to democratic
movements in Georgia and the Ukraine. Does
the Russian regime fear that one day there
will be opposition within its borders relying
on outside support such as the “rose” or
“orange” movements in Georgia and Ukraine
respectively. Putin’s regime should have more
confidence in itself; its leader is very popular
and the opposition is impotent.
For Russians, a particular
worry is the status of the
space between the western
border of Russia and the
current boundaries of NATO
and the European Union. The
Americans pressed for the
eastward expansion of NATO
without much consideration for
Russian concerns. The notion
that this was a policy that
could complicate relations with
Russia did not apparently occur either to the
Clinton administration or to President George
W. Bush and his advisers. The European allies
were scarcely more sensitive; France may not
have been very enthusiastic about enlarging
NATO, but found it difficult to oppose. The
entry of formerly communist countries into
NATO had in any case been verbally agreed to
by Yeltsin, even if they were to be condemned
by his successor.
During the Yeltsin years, relations between
Russia and Europe had been fairly cordial. The
buzzwords in Russia were democratisation and
privatisation. Yeltsin claimed that his country
had its roots in Europe. He wanted to be
recognised by the Europeans as a partner, and
raised no objections to the EU’s enlargement
The main reason
for the present
ill-defined, even
ghostly relationship
between Europe
and Russia is the
lack of unity among
the Europeans
themselves
EU-RUSSIA
strategy. All this coincided with Europe’s
decision to play a more active part in foreign
affairs. Relations with Russia were selected as
one of the first initiatives to test the Common
Foreign and Security Policy proclaimed by the
Maastricht Treaty of 1993. The Europeans
proposed a cooperation and partnership
agreement, which was signed in 1994 and
took effect in 1997. The outlook at that
time was very different to the attitude of the
Soviet Union, which had refused on principle
to consider the EU’s member
states as a single entity and to
deal with Brussels.
Yet even during this
generally positive interlude,
relations lacked real
substance. The political tools
that the EU used to deal with
Russia were insufficient. The
“common strategy” adopted
by the Europeans was based
on vague generalisations, such as Europe’s
wish to cooperate with a “democratic, peaceful
and prosperous” Russia. This anodyne text
was adopted in 1999 and no one felt the
need to change it until 2003, when Russians
and Europeans drew up four “areas of
cooperation”: the economy; freedom, security
and justice; external security; and education
and research.
But the promised cooperation in these
various fields has not borne fruit. Perhaps
the Russians expected to gain advantage in
sensitive areas where Europe was not prepared
to give, such as the direct distribution of oil
products in Europe, or the taking of stakes in
the EU’s arms industry. The equal treatment
in all matters that Moscow had hoped for
Spring 2008 Europe’s World | 33

34 | Europe’s World Spring 2008

EU-RUSSIA
was not forthcoming. The result of these
experiences is that Russia now understandably
concludes that it has not in any genuine sense
been “admitted to the club”.
The main reason for the present illdefined,
even ghostly relationship between
Europe and Russia is the lack of unity among
the Europeans themselves. For historical
reasons, the different nations of Europe
have highly individual views on Russia’s
internal development, its conception of
security and its “diplomatic” use of its
energy assets. Former members of the
Soviet empire like the Baltic states, Poland,
the Czech Republic, Slovakia and Hungary
see a revitalised Russia as a problem, selfconfident
once again, yet motivated by its
bitter memories of the humiliations that
followed the Soviet empire’s collapse.
So the EU countries feel neither a
psychological unity nor a sense of common
action. To come up with a working common
policy towards Russia, one would have to start
with the energy question. There is no common
European line on this key topic, and indeed how
could there be when there is no common policy
on the whole vexed question of EU energy
policy? It may be just one example of what
needs to be done to build worthwhile relationship
with Russia, but it would be a useful start.
Jacques Andréani is a former French ambassador
to Egypt, Italy and the United States.
E.W. ADVISORY BOARD MEMBERS
Spring 2008 Europe’s World | 35

EU-RUSSIA
Russia’s energy weapon
is a fiction
Anxieties that Vladimir Putin’s resurgent Russia could cut
supplies of gas to Europe have provoked talk of another
cold war. But Andreas Goldthau explains why energy is
useless to Moscow as a foreign policy instrument
Fears of Russia’s predatory power politics
have done much to fuel concern in
Europe about energy security. The recent
Ukraine case is just one in what to European
eyes is a long list of worrying events, that
includes gas disputes with Georgia and Belarus,
Russia’s attempts to by-pass Poland through
the Nordstream pipeline, and the squeezingout
of Western companies from upstream
projects like Sakhalin-II and Kovykta. President
Vladimir Putin’s public sympathy for the idea
of a cartel of gas producing states, together
with Russian attempts to curb alternative
supply routes to the European market, support
conjecture that Russia is increasingly using its
energy supplies as a foreign policy instrument.
In spite of this widespread public
perception, however, the real threat to
European energy supplies lies elsewhere, in
the fundamental lack of investment in the
Russian upstream sector. The prevalent and
geo-politically charged European discourse on
energy security is therefore misleading.
Rising energy prices have done much to
speed Russia’s recovery from the post-Soviet
period in which its political and economic
muscle had withered away. Now, though, as it
seeks to play power politics with energy, it is in
its partners’ eyes becoming increasingly
unreliable. The result of all the gas disputes is
that energy-poor Europeans have finally
become aware of their dependence on
imported hydrocarbons. And they have
become increasingly uncomfortable with an
energy game in which the producers set the
rules. The consequence has been calls for
collective action on the consumers’ side to
make up for this strategic disadvantage.
Proposed measures range from rather vague
recommendations that Europe should "speak
with one voice" to hard-nosed calls for an
"Energy-NATO" uniting the alliance members
to counterbalance the risk of blackmail by
such producing countries as Russia.
All of these suggestions have one thing in
common: a geo-political tunnel vision that
regards energy in terms of traditional “hard
security”, or in other words as part of a power
game played by states as they seek to dominate
the international scene. In fact this is a
misleading and short sighted view, while the
much-feared Russian “energy weapon” is itself
rather blunt.
36 | Europe’s World Spring 2008

First, oil must be taken out of any power
politics equation. Most crude oil is traded on
the global market and, unlike gas, is brought to
the consumer via a variety of routes. This
means that whenever a producer country may
decide to cut its oil supply to a consuming
country, it can do so, but in the knowledge
that this is unlikely to have any major effect as
the targeted country can make up for the
shortfall by buying the shortfall on the spot
market. The only way oil can be used as a
weapon is if all producer countries – or those
grouped in OPEC – decide collectively to block
oil supplies to their customers. This rather
unlikely possibility is made even more remote
by the fact that Russia is not an OPEC member.
That leaves natural gas. It is true that
Russia has the world’s largest gas reserves and
has emerged as the most important supplier
country to western and central Europe, where
it covers up to 100% of gas imports. It is also
true that this dependence may in the near
future become even more pronounced, when
Europe’s fast depleting own resources will
need to be made up for by still higher imports.
But although all this would suggest considerable
Russian leverage, there is no case for believing
in an energy weapon in gas either. This is
mainly for two reasons.
Gas is a two-party play. The exploration
and production of new gas fields, construction
of pipelines and the maintenance of
infrastructure are all extremely expensive and
time-consuming endeavours, so producers
and consumers generally negotiate long-term
contracts that can run for up to 25 years and
exclude secondary trading. These contracts
provide each side with the planning security
they both need; the producer can safely invest
COMMENTARY
By Andreas Heinrich
Yes, but that
doesn’t mean
Europe will be
warm and secure
Andreas Goldthau’s article rightly
describes European concerns about
energy security as misguided and
trapped in cold war-style rhetoric that has
resulted in “geo-political tunnel vision.” The
mutual dependence between Russia as an
energy producer and its consumer markets in
western Europe clearly blunts Moscow’s muchfeared
“energy weapon”. Instead, Goldthau
cites the fundamental lack of investment in
Russia’s up-stream sector, which could possibly
lead to a shortage of supply, as the real threat
to European energy security.
But in his discussion of a possible supply gap,
Goldthau tells only half the story. Gas disputes
between Russia and its transit countries have
disrupted European gas supplies in the past, and
have sparked doubts about Russia’s reliability
about European energy security. For Goldthau,
however, “the crucial issue in Europe’s energy
supply picture is not Russian power politics but
dry economics”. He sees Russian-European gas
relations as a “two-party game”.
Nevertheless, for most European customers,
imports of Russian gas are a multi-party game
involving at least one transit country as well as
countries from the energy security equation
does not therefore seem justified. Russia’s
Spring 2008 Europe’s World | 37

38 | Europe’s World Spring 2008

in a multi-billion dollar project secure in the
knowledge of a constant and reliable return on
investment, while the consumer has the
certainty of guaranteed supply for several
decades that removes any need to build-up
expensive stocks to buffer supply shocks.
Gas is also a regional play: it is transported
almost exclusively via pipelines, which, once
built, make it very costly for either party to
abandon the game. If, for instance, a producer
wanted to deliver gas to a different customer,
he would have to invest a lot of money in new
pipeline infrastructure. The same logic applies
for the consumer, only the other way round. A
glance at the dense pipeline grid connecting
Europe and Russia shows that neither side has
an interest in dumping the money they have
already invested, nor do they have much of a
choice. Russia has no alternative customer
base in, say, China, because the infrastructure
simply isn’t there, and wouldn’t be for some
time. The Europeans, for their part, can’t go
shopping around elsewhere for precisely the
same reason. Hence, both Russia and Europe
are bound together in a mutual dependence
that started decades ago.
What could alter this dynamic, though, is a
structural change in the gas market. If there
was, for instance, a global spot market for
natural gas, the existing bi-lateral relations
between producers and consumers could give
way to the sort of trade relations that exist in
oil. Much hope is presently being placed by
some in Liquefied Natural Gas (LNG) as this
relatively new technology allows gas to be
shipped in large quantities by tankers. If so,
this could break up the regional characteristics
of the gas market. Once LNG starts to account
for a growing share of overall gas consumption,
COMMENTARY
Andreas Heinrich
conflicts with transit countries do not have
purely economic roots; disputes have been
dictated by both geo-political power plays
put its trade relations with countries of the
foundations by eliminating subsidies.
Goldthau recommends bridging the
investment gap by helping Russia to stabilise
To this end, he believes that the modified
the core of Russian-European gas relations.
This is a problematic proposition for several
reasons. The first is rather symbolic: Russia
will not ratify the EEC even if it is modified,
and especially if third-party access to the
pipeline grid is abolished. The EEC was signed
by Russia at a time when the country was
weak and dependent on Western aid and
investment. The strong, self-confident Russia
of today will not implement a treaty that
it considers a humiliation because it was
written to favour consumer countries that
saw themselves as “winners” of the cold war.
Any new energy agreement that is to include
Russia – no matter how many stipulations of
the EEC it might contain – has therefore to be
renamed. Anything under the label of EEC is
considered a non-starter by the Russian side
and bluntly dismissed.
Secondly, the prevention of transit disputes
also requires a better understanding of
conflict structures. The very special relations
countries mean that disputes escalate easily,
and quickly become irrational because they
Spring 2008 Europe’s World | 39

EU-RUSSIA
a truly global gas market could emerge. That
sort of change in the market would offer new
options for both producer and the consumer,
and would foster new pricing mechanisms
based on global supply and demand.
But LNG is unlikely to provide a panacea
for Europe’s fears about energy security, or at
least not in the short or medium term. Because
gasification of natural gas is very costly, LNG is
quite expensive compared to traditional piped
gas. It is therefore only an option when
extremely long distances have to be covered.
Also, the initial up-front costs of building Gasto-Liquid
(GTL) plants and LNG ports are
much higher than for pipelines, which is why
LNG producers are also seeking long-term
contracts so as to have the planning security
that guaranteed sales volumes give. In other
words, even if expectations are high, LNG may
not provide an alternative any time soon. But
it may emerge as a second market that will
probably be characterised by some of the
same dynamics as piped gas.
All in all, there is little substance to the fear
that Russia could use its natural gas as an
“energy weapon” against Europe. If it were to
do so, it would simply loose its main customer
without any possibility of signing a contract
with an alternative customer. And that’s
certainly not an attractive move for a country
whose federal budget depends on energy
sales for the largest share of its revenues.
So if not the energy weapon, what should
Europeans worry about? If Europe finds itself
left out in the cold one winter soon, it will not
be because the Russians have intentionally cut
off the gas supply, but because their future
production may turn out to be insufficient.
This probably sounds paradoxical, as Russia
owns the largest gas reserves in the world. In
fact, however, the major Russian gas fields
have already started depleting. At the same
time, and as a by-product of resource
nationalism, western companies have been
largely squeezed out of the major current
exploitation and production projects. As a
result of the monopolised structure and strict
state regulation of the domestic Russian gas
market, private Russian gas producers have no
incentive to produce or invest. The monopolist
Gazprom now bears the main burden of
getting the Yamal and Shtokman fields
on-stream before the matured giant fields in
western Siberia quit producing. Gazprom has
also neglected the maintenance of existing
fields and facilities in favour of activities
outside its core business. The International
Energy Agency estimates that Gazprom will
have to spend an average of $17bn a year up
to 2030 on exploitation and production
projects, as well as on the maintenance of
current fields, if it is to satisfy growing domestic
demand and its export commitments. There
now seem serious doubts as to whether
Gazprom will be able to manage this.
At the end of the day, the crucial issue in
Europe’s energy supply picture is not Russian
power politics but dry economics. There is a
perceptible investment gap in the Russian gas
sector that is likely to cause a supply gap for
European households. The policy
recommendation for Europe is therefore
simple and straight forward: put a stop to all
the philosophical debates about Russia’s gas
weapon and instead initiate serious talks with
Moscow on measures to stabilise production
and prevent further irritations among the
transit routes. To this end, the Energy Charter
40 | Europe’s World Spring 2008

Treaty (ECT) should once again be the core of
Russian-European gas relations. At present, a
number of reservations have prevented Russia
from ratifying the treaty, notably the exclusion
of EU-Russian trade in nuclear materials, the
“regional integration clause” and third party
access to its transit infrastructure. Whatever
the substance of these fears, there is much to
be gained by Europe in making substantial
concessions on these points if that will secure
Russia’s commitment to a reliable multilateral
framework in the energy sector. As became
very obvious during the crises with Ukraine
and Belarus, it is essential that the ECT’s
dispute settlement mechanism should start to
work properly if future disagreements are to
be prevented from turning into conflicts.
Europe meanwhile should establish its
own mechanisms to buffer short-term
interruptions in gas supplies, in case further
disputes were exert to unwanted side effects
on European markets. This will call for more
infrastructure investment, the building of
interconnections between national markets
and of storage facilities in all of them. If
European Union member states could achieve
these two goals in the fairly near future, they
will have done much to secure their gas
supplies. Much more than through cold warstyle
rhetoric.
COMMENTARY
Andreas Heinrich
involve the integrity and sovereignty of those
countries. They cannot easily be resolved by an
energy regime based on rational negotiations
that focus on narrowly-defined trade issues.
Although an arbitration court for international
trade conflicts is already in place, consumer
countries in the West should help Russia to
establish market-oriented relations towards its
transit countries, and at the same time to make
it clear that geo-political power plays will not
be tolerated.
Conflicts between Russia and its transit
countries could all too easily interrupt Russian
gas supplies to Europe, so they pose a very real
threat to Europe’s energy security. A gap
between Russian gas production and supply
obligations caused by mismanagement and
under-investment is an equally dangerous
scenario, but is avoidable. Conflicts with transit
countries, however, are already a reality, and
are much harder to predict, prevent and remedy.
They should never be trivialised.
Andreas Goldthau is Transatlantic Fellow at the RAND
Corporation and a Fellow with the Global Public
Policy Institute. goldthau@rand.org
Andreas Heinrich is a senior researcher at the
Koszalin Institute of Comparative European
Studies (KICES) in Poland.
Spring 2008 Europe’s World | 41

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42 | Europe’s World Spring 2008

EU-RUSSIA
Forget politics; What Russia and the
EU need is a shared economic space
Politics is threatening investment and the growth of
trade between Russia and the EU, says Igor Yurgens of
the Russian Union of Industrialists and Entrepeneurs. He
explains how Russia's policymakers are trying to tackle
the barriers that stand in the way of a better business
relationship with Europe
Are Russian-European economic
relations to be based on free market
principles, mutual trust and
understanding? Or will they stagnate as a
result of foreign policy obstacles and Russia’s
unbalanced economy, improving but still
lagging behind the economies of rich
countries?
There has been little mutual trust lately
between the governments of Russia and the
European Union. The results of Russia's
parliamentary and presidential elections were
received sceptically by European politicians.
Diplomatic relations between Britain and the
Kremlin are at a low ebb since Alexander
Litveneko, a critic of the Russian government,
was murdered in London, it is believed by a
Russian agent.
Such political events can clearly threaten
the present state of trade and investment
between Russia and the EU. The volume of
Russian trade with the EU between January
and August 2007 was $173.3bn, 51.6% of the
country's foreign trade turnover. More than a
half of Russia’s goods are sold in Europe. Two
of Russia’s top three trade partners are
European: Germany with a turnover of $31.9bn
and the Netherlands with $28.3bn. China is
the third.
European countries account for 75% of
direct investment in Russia. Britain ranks first.
During the first part of 2007 it invested more
than $15bn, despite the Litvinenko case and
the tit-for-tat expulsion of diplomats.
Despite this evidence of good economic
relations, I have to admit that Russia still
repels foreign business by its bureaucracy and
the state’s interest in “strategic” areas of the
economy. Our European partners constantly
reproach us for increasing state interference.
The volume of foreign industrial investment
falls short of what the country really needs.
Russia’s economy is unbalanced. More
than half of its exports are oil and gas, with the
rest mainly chemicals and agricultural products.
Spring 2008 Europe’s World | 43

Petrodollars are Russia’s main resource for the
development of an information-based society.
The EU countries will continue to demand
energy, and Siberian deposits are far from
exhausted. Diversification of the economy
seems a distant prospect.
Our relationship with the EU is governed by
an agreement signed in June 1994. It refers to
the development of trade, business and
investments, competition issues, protection
of intellectual, industrial and business property,
and cooperation over finance. With the passing
years economic cooperation between the two
sides has become more complex and a new
legal framework is needed. But the European
Commission is unable to start working on a
new agreement until it has a mandate from the
27 EU member states. The 1994 agreement
has been prolonged and Benita Ferrero-
Waldner, the EU’s Commissioner for External
Relations, has promised that negotiations on
a new agreement are likely to start in the
Spring.
Present conditions for Russian investment
in the EU are also far from perfect. Investors
face political discrimination and administrative
and technical barriers, especially concerning
the power industry. Some EU tenders
announced as open have turned out to be
closed for Russian companies. Economic
nationalism is growing. Foreign investment is
limited in economic sectors considered by the
EU to be strategically and politically important.
Russian companies have had to face claims
that their goods are being dumped on the EU
market. New branches of Russian credit banks
in the EU countries face over-regulation and
expensive certification procedures.
Last September, a move by the European
Commission to prevent foreign companies
from controlling European transport networks
served as an example of a skirmish in this
“silent war”. The Commission’s order to
“unbundle” companies into units producing,
transporting and selling is hardly likely to
encourage foreign energy companies working
in the EU to seek structural reforms in the
Russian economy.
José Manuel Barroso, president of the
European Commission, is reported to have
“warned the president of Russia of the EU’s
intention to interfere with the expansion of
foreign state companies buying the EU’s
supply networks in non-commercial causes”.
It is another example of the EU’s over-blown
fears for the security of its energy sources.
The business elite in Russia and Europe
fear the growth of stagnation in political
relations between the Kremlin and Brussels
that is harming bilateral trade and investments.
Anatoly Chubais, a Russian business leader,
said recently that businessmen “have the
impression of dispersed vectors”. One vector,
he said, “is economy - business is progressing
- and the other one is politics, which is in
stagnation.” Without political consent the
economy vector merely produced
memorandums of intents.
Business has developed enough ideas to
show political leaders a route to the creation
of common economic space between Russia
and the EU: first towards a free trading zone,
and later to even closer integration. Inevitably,
the government will have a final word in this
matter. Clearly, the business elite on both
44 | Europe’s World Spring 2008

EU-RUSSIA
sides could teach politicians a lot. But the
ideas of business can only be fruitful if
supported by political consent. Major initiatives
in business have to be approved at the highest
political level. General modernisation of the
country cannot move independently from
government policy, nor can it contradict such
a policy. Elvira Nabyullina, Russia’s new
Minister for Economic Development and
Commerce, said recently that European
business “is Russia’s main partner on
international markets” and that its future
development “is one of the cornerstones of
Russian foreign economic policy.” To secure
Corruption is the stain left behind
by Soviet communism
MATTERS OF OPINION
More than half the citizens of 14 former Soviet
republics think corruption is worse now than under
Communism, according to a Gallup poll. Questioned
has increased. The sense of corruption getting worse
was greatest of all in Kyrgyzstan, where more than
eight in 10 people were of this opinion. Russians
and Lithuanians followed close behind: over seven in
10 people in both countries felt the same. Of all the
14 former Soviet republics surveyed, Uzbekistan was
where least people thought that corruption had got
In the same countries, more people think that since
communism the quality of public services like housing
and healthcare has got worse rather than better. The
country where the largest section of the population think
housing is now worse is an EU member state, Lithuania,
where 64% say housing quality has deteriorated.
As for healthcare, while nowhere did a majority say it
had improved, the largest proportions of people who
reported better health services were in Uzbekistan
IS CORRUPTION THE SAME AS
IN THE SOVIET ERA?
57%
18%
8%
Worse Same Better
Gallup WorldPoll Copyright© 2008 The Gallup Organization.
ARE HOUSING, HEALTHCARE AND
EDUCATION BETTER, WORSE OR THE SAME?
28%
42%
34%
20% 19%
38%
36%
Better
Same
Worse
27%
23%
Housing Healthcare Education
Gallup WorldPoll Copyright© 2008 The Gallup Organization.
Spring 2008 Europe’s World | 45

46 | Europe’s World Spring 2008

positive trends in the Russian economy, she
said, the government promised to create a
comfortable environment for business by
continuing institutional reforms and assist the
development of financial markets.
Statements like this are
encouraging, and it is to be
hoped that these are not just
words. But Russian business
needs more than a simple
reinforcement of the “positive
trends”; it needs a comprehensive
action plan. This
should include cutting bureaucracy, real
implementation of administrative reforms,
releasing the economy from the excessive
control of the state, and radical measures to
combat corruption. Russia has to become
integrated into the international economic
system, accepting the rules applied by the rest
of the world. Russia’s eventual accession to
the World Trade Organisation will be key to
this development, and its accession needs to
be promoted more actively by Europe as well
as by Russia. The long-delayed new trade and
investment agreement will anyway seem less
relevant once Russia is in the WTO. The rules
of the WTO have priority over the rules of any
regional economic organisation. The legitimacy
of a European law limiting the scope of
Russian business activity in Europe and
contradicting WTO regulations would be
immediately called into question.
Russia still repels
foreign business by
its bureaucracy and
the state’s interest in
“strategic” areas of
the economy
EU-RUSSIA
journalists said that during the concluding
press conference the terms “cooperation” and
“partnership” were used 108 times. Such
subconscious zeal by business people no
doubt indicates that they long for an efficient
economic partnership between
Russia and Europe. At least it
serves as a prospective
objective for politicians.
Business, I repeat has
enough developed ideas to
guide political leaders towards
the creation of a common
economic space between Russia and the EU;
first to a free trading zone, and later to an even
closer type of integration. This would remove
the problems of export imbalances and “energy
security”.
For Russia, such a style of integration
would become a practical stimulus for
economic and social modernisation. Of course
our government will have the final word as the
general modernisation of Russia's economy is
central to is own policymaking.
After a meeting in Helsinki in 2006 between
the Russian Union of Industrialists and
Entrepreneurs and the Union of European
Industrial and Entrepreneurial Confederations
Igor Yurgens is Vice-President of Renaissance Capital
and the former Executive Secretary of the Russian
Union of Industrialists and Entrepeneurs.
Spring 2008 Europe’s World | 47

Latin America is Europe’s next big
missed business opportunity
The economies of Central and South America offer
huge opportunities for European business. But
Bocconi University’s Carlo Secchi doubts whether
the EU is doing enough to develop its relationship
with the region
By 2050 Brazil and Mexico will be among
the world’s six leading economies,
say analysts at the investment bank
Goldman Sachs. Does the European Union
care? Perhaps, but almost certainly not
enough. If its own enlargement
is its most immediate
concern, internationally it
is India and China that are
the hot topics. And whereas
the Chinese government
is concerned about its
economy overheating, Latin
America seems to be warming
up. But looking over the
horizon, is it Latin America
that will be Europe’s next missed business
opportunity?
Latin America has a population of 550m,
with average yearly per capita incomes
of $4,000, immense natural resources and
substantial human capital. It accounts
for 8% of world production and grew by
Brazil and Mexico
will be among the
world’s six leading
economies. Does
the European Union
care? Perhaps, but
almost certainly not
enough
more than 5% in the past three years.
And although the United States is still the
main destination of Latin American and
Caribbean exports, Asia is becoming an
increasingly important market for goods
based on natural resources.
During the past four years,
Latin America has attracted
a yearly average of $61bn
in foreign direct investment.
Brazil and Mexico account
between them for 60% of
all this investment. Back in
the 1990s, foreign investors
were chiefly attracted by
privatisation programmes in the region, but
more recently mergers and acquisitions and
greenfield projects have been the most
common type of investment. Predictably
enough, Spain had been the most important
European investor in the region, but recently
a number of important Spanish operations
have passed to Italian companies, among
48 | Europe’s World Spring 2008

them the utility Endesa, acquired by Enel,
which now is the biggest private energy
distributor in Latin America.
At government level, Spain and Italy
have shown a willingness to work together
in the region to foster economic relations,
for Latin America is not perceived generally
as a new area for competition, but rather as
one where European countries should be
seeking more opportunities to collaborate
with one another.
Meanwhile, Latin American businesses
have been increasing their own foreign
investments. In 2006, Brazil invested
$28.2bn outside its borders, more than the
$18.8bn in foreign investment it received.
Emerging giants from Latin America as well
as Asia will, it is now being predicted, be at
the centre of world-wide investment in the
coming decades. The signs are there already.
In 2006, Italy’s Fiat Group and the India’s
Tata Motors established a joint venture to
make passenger vehicles and engines in
India. The following year, they extended
their partnership to Latin America producing
a Tata pick-up truck at Fiat’s factory in
Cordoba, Argentina, with an investment of
$80m.
It’s to be hoped that many more
major European corporations will soon be
following suit and identifying important
business opportunities in Latin America.
But small and medium sized enterprises
(SMEs), which means the majority of firms
in both Latin America and Europe, of course
find it more difficult to trade and invest
at international level, in part because of
high transaction and information costs. But
COMMENTARY
By Federico Steinberg
What the EU must
do is reform the
CAP and reap the
business rewards
Carlo Secchi’s analysis has a fundamental
trade policy is to blame for the lack of
dynamism in bilateral trade relations between
Europe and Latin America.
Trade negotiations between the two
regions are conducted at two different levels;
multilaterally in the World Trade Organisation’s
Doha Round and bi-regionally between the EU
and Mercosur, as well as with other smaller
groups of Latin American countries. The EU has
bi-lateral free trade agreements with Chile and
But the common feature of all these
negotiations is conflict. They have either
failed to make substantial progress or they
have collapsed. And in either case, Europe’s
agricultural protectionism is the main reason
why Latin American countries, led by Brazil,
are unwilling to open up further to European
goods and services.
This retaliatory protectionist behaviour by the
strongest and biggest Latin American countries
is the main reason European companies
are not able to take advantage of new
business opportunities there. Latin America’s
comparative advantage in trade, especially in
Spring 2008 Europe’s World | 49

SPONSORED SECTION
TIRANA HOPES NATO
WILL OFFER ALBANIA
MEMBERSHIP THIS YEAR
By Lulzim Basha,
Albania’s Minister of Foreign Affairs
Membership of NATO is the main short-term
priority of Albanian foreign policy today. Joining
the Atlantic Alliance would enable us to fulfil our
objectives of national and regional security, and
would provide a solid starting point from which
to speed up our on-going political, economic and
military reforms. The day that Albania joins NATO
will be a significant moment in this process.
Albania has always seen membership of NATO
as more than a means to improve the current
security situation; it is also a goal that is conducive
to our long-term development. Membership will
help to consolidate the country’s democratic
values and to increase national authority, as
well as supporting the continued opening of
our society towards regional neighbours and
beyond. Some 95% of Albanians support our
ambition to join NATO.
Currently, after 15 years of dialogue with NATO,
the Alliance considers Albania to be an aspiring
member which, thanks to the MAP process, has
reached the highest stage of relations short of
membership. Albania has been engaged in a series
of multi-dimensional reforms in the hope that the
country will qualify for an invitation to join the
Alliance at its Bucharest Summit in April 2008. We
have taken significant steps to strengthen the rule
of law and our market economy, including reform
of the judicial system and a gradual improvement
in domestic legislation. Albania has also stepped
up the fight against corruption, organized crime,
illicit trafficking, money laundering, plus other
economic and financial crimes. The country has
also restructured and modernized the armed
forces and made further advances in the area of
security and classified information. Albania also
continues to establish policies to build good and
constructive relations with its neighbours, while
making use of the entire range of opportunities
that arise from regional initiatives. NATO’s Riga
Summit in November last year acknowledged the
achievements of Albania and other Adriatic Charter
countries, paving the way for a possible invitation
to join the Alliance at the Bucharest Summit.
Albania has also been developing institutional
relations with the European Union for the last 15
years. It signed the Stabilization and Association
Agreement, plus the trade-related Interim
Agreement, with the EU in June 2006. Albania
backs the political and security objectives of the
Atlantic Alliance, the EU and other institutions of
central and south-east Europe. Cooperation with
them is helping Albania to protect and promote
regional stability and confidence through
dialogue and good neighbourliness.
Finally, Albania is renowned for its open–hearted
hospitality, humane relations, laudable religious
harmony and diversified cultural development.
This section is sponsored by the Chamber of
Commerce and Industry of Tirana-Albania
(tel: +355 4 230 284 / E-mail: info@cci.gov.al)
50 | Europe’s World Spring 2008

in Europe, clusters of SMEs increasingly
appear able to achieve economies of scale
and scope, and so to do well collectively in
global markets. This European experience is
now being widely studied in Latin America.
In Brazil, four local production systems
have combined to form Project Promos/
Sebrae/BID, based on the example of Italian
industrial districts. Between 2002 and 2006,
Brazil’s SME support services and the Milan
Chamber of Commerce created partnerships
involving furniture, shoes, designer lingerie
and handicrafts from different regions of the
country that may well be the shape of things
to come.
Brazil and Mexico are the key Latin
American countries. The EU’s association
agreement with Mexico is 10 years old, but it
doesn’t yet have a strategic partnership with
Brazil. This is partly because of the neverending
negotiation process with Mercosur,
the troubled Latin American customs union
that is still incomplete. The EU is currently
negotiating trade liberalisation deals with
all of Latin America’s regional blocs; as
well as Mercosur, these are the Caribbean
Community, the Central America Common
Market and the Andean Community. The EU
therefore needs to urge its Latin American
partners towards further integration. If they
were to adopt a common “rule of origin” for
their products this would be an incentive to
further liberalise their international trade,
and thus increase it.
Full trade liberalisation in Latin America,
although difficult to achieve, must be made
central to the European strategy. Greater
trade openness would be beneficial for
economic growth. But even if tariffs and
quotas are progressively reduced, trade
COMMENTARY
Federico Steinberg
the southern cone, is in agricultural products.
Climate conditions, the relatively low price
of land and labour, and high agricultural
productivity due to investment in sophisticated
technology, make Latin American agricultural
competitive. But as the biggest trading bloc
the EU is also best placed to protect its own
agriculture. Its tariffs are the highest among the
developed countries, and every year it spends
result is that food prices in Europe are high and
there is a strong incentive for over-production,
which increases the world’s agricultural output,
dives down international prices and damages
the unsubsidised competitiveness of Latin
Latin American countries have said for years
that they are willing to reduce tariffs on
Europe’s industrial products, and to further
liberalise services, investment and government
procurement. But they will only do so if the
EU reciprocates by substantially reducing its
agricultural protectionism. Economic analysis
suggests that they are right in this because
substantial CAP reform would not only benefit
European consumers but would also enable
the EU’s budget to invest more in R&D and
other productive areas, while compensating
genuine liberalisation of EU fair trade practices
would also unlock the stalled negotiations
with Mercosur and possibly even the Doha
Round too.
The question now is whether agricultural
lobby in Europe is still powerful enough to
maintain its unjustified privileges. We know
what the EU needs to do to promote economic
Spring 2008 Europe’s World | 51

flows may remain low if other trade costs
remain high. EU co-operation should
be directed to lowering trade costs. The
crucial issue is market access. Most Latin
American countries still get poor results
from their export efforts towards Europe,
the exceptions being raw materials and
energy sources. After the establishment of
the EU-Chile free trade area, Chilean exports
to the EU were substantially increased. But
in the case of EU-Mexico trade liberalisation,
the growth of imports from the EU has
exceeded the growth of exports to Europe,
resulting in a widening Mexican trade deficit
with the EU.
Ever since the 1999 Rio summit, the
European Union has proclaimed that Latin
America is a vital strategic political and
economic partner. But a huge gap has
remained between its words and its actions.
An abrupt change in the European approach
is now needed if a strategic bi-regional
partnership is to be created. The European
Commission apparently understands this.
Although the EU does not have a strategic
MATTERS OF OPINION
Emigration: Latin America's weakness
but also its lifeline
Cash sent home to families in Latin America and
the Caribbean by relatives living abroad amounts
to $60bn a year. This is almost triple the amount of
official development aid to those countries, and is
of those families who get remittances from relatives
40% get $1,400-$4,200, and 20% receive between
$4,200 and $7,000 a month.
Awareness of the scale of remittances sent to Latin
America sheds a new light on the migration debate
in a region with one of the world’s highest emigration
rates, where one in four people say they would
migrate if they had the means to do so, and the
young are especially keen to leave.
Migration is traditionally viewed as negative for the
country, due to the ”brain drain” and “brain waste”
phenomena: the first where large numbers of skilled
workers and college graduates leave to work abroad;
the second where highly educated and skilled workers
move abroad to work in low-skilled or unskilled jobs,
a particular problem for Latin Americans in the US.
An opposing view comes from the World Bank. It
says that remittances provide direct and immediate
benefits to the poorest in society. They can lift people
out of poverty, diversify household income and in
some cases are used to establish new businesses.
KEY FACTS
13% of Latin Americans said they have plans
to move to another country.
25% said they would migrate if they had the
means to do so.
35%
migrate if they had the means.
43% of Latin Americans say emigrants are
a big help to their country of origin
$60bn annual total remittances to Latin
America
Gallup WorldPoll Copyright© 2008 The Gallup Organization.
52 | Europe’s World Spring 2008

partnership with Brazil, its intention is to
push ahead with one as fast as possible. In
mid-2007 the Commission confirmed that it
will be revisiting the EU’s 10-year dialogue
with Mercosur, with the aim of giving new
impetus to the negotiations.
But there is also a keen awareness that
the EU’s hope for a special relationship with
Brazil must not be allowed to hinder regional
integration in South America, or worsen
asymmetries and imbalances within the
bloc. If Latin America is to become more
important as a strategic partner for the EU
in the global economy, and as a more
attractive market for European companies,
European institutions must become more
open to the needs of countries in the region.
The new start by the EU, focused on the two
most important players, Brazil and Mexico,
could prove a promising one, because of the
“pull” effect it might have on the other
countries. However, this must be
accompanied by measures to keep all Latin
American countries on board. Otherwise,
Latin America may well prove to be Europe’s
next missed business opportunity.
COMMENTARY
Federico Steinberg
opportunities in Latin America. The institutional
framework for negotiating all this already
bi-annual Europe-Latin America summits in
Lima, Peru. The economics of it all are clear; it’s
the politics that are so problematic.
Carlo Secchi is vice-president of the Istituto per gli
Studi di Politica Internazionale (ISPI) in Milan and
director of ISLA (Institute of Latin American Studies
and Transition Economies) of Bocconi University in
Milan.
Federico Steinberg is an international
economics analyst at the Royal Elcano Institute
in Madrid.
Spring 2008 Europe’s World | 53

54 | Europe’s World Spring 2008

While America electioneers,
Europe has a Middle East role
to play
What should Europe’s next move be now that US
military action against Iran seems less of a threat?
Michael Brenner warns the EU against the temptation
of doing nothing when instead it should be playing a
much greater role in the Middle East
Satisfactory relations with Iran are key
to resolving, or at least containing,
dangers elsewhere in the region.
Some observers believe relations improved
overnight with the publication in December
2007 of a United States government
intelligence report that Iran had in fact
suspended its nuclear weapons programme
back in 2003. President George W. Bush
continues to believe Iran is a threat, a
view shared by his closest
lieutenants who remain
suspicious of an intelligence
service that has been proved
wrong in the past.
US Secretary of Defense
Robert M. Gates has been
particularly hostile to any
easing of international pressure on Iran,
and wants the military option to remain
“on the table”. Nevertheless, publication of
the report has changed the politics of the
issue. The case for a pre-emptive American
Where does that
leave the EU now?
The EU finds itself an
observer of events,
unable to decide
what best to do
attack on Iran has become impossible to
sell politically, both in the United States
and internationally. Even Gates concedes
that regarding Iran the United States is now
wholly focused on diplomatic and economic
measures.
The European Union may feel that it
has been here before. In the autumn of
2005 the Europeans persuaded Washington
to give its tacit backing to
their diplomatic efforts with
Iran. The EU initiative was a
notable attempt to remove
a serious threat, and was
a move unprecedented in
the history of the Union’s
common foreign and security
policy. It remains an admirable
landmark, even though the initiative fell
short of expectations. Its fatal flaw was
an inability to deliver the one thing that
could persuade Tehran to forego its nuclear
ambitions, then assumed to be the bomb:
Spring 2008 Europe’s World | 55

a deal that guaranteed there would be no
American attack, gave Iran a voice in shaping
the future of the Persian Gulf and restored
the country’s international standing. In April
2003, the Iranian leadership had proposed a
comparable deal, with Iran pledging not to
oppose America in Afghanistan or Iraq, and
to restrain both its support for terrorism and
its nuclear programme. That overture, too,
was spurned by the Bush administration.
Where does that leave the EU now? The
evidence to date indicates that a tough stance
will not induce the Iran’s President Mahmoud
Ahmadinejad to change course. Instead,
threats seem to strengthen the hand of the
hardliners. In any case, the unwillingness
of Russia and China to approve the harsh
sanctions proposed in the UN Security Council
by the United States means that full pressure
cannot be exerted. A strategy of non-military
coercion backed by the now doubtful threat
of military action is unlikely to work. The EU
finds itself an observer of events, unable to
decide what best to do.
It could do nothing; that is a decision of
a kind. Any effort over the Iran problem is
MATTERS OF OPINION
Iraq and Iran - the US public's view
for several more years, regardless of who wins this
of those questioned − in an October 2007 Gallup
Poll − thought that keeping US troops in Iraq for
four years or longer would be too long. Numbers
were fairly evenly split on soldiers staying for two to
three more years, with 44% saying this was about
too long.
When questioned on Iran, an overwhelming majority
said they would prefer the US to pursue diplomatic and
economic channels rather than use military action to
compel Iran to end its nuclear weapons programme.
Even should diplomatic efforts fail, opinion was
equally divided between those who would support
military intervention and those opposed to this.
Interestingly, 73% of those interviewed said they were
very or somewhat concerned that America would
not do enough to prevent Iran developing nuclear
weapons. But slightly more – 76% − said they feared
the US would resort to military force too quickly.
It should be noted that all the surveys were
conducted before the publication last December of a
US intelligence report saying that Iran had halted its
nuclear weapons programme in 2003.
HOW LONG SHOULD US TROOPS STAY
IN IRAQ?
48%
22%
45%
44%
55%
36%
too long
about right
73%
19%
< 1 year 2-3 years 4-5 years > 5 years
Gallup Poll Copyright© 2008 The Gallup Organization.
56 | Europe’s World Spring 2008

complicated by the changing of the occupant
of the White House in a year's time. It is likely to
be a long 12 months, for despite being already
a lame duck, President Bush seems devoted
to using the same foreign policy touchstones
that have served him for the past seven years.
This is particularly true in the Middle East,
although to be fair he is now taking seriously
the need to give the Palestinians their own
state. Bush's probably Democratic successor
will be left the burden of the
region’s unresolved problems.
It is difficult to guess what
new directions might be taken
by a new administration, and
indeed, the substance of
American foreign policy may
hardly change. Presidential
candidates' public remarks so
far suggested little in the way
of fresh strategic thinking. This
is especially true of Iraq, the most likely scene
of new developments that will be unpalatable
to Americans, who generally have a low
tolerance of failure.
Should the EU therefore postpone
consideration of further serious policy
initiatives in the Middle East for the duration
of the electoral campaign and its political
interregnum in Washington? It’s a conclusion
that is too facile, and too convenient. We
cannot afford to continue along the current
course of inertia for another year. Nor can
we be sure that American strategic thinking
in 2009 will be more sober, more alliancefriendly
and will hold out a greater promise
of long-term solutions.
A closer embrace between Iran and a
Shia-led Iraq is inescapable. What remains
A passive Europe
could pay a steep
price for not trying
to breath life into its
foreign and strategic
policy, and applying
it in the places that
count the most
an open question is the exact nature of that
partnership, and the attitude of both toward
minorities, their Gulf neighbours, Sunni Arab
regimes and the Lebanon. The hope of using
a pro-western Iraq to countervail Iran is
illusory; Iraq is neither an answer nor an
asset but a major liability. So the challenge
is to neutralise that liability and to relieve
other susceptible trouble-spots from the
toxins Iraq has generated. A modus vivendi
with Iran could well be crucial
to that exercise.
There is absolutely no
concrete evidence that a
Democratic president would
change these fundamentals.
Quite apart from the fact
that it takes close to a year
for a new administration to
pull itself together, we can
already see that the fundamentals are not
being squarely addressed. Democrats have
been at pains not to allow any blue water
to separate them on Iran from the present
administration. All the major candidates also
foresee a significant American military and
political presence in Iraq for the indefinite
future. The next president will be further
handicapped by the general inability of the
American public to understand the choices
and trade-offs to be made; and by US
diplomacy that is hamstrung by America’s
loss of credibility and moral authority.
For Europe to shy away from the
problem over the next 12 months would
be tantamount to leaving the continent’s
great interests in the Iran affair hostage to
the calculations and impulses of players
in Washington and Tehran. But a course
Spring 2008 Europe’s World | 57

of action in these unruly waters must be
deep, it must be nuanced, and it must
be adaptable to a wide range of possible
contingencies.
The EU Reform Treaty recently signed
in Lisbon visualises an enhanced High
Representative, essentially a foreign
minister, the job now held by Javier Solana.
A cardinal weakness of multilateralism
in the absence of a recognised leader
is the tendency for difficult decisions to
be postponed. Solana, or his successor,
could be the catalyst for action, serving as
custodian of the Union’s common foreign
and security policy. He has to ensure that
EU-level policy fits together with national
policies. Coordination is always a challenge
for any capital when dealing with complex,
E.W. ADVISORY BOARD MEMBER
Institute for Strategic Studies conducts
interdisciplinary studies examining the most significant
issues that Poland and the contemporary world are
faced with. The Institute (earlier: International Center
for Development of Democracy) was founded in 1993
by the Jagiellonian University and Economic Academy
in Krakow, Poland. Today the Institute is a recognized
expert institution, which cooperates with a number of
other institutions dealing with international affairs and
security matters.
ISS focus on international affairs, paying particular
attention to the Polish presence in the European
Union, Euro-Atlantic security, Polish Eastern Policy,
the regional policy in Central Europe and social and
economical changes in the contemporary world.
intersecting challenges such as those in the
Middle East. Adding the supranational level
compounds the difficulty.
Any rethinking of EU policy on Iran
and the Middle East generally must involve
Europe's relations with the United States.
Until now, European governments – both
collectively and individually – have been
content to play two self-limiting roles. One
is as a supporter of American strategy; the
Union as such has supported the US in its
problems with Iraq after the invasion, the
2006 Israeli-Lebanon war, and most recently
in dealing with the awkward fact of Hamas'
electoral victory in Palestine.
Its other role has been to act in the
diplomatic margins left over from American
activities. Its attempts to nudge Iran toward a
negotiated status over its nuclear programme
have been an outstanding example of this.
But neither of these roles has carved out a
place in the arena of Middle East diplomacy
commensurate with Europe's interests or
latent influence. The Union needs to make a
candid examination of its relationship with
America, along with an analysis of its costs
and benefits.
A passive Europe could pay a steep price
for not trying to breath life into its foreign
and strategic policy, and applying it in the
places that count the most. The European
Union’s competence as an international
negotiator will be tested in how it deals with
this challenge.
Michael Brenner is Professor of International Affairs
at the University of Pittsburgh.
58 | Europe’s World Spring 2008

European foreign policy begins
with the neighbours
The new narrative in Brussels is that the EU should be
more assertive internationally and must help shape
globalisation. Loukas Tsoukalis looks at Europe’s track
record so far, particularly in the Mediterranean region,
and draws some lessons for the future
In a rapidly changing world where size
matters, Europeans have yet to take hard
decisions about how best to represent
and defend their international interests, and
their values.
European unity means global influence,
providing of course that common interests
and values prevail over
Europeans’ divergences. This
has increasingly been the
case over such global issues
as the environment, although
it may not yet be equally
true of energy or migration.
Institutional inertia places
a heavy burden on EU-level
policymaking, while illusions
of national power die hard in
some of Europe’s capitals.
Defending common interests and values,
shaping globalisation and strengthening
multilateral institutions constitute the new
official narrative in Brussels, even though
Institutional inertia
places a heavy
burden on EU-level
policymaking, while
illusions of national
power die hard in
some of Europe’s
capitals
there is still a considerable gap between
words and deeds. A new global role for
Europe could nevertheless be a project that
mobilises many Europeans.
We certainly have common interests and
values to defend, and these can only be
defended effectively if we invest in our
own unity. The way Europe
developed its trade policies is
a good example of this. We also
have long experience in jointly
managing interdependence
through common rules and
institutions; it’s experience
that Europe could usefully
export to an increasingly
multi-polar world.
Foreign policy begins, of course, with the
neighbours, and our own neighbourhood
is mostly poor and unstable. Enlargement
has so far been the Union’s most successful
foreign policy, and has done much to extend
Pax Europeae to the more unstable parts
Spring 2008 Europe’s World | 59

of the old continent. It has also acted as a
convergence machine for the benefit of less
developed countries.
The two latest enlargement rounds may,
however, prove more difficult to digest.
We are, after all, talking about 12 new
EU member states that in most cases are
formerly communist countries that start
from low levels of economic development,
and still bear wounds of totalitarianism that
will take time to heal.
With the exception of Croatia, further
enlargement is likely to proceed at a slow
pace. There is little appetite for it in the
EU at present, while candidate countries
are far from able to meet the criteria for
accession. While it is important at this
stage not to shut the door in the face of
candidates, we should also try to narrow
the distance between membership and nonmembership,
by gradually offering better
access to the European market and policies,
without prejudice to the final outcome of
what may prove to be a long process of
initiation for the countries of the western
Balkans and Turkey. As others may in due
course be joining them in the EU’s waiting
room, an exercise of this sort will demand a
high degree of flexibility and generosity from
the Union.
There is also the EU’s wider
neighbourhood to the east and the south.
Can Europe export democracy, stability
and prosperity to countries that have no
prospect of becoming members in the
foreseeable future, and others that have no
prospect at all? This is precisely the aim of
the European neighbourhood policy, but as
any seasoned observer might reasonably
comment, so far it’s been a triumph of hope
over experience.
There are lessons to be drawn from
the longer established Barcelona process,
which brings together the EU-27 and the
countries of the Mediterranean region.
Grand designs and ambitious unifying
principles are difficult to apply to so diverse
a group of countries with such little sense of
common purpose. A regional approach may
be a noble aim for the EU, but bilateralism
is likely to remain the name of the game.
It’s what most of our partners actually want
from us. There is also little mileage to be
made out of ‘shared values’ with autocratic
regimes that have no intention of bowing
to political conditionality from Brussels.
The carrots we offer are not alluring enough,
and the sticks we wield don’t have much
clout. Access to the European internal market
demands too much of our neighbours in terms
of regulatory harmonisation, the common
agricultural policy is still too restrictive, and a
good deal of foreign aid is wasted.
The frustrations of trying to exercise the
EU’s vaunted ‘soft power’ are as great as
ever; ask anyone who has had to negotiate
with the Israelis and Palestinians. Everybody
in the Middle East knows that power lies
elsewhere, even if the European Union
usually foots a large part of the bill. The
creation of a viable Palestinian state as an
integral part of an Arab-Israeli peace deal
would do much to stabilise the whole region
and would do much to deprive Islamic
fundamentalism of its legitimacy. But Europe
would be unable to deliver such a miracle
on its own and without active American
involvement.
60 | Europe’s World Spring 2008

We Europeans need to scale down our
rhetoric and try to be as monophonic as
possible. Our neighbourhood policy suffers
from a lack of internal coherence because
EU member countries regularly undermine
common principles and policies agreed in
Brussels. We also need to adopt a much
more differentiated approach to individual
countries. And we need a common policy
on energy and migration, before we are able
to talk effectively with our
partners in the Mediterranean.
The same thing, of course,
applies to our relations with
countries in eastern Europe.
We should apply more
generosity and efficiency
to foreign aid, while
strengthening conditionality
and linking it directly to
reform in partner countries.
Internal reform is, after all,
the determining factor for
economic development and political stability.
This is precisely what has been in short
supply so far in several of our neighbours,
and most notably along the southern shores
of the Mediterranean. Grand schemes and
international agreements are no substitute
for internal reform and modernisation in the
Arab world. This is the hard lesson to draw
from earlier European initiatives.
Europe should try
to make its soft
power more effective
and also add hard
tools to it whenever
possible. The rest
of the world will
not wait forever for
Europe to get its act
together
its potential added value, its relationship
with the EU, not to mention the amount and
source of new financial resources needed
and the conditions under which they will be
dispensed in what would purportedly be a
project-oriented Union.
Sarkozy’s proposal could provide a
catalyst for reshaping Europe’s neighbourhood
policy, including most notably relations with
our Mediterranean neighbours.
It’s something the EU urgently
needs, and it’s likely to feature
high on the agenda when
France takes over the revolving
six-month presidency of the
EU in mid-year. And perhaps
there is a good case to be
made for more regional
differentiation within the EU,
so long as it doesn’t undermine
the Union’s common
institutions and core policies.
Such differentiation would
make sense in a large and diverse Union that
has an even more diverse ‘neighbourhood’ to
contend with. Most important of all, Europe
should try to make its soft power more
effective and also add hard tools to it
whenever possible. The rest of the world will
not wait forever for Europe to get its act
together.
France’s President Nicolas Sarkozy
has further stirred the troubled waters
of the Barcelona process by calling for a
Mediterranean Union (or a Union for the
Mediterranean in the updated version of
his proposal). We now have a clearer idea
as to who will be invited to join, although
there are still many questions concerning
Loukas Tsoukalis is President of the Athens-based
Hellenic Foundation for European and Foreign
Policy (ELIAMEP), and a professor at the University
of Athens and the College of Europe, Bruges.
Spring 2008 Europe’s World | 61

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Section
2EUROPE
The case for urgently re-starting
talks on Cyprus
There has been worsening antagonism between Cyprus’
Greek and Turkish communities since the 2004 collapse
of the UN’s reunification plan. But David Hannay,
who was Britain’s Special Representative for Cyprus
from 1996-2003, says that with so much at stake talks
should be re-started soon
Ever since the Greek Cypriots rejected
the last United Nations plan to
reunite Cyprus in 2004, antagonism
has grown between the Greek majority and
the Turks in the north of the
island. Turkish Cypriots have
withdrawn into the embrace
of Turkey and attempted to
gain greater international
recognition for their “republic”.
The Greek Cypriots are using
their membership of the
European Union as a weapon
to frustrate Turkey’s ambitions
to make progress in EU
accession talks, and they are also blocking
attempts to increase trade between the EU
and the Turkish zone. Tactical manoeuvring,
The EU cannot afford
to let Cyprus stew
in its own juice, not
least because as a
member state the
island is proving a
very uncomfortable
bedfellow
megaphone diplomacy and positional play,
which have dogged negotiations over Cyprus
for much of the last half century, are once
more the order of the day.
Yet the EU cannot
afford to let Cyprus stew
in its own juice, not least
because as a member state
the island is proving a very
uncomfortable bedfellow.
The whole of Cyprus joined
the EU in May 2004, but the
acquis communautaire – the
body of common EU rights
and obligations – applies only to areas
under direct government control, so it is
suspended in those parts administered by
66 | Europe’s World Spring 2008

Turkish Cypriots. The Turkish government,
unwisely, became embroiled with the EU
over its plan to extend the customs union
to include all new member states, including
Cyprus. Meanwhile the EU has failed to
deliver fully on aid and trade pledges to
Cyprus.
Perhaps most worrying of all – for Cypriots
on both sides of the divide, as well as some
EU member states – the “Cyprus problem”
is now a pawn on the wider chess-board
of Turkey’s bid for EU membership. Greek
Cypriot intransigence has given succour
to those member states who want to keep
Turkey out. So, if the stalemate over Cyprus
continues, it could spell the end of Turkey’s
chances of becoming an EU member. It
might also prevent a future rapprochement
between Greece and Turkey – which was
so bravely promoted by both governments
only a few years ago.
The lack of progress in re-opening talks
between Greek and Turkish Cypriots is also
feeding frustration among both communities
at home, making an eventual settlement
even harder to reach. For example, local
support is already dwindling for a negotiated
solution and all the necessary compromises
that this would entail. Not one inch of
territory has been returned to the Greek
Cypriots, nor have any of the Greek refugees
who were forced to flee their homes in 1974
been able to re-possess their property in the
north. Future property settlements are being
further complicated by a building boom
in the Turkish area. Meanwhile, Turkish
Cypriots are aggrieved at being excluded
from the benefits of EU membership now
being enjoyed by the rest of the island.
COMMENTARY
By Yiorgos Lillikas
Re-open talks,
yes. But not as
a sideshow to
Turkish accession
David Hannay has got it wrong – again.
He was one of the main protagonists
in the process that to his dismay led to
the rejection of the infamous Annan Plan, the
UN proposal to reunite Cyprus which went to
a referendum in 2004. Now he says it’s time
to try to resolve the Cyprus problem again,
without showing that he has recognised why
Greek Cypriots said “No” four years ago.
So let us make it quite clear. The Annan
Plan was rejected because it was designed
to facilitate Turkey’s entry into the European
Union. As Lord Hannay’s article makes plain,
the EU-Turkish question is still his underlying
concern in Cyprus. Until that changes, he
scepticism.
We certainly can agree with David Hannay that
it is time to address our island’s troubles once
more. But not for the reasons he emphasises.
The Cyprus problem is worth revisiting because
the Cypriot people – Greek and Turkish alike
– deserve to have a prosperous and peaceful
future within the EU. This is more important
than Hannay’s preoccupation with Turkey’s
bid for EU accession. Hannay’s basic thesis
is that Turkey won’t be able to join the EU
unless the Cyprus question is resolved. That
Spring 2008 Europe’s World | 67

There are therefore compelling reasons
to re-start negotiations over Cyprus.
Unfortunately, these reasons neither
guarantee that talks will resume nor boost
their chances of success. Just over a year
ago, the Finnish EU Presidency failed to
unscramble the gridlock over the Cyprus
trade issue, illustrating yet again the limited
value of trying to agree partial solutions and
“confidence-building” measures. The UN’s
latest initiative to get low-key, exploratory
talks moving – the so-called Gambari process
– is going nowhere. Cypriot presidential
elections next February may give a second
term in office to Tasos Papadopoulos, the
Greek Cypriot leader who
led the campaign for a “No”
vote in the 2004 reunification
referendum. So there are
plenty of obstacles in the
way of a negotiated solution.
On the other hand, recent
Turkish elections returned
the same government which
made a serious attempt to
settle the Cyprus problem in
2004 and which is committed to making a
success of Turkey’s EU application. So it’s
not all gloom and doom.
Some people say, of course, that it would
be better to leave Cyprus alone for the next
few years and only look at the problem
again in the closing stages of Turkey’s EU
accession. These voices are likely to get
louder if Papadopoulos is re-elected as the
Cypriot president next year. In my view, such
a delay would be a mistake. Turkey would
then have to conduct two parallel sets of
negotiations – one over Cyprus and the
other over its own EU accession. Talks about
It would be far
better to try to
re-start talks about
Cyprus sooner rather
than later. That does
not mean rushing
straight into full-scale
negotiations
Turkey’s final entry into the EU will – in all
likelihood – contain some highly sensitive
issues. So a dual set of negotiations would
risk overlaps and trade-offs between the
two, or a cumulative burden of compromises
which might become too great for the Turkish
people to accept. Thus both negotiations
could be wrecked at one stroke. For the
Greek Cypriots, it is pretty well certain that if
Turkey’s accession talks fail in this way, that
would also end any chance of resolving the
Cyprus problem.
I think, therefore, that it would be
far better to try to re-start talks about
Cyprus sooner rather than
later. That does not mean
rushing straight into fullscale
negotiations, or setting
some kind of rigid timetable.
The UN’s Gambari process,
for example, envisaged a
preparatory phase ahead of
face-to-face talks. Shuttle
diplomacy by a UN team
could be the first step, and
could sound out each side for any hints of
movement from their entrenched positions.
As this really may be the last chance for
compromise, it will take a mixture of caution
and determination not to fritter it away.
On matters of substance, both the
Greek and Turkish Cypriots will have to take
proper responsibility for the solutions being
negotiated. And they must also be prepared
to stand firmly behind their decisions during
any subsequent referendum campaign. All
too often, Cypriots present themselves as
helpless pieces in a wider game being played
by Greece, Turkey or the “great powers”.
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There may have been some truth in this view
in the past, although never to the extent
that many Cypriots would like to believe.
This time around, it has to be different. Only
genuine negotiations by both parties _ and
a mutually accepted settlement _ are likely
to stand the test of time.
Given the complexity of the island’s
problems, and the sensitivities of the Cypriot
people, it would be foolish for an outsider to
try to sketch out what should and should
not be in any future settlement. It would,
however, seem safe to summarise certain
elements at the outset. For example, it would
be impractical to drop the basic framework
of a bi-communal, bi-zonal federation which
was agreed by both sides as long ago as
1977. Also, there seems little doubt that
there will have to be some changes from the
final, rejected version of the UN reunification
plan of 2003-04, although earlier versions of
this plan might contain some ideas worth
re-visiting. It may also be constructive to
take advantage of transitional provisions
linked to Turkey’s EU accession. One earlier
UN suggestion was for Turkey to complete
the withdrawal of its troops from Cyprus
when it joined the Union.
There are also certain concerns raised by
one side which could be settled without any
difficulty for the other. The Greek Cypriots
were worried, for instance, about the tax
bill for the last proposed settlement; if the
EU and other international players agreed
to subsidise the plan this time around, that
would cut the potential cost for Nicosia
without involving the Turkish community
at all. Of course, these kinds of shifts
require a move away from the zero-sum
COMMENTARY
Yiorgos Lillikas
may well be the case. He still dreads the
idea of burdening Ankara with accumulated
compromises if negotiations over Cyprus are
linked to the EU’s final entry requirements
for Turkey. Yet part of his solution to the
dilemma includes transitional provisions for
Cyprus which depend upon Turkey’s accession.
This contradictory position would make Cyprus
a hostage to an eventuality which even David
Hannay very much doubts will occur.
In the run-up to the 2004 referendum,
Hannay and his team worked very hard to
present the Annan Plan to the people of
Cyprus in a favourable light. Yet this plan
Conveniently, it did not touch upon the status of
the so-called sovereign British bases in Cyprus,
nor the permanent derogations from the acquis
communautaire, nor the long transitional
enough to support it. In his article, Hannay
accuses President Tasos Papadopoulos of being
a stubborn opponent of the Annan Plan and
the main driver of the “No” vote in 2004. If
he wants to identify those who refuse to see
the way out of the current impasse, he would
do better to look to outsiders, especially those
pointing the finger of blame at the people and
president of Cyprus. Maybe he could start by
taking a peek at his mirror.
A just and viable solution can only be a
result of negotiations between Greek and
Turkish Cypriots, in a process where both
communities have ownership of the outcome,
based upon a bi-zonal, bi-communal federation.
I believe the right way forward, therefore, is to
Spring 2008 Europe’s World | 69

mentality that has hitherto dominated every
attempt to resolve the Cyprus problem. But
community spirit is part of the ethos of
the EU. Cyprus has joined the Union and
Turkey wants to join; it would be good if
they played by the EU’s rules and not just
paid lip-service to them.
What, then, should the role of international
players be if fresh talks can get started? The
UN, the EU, Greece, Turkey and members
of the UN Security Council have all played
prominent parts in the past and, for various
reasons, will have to be involved next time
around too. However, I think it would be
good for them to take a step backwards
and let the two Cypriot sides have more
“ownership” of the negotiations. Then, the
Cypriots would be unable to hide behind an
international smokescreen when it comes to
taking responsibility for decisions taken at
the negotiating table. Nevertheless, external
actors will still have an important job to do.
They need to be united in their support for
any renewed effort to reach a settlement
and to avoid attempts to play one off
against the other. The UN will remain an
essential player as it has been from the
start. Ever since UN peacekeepers were
deployed on the island in 1964, it has been
the only party acceptable to all sides as a
“midwife of compromise”. While the EU also
has to be present at the talks, it cannot be
a neutral mediator since Greece and Cyprus
are both members. The Security Council will
also be needed to give solid support to the
E.W. ADVISORY BOARD MEMBERS
The Institute for International Relations (IMO)
IMO is a public, non-profit, scientific and policy research
institute, established in 1963. Its mission is to contribute to
better understanding of international economic and political
relations, European integration process, culture and communication,
and environmental policy. IMO activities include
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improvement of information and networking, publication
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of the international network Culturelink and hosts the only
European Documentation Centre in Croatia.
Contacts
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Tel.: +385-1-48 77 460, Fax: +385-1-48 28 361, E-mail:
visnja.samardzija@irmo.hr, WWW: www.imo.hr
70 | Europe’s World Spring 2008

UN’s negotiators and guarantee provisions
of any settlement. This will help to avoid the
kind of doubts and fears which surfaced in
2004 about implementation of the previous
UN plan.
It won’t be easy to engage people’s
interest in solving the Cyprus problem; it
never has been. Cyprus suffers from being a
second class problem, one that occasionally
flares up, only to be damped down again
with short-term palliatives. Many
international diplomats are weary of the
constant squabbles, endless setbacks and
stubbornness shown in previous negotiations.
And yet a lot could be at stake over the next
few years. This may be our last chance to
heal one of Europe’s few remaining open
wounds and give the island the sort of
security and prosperity that has enriched so
many other parts of Europe. Neglect of
Cyprus could have serious consequences
for all concerned, especially if its continued
division keeps Turkey outside the EU. The
future then would be fraught with tension in
a part of the world where the EU needs to
encourage peace and stability. That, surely,
is worth making another effort to avoid.
COMMENTARY
Yiorgos Lillikas
implement the Gambari process to provide the
basis for fully-fledged negotiations. Whether
this is the last chance or not, the Gambari
process promises a “bottom–up” approach
which would ensure the necessary joint
ownership of the solutions. Given that Hannay
recognises the merits of the Gambari process
– and the need for joint ownership of a
settlement based upon a bi-zonal and
bi-communal federation – I am disappointed
that he also recommends a parallel system of
UN shuttle diplomacy to “sound out each side
for any hints of movement from their entrenched
positions” on the Annan Plan.
Lord Hannay of Chiswick is a former British
Ambassador to the UN and before that the EU. He
was the UK’s Special Representative for Cyprus from
1996-2003
Yiorgos Lillikas is a former Republic
of Cyprus minister of foreign affairs.
Spring 2008 Europe’s World | 71

Why the EU may never get its
accounts straight
The EU’s auditors constantly face demands for a
Statement of Assurance, a kind of all-clear signal
for its accounts, and they constantly decline.
François Colling, a former member of the European
Court of Auditors, explains why and suggests a way out
The European Court of Auditors is
often misunderstood. Now that it is
30 years old, an age when you can
usually expect to have got your life in order,
the time may be right to clear up the various
misunderstandings and look to the future.
Auditing of the European Community’s
accounts was originally done by a body set
up in 1959 called the Audit
Board. As the Community
expanded, gained new
sources of money and
became increasingly
ambitious, the Court of
Auditors was founded in
1977. It was upgraded in
1992 under the Maastricht
Treaty, which introduced a
new instrument in the form
of a Statement of Assurance
(SOA) to be provided by the Court. The
SOA confirms not only that the Court
has checked the European Commission’s
financial transactions, but that the
Matters are not
helped when
journalists without
enough background
knowledge
misrepresent the
audit results and put
together inaccurate
reports
underlying operations have been checked
too, meaning the activities of the member
states and any other beneficiaries.
But right from the outset – the budget year
1994 – the Court has not been in a position
to issue an SOA in respect of the legality
and regularity of a major part of community
budget expenditure. Although the accounts
were essential reliable, the
“irregularities” identified by
the Court have prevented it
providing a clean bill of health
in the form of an SOA.
The long-standing absence
of an SOA is often taken
by the public to confirm
the view that the European
Union is inefficient in its use
of taxpayers’ money. This
undermines the authority of the Commission,
puts Parliament in a difficult position and is
detrimental to the “European idea”. Matters
are not helped when journalists without
72 | Europe’s World Spring 2008

enough background knowledge misrepresent
the audit results and put together inaccurate
reports of the parliamentary debates on the
audit, which run for several months each
year. In 2006, Siim Kallas, the Vice-President
of the Commission responsible for this area,
declared that his main objective was to
achieve a “positive” SOA, further confirming
its importance in the public’s mind and
putting more pressure on the Court.
Others seek sensationalism by bringing
fraud into the equation, which intentionally
or not, they confuse with error. Yet it’s vital
to point out that the overwhelming majority
of irregularities identified by the Court arise
from the complex rules and weaknesses
in management systems rather than fraud.
In any case fraud has nothing to do with
the SOA. If it arises, it is dealt with by the
Commission’s anti-fraud department.
It’s worth taking a closer look at the
“irregularities” that bedevil the issuing
of an SOA. Although the Court is the
Commission’s auditor, and its annual report
enables Parliament and the Council of
Ministers to check that EU’s financial affairs
are properly managed and so formally
discharge the accounts, the Commission
itself has little direct responsibility in
this. Between 80% and 85% of community
credits are managed and monitored by
the local and national governments of
member states. The Commission is only
directly responsible for the management
of its own administrative income and
expenditure: spending on internal policy
(including research) and some external
initiatives. Management of the remainder
of the credits (own resources, agriculture
and economic and social cohesion funds)
COMMENTARY
By Herbert Bösch
An interesting
proposal, but
unrealistic
François Colling wants to narrow
the scope of the European Court of
control. He also wants the SOA to cover
all areas of the budget over a three-tofive
year cycle. I disagree on both counts.
How can the Court of Auditors help to
is spent by the member states – mainly on
agriculture and structural funds – if it is only
required to audit those areas where the
Commission has sole responsibility? The only
way would be for national governments to
account to the European Parliament for their
highly unrealistic.
So is the annual SOA useful? At the moment,
it is common practice both in the private
auditors to issue their opinion on the financial
soundness of an institution every year. A shift
to multi-annual audits would risk errors passing
unnoticed for several years. The Commission
often says that “errors will be corrected later”,
but so far the discharge authority has no
evidence to support this. As long as the budget
is annual, control over its implementation must
also be annual. Without a yearly audit and
statement, the Council and Parliament would
lose an important tool in the shaping of future
decisions.
Spring 2008 Europe’s World | 73

74 | Europe’s World Spring 2008

falls under “shared management” with
the member states, or is “devolved” to
countries in the queue to join the EU or
is shared with international organisations
(humanitarian aid).
A number of the more cumbersome
administrative systems are due to be changed
during the next few years, particularly those
of member states. But they may prove to
be merely procedural ones. Against this
background, the financial management of
the Union is being reduced to the single
issue of the SOA, with the risk that the
focus will be on the legality and regularity of
the underlying transactions and not on the
prime objective of ensuring that community
funds are properly managed. Some observers
believe that if the budget management
system isn’t changed, the Court will never
be in a position to deliver a “positive” SOA.
Is the Court to blame, as some in the
Commission claim? So far, the EU executive
has always been able to convince Parliament
that the system is efficient and beyond
professional reproach. This is based on an
assurance model that estimates the inherent
risk of error, and then evaluates and tests
the quality of the internal audit systems.
This determines the scope of the validation
tests to be conducted on the underlying
operations in each of the areas audited.
Because an SOA essentially involves a
review of the systems and controls and
appropriate random sampling, it can only
give a positive result if the total number of
errors remains within a predefined threshold.
Once the budget has been executed, the
Court is then able to identify the error rate
COMMENTARY
Herbert Bösch
François Colling also makes a distinction
between legality and regularity audits
clearly prefers the latter. It is obvious that
financial audits alone are not enough to help
decision-makers identify whether spending
objectives were achieved in an economic,
effective and efficient manner. This would
require performance audits, but they can only
complement – not replace – financial audits.
That will remain true as long as performance
to which legality and regularity requirements
were respected.
One way the Court could cut down its use
of resources on legality and regularity audits –
which is the real problem here – would be to ask
the Commission and the member states to do
the work instead. The European Parliament has
already proposed that "national management
declarations" be introduced to this end in
three successive reports. The Court, however,
has only given this proposal a very lukewarm
welcome – just enough to be polite.
The Court's sole function should be to
give an audit opinion on the Commission's
financial statements and assurance
representations. This opinion should allow
whether EU funds have been spent for their
intended purposes, in accordance with all
relevant regulations and the principles of
sound financial management. It is up to
the Court to determine how this should be
achieved. The Court’s methods cannot be laid
down by treaty, which is a political and legal
professional practices.
Spring 2008 Europe’s World | 75

for the previous year. For most areas of the
budget, the findings and recommendations
are identical year after year.
What, then, is the point
of having professional audit
methods, and constantly
perfecting them, if the results
they deliver, year in year out,
systematically lead to the
same conclusions? The vast
majority of errors could be
avoided by tightening the
internal audit of the budget
circuits, simplifying the
rules and procedures and ensuring proper
certification of the management bodies of
the member states.
Is the Court to blame,
as some in the
Commission claim?
So far, the EU
executive has always
been able to convince
Parliament that the
system is efficient
and beyond
professional reproach
The fact is that audits of the legality
and regularity of community programmes
do not really have political
or financial consequences,
and since 1999 the European
Parliament has systematically
granted discharge, merely
recommending to the
Commission a multitude of
solutions aimed at the recurrent
weaknesses uncovered by the
Court.
The only instrument of
consequence at Parliament’s
disposal to penalise the Commission’s
“defective” budget policy is a motion of
censure requiring the mass resignation of
E.W. ADVISORY BOARD MEMBERS
76 | Europe’s World Spring 2008

the College of Commissioners, the so-called
“nuclear option” that is generally regarded as
a disproportionate measure. In delivering its
discharge for 2003, Parliament commented
"that the SOA would not give the legislator
or the public any indication as to whether
the money had been used efficiently…
it goes no way to sorting out the mess".
Parliament appears to be saying that the SOA
merely delivers a post-mortem and goes no
way towards improving the management of
community funds.
The Council, Parliament, the Commission
and the Court should on the basis of
years of experience, have engaged in a
political debate on the appropriateness
and effectiveness of the annual SOA in its
current form. A review of the Maastricht
treaty is worth considering, so as to limit the
Commission’s responsibility to those areas
for which it has sole competence, and thus
changing the scope of the SOA. Instead of
issuing an SOA every year for the budget as
a whole, would it not be better if the Court
looked at all areas of the budget over a 3-5
year cycle, because changes to financial and
operating conditions would be slow and
gradual in effect?
COMMENTARY
Herbert Bösch
The whole discussion about audit procedures
is an unfortunate consequence of the Court’s
“one member from each member state”
structure, which seriously affects top-level
decision-making. The need to take 27 political
as well as professional views into account
results in "lowest common denominator"
choices. A cut in the number of members would
certainly help, but might well be insufficient by
to make the Court primarily professional, rather
than predominantly political. Perhaps creating
a "College of Auditors General" would be the
best option, with five members plus a
Supervisory Board composed of one member
from each EU country.
As a result, the European Court of
Auditors would then be better placed to
examine the effectiveness and efficiency of
each of the community programmes, and
better able in the interest of the Unions’
taxpayers to deliver more worthwhile
conclusions and recommendations.
François Colling is a former member of the European
Court of Auditors.
Herbert Bösch MEP is chairman of the
European Parliament’s Committee on
budgetary control.
Spring 2008 Europe’s World | 77

EUROPEAN PARLIAMENT SPOTLIGHT
“IT IS UNACCEPTABLE THAT ONE-FIFTH OF THE
WORLD LIVES IN EXTREME POVERTY. COMBATTING
POVERTY IS OUR NO. 1 PRIORITY”
Joseph Daul, Chairman of the EPP-ED Group
sector and the removal of remaining barriers to
competition in the next few years so that we can
unlock the full potential of the industry.
The EU has often been criticised for being too
distant from its citizens. What would be your
plan to bring the EU closer to its citizens?
What should the EU be doing to improve the
global competitiveness of Europe’s financial
services and banking sector?
Creating an integrated EU market for financial
services is a crucial part of the Lisbon economic
reform process and is also essential for the EU’s
global competitiveness. Our financial markets are
going through far-reaching changes, with national
markets merging into a single European market
through cross-border consolidation and increased
competition within the eurozone. The EPP-ED group
strongly supports these developments because we
believe they will both improve the competitiveness
of the financial sector and also help to increase
long-term economic growth.
We think that the central philosophy of the EU’s
Financial Services Action Plan has proved sound. The
industry is benefiting from improved performance,
solid profitability and greater financial stability,
despite external market turbulence. However, the
internal financial market is far from complete and
some urgent problems still need to be addressed.
In particular, the situation over long-term savings
must be improved urgently if we are going to meet
one of Europe’s biggest economic challenges –
financing the huge deficit in pensions. The EPP-ED
hopes to see further consolidation in the financial
Our citizens expect good channels of communications
so they can hear about the achievements of
the EU. Therefore, we need to be as open and
transparent as possible. But people also want to
see concrete results from the EU in their daily lives
and know about the benefits of Europe for the next
generation. Thus we need better ways to inform
people about their rights and what Europe can do
for them.
Over the last six decades, the European project has
made some remarkable advances - bringing peace,
creating wealth and reducing inequalities. But
factors like demographic change are undermining
the European model, especially in areas such as
health, immigration, the environment, education
and the world of work. Globalisation, too, is a threat
to Europe’s long-term achievements. We want the
EU to take greater control of its future, rather than
simply reacting to events. For example, we need
to be able to adjust the European social model to
the new reality while preserving its essential values.
Consequently, we need to find ways to combine
increased security with greater flexibility. All change
implies risks, but the EU needs to manage key
aspects of these global changes more proactively.
The EU is the biggest development and
humanitarian aid donor in the world. What
should Europe be doing to emphasise this?
The EPP-ED believes in the equal value of all human
beings. It is unacceptable that around one-fifth of
the world's population lives in extreme poverty and

millions of people die every year from diseases such
as HIV/AIDS, tuberculosis and malaria. Combating
poverty is, therefore, the number one priority for
our group. But we also believe that EU development
cooperation must address the causes of poverty,
rather than the symptoms alone. So aid should
support the productive potential of the poorest
countries and create the necessary conditions
for sustainable development. Only then will these
nations be able develop strong, stable economies
which will no longer need international aid. One way
to promote this type of development is to open our
markets up to free and fair trade.
However, economic aid can only be effective in
a climate of peace. The EU must, therefore, also
prioritise actions that promote peace, freedom
and justice. In the past, aid has been given to
undemocratic and oppressive regimes. Alternative
ways must be found to assist poor people without
supporting dictators. We also want to strengthen
individual freedoms and rights through democracybuilding,
support for strong and transparent national
institutions as well as free and fair elections.
With 2008 being the European Year of
Intercultural Dialogue, what should its concrete
aims be and how could they be achieved?
EU enlargement – plus greater labour mobility,
migration and trade - have all increased contacts
between cultures, religions and ethnic groups. In
an increasingly multicultural EU, the promotion
of intercultural dialogue is fundamental. But if we
want to play our full role in the world, and engage
in dialogue over shared values with other cultures,
we need to reaffirm our own values and convictions.
Therefore, the priority for the EPP-ED group is to
defend freedoms that are linked to the rule of law,
democracy and the promotion of human rights.
Protecting family values at a time of demographic
change and falling birth rates, including the freedom
of education, are also essential pillars of EPP-ED
political activity. So we will continue to be at the
forefront of promoting freedom and denouncing
abuses of human rights. For us, there can be no
double standards.
Meanwhile, our group also plans to organise various
specific events during the Year of Intercultural
Dialogue, including workshops and discussions with
the representatives of different cultures. We will
continue our dialogue with the Orthodox Church
and extend our exchange of ideas to the Muslim
and Jewish communities.
What timeframe do you see for EU enlargement
in the western Balkans? What are the main
stumbling blocks and how should they be
resolved?
The EU has an immediate interest in this region and
has repeatedly said that all the countries of south
east Europe which are involved in the so-called
Thessaloniki Process could one day become EU
members. The EPP-ED group strongly supports
that approach. Croatia is well on its way to joining
the Union and the European Parliament hopes
the necessary national reforms will be completed
in time for their membership to be approved
before the next European elections in June 2009.
We need an equally coherent and decisive policy
for the other countries in south east Europe. I
am particularly pleased that the EU and Bosnia
and Herzegovina have signed a Stabilisation and
Association Agreement (SAA) after a period when
there were serious concerns about the country's
future. Bosnian politicians have now decided to
pursue the path of democratisation. For the EU,
this is a significant step forward in the process of
engagement, but we must remain clear that further
advances will require our conditions to be met.
For Serbia, the final signing of an SAA depends
on full cooperation with the International Criminal
Tribunal for the former Yugoslavia. The EPP-ED is
fully committed to this. The tribunal was established
to prosecute crimes committed during the 1990s
wars and to contribute to a permanent peace
in the region. For Kosovo, the unresolved issue
of its status remains a barrier to progress, but I
believe the plan drawn up by the former Finnish
president, Maarti Ahtisaari, provides a good basis
for a settlement. The region’s future is in the
European Union. However, these countries must
remember that they share huge responsibilities to
overcome their difficult past. The only way forward
is through regional cooperation, reconciliation and
the democratisation of institutions and practices.
Joseph Daul was interviewed for Europe’s World by
journalist Simon Taylor. This section is supported
by the EPP-ED Group (http://www.epp-ed.eu)

The EU must speed-up its Western
Balkans enlargement
The EU is dragging its feet over the Western Balkans,
warns Wolfgang Petritsch, the EU’s former Special
Envoy to Kosovo. He urges the Union to draw on its
experience with Bulgaria and Romania to accommodate
the special needs of the Balkan states
When some politicians talk about the
Balkan states joining the European
Union, they seem preoccupied by
the spectre of “over-enlargement”. It is high
time to take a look at the Western Balkans
as a whole – and not solely at the problem
of Kosovo’s desire for independence. For
a start, the EU needs to use
the Commission’s monitoring
tools on this volatile region –
such as the recent Progress
Reports – together with
various other studies to
produce a document with
a comprehensive regional
approach focusing on the
remaining steps leading
each country towards
membership.
The Western Balkans – a term used only
since 1999 – consists of Albania, Bosnia
and Herzegovina, Croatia, Macedonia
(FYROM), Montenegro, Serbia and Kosovo.
With these generally
reassuring prospects
for the Western
Balkans, what then
are the reasons for
the Union’s lingering
”enlargement
fatigue“?
Taken together they have roughly 22m
inhabitants – about the size of one of the
most recent EU arrivals Romania. Economic
developments there are promising, with
almost all economies of the region posting
high growth, increasing industrial production
and expanding exports. Inward investment
is steadily increasing as
business seems to believe
that remaining political and
security challenges – the
possible negative effects
of post-status Kosovo and
the Bosnia malaise – will be
overcome sooner rather than
later.
Much work has already
been done to re-establish and then
improve regional contacts. The EU-led
Stability Pact for South Eastern Europe
has since 1999 successfully coordinated
regional cross-border cooperation, for
the first time since the breakdown of
80 | Europe’s World Spring 2008

Yugoslavia. Energy, transport infrastructure
– roads, railways and waterways – and
crime prevention are among the diverse
sectors that benefited. The Stability Pact
has now been successfully transferred to
local ownership and has re-emerged as
the Sarajevo-based Regional Cooperation
Council, ready to build up regional and
multilateral standards for its members.
The recently revived Central European
Free Trade Agreement (CEFTA) is meant to
be the main regional engine for trade and
business generally. Remarkably, it will be in
line with the WTO rules and with the parties’
obligations towards the EU.
The South-East European Cooperation
Process is the first genuine policy forum of
the wider Balkans region, where countries
from the region, both EU members and
candidates, participate. This is one of the
relatively new regional organisations that
undoubtedly contribute to preparatory work
in the candidate and potential candidate
countries of the Western Balkans. But they
must not be seen as substitutes for the far
more comprehensive accession process.
With these generally reassuring prospects
for the Western Balkans, and considering the
relatively small size of the region, what then
are the reasons for the Union’s lingering
”enlargement fatigue“?
Accession is clearly impeded as long
as the states in the region continue to
experience fallout from Kosovo’s status;
and as long as nationalists – almost two
decades after the implosion of Yugoslavia –
continue to raise territorial questions; and as
COMMENTARY
By Marie-Janine Calic
And that means
that we need a
proper roadmap
for the region
The uncertainties over the Kosovo status
decision underline the fact that it is high
time for the EU to reconsider a longterm
strategy towards the region. Wolfgang
Petritsch´s proposal on a customised accession
strategy for the countries of the western
Balkans is timely and well-conceived: it would
give countries a better sense of direction and
would simultaneously mitigate regional fall-out
from the Kosovo solution.
has been a spectacular success, pointing to the
enormous transformational power of European
integration. In this process of on-going
unification, the western Balkans represent a
major piece of unfinished business. Only Croatia
and Macedonia hold the status of accession
candidates, while potential candidates like
Albania, Bosnia and Herzegovina, Serbia,
Montenegro, and Kosovo do not have anything
more than the vague promise of joining the
European Union sometime in the future.
It is true that through the Stability Pact’s
countries of the western Balkans a “European
perspective”. The Thessalonica summit of 2003
then reinforced the prospect of association with,
and potential membership of, the Union. But
Spring 2008 Europe’s World | 81

long as heirs to men like Radovan Karad i
and Ratko Mladi still hope to settle ethnic
scores by violent means.
Certainly, the pace at which individual
candidate countries move closer to the
Union continues to depend on the speed
of their reforms, and the support for them.
Europe, with the vital support of the United
States, has taken great strides to stop the
carnage of the 1990s and subsequently to
help rebuild the Balkan countries. But the
European Union has so far failed to prepare
in a comprehensive way the Western Balkans
for accession, and to follow through on its
own in line with the Thessaloniki promise of
2003. At their summit meeting in Greece’s
second largest city, EU leaders said that
they would be ready to admit the states
of Western Balkans when they came up
to the Union’s standards. This was not a
matter of charity; the Balkans would bring
value to the EU. But the EU’s work with the
MATTERS OF OPINION
Corruption may yet torpedo Balkan
candidates for EU membership
Corruption is so widespread in Balkan countries that the
European Commission considers it to be a major obstacle
to their EU membership. Measures to tackle corruption
in these countries are, according to a Commission report
last November, “not commensurate with the magnitude
of the problem”. Along with organised crime and ethnic
tensions, corruption is impeding progress towards the
Citizens of Balkan states seem to agree that corruption is
endemic in their country, according to 2006/2007 Gallup
surveys in the region. Bosnia and Herzegovina as well
are the countries where most people think corruption is
Even in Montenegro, where the perception of corruption
is least felt, it is still thought to be widespread in business
in each Balkan state surveyed – Albania, Bosnia and
Herzegovina, Croatia, Kosovo, FYROM and Serbia –
said that using gifts, payments or personal contacts to
influence officials does more harm than good. Despite
this, over seven out of 10 people who reported paying
a bribe to an official or civil servant in the previous year
said that promises made to them were honoured.
HOW WIDESPREAD IS CORRUPTION?
WHAT BALKANS CITIZENS BELIEVE
Kosovo
Bosnia and Herzegovina
Croatia
Macedonia
Albania
Serbia
Montenegro
0 10 20 30 40 50 60 70 80 90 100
government
business
Gallup WorldPoll Copyright© 2008 The Gallup Organization.
82 | Europe’s World Spring 2008

Balkan states to prepare for accession has
been piecemeal. And its lengthy internal
crisis over the proposed constitution also
damaged its reputation in the Balkans.
Let us hope that the Reform Treaty, given
its blessing by European Union leaders in
Lisbon last December, will help to reassure
the critics and pave the way for a new – and
more robust – phase of Balkans integration.
If not, one would indeed have to ask
what had happened to the European spirit
of the 1970s and 80s, when countries such
as Greece, Portugal and Spain, which had
just emerged from dictatorship and civil
unrest, were welcomed into the European
community of democratic states. Political
decisions taken then were far more risky
than those at hand in the Balkans. During
the Cold War period Western Europe had
realised that it had to include those countries
following the continent’s historic decision
to integrate. The Greek and Iberian success
stories demonstrate the wisdom of the
courageous decisions taken at that time.
What about today? The most recent
EU-members, Bulgaria and Romania, both
Balkan countries, are examples of countries
with special needs. While Brussels, it seems to
me, at first took the accession negotiations
a bit too casually, it subsequently took
a more responsible line and decided to
continue monitoring the two countries
even after their accession. It wants Bulgaria
and Romania to develop the effective
administrative and judicial systems that are
an obligation of membership of the Union,
as well as enjoying its benefits.
The EU could learn from this experience
to develop an accession strategy for the
COMMENTARY
Marie-Janine Calic
now new foreign political priorities are on the
EU’s agenda, support for the western Balkans is
decreasing. Enlargement “fatigue” risks becoming
translated into policy paralysis, postponing further
accessions to a distant future.
This ambiguity over the future of Balkan
accessions comes at a critical moment as the
EU now faces serious challenges in the region,
notably the uncertainties surrounding Kosovo´s
future status, as well as the constitutional crisis
in Bosnia and Herzegovina. The region still
suffers from such structural problems as weak
institutions, a poor business environment,
high unemployment and poverty. Against this
background, the region sees conditionality
more as an obstacle than an incentive to
developing closer relations with the EU. Muchneeded
reforms now risk being delayed.
Enlargement fatigue is already endangering
the efforts of the EU in Balkans stabilisation.
It risks discouraging EU oriented transition,
discrediting the reform-oriented political and
business elites and further widening the gap
between the Balkans’ accession countries
and the “left outs“. What is now needed is
that promises eventual full membership and
Western Balkan countries need both the
political perspective of EU accession and
concrete measures to aid the reform process.
The vague and remote prospect of “potential
candidature” simply won’t yield the sort of
institutional and economic improvements that
are needed.
A more effective EU policy towards the
region therefore has to be based on a much
Spring 2008 Europe’s World | 83

84 | Europe’s World Spring 2008

countries of the Western Balkans, whose
development has been delayed by a complex
post-conflict transition process. Their special
needs should be taken aboard in any new EU
approach. This would inject new hope into
countries seeking membership and at the
same time mitigate the fallout from Kosovo.
Progress-guided accession negotiations
would help build the much needed national
consensus in those divided societies.
It is in the interest of Europe as much as
it is in the interest of this region to speed up
the much delayed integration of the Western
Balkans into a dynamic Union. Unless the
EU acts quickly, the whole region might
slide backwards again, affecting its delicate
security and with dire social and economic
consequences.
After the Lisbon agreement on
streamlining the EU’s institutional
architecture, a reinvigorated accession
process will undoubtedly contribute to the
Union’s consolidation, both territorially and
politically. It will also strengthen the role of
the Union in the wider neighbourhood of
Europe, in the Mediterranean, the Middle
East and around the Black Sea.
COMMENTARY
Marie-Janine Calic
more pro-active approach, including a preaccession
roadmap with concrete target dates,
clear conditions and benchmarks to measure
progress. A parallel effort to build trust within EU
member states should also get more attention.
This should be a shared task for both EU and
western Balkan states. Countries in the region
need to show their determination to implement
of reforms and comply with EU conditionality,
while the EU must make it crystal clear that
such efforts will be rewarded in just the same
way as previous accession rounds.
The western Balkans countries still have a
long way to go before they can realistically
that an intelligent combination of political
incentives and re-focused assistance would not
help break down this last division in Europe.
Wolfgang Petritsch is Austria’s Ambassador in
Geneva to the UN and WTO. He was previously the
EU’s Special Envoy on Kosovo and the International
High Representative for Bosnia and Herzegovina.
Marie-Janine Calic is Professor of East and
South East European History at the Ludwig-
Maximilians University of Munich and the
College of Europe in Natolin. She is a former
political advisor to the Special Coordinator of
the Stability Pact for Southeastern Europe.
Spring 2008 Europe’s World | 85

86 | Europe’s World Spring 2008

Why Turkey may turn its back
on Europe
For 40 years secular Turkey has sought to become part
of Europe, but of late it has re-discovered its eastern
options. Mark Almond analyses the change in Turkish
attitudes and the pressures counteracting the EU’s
gravitational pull
Long plagued by earthquakes, Turkey
was for decades a haven of geopolitical
stability. Ever since the
collapse of the Ottoman Empire at the end
of World War I, Turkey’s republican leaders
had orientated their country to the west. And
Turkey’s secularisation and integration into
western structures gathered even greater
pace after World War II when Turkey became
the south-eastern lynchpin of America’s
strategy for containing the Soviet Union.
After Iran’s Islamic Revolution in 1979 and
Saddam Hussein’s spectacular falling out
with Washington in 1990, Turkey retained
her key role in US strategy even though the
Soviet challenge had disappeared. But since
2003 Turkey’s reliability as a US ally has been
called into question because Washington’s
actions in the Middle East have gone against
Ankara’s interests.
Turkey could still act as the cornerstone
of America’s double containment of Iran
and Iraq, but instead now risks becoming
the frontline in a new war against Iran, and
worse still finds herself facing a re-invigorated
Kurdish insurgency sponsored from northern
Iraq. Quite suddenly, the American alliance
that had secured Turkey against her historic
regional rivals of Russia and Iran, seems to
many Turks to be costing much more than it
offers in return.
Just as Ankara’s once unthinking
adherence to Washington has undergone a
profound re-evaluation since 2003, when
the Turkish Parliament voted to deny US
troops the use of their country as a launch
pad for the invasion of Iraq, so too has the
Turkish consensus on its decades-long EU
candidacy begun to wobble.
Both the dominant AK (Justice and
Development) Party and its secular rivals
remain publicly committed to pursuing EU
membership, but in practice doubts have
emerged about whether Europe wants Turkey.
The insistence of France’s President Nicolas
Sarkozy that a referendum should be held
there on Turkey’s admission suggests to
many Turks that years of painful adjustment
to EU norms will never produce the payoff
Spring 2008 Europe’s World | 87

of membership because they anticipate a
Gallic “Non”.
Politicians in Washington and Paris have
also been flirting with the idea of declaring the
brutal deportation of Anatolian Armenians in
1915 a genocide. This not only offends Turkish
self-esteem and the sense of victimhood
that many Turks feel about the ethnic
cleansing directed at their grandparents in
the century before 1922, but also carries with
it potentially ruinous demands for billions in
compensation. Many westerners fail to see
that declaring the 1915 events a genocide is
not just feel-good gesture politics but would
have tangible consequences.
Washington and Brussels both seem
convinced that Turkey has nowhere else to
go, so that snubs and brusque elbowings by
the United States or the European Union will
be accepted with fatalism by Turks who are
always ready to be the political handmaidens
of their western partners if never their bride.
But this cosy assumption in NATO and the
EU overlooks a profound tectonic shift since
1991 in Turkey’s geo-political position.
Immediately after the collapse of
the USSR, Turkey looked to the newlyindependent
central Asian states in a mood
of pan-Turkic romanticism. These remote
ancestral homelands at their time exercised
a hold on Turkish imaginations, but today it
is business opportunities, energy resources
and other practical matters that are creating
a loose Turkic “commonwealth” rather than
any overriding ethnic unity.
E.W. ADVISORY BOARD MEMBERS
88 | Europe’s World Spring 2008

But most striking is Turkey’s renewal of
relations with Russia without damaging its
ties to the newly-independent post-Soviet
states. Western fears of a resurgent Russian
empire look exaggerated from the other side
of the Black Sea.
Turkey’s ancient antagonisms towards
Russia, and grievances at the Russian
conquest of the Turkic lands to the north,
like the Crimea, briefly revived when the
Soviet Union imploded. In the early 1990s,
Turkish generals who were some of them
descendents of Circassian or Chechen
refugees from the expanding 19th century
Tsarist empire, saw the humiliation of
Yeltsin’s troops in Chechnya as part of a
long-awaited revenge. But over the last
10 years or so, Turkish policy towards the
former Soviet Union has moved into a more
forward-looking approach. Instead of relying
largely on ancient ties of language and
distant kinship, Turkey has been building
new links with an economic emphasis.
Russia, Ukraine and the Turkic republics of
central Asia all benefit from Turkish expertise
in large-scale construction projects, as well as
access to Turkish consumer products. At the
same time, Turkey’s growing economy and
population is importing more and more energy.
The Turkish governing elite has in the
meantime had to watch both the EU and
NATO embrace ex-communist countries
with far more shaky market economies and
shorter democratic records than their own.
“New” Europe’s leapfrog into the EU ahead
of Turkey after a far shorter waiting time led
one Turkish general ruefully to remark: “If
we had joined the Warsaw Pact rather than
NATO, we would be in the EU by now.”
In Ankara, there is a sense that the
EU’s elites have taken Turkey’s pro-western
loyalty for granted. Turkey’s anxiety to join
the EU as a way of proving her secular non-
Middle Eastern identity was for four decades
so strong that Brussels may now misjudge
the changing Turkish mood as well as the
change in its political generations.
At first sight, the events of last summer
seemed to confirm the fears of the anti-
Islamic Europeans. The triumphant
re-election of Recep Tayyip Erdogan’s
AK Party was followed by the election of
Abdullah Gul as the first president of the
Turkish Republic whose wife wears a head
scarf. Yet, even if many of their local activists
and voters are firmly Muslim in their views,
Erdogan and Gul remain committed to
the goal of European integration. Time is
running out, however, for them to satisfy
their supporters and silence their critics by
achieving it.
The problem is that Turkey’s once dominant
secular and pro-western elite has been thrown
into a crisis of direction by the electoral
triumphs of the AK Party, and even more by
the United States’ early courting of Erdogan
and Gul. Even if the AK Party can rely on the
allegiance of millions of voters and swarms
of new members anxious to join the winning
side, the secularists are deeply entrenched
in Turkey’s institutions, universities, media
and business. Both ordinary AK supporters
and disillusioned secularists are now deeply
suspicious of America’s actions and motives
in their region.
The tacit backing by key military figures
of the Turkish Parliament’s refusal to endorse
the March 2003 US invasion of Iraq was a sign
Spring 2008 Europe’s World | 89

that Turkish nationalism could unite the AK
Party’s rank-and-file MPs with their otherwise
implacable foes in the secular camp. Erdogan
and Gul have to tread on very thin ice in their
international policies precisely because of
this hidden alliance of opposites.
If the EU were to openly snub Turkey over
membership, or if America were to seem too
lax on the Kurdish problem emanating from
Northern Iraq, then a huge swathe of the
two camps that are divided over symbolic
issues like the headscarf could well unite.
That would prove very awkward indeed for
the west.
Turkey’s links with Israel, for instance,
have been strained by Israeli investment
in Kurdistan. Shimon Peres made a gesture
of reconciliation by choosing Ankara’s
parliament as the setting for the first
speech by an Israeli President to the
parliament of a predominantly Muslim
country, but Israel’s concerns about Iran
are far more serious than are Turkey’s.
Israel’s two most irreconcilable enemies,
MATTERS OF OPINION
Divided opinions in Turkey
The role of religion in the public sphere divides
opinion in Turkey. While the secular military remains
the institution in which people have the greatest
confidence and the wearing of Islamic headscarves is
banned in universities, the Justice and Development
At the same time, opinions on the role of Islamic
religious law – Sharia – are very different in Turkey
from those in other predominantly Muslim countries.
that Sharia should not be a source of legislation. Just
7% think it should be the only source of legislation.
In Egypt and Pakistan, in contrast, a majority think
Sharia should be the only source of law, while in Iran
and Indonesia, a majority say that Sharia should be a
source, but not the only source, of legislation.
Meanwhile, as Turkey pursues membership of the
trust in the organisation, according to a Gallup Poll
conducted in May 2007. Less than one-quarter of
people surveyed said that they trusted the EU “a lot”
or “some”. In contrast, over one-third answered that
WHAT STATUS FOR SHARIA LAW?
Turkey
Egypt
Iran
Indonesia
Pakistan
0% 10% 20% 30% 40% 50% 60% 70%
The only source of legislation
A source of legislation, but not the only source
Not a source of legislation
Gallup WorldPoll Copyright© 2008 The Gallup Organization.
90 | Europe’s World Spring 2008

Iran and Syria are in fact among the
most vocal supporters of Turkey’s hardline
stance towards the Kurds.
America’s conquest of Iraq has
de-stabilised Turkey’s western orientation
more than Washington cares to admit. The
idea of placing Turkey outside “the west”
would have seemed improbable a few
years ago, despite her Muslim population.
Most Turks don’t want to see their country
excluded from the west, but if the EU spurns
them by endlessly delaying their accession
while speeding up entry procedures for much
weaker though much less Muslim candidates,
then the real risk is that Turkey will feel strong
enough as well as embittered enough to
strike out on a new geo-political course.
Russia and Iran were once Turkey’s
great geo-political rivals, but today they
are her major markets and her energy
suppliers. Energy is the key to Turkey’s
new geo-political position. Her industry and
population are both growing dynamically
and each demands fuel. Energy politics
are producing a synergy between Turkey,
Russia and Iran. Turkey no longer feels
threatened by her historic rivals. Russia is
a rapidly growing market for Turkish goods
and services rather than a military threat.
While western Europeans may long for a
new cold war over energy, and fret about
Iran’s nuclear programme, Turkey seems
self-confident enough to deepen energy ties
with both Moscow and Teheran. The Turks
understand that an energy superpower is
only as strong as its customer-base. Neither
Russia nor Iran can afford to cut the flow
of oil and gas without provoking a massive
internal crisis.
Turkey has not turned her back on prowestern
energy suppliers, but has diversified
in her own interests. For instance, Romania
is to supply electricity by cable from its
Cernevoda nuclear power station – but
Romania’s ability to export electricity is an
index of the fall in industrial demand in the
EU’s newest member, while Turkey, even
though still in the accession queue, enjoys
booming demand.
Western Europe’s fears of another wave of
migration from EU enlargements still to come
may make local political sense, but risk turning
Turkey on its geo-political axis. In their different
ways, Washington and Brussels are both
alienating Turkish politicians, businessmen
and the population at large. Twenty years ago,
Turkey seemed trapped at the south-eastern
edge of the western world. Now a wider
world is competing for Turkey’s friendship, and
offering attractive inducements to Ankara to
deal on terms favourable to Turkey.
Straddling the fault lines between Europe
and the Middle East, Russia and the west,
Turkey today has a number of geo-political
options which make the assumptions in the
west about the country’s future seem naïve.
NATO and the EU can still work to keep
Turkey on board, but their sloth and
condescension may be pushing Turkey into
a new constellation that looks less
improbable on the far side of the Bosphorus
than from Brussels. And the west may soon
find it has more to lose from letting Turkey
slip her moorings, than the Turks risk by
steering a more independent course.
Mark Almond is Lecturer in History at Oxford
University's Oriel College.
Spring 2008 Europe’s World | 91

The dangers to the EU of
condemning Ukraine and Belarus
to political limbo
When it comes to a new enlargement round in eastern
Europe, the EU can’t go forward and can’t go back.
Krzysztof Bobinski looks at the unpalatable choices
that now confront Brussels
Amerit of the Berlin Wall was that it
marked a finite border for the European
project. It meant that few bothered to
ask where does Europe end? The answer was
obvious. But with its unlamented fall almost
20 years ago, that question of where Europe’s
borders might end up has become a staple of
the European debate.
The collapse of the Wall in 1989 saw
European Commission officials dusting off
their atlases to search for places about
which they knew little and cared less. Leon
Brittan, then a commissioner and supporter
of enlargement, recalls that some officials
and countries even hoped that the pre-1989
line could be held. They felt that enlargement
even to the Scandinavian and Alpine countries
was going too far. It was only in 1993 that the
Council officially recognised that membership
for all the former Soviet bloc countries could
be a long-term goal. “There were many sceptics
in the College of Commissioners with whom I
often locked horns,” he has since written. And
it took a further four years for the new round
of membership talks to get started.
Now, with the accession of the 10 former
command economies, the sceptics are much
fewer. But the pressure to enlarge once more
to the east is still there. Now that they’ve
been dusted off, those atlases are kept close
to hand in EU offices. And in contrast to the
1990s, the debate on Europe’s frontiers is
not confined to officials or think-tankers. In
mid-2005 the voters came on the scene when
in France and the Netherlands they rejected
the constitutional treaty. Both decisions were
partly motivated by a fear that enlargement
was going too fast and too far. “We don’t want
the Romanians deciding on how we should
order our lives” a Dutch professor recently
complained. Evidently a pause was needed.
Many of the former Soviet Republics, with
aspirations to EU membership as well as
Turkey, have become the victims of that loss
of nerve. The Balkans are also having to
92 | Europe’s World Spring 2008

wait. The Baltic countries – Lithuania, Latvia
and Estonia, part of the Soviet Union since
1940 – slipped in under the wire in 2004. But
they were all small and contiguous to the EU.
Ukraine is big, and Georgia is far away in the
Caucasus. Then there is Belarus, whose ruler
Alexander Lukashenko steadfastly refuses to
recognise the political logic of the past two
decades and clings to a model of authoritarian
rule which makes acceptance of his country by
the European Union impossible.
The European Union itself, is caught in a
trap. As the soul searching continues among
the “old” member states on the relevance
of the organisation – what is it actually for?
– the membership queue lengthens of eager
converts to the European ideal. Those with
candidate status, like Turkey or Croatia, are
locked into adapting their legislation and
institutions to the EU’s body of law, the
acquis communautaire. This is akin to a ride
on railway tracks, even if at times the Turks
may feel it’s more a fairground roller-coaster.
Yet the accession process firmly sets out the
reform tasks to be performed. It also gives
governments the impetus to challenge interest
groups as well as the criminal mafias who fear
the transparency the acquis’ implementation
would involve. The process may be difficult, but
it is ultimately benign – countries are moved
to reform by introducing market rules and by
adhering to the rule of law and democratic
procedures. Many of those countries that
have now entered the EU admit that their
politicians would never have had the courage
to bring in necessary changes if not for the
pressure from the Commission (the stick) and
the prospect of membership (the carrot).
If the accession process brings candidates
a measure of certainty, then each new state
in the membership queue brings a total lack
of certainty to the present member states –
especially the older ones. “We are proceeding
with enlargement, but it could mean the end
of the EU as we know it and the establishment
of no more than a large free trade zone” says
Jacques Rupnik from CERI in Paris. Rupnik has
just published “Les Banlieues de l’Europe”, a
collection of essays on the subject and argues
that “at least we should discuss the issue”.
Where does all this leave Ukraine? It
is a country of 47m people that has seen
itself as a prospective candidate for EU
membership since 2004 when the Orange
Revolution, that massive gathering of pro
democracy demonstrators in the capital,
Kiev, forced the country’s rulers to respect
election rules. Since then, another two free
and fair national elections have been held in
Ukraine. In contrast to Russia, its northern
neighbour, Ukrainian politicians have shown
that they are keen to make a break with the
communist past. Last November as President
Wiktor Juszczenko was inaugurating a year of
commemorations of the great famine of
1932-1933 in Ukraine, riot police in Moscow
and St Petersburg were breaking up small
street demonstrations of President Vladimir
Putin’s opponents. The contrast couldn’t
be greater. While Ukraine was remembering
the fate of millions of Stalin’s victims.
Russia was cracking down on a symbolic
show of opposition to the Kremlin. Russia’s
Nezavisimaya Gazeta newspaper editorialised
that the authorities in Russia were afraid
of taking the “moral and maybe material
responsibility” for the famine and attempting
to “wipe out the memory of the event”.
But there is more to Ukraine’s drive
for independence and a strengthening of
Spring 2008 Europe’s World | 93

links with the west than a rejection of the
region’s Stalinist legacy. Ukraine’s powerful
business leaders are fully aware of the fate
of the oligarchs in Russia and they see the
prospect of EU membership as a way of
legitimising their wealth and fending off
their Russian rivals. Not only do Ukraine’s
business barons want to develop their
business empires within the safety of a
legitimate free market framework, they also
want to be able to invest abroad in the EU.
There is a long way to go, however. Ukraine’s
political elites have mastered the art of getting
democratically elected but a consensus on
effective government sorely eludes them.
Russian influence is still strong especially in the
east of the country and the state apparatus
is weak. Ukraine needs the discipline of
the accession process if reforms are to be
implemented effectively. And that means a
promise from the EU of membership.
Belarus is different. It appears that the
mass of its 10m people are still so scared of
the rigours of the free market that they are
ready to ignore the calls of the democratic
opposition against President Lukashenko’s
authoritarian rule. That will hold true as long
as cheap energy is available from Russia as
a de facto subsidy to the Belarus economy
and consumer. But that time is coming to
an end, with energy prices rising and the
Belarus economy facing economic shocks
that could provoke unrest and pose a threat
to the country’s ruler.
Lukashenko appears to see the danger.
He has been making overtures to the EU to
counter what he sees as a growing rift with
Moscow. And the Belarus government has
been exploring the possibility of securing oil
supplies through Ukraine should the Russians
cut off supplies through the Friendship pipeline
to the country’s two oil refineries at Mosyr and
Nowopolock.
A tightly controlled privatisation
programme is also beginning, with revenues
from asset sales to be used to fill budget
shortfalls caused by rising energy prices. It
can reasonably be assumed that the regime’s
senior officials are being given a stake as a
nest egg, just in case things should change. At
the same time Lukashenko has given no sign
that he is willing to democratise his regime, let
alone release political prisoners. And that’s
a real problem. “It is only by staying firmly
on the democratic path that the doors to
cooperation and integration with the rest of
Europe can be opened up. This is the message
for Minsk,” said Carl Bildt, the Swedish foreign
minister, late last year in Warsaw.
Both Ukraine and Belarus are thus in a
state of flux. But if Brussels should decide to
leave in abeyance the possibility that they
might join the EU at some point in the future,
both also face being left in a political limbo
that in the longer term, could threaten the
security of the EU on its eastern flank.
In Ukraine, the EU’s failure to encourage
the government in its European aspirations
risks creating a growing disillusionment with
the West. This has already happened in
Turkey, where support for EU membership
has fallen markedly. That would strengthen
Russia’s position in Ukraine, where Moscow is
constantly ready to point out that the country
should return to its Slav roots and not flirt with
a West that doesn’t want it.
94 | Europe’s World Spring 2008

In Belarus, should Lukashenko’s regime
falter, then the democratic opposition would
be strengthened by the promise of having
the EU behind it. Otherwise, it is just as likely
that Russia would step in and use its proxies
to implement a more modern version of the
authoritarianism that Lukashenko espouses.
Soon it will be the 20th
anniversary of the Soviet
Union’s collapse and the
widespread abandonment of
the communist system by its
former satellites. Since then
a new generation has come
of age throughout the region,
brought up in conditions
entirely different to those
which their parents and
grandparents suffered.
The young people in the
EU’s new member states are
self-confident and well-travelled. They feel
themselves to be citizens of a prosperous and
secure continent. In Poland last autumn, it was
these younger voters who helped to dismiss a
government whose incipient authoritarianism
and xenophobic attitudes threatened to
isolate their country once again. They are
already integrated into the West.
Ukraine and Belarus
are in a state of flux.
But if Brussels should
leave in abeyance the
possibility that they
might join the EU,
both also face being
left in a political
limbo that could
threaten the security
of the EU
authoritarian attitudes which in Putin’s Russia
appear to be in the ascendant.
This is what is at stake in the debate about
the EU’s further enlargement into the post-
Soviet east. The issue is whether western values
are to take root in those countries that on the
whole want to be integrated
with “Europe”, or whether they
will instead drift away into a
grey area from which they will
sooner or later challenge the
values and democratic ways of
the West.
Now is unfortunately not
the best time to make this
argument. The EU’s “old”
member states don’t want to
hear of further enlargement,
and the new ones have so far
been unable to make a
convincing case for future
expansion to the east. But the Dutch professor
who fears that Romanians will start to order
life in Holland might reflect that Romania is
itself changing as a result of its EU membership.
Refusing to countenance a fresh enlargement
to the east means that at some point those
countries, that are outside the EU, will start to
threaten the values he holds so dear.
Further east, their contemporaries have
also grown up in a post-Soviet world. In
Ukraine, it was in the main young people who
during the Orange Revolution rejected a return
to the past. But as reforms falter and hopes
of integration with the West wane, so will the
feeling of exclusion by the West grow. The
danger is that this will build support among
the young, in both Belarus and Ukraine, for the
Krzysztof Bobinski runs Unia & Polska, a pro
European NGO based in Warsaw. He was for many
years the Warsaw Correspondent of the Financial
Times.
Spring 2008 Europe’s World | 95

96 | Europe’s World Spring 2008

Europe badly needs a
Nordic-style “knowledge policy”
As the practical use of knowledge becomes vital to
Europe’s economic progress, Per Unckel, a former
Swedish Minister of Education and Science, describes
how his country revitalised its education system to give
students a competitive edge for the future
The Nordic countries have performed
well economically. Their various
social models covering such areas
as the labour market, the justice system
and education have helped to give them a
competitive edge globally. Now I believe we
in the north can take a lead in providing the
European Union with that vital key to future
competitiveness, a knowledge model.
It is obvious that a knowledge policy is, or
has to be, much broader than just education
or just research. A knowledge policy has to
cover everything from kindergarten training
to knowledge transfer from universities to
companies.
Let us see what has to be done, and
what in practice is being done. To start
with, such a policy deviously requires broad
and powerful investment for research and
development. Sweden is investing more than
any other European country in research and
development and well above the EU-target
of 3% of GDP. Many countries are investing
less. And even Sweden’s 4% might not be
enough. China, India and the United States
seem in this respect to be more foresighted
than most EU countries.
Even large investments in R&D may,
however, be of limited use if knowledge can’t
be transformed into business. Knowledge
transfer in Europe is often seen simply as
providing organisational structures linking
universities and companies. Such structures
are important but must be combined with
a general business climate where success
is rewarded and where failure is not treated
as a human and financial catastrophe. The
success of the US is to a great extent based
on this kind of thinking.
Higher education has to be taken seriously.
Students have to see their life at university
as demanding as their professional career
will be. Yes, it is true that the university years
should also be seen as a time to develop
critical thinking, and as a value in itself. But
this should not be an excuse for too little
individual effort. Governments should offer
students possibilities that are in tune with
Spring 2008 Europe’s World | 97

the demands of the knowledge society. In
many European countries, university policies
are not tailored for such needs and are far
too much a heritage of yesterday.
When it comes to basic vocational
training, there are European traditions that
could be developed in line with modern
realities. But a potential conflict would
have to be resolved between involving
companies in improving training and their
more immediate concerns to use their time
and other resources effectively.
Let us look now at educational systems
generally. Most European systems are
based on practices and theories that are
very old. Although education possibilities
and structures have gradually been widened,
in practice they have remained very much
the same. The major shortcoming of most
European educational systems is that they
are working in monopoly conditions. Students
have nowhere else to go, and teachers, if
they want to remain in their profession, have
to stick to what the curriculum offers.
As is the practice in monopolies, the
consumers, in this case children, are often
seen as a homogenous mass, where all
needs and expectations can be met with the
same pedagogical approach. But schools
must be able to meet needs and abilities
of the individual child in a way that makes
learning a stimulating adventure.
Sweden has a system that other countries
might find worth studying. Its schools are
financed by local communities and work
within the framework of a national curriculum
designed by parliament and government.
These rules are for everyone to follow.
But individual schools are, in Sweden, run
on a competitive manner. Anyone can apply
for the right – licence – to run a school, be
they parents, teachers or even companies.
The National School Board is, in principle,
instructed to say yes to an application if it is
likely that the proposed school can fulfil the
national goals and has a solid financial base.
A non-public school need not necessarily
offer something different to that available at
a public school. The reason for this liberal
approach is that non-public schools are not
merely seen as supplement to the public
schools, but as fully-fledged alternatives.
A community where a non-public school
is offering its services has to support it with
the same amount of money, or voucher, per
student that it provides to public schools.
The voucher is the same for every student.
Schools that receive vouchers cannot charge
additional fees.
After this system was adopted at the
start of the 1990s many non-public schools
were established. The pioneers were often
parents’ or teachers’ cooperatives, usually
with a special pedagogical philosophy. Later,
companies operating chains of schools have
come to play an important role.
The variety of schools has increased
throughout Sweden. The voucher system
means that all students, irrespective of
family income, can attend non-public
schools. Even in rural areas there is now
a wide choice of schools and it seems
that the overall quality of Swedish schools
has benefited from competition. The very
existence of non-public schools has created
a demand for reform also of public schools. If
there is a difference, it also seems that non-
98 | Europe’s World Spring 2008

public schools often are better at dealing
with children with learning problems.
There are, of course many alternatives
to what has been done in Sweden to
revitalise education. But three features seem
particularly important when looking at the
experience gained. Reform was based on a
combination of public and market systems.
It was general in its form, without demanding
that non-public schools had to be special in
order to be licensed. And reform reached
out to cover all students.
This is what Sweden can offer, probably
the most ambitions voucher system in the
world but screwed into a social framework
that is deeply rooted in the country. It is
worth studying because, at the end of the
day, it is using common principles of
competition in an area where earlier such
principles had not been generally accepted.
One thing is for sure. “No change” is not an
acceptable alternative.
Per Unckel is a former Swedish Minister of Education
and Science.
MATTERS OF OPINION
Europe's “Entrepreneurial gap”
Europeans lag behind their US counterparts in their
desire to become their own boss. Across the European
of people say they would like to be self-employed; while
they would prefer to be self-employed, compared with
37% who would prefer to be an employee.
said that their school education helped develop an
entrepreneurial attitude, compared to 63% of US
respondents. Portugal, Malta, the Czech Republic
and Ireland were the EU countries where the largest
proportion of people said that school had helped
develop their initiative and entrepreneurial skills.
education helped develop an entrepreneurial attitude:
among the same age group, over 64% said that this
was the case, above both EU and US averages.
The main reason given by Europeans for preferring to
be employees is that they want a steady job with a
HOW DESIRABLE IS IT TO BECOME SELF-
EMPLOYED WITHIN THE NEXT 5 YEARS?
32%
28%
40% 40%
46%
42%
The desire to own one’s own business can be observed
to have shrunk on both sides of the Atlantic in recent
work for themselves. This figure rises to 62% in the new
member states. They are also more likely to say that their
2
0
0
4
2
0
0
7
EU15
Source: Eurobarometer 2007
2
0
0
4
2
0
0
7
EU10
2
0
0
4
US
2
0
0
7
Spring 2008 Europe’s World | 99

SPONSORED SECTION
MACEDONIA WINS MORE INTERNATIONAL
HIGH-TECH INVESTMENT
the government’s tax cuts and reforms in tax
procedures. Macedonia says it now offers
investors the most attractive fiscal package in
Europe, with a flat rate of 10% for corporate
and personal income tax - and no tax at all
levied on re-invested profits.
The UK-based precious metals corporation,
Johnson Matthey, is the latest international
company to locate new high-tech production
facilities in the Republic of Macedonia. The
company has decided to build a state-of-theart
factory to manufacture catalytic converters
for global export in one of Macedonia’s four
technological-industrial development zones.
It is another step on the road to recovery
for Macedonia as an international supplier
of automotive components – a role that
had apparently disappeared with the collapse
of the former Yugoslav car industry. Other
multinational component manufacturers
have also shifted their European bases to
Macedonia, alongside information technology
and pharmaceutical companies. They have
all been lured by a combination of official
investment incentives, good transport and
communications networks, and a skilled local
labour force.
Macedonia’s government says its top priority is
to attract foreign direct investment, a markedly
pro-business stance that distinguishes the
country from its neighbours. Its strategy is
backed by the World Bank which has ranked
Macedonia as the fourth best market reformer
worldwide. The Bank has, in particular, praised
Macedonia’s efforts to cut red tape for
business have also gone down well in the
World Bank and the European Union. The
so-called ‘regulatory guillotine’ project, for
example, allows entrepreneurs to register a
new company in less than four hours and at
a cost of just 42. The European Commission
recently commented: “In June, the authorities
started to implement the ‘regulatory guillotine’,
involving a significant reduction of redundant
legislation, introduction of the ‘silence is
consent’ principle’, lowering of fees in a number
of areas and simplification and shortening of
a number of procedures.” The Commission’s
Progress Report on Macedonia published
last November also underlined Macedonia’s
sustained macroeconomic stability, a reduction
of the trade deficit, a payback of foreign debt
and an increase in official reserves.
The Macedonian government has also
established four technological-industrial
development zones, or free economic zones,
which are planned to become hubs for clean
manufacturing industries and the development
of new technologies. Investors in these TIDZ are
entitled to a 10-year exemption on corporate
income tax and a 50% cut in personal income
tax for five years. They are also exempt
from VAT and customs duties on goods, raw
materials, equipment and machines. Land in

over-investment and outward labour migration.
Meanwhile, economies further east lack the
stability necessary for major investment
projects, Mizo noted.
these zones is available for long-term lease of
up to 99 years at concessionary rates.
Another crucial attraction for foreign
investors is Macedonia’s strategic location
in the centre of south-east Europe; it sits at
the crossroad of the major trans-European
Corridors 8 and 10. A well-developed
transport infrastructure enables swift access
to assembly plants in central Europe and
Turkey. And, since Macedonia is less than
one day’s drive from most central European
countries, manufacturers benefit from low
transportation costs for both their products
and parts. Transport experts calculate, for
example, that it takes a maximum of two days
to truck 20 tons of goods from Macedonia to
German plants in Munich at a cost of around
1,300. An equivalent delivery to Gebze in
Turkey would take less than one day and cost
about 1,000.
Macedonia also prides itself on an abundant,
flexible, highly skilled and competitive work
force. The average monthly gross salary is
370, among the lowest in Europe. Viktor Mizo,
head of the republic’s investment promotion
agency, observed that, “Excess capacity and low
average wages put the country in an excellent
position to capitalise on leading manufacturers’
search for new, reliable markets in eastern
Europe.” He added the flexible labour market in
Macedonia contrasts with the situation in most
central European economies, which suffer from
The value of the country’s skilled workers
is already evident in the automotive sector,
where local companies supply multinationals
with clutches and engine blocks. The country’s
long tradition of producing car components
means Macedonia is now particularly well
placed to manufacture high value-to-weight
and labor-intensive products such as safety
systems, electronic components, precision
plastic products, aluminum and zinc die
casting and grey iron casting components.
And, if the workforce lacks any specific skills
needed by foreign investors, Macedonia’s
universities and other educational institutions
are willing to provide courses to match
international requirements. For instance, the
Department of Mechanical Engineering in Skopje
helped to train 165 students in anticipation
of demand from Johnson Controls, which
began pilot production of high-end electronic
components in Macedonia last December.
The presence in Macedonia of international
corporations such as Société Générale,
T-Mobile, Mobilkom Austria, EVN, Johnson
Controls, Johnson Matthey, Lukoil, Siemens
and many others indicates that the republic
has succeeded in creating a highly favourable
business environment. The government’s
comprehensive incentives package, together
with the image-building and awareness-raising
promotional campaign ‘Invest in Macedonia,’
has put the country firmly on the world
investment map.
This section is sponsored by Invest Macedonia, the
Agency for Foreign Investments of the Republic
of Macedonia. For more information, please visit:
www.investinmacedonia.com

102 | Europe’s World Spring 2008

Finding a new EU budget
won't be easy
The EU is looking hard at ways to overhaul its finances.
Marc Laffineur, Vice-President of France’s National
Assembly, wants an end to such “special cases” as
Britain’s rebate while offering a strong defence of the
Common Agricultural Policy (CAP)
When Margaret Thatcher banged on
the table at the European Council
in 1984 to say, “I want my money
back”, British demands for a budget rebate
were fully justifiable. Then it was a special
case, but now it no longer has the same
legitimacy.
And here we can see the “paradox of
Europe”. When they signed the Reform
Treaty in Lisbon, last December, the 27
member states signalled their willingness to
make the sort of sacrifices that will create a
Union that is not just a free-trade area but
an ambitious political project. Yet, those
same 27 member states also demonstrate
their self-interest when it comes to the EU’s
budget.
So if Europe wishes to become more
consistent and dispel uncommunitarian
attitudes that are so greatly at odds with
their European political ambitions, then the
EU’s budget has urgently to be reformed,
not least by ending all “special cases”.
Originally, the European Community
budget was financed out of “own resources”
derived from VAT revenues and customs
duties. But all of this soon proved inadequate,
and from the 1980s those own resources
were supplemented by contributions voted
by national parliaments based on each
member state’s GDP.
The “GDP fund”, although obscure to the
public, is fair and equitable to the extent that
it ties national contributions to a country's
level of prosperity. But there remains room
for endless debate on “net balances” and the
notion of “fair return”. In my briefing report
to the French National Assembly in March
of last year I said that the existing system
is “undemocratic and does not promote
the commitment to European integration”
since it is “inordinately complex, lacks
transparency and is totally incomprehensible
to the European public.”
A two-stage approach to reform now
favoured by the European Parliament
Spring 2008 Europe’s World | 103

appears to be the best solution on offer as it
greatly simplifies the method of calculating
national contributions. Under stage one
of the proposed budget reform, a fixed
percentage of GDP, of the order of 1%,
would be demanded of each member state.
Everyone's contribution would be calculated
fairly, taking account of differences in wealth
and ending the various exemption devices,
beginning with the British rebate. However,
such a reform is politically feasible only if
accompanied by a review of how the EU’s
money is to be allocated.
This is an issue that must not be brushed
aside in the coming debate on budget
reform. On the contrary, it needs to be
a central aspect of reform, and all the
more so because this review should take
place very soon. The British have demanded
that a deadline be set for 2008-09 to
“review the entire financial framework
relating to revenues and expenditure, and
continually to press ahead with and extend
modernisation”.
This review poses two major challenges;
the British rebate and the CAP. The rebate
problem looks the easier to solve. It is a case
of moving gradually towards its termination.
But no one is contemplating the dismantling
of the CAP.
The CAP has to change, but it is important,
now more than ever, to reaffirm the Union's
need to be self-sufficient in food. With the
worldwide growth of population, there are
fears of shortfalls in food production. It is
E.W. ADVISORY BOARD MEMBERS
104 | Europe’s World Spring 2008

vital not to think of agriculture purely as a
budgetary burden. It is primarily a strategic
strength that, contrary to what some may
believe, could even turn out to pay for itself
in the short-term.
In recent months, there has been
increasing pressure on world commodities
market, that has substantially raised food
prices. The European Union has a strong
card to play in this situation, as it proved last
September, when it ended the compulsory
set-aside of 10% of land. In other words, our
farmers were allowed to put an extra 4.4m
hectares of land under cultivation. Set-aside
was a device put in place in 1992 to combat
over-production; now there is a moratorium
on it to meet possible under-production.
This shows that the CAP has already had to
adapt to changing times.
But negotiations on the EU budget
review cannot be conducted on the basis
of our needing to amputate part of the
CAP to restore some kind of balance with
a reduction in the British rebate. There is
a common interest in ensuring that our
agriculture should be highly-productive so
as to guarantee food security for Europe's
citizens. The community's preferred choice
is clear: we must create reserves through the
use of land, thereby reducing CAP subsidies.
With the expiry of the deadline clause
in 2008-09, Europe's budget must work
within the priorities of the Lisbon strategy
by transferring any extra funds to research
and development (R&D). Even though the
European Parliament managed to ensure
that the Galileo navigation satellite project
would be financed entirely from community
funds in the 2008 budget, it is undeniable
that the budget share set aside for R&D
remains too low, even though it is vital to the
Union's global economic competitiveness.
At very least, it is clearly inadequate to meet
the European Council’s March 2000 target of
making the Union “the most competitive and
dynamic economy in the world by 2010”.
The second stage in the review of the
EU’s funding mechanism is planned to
start in 2014. National contributions will
be gradually replaced by the Union’s own
resources. Various proposals have been put
forward on how to raise this new money. But
few of them are technically, politically and
financially acceptable or feasible. The two
most recently proposed sources are VAT
and corporation taxes.
Corporate taxation seems to me to be
preferable for three reasons. First, companies
are the main beneficiaries of the single market,
which provides economies of scale, and
freedom of transactions, travel and capital.
Second, there would be fewer communication
problems. Last, and most important of all,
because tax competition between EU member
states has become a serious obstacle to
building a united Europe.
If such a tax were to see the light of day,
it would not be before 2014. It seems
sensible to me to remind all interested
parties that seven years were needed to
harmonise the VAT base, so it would clearly
be advantageous to use the time now
available to ensure that the corporate tax
base, too, is harmonised.
Marc Laffineur is a Vice-President of France’s
National Assembly and a UMP Deputy for
Maine-et-Loire.
Spring 2008 Europe’s World | 105

106 | Europe’s World Spring 2008

It’s time Europe stopped crying
“foul” to justify its protectionism
The EU system shoots itself in the foot when it levels
trade defence measures against low-cost competitors,
warns Henrik Isakson of the Swedish National Board
of Trade. He argues that European companies lose more
than they gain from protectionism
Defending the European economy
against unfair international trade
practices has long been a key
element of EU external policies. It is almost
an instinct among some politicians and
business leaders that if competition is
deemed unfair the European Commission
should be asked to marshal new trade
defences. Yet, the concept of trade defences
is problematic in today’s globalised economy.
What are we defending ourselves against,
and more fundamentally, what are “unfair”
trade practices?
Let’s start with trade defences. In the
unfortunate absence of international
competition regulations to prevent abuse
of dominant market positions like predatory
pricing and other anti-competitive activities,
trade defences are a second-best option.
Defence measures usually take the form of a
temporary tariff and are normally supposed
to correct a distorted import price and
raise it so that the European producers do
not have to compete against under-priced
(dumped or subsidised) products. By far
the most widely used instrument is an antidumping
duty to impose some restraint on
companies behaving in an anti-competitive
way. Unfortunately, this comes at a price. By
increasing tariffs, it is a measure that also
raises prices for consumer durables and
other input goods imported for European
industry, which often means a welfare loss
for society as a whole. This has long been
known, but of course is ignored by those
interests in Europe seeking trade defence.
Today, though, there is a new reality that
increases the economic risk of opting for
trade defences. The very word “defence”
creates an image of a nation state, that is
commercially connected to the rest of the
world only via traditional trade. For such
a state, all imports would truly be foreign
goods, so that its trade defences would
consequently be directed only against foreign
interests. In today’s globalised world that
can hardly be the case. Although we still have
traditional trade, we also have foreign direct
investments, off-shoring and outsourcing.
We have global supply lines in which goods
Spring 2008 Europe’s World | 107

are developed in one country, manufactured
in another and assembled in a third. Capital
and know-how flows across borders, so
traditional bi-lateral trade patterns have
been replaced by a complex new web of
international commercial relations.
This clearly has major implications for
the whole concept of trade defence. If one
wants to defend oneself, then one must have
a clearly defined adversary to defend oneself
against. This is generally no longer the case.
If you have a mobile phone, assembled
in India, but developed and designed in
Finland, is it an Indian or a Finnish product?
When European corporations outsource
manufacturing that is labour-intensive to
low-cost countries but keep the rest of the
production process in Europe, they are
greatly complicating matters for anyone
trying to evaluate the economics of trade
defence.
Using trade defence in a globalised
world is risky; the sheer complexity of the
globalised economy makes it uncertain
who a measure will actually hit. To aim an
anti-dumping measure against an Asian
manufacturer may instead inflict most of
the damage on a European producer. That
to some extent happened in the October
2006 anti-dumping action against leather
shoes, when the EU decided to impose
anti-dumping tariffs against China and
Vietnam. Sweden’s National Board of Trade
conducted a case study of five European
shoe producers in different countries and
market segments to establish where the
value added in their production processes
is created. Examples from high quality
fashion shoe producers in Italy and Spain,
showed that things are not always what
they seem, and are seldom as simple as
they used to be. Although manufactured
in China and Vietnam, the shoes were
designed, developed and marketed in
Europe and these largely intangible
production processes before and after the
physical manufacturing constituted 80%
of the value added. In other words, shoes
from China were 80% European! For less
expensive shoes, with lower sums invested
in the intangible parts of the production
process, this figure was not as high, but
is still more than 50%. The anti-dumping
measures imposed by the EU therefore hit
European companies hard.
One might perhaps argue that this
was only one case study involving a few
companies in one particular sector. Yet
there is every reason to believe that these
figures apply equally to other companies
in other sectors, because the main reason
that manufacturing is relocated to low-cost
countries is precisely because costs are low,
so the part of production that is physical
manufacturing is often only a small part of
the total value added.
If we turn to sectors with a higher human
capital content, electronic consumer goods,
for instance, they have much higher R&D
costs than the shoe sector, so manufacturing
these goods on an assembly line in a lowcost
country is probably not very costly in
comparison to R&D and other intangible
costs. For more advanced goods, the EU
value added (if the intangible part of the
whole process of production is in Europe) is
quite high. Imposing trade defence against
such goods, even if legally warranted, is
clearly likely to create problems for the
globalised European industry.
108 | Europe’s World Spring 2008

Many would say that these problems are
the price to pay for ensuring that companies
do not engage in anti-competitive behaviour,
or receive trade distorting subsidies. But
the majority of trade defence measures
are probably not directed against anticompetitive
business practices, at least not
in the sense of EU competition law. More
often it is the politics of protectionism that
are the crucial factor behind trade defences.
Anti-dumping measures are frequently
used against products that are simply so
cheap that they pose a threat to European
producers, even though that is no more
than fair competition.
This raises another, more fundamental
criticism of the way Europe’s trade defence
mechanisms are misused. That is when
they are resorted to even out natural
comparative advantages, that a competitor
may enjoy. International trade is by definition
a competition between companies on an
uneven playing field. Some companies, for
example, have easier access to capital,
whereas their competitors cannot get
access to finance at reasonable rates of
interest. Some have excellent infrastructure
at their disposal, while their international
competitors may have to contend with
constant power cuts. Some companies have
to pay excessive taxes, others operate out
of tax havens. Some find it easy to recruit
top notch engineers, whereas for others the
abundance is cheap labour.
These problems and opportunities
have much to do with where in the world
companies operate. Are they based in
Europe, in a developed country or in an
emerging market in Asia, or perhaps one of
the least developed countries in Africa? The
legal and economic framework a company
operates within sets the conditions for which
it is able to compete in the world market,
and is an essential part of the comparative
advantages all trade is based on.
To create a completely level playing
field is impossible and nobody advocates
it. Many politicians and business leaders
are nevertheless keen to focus on some of
the differences they don’t like, from their
particular point of view, that they would
like to see levelled out. They therefore
focus on the differences that they find
most troublesome, and nowadays they
often find that the playing field is tilted in
favour of China. They complain the Chinese
have all the “unfair” advantages. Yet from a
developing country’s perspective European
companies have so many other advantages,
notably superior technology.
The bottom line is that the EU really
should not, under the guise of countering
unfair trading practices, restrict competitors
from exploiting natural comparative
advantages just because we cannot compete
with them. When we do so we have to
accept increased prices and thus lower
welfare. And what will happen when our
trade partners seek to even out our own
comparative advantages? More and more
countries around the world are already
equipping themselves with anti-dumping
laws, and that is an ominous sign. European
companies could yet find it harder to get
market access overseas, and then a vicious
circle of protectionism would develop.
Henrik Isakson is Senior Adviser of the Swedish
National Board of Trade.
Spring 2008 Europe’s World | 109

This enlargement mess
The EU has fallen victim to an enlargement fallacy,
says Armand Clesse of the Luxembourg Institute
for European and International Studies, and wrongheadedly
believes it can remodel its new members in
its own image. The price may be Europe’s long-term
economic decline
During its formative first three
decades, the European project
was protected by the Iron Curtain,
which relieved Europeans of the need to
ask elementary questions about its goals
and limits. And when the
European Community of
six was enlarged to include
the United Kingdom, Ireland
and Denmark, and after that
Greece, Portugal and Spain,
that created an illusion of
political progress even
though the EU was in fact
moving away from building a
genuine political community.
Since the fall of the Berlin
Wall in 1989, Europe has
seemed increasingly at a loss. Unable to
cope with new challenges, it has contented
itself with references to loose politico-moral
obligations; the mantra has been that we
cannot leave central and eastern Europe out
in the cold and in a geo-strategic void. But the
EU has proved incapable of coming forward
with a meaningful political design. More and
The EU is a gutless,
spiritless, headless
organisation held
together by little
else than material
incentives. It is the
kind of Europe
the British or
Scandinavians have
always cherished
more, it is the victim of divisions, rivalries
and mutually incompatible demands.
Thus the EU risks paying the price for
decades of complacency. Brussels is the
weak, cold heart of the Union,
regulating and de-regulating,
imposing norms and standards,
pumping money but not
political content through the
veins of the organisation.
The EU is a gutless, spiritless,
headless organisation held
together by little else than
material incentives. It is the
kind of Europe the British or
Scandinavians have always
cherished, and that the other
nations no longer have the
spirit to oppose.
There is now a serious risk of a slow
erosion of the EU’s basic ideological
consensus, its political fabric and its social
tissue. If so, Europe will be unable to
avoid long-term economic decline. These
trends may be accompanied and reinforced
110 | Europe’s World Spring 2008

y resurgent nationalism and right-wing
extremism that will focus on foreigners and
immigrants, and specifically on Muslims.
Europe’s predicament highlights the
many omissions and blunders that have
been committed since the end of World War
II. For Europe has yet to come to grips with its
new and somewhat depressing geo-political
situation. The EU’s situation is further
aggravated because it is so ill-prepared
to tackle the deeply irrational forces that
now confront it. Its enlargement policy has
been deeply flawed since its inception. The
Union has deluded not only the public but
also itself by proclaiming that geographic
widening – and above all the feat of raising
less economically developed countries to
its own standards – was a sign of vitality. It
has frequently applied superficial material
criteria to candidate countries instead of
more rigorous and comprehensive ones.
And it has done so without examining the
impact of enlargement on the consistency
of the whole, or its capacity to act both
economically and politically within Europe
and globally. The EU has therefore been
growing in size but shrinking in substance.
Nor has Europe’s enlargement policy ever
become part of a lucid long-term integration
concept in which a certain level of economic,
social and political integration would have to be
reached by prospective new members. Perhaps
at each new stage of European integration –
long before any further enlargements could be
considered – there should have been a critical
review of what has been achieved and what
remains to be done.
Now that a perhaps fatal level of confusion
and disarray has been reached, "enlargement
fatigue", if not “enlargement aversion”,
certainly seems to have set in. But this
aversion is not the sign of a clearcut rejection,
but rather of resignation and capitulation.
The EU has fallen prey to an enlargement
fallacy – namely the Union’s irresistible power
of attraction, persuasion and transformation,
and its capacity to remodel the whole of
Europe in its own image. Instead of setting
rigorous conditions, the Community has
relied on the hope that once inside, the new
members would learn quickly, adapt and
move towards the EU’s standards.
A dramatic example of this wrong-headed
approach has been the issue of minority
rights. The Union failed to apply the criteria
it had set in Copenhagen by choosing
to ignore the disastrous situation of the
Roma in many central and eastern European
countries, above all in Romania where up
to 2.5m people of that ethnic group live
in abject poverty and are daily victims of
contempt and discrimination. Their situation
is not much better in Slovakia and in some
other neighbouring countries. It is only now,
with the Roma having come to Rome, that
the Romans want to put the issue high on
the EU agenda. Unfortunately, the incentives
for Romania and the others to act, and
the means of pressure available to other
member states are limited.
The EU is an organisation that seems
unable to cope with existential challenges.
Blame the architects of the Treaty of
Rome for this, if you like, but any lack of
courage at that time should be seen in
the context of the failure of the proposed
European Defence Community (EDC) and
of a European Political Community (EPC) in
Spring 2008 Europe’s World | 111

1954. Then there was the political lethargy
of the 1960s and 1970s. In any case, the EU
has largely betrayed the European ethos of
the late 1940s and early 1950s and never
seriously tried to define a telos. Today, more
and more people have the impression that
instead of alleviating the predicaments of
the nationstate, the EU reinforces them, and
that it is less and less able to
deal with the most pressing
issues of our time.
One might say that the EU’s
enlargement policy reflects the
politics of embarrassment, as
characterised by a high degree
of irrationality, incoherence
and arbitrariness. Why, for
example, admit Romania or
Bulgaria and not first Croatia
or Serbia? Is it because the
EU has become a hostage
of the Hague tribunal? One
cannot avoid the impression that the people
in charge in Brussels and in the capitals
were often using specious arguments to
justify such decisions. National affinities and
antipathies have also played a significant
role. Is it not somewhat paradoxical that
those who created so much political disaster
in Europe in the 1930s and early 1940s,
the Germans, should have exercised an
increasingly decisive influence on the building
of the new European political order?
Looking to the present, one may wonder
whether the EU of 27 has now embarked
on a journey towards political irrelevance.
The EU’s political periphery seems to be
growing, while the core is petering out. Is
the organisation falling prey to geographic
One may wonder
whether the EU
of 27 has now
embarked on a
journey towards
political irrelevance.
The political
periphery seems
to be growing,
while the core is
petering out
overstretch that is a concomitant of its
growing heterogeneity, so that the centrifugal
forces prevail over the centripetal ones? The
EU’s so-called Reform Treaty will certainly
not stop the trend towards the Union’s
slow dissolution. Nor could the ill-fated
constitution have achieved that modest
goal. To survive, the Union must now confine
itself to a minimalist agenda
and refrain from touching
upon any questions of real
political substance.
To be fair, when talking
about the pernicious effects
of enlargement, one has first
to admit that the new
members have joined an EU
that is already decaying
politically. It may, in the short
and medium-term, be able to
preserve economic
achievements like the single
internal market or the single currency, but
any strengthening of its political
underpinnings is hard to imagine. Debate
about the EU’s “finalité” will only trigger
endless discussions that are fruitless and
frustrating. This means the Union will have
to devote much of its energy to preventing
the discrepancies between the political and
the economic dimensions of integration
from becoming too pernicious. For the sake
of its own self-esteem, it may well stick to
its discourse and lofty aims, but it will know
inwardly that these are to remain
unattainable goals.
Armand Clesse is Director of Luxembourg’s
Institute for European and International Studies.
112 | Europe’s World Spring 2008

Power to the regions, but not yet
farewell to the nation state
European integration has been accompanied by the
emergence of sub-national regional governance, says
Luk Van Langenhove. He considers whether the
governments of regions may start to replace those of
nation states
Our world has long been one of
states. The earth, with the
exception of Antarctica, is divided
among the territories of about 200 states,
whose creation has since medieval times
considerably reduced the number of
political-economic governance units. By
1948, these had been consolidated into
only 74 countries in the world. Since then,
the number has been rising, witness the
quadrupling of the UN’s membership. Many
of these new countries are relatively small –
87 have populations of less than 5m.
Today’s world of states is the result
of complex trade-offs between economic
size and heterogeneity, and is also the
result of a process where the concept of
national sovereignty successfully competed
against other forms of governance. Ever
since the landmark Treaty of Westphalia in
1648, the building blocks of the world order
have been national sovereign states on the
one hand, and international multilateral
international arrangements created by them
on the other.
The Westphalian order that emerged in
Europe and now spans the world proved to
have a stabilising effect, making it difficult
to change borders to create bigger units,
especially now that war has largely been
abandoned as a means of expanding territory.
But some existing states are under pressure
to split up as a result of nationalism and calls
for cultural autonomy. Large countries where
centralised government is under fire may
face demands for devolution. So although
existing states do not favour the creation
of new states, they will probably continue
to emerge.
Bigger entities of governance continue
to be created, however, as a result of
regional integration, including trade
arrangements, security alliances and even
political co-operations. A new world order
seems to be emerging. Along with states
Spring 2008 Europe’s World | 113

and global institutions the building blocks
include regions and regional organisations.
The trend towards global governance clearly
has enormous implications. In an article
in the UN Chronicle in 2004 I hinted at
the possibility of a UN reform in which
regional organisations would be given seats
in the Security Council along with states.
It looked like social science
fiction then, and some will
probably say it still is. But
Javier Solana, the EU’s foreign
affairs chief, posed much the
question in the last issue of
Europe’s World in his article
“Countering globalisation’s
dark side”, when he asked
whether at some point in the
future there could be seats
for regional organisations in
the Security Council.
The EU is the world’s most advanced
form of supranational regionalism. It
has managed to develop a model that
incorporates political elements in a deep
economic integration, and challenges
existing assumptions about governance.
Although not the model for the rest of
the world, its underlying idea of a regional
integration with co-operation over culture,
politics, security, economics and diplomacy,
has to be an incentive for political and
economic efforts in other regions to achieve
stability and prosperity.
European integration has been
accompanied by “de-federalisation”:
the emergence of sub-national regional
governance. The EU is not just a collection
of 27 member states; it is also an association
A new world
order seems to be
emerging. Along
with states and
global institutions
the building blocks
include regions
and regional
organisations
of hundreds of local regions. Regions can
be found at all territorial levels. One could
organise nice academic debates about what
a region actually is, but a more pragmatic
approach is just to accept the plurality of the
concept and focus on what regions are not.
They are not sovereign states! But regional
governance does seem to be related to what
is happening with and within
states. Some will argue that
we are witnessing a decline of
the importance of states for
many issues of governance,
and that regions of all kinds
are filling the gap.
The view that regions
as entities of governance
could or should complement
or even replace states is
shared by a growing number
of scholars. Kenichi Ohmae argued in his
book “The End of the Nation State” that
regional economies are the new engines of
prosperity while “traditional nation states
have become unnatural, even impossible,
business units in a global economy.” Robert
Cooper in “The Breaking of Nations” noted
that “the deconstruction of the modern
state is not yet complete, but it proceeds
rapidly” through the European Union and
movements towards greater local regional
autonomy. And Mark Leonard in “Why
Europe will run the 21st century” called for a
“regional domino effect” that should lead to
a world of interdependent regional clubs.
I myself believe that an announcement
of the “death of the state” is – to paraphrase
Mark Twain – gravely exaggerated. In the
foreseeable future, states will remain
114 | Europe’s World Spring 2008

important centres of governance. But
in an attempt to face the challenges of
globalisation, states can – on a voluntary
basis – turn to world and local regions
to complement and even strengthen their
power. As such, the world of states would
gradually become a world of states and of
regions.
for sub-national regional governance and
the forces of devolution must be handled
with care. Kosovo has shown that the
process of state building is not yet over.
Recent developments in Belgium also
show how quickly legitimate claims for
cultural autonomy and regional economic
governance can trigger separatist claims.
Such a transformation has two main
drivers. One is the diminishing capability
of states in the global age to
deliver good local governance.
The other is the growing
limitations of multilateral
organisations to deliver good
global governance in dealing
with global threats. The pillar
of the Westphalian world
order, the state, and the pillar
of multilateralism, the global
international organisations,
are both under siege. But states and
international organisations can adapt and
give birth to innovations that provide better
governance. A world of states and regions
could well be such an innovation that holds
the promise of a renewed and better system
of global and local governance. An extension
of this idea might suggest that regions
themselves could replace states as centres
of governance.
For the EU to have a key role in this
process, it has to have the internal
mechanisms and institutional arrangements
that will give it an effective presence on
the world stage, as foreseen in the Lisbon
Treaty. Promoting regional integration and
strengthening regional organisations needs
to be high on the EU’s agenda. But support
An extension of
this idea might
suggest that regions
themselves could
replace states
as centres of
governance
This role of the EU, assisting regional
development both in Europe and globally,
would not be a movement
against states. It is a way for
states to respond better to the
challenges of globalisation. In
that sense one could say that
we are not moving towards
a post-Westphalian world
order but towards a neo-
Westphalian world order.
The old world of states has
made positive developments in governance,
but has also created what Nobel prizewinning
economist Amartya Sen called an
illusion of destiny that has resulted in
incredible violence. The multiple world of
regions could be a way to replace the illusion
of a single national identity with the more
realist view that people hold plural regional
identities. As such, the world of regions might
not only be a more complex world but also
one with more chances of peace and freedom.
Europe can help to make this challenging
vision real.
Luk Van Langenhove is the Director of the
Comparative Regional Integration Studies programme
of the United Nations University.
Spring 2008 Europe’s World | 115

116 | Europe’s World Spring 2008

POLICY DOSSIER: BANKING & FINANCE
Europe’s bumpy road to a single
financial marketplace
The emergence of the US sub-prime mortgage crisis is a vivid demonstration of just how
globalised finance and banking has become. Just a few years ago it seemed inconceivable
that problems in such an apparently obscure US market could lead to huge losses at some
of the world’s largest international banks and generate a global credit crunch that looks
set to continue afflicting the world’s interbank markets.
The economic dangers from this liquidity crisis are clear. While banks remain fearful of
lending to each other, lending to consumers and businesses could eventually be reined-in,
and that could constrain economic growth. The European Commission has said that it
expects eurozone economic growth to slip from 2.6% in 2007 to 2.2% this year.
The good news is that the scale of European financial integration since the euro’s
introduction may lessen the impact of this crisis. The European Central Bank’s bold
response is perhaps the most dramatic example of this. When interbank lending rates
began to soar last August, the Federal Reserve Bank injected a mere $24bn of liquidity
while the ECB committed a huge 95bn of funds in its attempts to head-off the credit
crunch. The crisis is still with us, but things could have been worse.
Europe’s growing financial muscle is making a strong impression in the US where
corporate America is increasingly calling for a shift towards European-style flexible
“principle-based” regulation. And with the creation of the Transatlantic Economic Council,
following last April’s US-EU summit, Washington now appears to accept that financial
rule-making must be performed in equal partnership with Europe.
THE UPS AND DOWNS OF THE EURO
After decades of hesitation and doubt, Europe’s
single currency was launched in January 1999. Peter
Sutherland, chairman of Goldman Sachs
International and a former EU Commissioner said it
was the EU’s most important political project in 40
years. But many, especially in the US and the UK,
questioned whether the new single currency would
survive. Their concerns were over the long-term
sustainability of a “one size fits all” monetary policy
for all eurozone members, and doubts over whether
it would be possible to pursue a credible single
monetary policy without a single fiscal policy.
With hindsight, those fears now look exaggerated.
Against the backdrop of a solid global economy
since the euro’s birth, the eurozone’s economy has
begun to grow solidly. Comparing the US economy
with the 13 EU countries in the single currency, the
eurozone emerges as a giant with annual output of
over $11,300bn, compared with a gross domestic
product (GDP) of just over $13,000bn for the US.
The single currency - designed to be a
Deutschemark-like “hard” currency - has also been a
force for stability. In the second half of the 1990s, as
prospective euro members’ interest rates converged
downwards towards German levels, and then in
Spring 2008 Europe’s World | 117

1997-98 as the Asian and Russian debt crises
rumbled around the world, the economies and
financial markets of the future euro club coped
admirably. As the EU’s Monetary Affairs Commissioner
Joaquín Almunia remarked not long ago: “European
Monetary Union (EMU) provides stability and
protection in a fast changing global economy …
increased resilience to external shocks and removal
of exchange rate risks have helped achieve…
consistently low and stable inflation rates.”
But the eurozone may now be entering a more
difficult period. The crisis in the US sub-prime
mortgage sector appears to be signalling a wider US
economic slowdown and when the US sneezes the
rest of the world tends to catch cold. The liquidity
crunch in the world's interbank markets, which has
its routes in that sub-prime mortgage crisis and
which began in August 2007, also carries wider
economic risks.
Despite headline-grabbing attempts last
December by the world’s major central banks - the
European Central Bank (ECB), the Fed, the Bank of
England, the Swiss National Bank and the Bank of
Canada - to inject liquidity into the troubled
interbank market, interbank lending rates remained
only marginally below their seven-year highs. With
the liquidity crisis showing few signs of petering out
quickly, banks look set to remain wary of lending to
each other. Against that backdrop, banks may
eventually have to rein back their commercial
lending. When credit is in short supply, economic
growth eventually suffers.
Last November, the European Commission
said that an unexpectedly sharp correction in
house prices resulting from the credit squeeze
could pose risks to European growth. The
Commission expects growth to "hold up
reasonably well", but it nevertheless expects
eurozone economic growth to fall from 2.6% in
2007, to 2.2% in 2008 and then down to 2.1% in
2009. "Residential construction investment will
have a significant correction and will contribute
much less than in the previous period to our
growth," remarked Commissioner Almunia. In
Germany, the eurozone’s economic powerhouse,
retail sales fell 3.3% between September and
October last year, yet with eurozone inflation
reaching 3% in November the ECB’s capacity to
tackle those weaker conditions with interest rate
cuts is limited.
EUROPE'S SLOWING ECONOMY:
REAL GDP GROWTH
3,5%
3,0%
2,5%
2,0%
1,5%
1,0%
0,5%
0,0%
2006 2007 2008 2009
EU
euro area
source: European Commission
Even without a cloudier economic outlook,
Europe’s new currency and its wider financial
markets still have a long way to go to achieve the
levels of efficiency needed to service the giant EU
economy. The ECB’s Jean-Claude Trichet noted in
mid-2007 that there is much left to do before the
EU’s banking and financial markets achieve the
depth of integration and sophistication needed
to contribute fully to stability and growth. The
ECB reacted boldly late last summer by injecting
huge amounts of liquidity into the interbank
market as the credit squeeze began, but there is
no clear structure for coping with economic or
financial crises.
Unlike America, Europe doesn’t speak with one
voice in inter-governmental financial institutions.
Just who is responsible for managing the euro’s
value internationally, should that be needed, is still
unclear. Europe lacks the political underpinnings
the US brings to its dollar policy, and this denies the
EU a global influence commensurate with its
economic weight.
The euro has nevertheless been a greater
success then many predicted. Politically, the
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POLICY DOSSIER: BANKING & FINANCE
divisions in the EU over such issues as the
constitutional treaty would probably have been
greater had it not been for the euro. And the euro’s
existence has reduced the risk of political problems
becoming compounded by currency crises; it is
thus a cohesive and disciplining force.
THE EURO’S PATH TOWARDS A MORE
GLOBAL ROLE
The euro, after the US dollar, is the currency in
which foreign governments most want to invest
their reserves, and companies to do international
business in.
Foreign exchange reserves held by
governments around the world to meet their
international obligations intervene in exchange
markets and cope with external payments crises
have been multiplying fast in recent years, and
now total around $5,000bn. Of that, $3,300bn
can be identified by currency in IMF statistics,
and since 1999 the share of -denominated
reserves has surged from less than 18% to almost
26%, with the US dollar dropping from 71% to
less than 65%. By 2010, says Deutsche Bank
Research, the euro’s share of international reserve
assets could reach 30-40%.
INTERNATIONAL RESERVE ASSETS (%)
How the euro has been catching up with the
dollar
80%
70%
60%
50%
40%
30%
20%
10%
source: IMF
USD
Euro
$
1999 2001 2003 2005 2006
THE EU’S FINANCIAL SERVICES
ACTION PLAN
When the European Commission proposed its
Financial Services Action Plan (FSAP) in May 1999,
the intention was to tackle the morass of national
financial regulations and create a genuine single
market in financial services. Endorsed by the
European Council in Lisbon in March 2000, it was
seen as essential to accelerating growth at a time
when unflattering comparisons were being drawn
between US dynamism and “old Europe”. The US
then appeared to have moved to an altogether
higher plane of growth, productivity and capacity
for technological innovation.
To improve the EU’s economic performance, it
was thought vital to mobilise savings and allocate
them more efficiently. The FSAP would seek to
remove entrenched protectionist barriers to the
cross-border integration of wholesale financial
services for large companies, and to the retail sale
to ordinary consumers of financial products across
borders.
Action would also be needed to make sure that
Europe’s financial markets would have solid
regulatory underpinning to reduce the risk of the
euro’s international credibility being threatened by
a major financial crisis.
By December 2003, in an unparalleled flurry of
legislation, all but a handful of the 42 components
of the FSAP had been approved - a process in sharp
contrast to the decade or more of haggling over the
EU’s Takeover Directive. Only a few items, notably a
new capital adequacy regime for insurance
companies, Solvency II, are today still going through
the EU’s legislative processes.
Just as fundamental to the development of
Europe’s financial markets is the Capital
Requirements Directive (CRD), which establishes
new methods for calculating banks’ regulatory
capital adequacy needs. Although based on Basle
II, the Bank for International Settlements’ global
capital standard, it is being applied within the EU in
different forms to all banks. In the US, only the
Spring 2008 Europe’s World | 119

largest banks may be required to implement Basle
II, so now there are fears there that the EU could
benefit from a competitive advantage through the
CRD’s progressive implementation, which began in
January 2007.
Other key elements of the FSAP include the
Prospectus Directive to harmonise the prospectuses
backing the sale of securities, the Market Abuse
Directive countering insider trading and market
manipulation, the Third Money Laundering Directive,
and the Transparency Directive dealing with disclosure
requirements for quoted companies. EU-listed
companies are also now required to adopt
International Financial Reporting Standards, creating
a common accounting system across the EU.
Although the FSAP’s legislative phase has now
been largely completed, there is still a long way to
go before it’ll have its intended impact on EU
financial markets. And thanks to the liquidity crisis
still afflicting the interbank market, various aspects
of the FSAP are coming in for scrutiny.
LESSONS OF THE CREDIT CRUNCH
The heart of any national banking and financial
system is a country’s central bank; in the EU’s
eurozone area it is the Frankfurt-based ECB that is
responsible for managing monetary policy for the
euro, now the currency for 15 of the EU’s 27 member
states.
The ECB’s primary objective is to maintain price
stability, which it has defined as an inflation rate
“close to but below 2%.” And the ECB has largely
succeeded in maintaining the anti-inflation credibility
of the Bundesbank, Germany’s central bank.
But the ECB - as with any national central bank
- also has a responsibility to help ensure the
stability of the eurozone's financial system. That
may include influencing banking regulation policy
or providing liquidity to the financial system. But
the ECB's role regarding financial stability is less
clear than in the case of a national central bank
working with the national finance ministry. The
eurozone has no finance ministry, only the unwieldy
Ecofin Council of all EU countries’ finance ministers,
and the informal Eurogroup of eurozone finance
ministers. The ECB has nothing more than an
advisory and coordinating role in the field of
banking supervision, and is not a fully-fledged
lender of last resort.
But the ECB can provide liquidity to the markets.
It did so in 2001 following the 9/11 terrorist attacks
and, more dramatically, in August 2007 when liquidity
in the interbank market was drying-up. Last summer,
the on-going problem of defaults in the US subprime
mortgage sector began to cast doubts over
the financial health of those banks holding securities
backed by such assets. As the banks became wary of
lending to each other, the ECB responded by injecting
a huge 95bn of liquidity into the market in early
August to try and push interbank borrowing rates
down and head-off a credit crunch.
The ECB's intervention was also by far the most
active of any central bank. The New York Federal
Reserve Bank, for instance, injected only $24bn at
that time, and the Bank of England was soon being
criticised for its unwillingness to extend the list of
eligible collateral that could be used in return for
borrowing central bank money. In December, the
Bank of England back-tracked on that point after
announcing plans to offer funds to the market
against a much wider range of collateral, including
mortgage-backed securities. In contrast, the ECB
had from the start adopted a more liberal approach
to collateral.
Few would doubt that the ECB passed the test
of the crisis management aspect of the liquidity
crunch with flying colours - a further indication,
perhaps, of the growing maturity of the eurozone's
institutions. But the crisis has nonetheless
highlighted a wider range of financial stability issues
for European policymakers. And perhaps inevitably
- given the highly visible run on the deposit base of
UK mortgage bank Northern Rock - many of those
issues have reflected the questions surrounding
banking regulation.
Because of banks’ growing reliance on secured
funding via securitisations and off-balance sheet
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POLICY DOSSIER: BANKING & FINANCE
vehicles, it has become clear that lenders are
vulnerable to sudden disruptions of structured
credit markets. The need now being identified is for
banks to further strengthen their liquidity risk stress
tests to reflect a range of different scenarios -
including the protracted closure of a broad range of
securitisation markets.
Trichet also confirmed last November that the
ECB, along with the European System of Central
Banks Banking Supervision Committee, were
working on this area. The Bank of England, with the
UK’s Financial Services Authority, has also focused
on liquidity management as a major priority and is
pushing for extra liquidity measures in the Basle II
capital adequacy rules.
Thought is also being given to whether existing
EU rules inhibit effective regulatory responses. In
the UK in particular, the role of the Markets Abuses
Directive has come under scrutiny after the Bank of
England’s Governor Mervyn King highlighted the
provisions of the directive as a key reason for
blocking discreet support for Northern Rock. The
UK’s central bank argued that being forced to
publicly announce the support operation virtually
ensured a run on Northern Rock’s deposit base. The
capacity to have acted with more discretion, it is
argued, could have limited the scale of the required
support operation and removed some of the danger
of contagion spreading to the rest of the banking
sector.
As central banks are the only lenders of last
resort, the wisdom of separating banking regulatory
function from the central bank - especially in the UK
- is now being questioned, and a similar debate is
underway in Germany, where the regulatory agency,
the Bundesanstalt für Finanzdienstleistungsaufsicht
(BaFin), is equally separate from the Bundesbank.
The role of the rating agencies is under scrutiny,
too. The Committee of European Banking
Supervisors and the Financial Stability Forum, are
being prompted to consider whether rating agencies
face a conflict of interest by advising institutions on
packaging debts whilst also awarding them high
quality ratings.
The apparent failure of rating agencies to alert
investors to the growing credit difficulties in the US
sub-prime mortgage market may be another issue.
France’s President Nicolas Sarkozy and German
Chancellor Angela Merkel are both reportedly keen
on tougher regulations for rating agencies.
Most significant of all, perhaps, the credit crisis
has re-emphasised the limitations on any single
national authority from tackling increasingly
international problems. Policymakers across Europe
are therefore stepping-up the level of cross-border
consultation. A key institution is the Financial
Stability Forum, which is linked to the Bank for
International Settlements and brings together
finance ministries, central banks and regulators. In
the private sector, a number of major players,
including Deutsche Bank, have begun to call for a
single pan-EU regulator.
WHY EUROPE CHERISHES THE CITY
OF LONDON
How important to the EU economy are banking and
finance in general, and the City of London in
particular? According to a report on behalf of the
City, Europe’s wholesale financial services
businesses was worth 195bn in 2006, accounting
for close to a third of total global wholesale
financial services output of 643bn, or 1.4% of
global economic output.
Between 2001 and 2006, the EU wholesale
financial sector has been expanding at around 6% a
year, roughly comparable to the rate of growth of
the US sector and much quicker than the average
1.9% growth rate between 2001 and 2006 for the EU
economy as a whole. Wholesale financial services
are thus a substantial growth sector and now
account for around 1.7% of the EU’s GDP.
The EU has also become a dominant force in
the global bond market − in 2006 around 32% by
value of outstanding global bonds were held in
Europe. In the equity markets, however, the US
remains the leader in terms of market capitalisation,
trading levels and the size of its equity markets
compared with GDP.
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Just over half of the gross value added by the
EU’s wholesale financial services industry is
clustered in eight financial centres, with London,
the Ile de France region around Paris and Frankfurt
accounting for just over a third of the total. But in
the EU, London accounts for 28% of gross value
added by sector. And London’s European dominance
of the major international financial markets - as
demonstrated by the table below - is unquestioned.
London is well on the way to matching New York as
the world’s top international financial centre, thanks
in large part to the influx of American investment
banks.
equalling or even supplanting London as Europe’s
top financial centre now seem a distant dream.
The City is a major European asset, and
policymakers should be mindful of possible threats to
its position. The spectacle of thousands of savers
queuing last September to withdraw money from
Northern Rock - the first run on a UK bank in over a
century - can have done little for London's international
image. That in turn raises concerns over issues that
range from the appropriateness of separating the
regulatory function from the lender of last resort and
the adequacy of deposit protection, through to the
WHERE THE DEALS ARE MADE
Foreign equities turnover 33% 42% - 3% -
Derivatives turnover
Hedge fund assets 66% 21% 1% - 2%
Source: International Financial Services London
Although the British currency is still the pound
sterling, the City joined the euro, practically
speaking, right at the currency's birth. In the final
years just before the euro's launch, the Bank of
England played a robust role in leading the City's
technical preparations. That along with the City's
other fabled advantages - the English language,
being in the right time zone to do business in Asia
and New York on the same trading day, and the
City's pro-globalisation instincts - and it was
perhaps inevitable after the euro’s birth that London
would remain Europe’s main financial centre.
London also benefits more than other centres
from the growth in financial services. It's estimated
that there are nearly a quarter of a million wholesale
financial services sector jobs in London, while in Ile
de France there are 100,000 and in Frankfurt just
57,700. Frankfurt’s hopes just a few years ago of
possibility that some EU directives may hinder effective
regulatory responses to a crisis.
THE JURY IS STILL OUT ON MIFID
EU policymakers need to balance protection for
European consumers with an awareness that too
restrictive rules can damage centres like London
that are largely wholesale based. Last November’s
implementation of the Markets in Financial
Instruments Directive (Mifid), which is designed to
protect small investors, is seen by many in the City
as an example of this. In 2006, the UK's Financial
Services Authority estimated that the cost to the
City of implementing Mifid would be about £1bn,
with ongoing costs of £100m a year.
Mifid has drawn comparisons with America's
onerous Sarbanes-Oxley Act. It is widely accepted
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that it was Sarbanes-Oxley that allowed London to
grab a huge slice of business - especially Russian
and Asian business - away from Wall Street.
Mifid could nevertheless be a catalyst for change
by giving EU financial centres the regulatory
foundations for a pan-European securities market.
When Mifid was enacted, the European Commission
said the new directive “would allow investment firms,
banks and exchanges to provide their services across
borders on the basis of their home country
authorisation (and) benefit investors, issuers and
market participants by allowing banks and other
investment institutions to compete fairly with stock
exchanges.”
It is true that eliminating stock exchanges’
monopoly status maybe no more than evolutionary.
Already corporate bonds, financial derivatives and,
through various alternative trading structures,
shares, are exchanged “over-the-counter” in the UK
and the US, rather than on the floor of an exchange.
But Mifid provides a regulatory framework for this in
countries like France and Italy, where national rules
have long required trading to be carried out in a
regulated market place.
Mifid has therefore helped pressure Europe’s
bourses into cutting trading costs. That, alongside
technological change and financial market
globalisation, has been a factor driving pressures
on bourses to merge. This is evidenced by the
succession of (unsuccessful) bids for the London
Stock Exchange, the LSE’s own bid for Italy’s stock
exchange, and the successful merger of the multinational
European exchange Euronext and the New
York Stock Exchange.
WHY CROSS-BORDER BANK MERGERS
ARE FAIRLY RARE
Six months after Europe’s finance ministers
gathered in September 2004 at the Dutch resort of
Scheveningen for an informal Ecofin Council
meeting, Rijkman Groenink, the then chief executive
of Holland's ABN-Amro bank launched a takeover
bid for Italy’s Banco Antoveneta. Ironically, Mr
Groenink had been one of three top bankers invited
to Ecofin to brief ministers on barriers to crossborder
EU banking consolidation.
A background paper for their discussion had
underlined the way that the closer integration of
Europe’s national banking sectors would boost
competition and lower borrowing costs for companies
and individuals. The threat of takeovers by large US
banks was also a factor behind European banking
consolidation. The paper highlighted obstacles to
cross-border deals, including fragmented and
incompatible regulatory structures and tax, legal and
cultural differences.
But it wasn’t long before ABN-Amro itself ran
headlong into another obstacle, rampant
government-backed protectionism. It was only after
a bitter struggle and a scandal surrounding the
forced resignation of Antonio Fazio, Governor of
the Bank of Italy, who was revealed to be conniving
to block cross-border takeovers of Italian banks,
that ABN-Amro was able to pull-off its deal.
Today, ABN-Amro has itself been taken over. After
a protracted battle between the UK’s Barclays and a
Royal Bank of Scotland-led consortium which included
Belgo-Dutch Fortis and Spain’s Banco Santander,
ABN-Amro fell to the consortium. The deal wasn’t so
much a cross-border merger as cross-border
dismemberment, favoured by shareholders for purely
commercial reasons. Despite this - an approach
accepted, but not favoured, by Dutch regulators - it
was endorsed by the EU’s Internal Market Commissioner
Charlie McCreevy.
Whether such a cross-border deal could happen
now, in the midst of the credit crunch, is another
matter. Indeed, It seems unlikely that the consortium
would have been so determined to bid for ABN-
Amro had the members known that they would be
raising funds from shareholders to finance the deal
in difficult market conditions. The liquidity crisis
initially had the effect of curtailing M&A activity in
all sectors – for both cross-border and “in-market“
deals – although there is now some evidence that
an appetite for deal-doing is returning as share
pries have fallen and companies have begun to look
cheap by historic standards.
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There have always been considerable commercial
obstacles to cross-border deals. The ECB has
stressed that public policy can only play a limited
role, namely in reducing obstacles to cross-border
banking. A merger or takeover must ultimately
generate value for shareholders. But synergy
benefits - savings generated from consolidating
overlapping operations - are a key commercial
consideration, and are usually only sizeable when
the parties concerned compete in the same markets.
The scale of such “in-market” synergy benefits was
dramatically demonstrated when Royal Bank of
Scotland’s acquisition of NatWest in 2000 generated
£1.44bn in cost savings. Cross-border deals, though,
usually deliver only limited synergy benefits because
of limited overlaps between banks in different
countries.
CREATING EUROPE-WIDE BANKING IS
FAR FROM STRAIGHTFORWARD
The integration of national banking in Europe into
an EU-wide sector is progressing only slowly in
contrast with other areas where “europeanisation”
has been galloping. The eurozone’s unsecured
money market reached in the ECB’s words “near
perfect” integration as soon as the euro was
introduced. Even in the equity segment, there has
been a sharp increase since 1997, in investors’
holdings of shares from other eurozone countries
when compared with foreign holdings of securities
of non-euro area states.
Yet in the banking sector, even though wholesale
banking shows signs of increasing integration, retail
MAJOR CROSS-BORDER BANK M&AS 2000-2006
Acquirer Target Value (bn)
1.6bn
1.1bn
2.1bn
6.1bn
13.3bn
10bn
3.3bn
Source: ECB
This leaves cross-border banking deals as largely
a means for securing access to new markets - such
as Banco Santander's acquisition of UK mortgage
bank Abbey National. Yet despite these natural
commercial impediments, there is growth in crossborder
banking within the EU. Between 2000-2004,
cross-border deals accounted for 14% of total value
of euro area banking M&As. Owing to larger rather
than more numerous deals, this had risen to 38% by
2004-05. In 2005, the Euro System of Central Banks
(ESCB) identified 33 EU banks with significant
cross-border activities, 16 of which were active in at
least half of the eurozone countries. They accounted
for some 38.7% of eurozone banking assets.
banking “continues to be fragmented” nationally
says the ECB. Quite why, and what to do about it, is
contested. Practical and cultural differences play a
predominant role. Whether in Madrid, Rome,
Liverpool or Helsinki, ordinary consumers feel more
confident dealing when with a local bank.
According to Deutsche Bank, part of the problem
is that the “minimum harmonisation” approach that
has been followed to date has proven ineffective.
National implementing laws have diverged too
widely, especially in relation to consumer rules like
deposit protection. This helps member states to
retain regulations that insulate their own domestic
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POLICY DOSSIER: BANKING & FINANCE
banks from outside competition, to the disadvantage
of consumers.
At the beginning of 2007, the Commission’s
sectoral inquiry into competition in the retail
banking market found grounds for concern over
free and fair competition in the markets for payment
cards, payment systems and retail banking products.
These included large variations in fees, barriers to
entry to markets, obstacles to customer mobility,
product tying and supervisory, regulatory and other
legislative measures hindering new market
entrants.
Brussels believes the best way forward is new
measures like the Consumer Credit Directive and
the Payments Services Directive, coupled with
pressure on private sector players to establish a
Single European Payments Area (SEPA), and on
governments to implement directives in ways that
will facilitate the creation of a single EU financial
market. But the route is likely to be bumpy.
TACKLING THE “BLOCKED PLUMBING”
OF CROSS-BORDER CLEARING AND
SETTLEMENTS
If the plumbing is blocked, water can’t circulate; the
same is true of financial markets. The cash (liquidity)
produced from selling a stock or a bond must be
moved to the seller and the ownership of the
securities transferred to the buyer. The pipes
through which these operations are channelled -
the securities clearing and settlement systems, or
“post trade services” - may now be electronic, but
if they are not efficiently integrated within countries
and across borders, then financial markets will not
function efficiently.
Inefficiency appears ingrained in Europe’s
cross-border securities infrastructure, split as it is
between a plethora of nationally based systems,
international settlement engines and agent banks.
Some estimates suggest the waste is equivalent to
between 0.2% and 1% of the EU’s GDP. Hence the
ECB’s decision to consider intervening directly by
launching its own pan-European settlement system.
The ECB estimates that at 35 the maximum cross-
border settlement costs in the EU are more than
ten times the cost of the same transaction in the
US. That needlessly increases the cost of capital for
companies.
The ECB believes the way to rectify this market
failure is to construct its own securities settlement
engine, Target 2 Securities (T2S). This would initially
provide settlement for bonds and equities, and
would in effect be bolted onto the cash payment
system, Target 2 - that it launched last November.
The EU’s internal Market Commissioner Charlie
McCreevy, no friend of state intervention, even by
central banks, has secured an agreement from
banks and other providers and users of settlement
services on a voluntary code to provide for
interoperability of the various structures, and nondiscriminatory
access to them with fair and
transparent pricing. The Commission and the ECB
say their proposals are complementary.
The ECB's proposals would, though, mean
heavy investment yet uncertain success. It is
uncertain, for example, that T2S would become the
dominant system, as central securities depositaries,
like Euroclear and Clearstream may choose not to
use it. With Euroclear aiming to settle 65% of
European equities, by market capitalisation, on a
single system by 2010, some doubt whether the
ECB needs to intervene at all. Moreover, the mere
presence of T2S could help generate a market
solution to the problem of the plethora of inefficient
systems. Essentially, fears amongst existing
settlement system providers of losing business
T2S could act as a sufficient incentive to
drive mergers.
Simply getting the plumbing right is only part of
the answer. In 2001, Alberto Giovannini, a former
senior Italian Treasury official, submitted a report
to the Commission by a committee of experts
identifying 15 barriers to the provision of efficient,
integrated EU cross-border post-trade services.
Several reflected national legal and tax barriers. Yet
most of these have remained untouched, leaving
much work to be done to make integrated EU
trading a reality.
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SPONSORED SECTION
PLURALISM AND INTEGRATION –
A EUROPEAN APPROACH
of origin is part of their business plan. This includes
guaranteeing access to finance for SMEs, and general
access to financial services, without which economic
development would come to a standstill.
The creation of the European Union is a unique
phenomenon. The European idea has achieved
incredible political, cultural and economic dynamics.
However, many challenges remain, and the integration
of our financial services industry is among the
greatest.
The big gain of integration lies in the establishment
of a competitive and efficient financial environment.
In order to succeed, market regulation is necessary
and we applaud the EU law makers for their efforts,
and especially for recognising that in order to achieve
efficient integration we do not have to pay the price
of losing the diversity of our financial system. Indeed,
pluralism and integration are not at odds. In fact,
pluralistic integrated markets are the best outcome we
could hope for.
From the perspective of the customer, pluralism and
the competition between different banking models
lead to a wide range of products and services, better
prices, and, as a rule, more bank branches and a
more stable and continuous overall supply of financial
services. Pluralism also results in well balanced
provision of financial services. Different types of
banks identifying with different corporate and social
values ensure that financial development is not singleminded
or myopic. For example, in the case of savings
banks the economic development of their regions
There remains the question how integration will be
realised on our pluralistic markets. With respect to retail
financial services, much depends on how the demand
for retail banking products develops. Retail customers
strongly value reputation, cultural background and
geographic proximity of their bank. Their trust and
confidence rest on close contact and personal counsel.
In order to deserve and keep this trust, banks have to
be able to flexibly react to their customers’ needs. For
these reasons, seeking to achieve integration by full
harmonisation and standardisation would be fruitless
and potentially harmful.
It is of utmost importance for regulators to take into
account the realities of the markets for retail financial
services. Retail banking markets have already reached
a high degree of integration and are demonstrating
impressive efficiency and competitiveness. Should
there be scope for further market integration, it could
work through many channels. Consolidation is one of
them, but alternatively organic growth and expansion
would even further increase the choice of banking
products for Europe’s consumers, in line with the goals
of integration.
As it has held true in the individual member countries
as well as on a European level, pluralism will ensure
intense competition and dynamic market interaction
for the future, too. Plurality is a key feature of
the European banking system. It is the variety of
our business models that guarantees that market
integration will hold its promises to consumers.
Heinrich Haasis
President of the European Savings Banks Group
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POLICY DOSSIER: BANKING & FINANCE
EUROPE’S BID TO SET GLOBAL
INSURANCE RULES
Last July, the European Commission outlined
proposals for what could be one of its most
important financial services sector directives. The
Solvency II Directive will establish a completely new
regulatory system for Europe’s insurance industry,
and may even allow the EU to set a new global
standard.
With this reform, the Commission is seeking to
eradicate the weaknesses in the EU’s insurance
regime, comprised as it is of a hotch-potch of 14
different directives. The way EU insurance
regulations are interpreted varies widely from state
to state, and this is hindering the development of
an EU-wide insurance market.
The historical principles underpinning insurance
regulation vary widely across the EU, with some
countries putting greater emphasis on serving the
national interest and on consumer protection,
while others provide for much greater freedom of
action by insurers. There is no EU-wide early
warning system to alert supervisors when a company
may be encountering serious difficulties.
Solvency II would establish just such a system
by setting out standard formulae for solvency
capital requirements which, when breached, would
trigger automatic supervisory intervention. The goal
would be to ensure that intervention requirements
would be harmonised, thus triggering intervention
in the same way across the EU. There would also be
a minimum capital requirement which, if breached,
would stop an insurance company from doing
business.
If successful, the new regime could not only see
the EU taking the lead in shaping global insurance
regulatory standards, but could also provide
European insurance companies with a competitive
advantage - especially over US rivals, which still
face highly fragmented regulation.
Solvency II could benefit large and diversified
insurers, like Allianz, Aviva or Axa, as the spread of
their business lowers their overall risk profile.
Commission officials estimate that up to 40% could
be shaved from the solvency requirements of such
players, potentially freeing-up huge quantities of
capital.
Like the Basle II-based Capital Requirements
Directive (CRD) in banking, on which it is partly
modelled, the new Solvency II regulatory framework
would have three pillars - a new capital regime, a
quality of management assessment and a disclosurebased
market discipline structure. But insurance
companies, unlike banks, would be able to rely fully
on internal risk models for establishing their capital
needs, making Solvency II different from the banking
industry capital adequacy regime which began,
progressively, to come into effect in the EU at the
beginning of 2007.
But there is more to defending the
competitiveness of Europe's insurance industry
than regulation. Policymakers will need to keep a
watchful eye on the growth of tax-haven centres,
such as Bermuda, where a growing proportion of
the global insurance sector's capital is now raised.
The Lloyd's of London insurance market has lost
out to Bermuda especially, with Lloyd's underwriters
like Kiln, Hiscox and Omega having moved their
headquarters and domicile to Bermuda because of
its attractive tax regime.
HOW EUROPE HAS JOINED AMERICA
AS A GLOBAL RULE-SETTER
The EU’s move to take the lead in such areas as
shaping global insurance regulation is in sharp
contrast to the role played by Europe in this sphere
earlier in the decade. It isn’t so long ago that
representatives from the US Securities and Exchange
Commission (SEC) would come to Brussels to
instruct their European peers on the rules they
wanted to introduce.
The nature of the relationship saw a clear shift
last April at the 2007 US-EU summit in Washington
DC. German Chancellor Angela Merkel, as holder of
the EU’s rotating Presidency, successfully argued for
the establishment of a Transatlantic Economic
Spring 2008 Europe’s World | 127

128 | Europe’s World Spring 2008

POLICY DOSSIER: BANKING & FINANCE
Council to oversee a reduction in transatlantic
regulatory burdens. Just prior to the summit, the
SEC had come to an agreement with the German
financial regulator, the BaFin, on information
sharing.
In June of last year came a second success for
the EU, when the SEC proposed the recognition of
Europe’s International Financial Reporting Standards
for foreign companies listed on US exchanges.
Cooperation on accounting rules took a further
step forward last November with an agreement
between the European Commission and the SEC for
overseeing the work of the International Accounting
Board. Since then, the Washington-based Financial
Services Roundtable representing the 10 largest US
finance houses, has urged US regulators to adopt
European-style flexible “principle-based” financial
regulation.
Last July, the SEC adopted measures allowing
companies to comply with certain aspects of the
Sarbanes-Oxley rules in a less costly manner. That
onerous legislation was born out of 2000’s dot.com
bubble and the associated collapse of fraudulent
corporations such as Enron and WorldCom.
American policymakers have apparently begun
to realise just how far their attempts to impose US
corporate governance rules extra-territorially had
boomeranged to damage US financial
competitiveness. The realisation that US regulations
do not cross borders easily has been catalogued in
reports by such eminent bodies as the Paulson
Committee (named after US Treasury Secretary
Hank Paulson) and New York Mayor Michael
Bloomberg’s task force on “Sustaining New York’s
and the US’s Global Financial Leadership.”
Both sides can also see that, given the increasing
integration and inter-dependence of transatlantic
financial markets, whether in the shape of the
dominant role of the giant US investment banks in
London or the symbolically and practically epochal
decision to merge Euronext with the New York
Stock Exchange, closer cooperation is not only in
the interests of both parties but is vital to the
financial stability of both. As joint standard-setters,
the US and the EU have the capacity to influence
the development of regulatory standards in the less
mature financial markets of the world’s new Asian
economic powers.
This Europe’s World policy dossier was
researched and written by John Adams, a
UK-based financal journalist and Stewart
Fleming, a Brussels-based freelance journalist.
Baltic Development Forum is an independent non-profit
networking organisation with members from large
companies, major cities, institutional investors and
business associations in the Baltic Sea region. Baltic
Development Forum works with a wide range of
partners, including businesses, governments, regional
organisations, research and media institutions. The
mission of Baltic Development Forum is to promote
the Baltic Sea region as an integrated, prosperous
and internationally competitive and innovative growth
region.
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research and training institute. ELIAMEP has a strong
publications record and significant experience in coordinating
research programmes and training seminars. Its wide range of
events (including the Halki International Seminars) provide a
forum for open-discussion on topical issues principally relating
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Spring 2008 Europe’s World | 129

Taming the private equity
fund “locusts”
The pensions, savings and jobs of ordinary people are being threatened by
hedge and private equity funds, warns Poul Nyrup Rasmussen, President
of the Party of European Socialists and former Danish Prime Minister
The full repercussions of the financial crisis
triggered by bad mortgage debts in the
United States are still unclear, but what we do
know is that its unforeseen effects already include
an unstoppable demand for greater transparency in
our financial markets, and better regulation.
One part of the financial market not subject
to the rules of transparency and disclosure that
apply to, say, banks and mutual funds, concerns
hedge and private equity funds. These private
funds were once relatively small. Rich individuals
took on higher-risk investments in innovative
and start-up companies. Today, the five biggest
private equity deals have involved more money
than the annual budgets of Russia and India.
Assets in hedge and private equity funds stand at
$3 trillion today and are expected to reach $10
trillion by the end of 2010. The funds now rely
heavily on investment from pension funds, and
on money borrowed from banks and other nonprivate
sources.
It’s not the locusts that need taming,
but the knee-jerk legislators
Who could disagree with Poul Nyrup Rasmussen
when he says it is “clear that nobody wants
to ban or unnecessarily restrict private equity
or hedge funds”? Unfortunately, his article also contains
a number of inaccuracies and myths tantamount to
scaremongering, and could encourage the hasty
adoption of unnecessary and poorly designed financial
legislation. Rules that are clear can stimulate the
European economy, but rules based on fear will stifle it.
Mr. Rasmussen is right to point to the repercussions
of the sub-prime mortgage debt crisis and to suggest
that greater transparency in financial markets could
reduce the risk of it reoccurring. But what is needed is
not new regulations for venture capital, private equity
or hedge funds. He states, though, that private equity
funds are a menace to healthy companies, workers
and the Lisbon agenda. In my view, this paints an
inaccurate picture of the private equity industry. Private
equity firms are not interested in short-term profits.
They provide medium to long-term finance in return for
an equity stake in potentially high-growth unquoted
companies. A typical investment entails a substantial
injection of capital and considerable restructuring costs,
leading to a more competitive and thus more valuable
company. They usually invest for at least a few years,
and sometimes retain significant stakes for decades.
It is also untrue that private equity funds are
generally bad for workers. The restructuring of a
struggling company may lead to redundancies, but
130 | Europe’s World Spring 2008

POLICY DOSSIER: BANKING & FINANCE
These private funds now account for about twothirds
of all new debt. If there is a debt problem, as in
the US mortgage crisis, you have to look at the role
of the private funds in creating it. They are a threat
to financial stability. Unless regulated they are likely
to trigger future crises due to their reliance on huge
accumulated debt and their lack of transparency.
Financial instability is not some remote danger
that does not disturb our lifestyle. Ordinary families’
pension funds, savings and jobs will pay the price
in the end.
Then there are other problems not directly
connected to the recent financial crisis. Private
equity funds are a menace to healthy companies, to
workers’ rights and to the European Union’s Lisbon
Agenda (aimed at making Europe the world’s most
competitive economy). Private equity funds – more
than hedge funds – are often involved in “leveraged
buy-outs”. In a typical pattern, a company is bought
with borrowed money, the company is then saddled
with the debt and interest payments, workers are
laid off and assets are sold. A once profitable and
healthy company is milched for short-term profits
– benefiting neither workers, nor the company’s
long-term prospects, nor the real economy.
In Britain, the Automobile Association was
bought by private equity in 2004. The AA had made
a profit of £75m and was providing an expanding
service with 10,000 staff. Annual profits have gone
up to £190m while 6,000 workers have been laid off,
and both costs and waiting times for AA members
needing its vehicle repair and recovery services have
increased. In Denmark, the TDC telecommunications
company was taken over by a group of private equity
firms in 2005, with 80% of the purchase financed by
borrowing. The company’s assets-to-debt ratio leapt
from 18% to 90% as company reserves for long-term
development – essential in the telecoms industry –
were used to pay the debt!
These funds are largely exempt from paying tax,
often because they are registered offshore although
of course they have to operate from the world’s
major onshore financial centres. One fund manager
has admitted that he pays less tax than his cleaning
COMMENTARY
By Sebastian F.A. Vos
it can also increase output, create new jobs and
revitalise distressed companies, as was the case with
Burger King and Toys “R” Us. Over the past five years,
British businesses backed by private equity increased
with 1-2% for public companies.
And private equity funds in fact make a substantial
contribution to the Lisbon agenda and the “real
economy”. The superior returns they deliver are
of benefit to pension funds and other savers, but
also drive competitiveness in the broader economy.
Because these firms make money by increasing the
value of their investments, they use the most effective
management techniques. They also invest heavily in
innovative industries and R&D, contributing to the
knowledge based economy that is a cornerstone of
the Lisbon agenda.
Hedge funds, as distinct from private equity, are
investment funds that typically have a short “time
horizon” and take high risks to earn high returns. Having
initially struggled to gain the trust of investors, hedge
funds have become a very popular investment vehicle.
With this has come close scrutiny of their investment
strategies. Following the Council conclusions on hedge
funds in May of last year, the Commission is now
looking at ways to address specific concerns.
A relatively new phenomenon on the EU scene,
illustration that large investors can often attract
Spring 2008 Europe’s World | 131

lady. In the US, it has been calculated that the funds
involve a tax loss to the country of $2-3bn – three
times the EU budget for humanitarian aid. It is only
a slight exaggeration to say that hedge and private
equity funds represent the opposite of sustainable
long-term growth: they are high-risk, high-profit
ventures often keyed to short-term gains.
Trade unions in the UK, Germany, Canada and
elsewhere have for long spoken of the damage
caused by leveraged buy-outs. So have such senior
politicians as Germany’s former Vice-Chancellor
Franz Müntefering, who described private equity
funds as “locusts”, and Barney Frank, chairman of
the powerful US House Committee on Financial
Services. The European Parliament’s Socialist Group,
the House of Commons in the UK and the Australian
parliament have all investigated these private funds.
However, Charlie McCreevy, the EU’s internal
market commissioner, is staunchly resisting any
move towards better control of private equity and
hedge funds. But the tide is turning against him.
At the EU’s Autumn summit in Lisbon the three
heavyweights of European politics – Gordon Brown,
Angela Merkel and Nicolas Sarkozy – agreed in a
joint statement that more transparency is needed
in financial markets. In a separate move Gordon
Brown promised as Britain’s new prime minister
to close any tax loopholes that enable hedge fund
managers to exempt themselves from tax.
Both the private equity and hedge fund
industries have reacted by publishing voluntary
codes of practice. Paul Marshall, a hedge fund
chairman, told the Financial Times that he hoped a
voluntary code of conduct for the industry “will take
the pressure off”. At least that was transparent.
It is important to be clear that nobody wants
to ban or unnecessarily restrict private equity
and hedge funds. These private funds could have
a useful role to play: the often-repeated claim
of the industry that they use private money to
invest in innovative and high-risk new companies.
Their critics want to ensure that they honour the
COMMENTARY
By Sebastian F.A. Vos
negative attention. As with other types of fund, too
little attention is given to the differences between
them. They are, in effect, state owned investment
funds that invest in a wide range of assets. In a
knee-jerk reaction last summer over feared “noneconomic”
investment incentives such countries as
France and Germany seemed tempted to draft laws
restricting SWF investments. But the Commission
is taking a more measured approach. During an
initial debate on the topic, the Commissioners
indicated that they first want to fully understand
the SWF phenomenon before considering whether
EU regulations might eventually be necessary.
Furthermore, the Commission seems to be
developing a sophisticated approach whereby there
is an appreciation of the differences between funds
which are already more transparent such as Norway
and Temasek and those with room for improvement,
as in the case of Russia.
Mr. Rasmussen concludes his article by saying:
“Change is coming, and for the sake of our pensions,
our savings and our jobs, the sooner it comes the
better”. I wholeheartedly agree with him, but the
change I have in mind is not to hurriedly erect more
financial legislation that slows down capital providers
wishing to invest in Europe. Instead, we should to
strive for a better understanding of how each of them
operates and to gain an appreciation of the positive
role they can play in fostering European growth, jobs
and innovation.
Sebastian F.A. Vos is an Account Director at Hill &
Knowlton International.
132 | Europe’s World Spring 2008

POLICY DOSSIER: BANKING & FINANCE
transparency and tax rules accepted by everyone
else in the financial markets.
Ultimately private funds should be regulated
globally. But coordinated action by the
European Union and the US would be a realistic
start. Private funds cannot operate without
those two giant markets, and would have to
comply with their requirements. The will to take
action exists in the EU. When faced with the
leaders of Europe’s three largest economies,
Charlie McCreevy is not a serious obstacle. The
current occupant of the White House is a more
formidable obstacle to reform in the US, but a
change is coming.
Leveraged buy-outs cannot be dealt, though,
with solely by getting the funds to follow the same
rules of transparency and disclosure as everyone
else. They would still be objectionable. There
are at least two possible solutions; first, set a
limit on the amount of debt that a company can
accumulate, and, second, change acquisition and
merger legislation to include leverage. The latter
clearly falls within the competence of the European
Union.
Hedge and private equity funds are presenting
an unacceptable face of today’s global economy.
The will is growing – particularly in the wake of this
year’s financial crisis – to bring make these private
funds more generally acceptable. There is still a lot
of talking to do. Serious discussions are needed
at EU level to reach agreed European and intergovernmental
actions, and to encourage the US to
move in the same direction.
Change is coming, and for the sake of our
pensions, our savings and our jobs, the sooner the
better. 3
Poul Nyrup Rasmussen is President of the Party
of European Socialists and a former Danish Prime
Minister.
How the EU is banking
on decentralisation
The EU wants its banks to be decentralised while remaining under close
supervision. Christian Noyer, Governor of the Banque de France, says
banking is on the right track even though much still needs to be done
An ambitious system is being worked out for
the supervision of financial services and stock
exchanges in the European Union. It will help
to develop broad, liquid and well-entrenched financial
markets, and will be especially valuable within the
eurozone. The guidelines of the Lamfalussy Process,
named after former Belgian central banker Alexandre
Lamfalussy who chaired the EU advisory committee
that developed it, are evolving in several stages. The
first two deal with major principles and how they are
applied, and in the third stage, committees of national
supervisors have the task of organising the effective
use of directives and regulations. These level 3
committees have existed in the securities sector since
2001and in the insurance sector since 2003, while the
Committee of European Banking Supervisors – CEBS
– was put in place in January 2004.
The Lamfalussy Process aims at the
harmonisation of regulatory regimes, and supervised
Spring 2008 Europe’s World | 133

decentralisation. In line with this, our system calls
for a certain proximity between supervisors and
financial institutions which helps to ensure the
effective surveillance of banking risks. The recent
turbulence linked with loans to sub-prime clients
in the United States is a reminder to Europe
of the importance of effective supervision, wellcoordinated
between supervisors.
But decentralisation also brings with it risk. If the
coordination of national supervisors is inadequate,
the implementation of European rules will be
inconsistent. The financial system’s vulnerability
will increase and competition between member
states will be distorted. Level 3 committees must
therefore ensure these risks are circumvented.
The experience of the CEBS is therefore
instructive. When dealing with the numerous
directives and guidelines, the committee laid down
conditions for the consistent implementation of
the European Capital Requirements Directive. This
directive converts into Community law the new
international agreement on bank solvency, known
as Basel II. For that banks operate in a number of
different countries, this will greatly help their Basel
II transition.
The CEBS then improved cooperation among
national supervisors of the principal European
banking groups by linking them through “operational
networks”. This scheme, tested among ten large
banking groups, could be extended to other
establishments in the near future. Its aim is to
produce common answers to the practical issues
raised by supervisors.
Gradually European supervisory culture
can now be expected to emerge, reducing
discrepancies among EU states. But it will be
essential to lead from the front, and to achieve
total regulatory convergence the Council and
the European Parliament must give preference to
European directives for maximum harmonisation,
and at a practical level national supervisors must
ensure that there is a true convergence of their
methods.
EU France ministers grouped in ECOFIN have
been looking at ways to improve the Lamfalussy
Process. Some of its initial proposals concern the
working of level 3 committees.
First, these committees’ accountability to
European institutions should be enhanced by
submitting their annual work programme for the
institutions’ views. Second, the EU-level commitment
to national supervisory authorities, which depends
on voluntary participation, clearly needs to be
reflected in national mandate. Last, governance
of the committees needs to be increased, using
qualified majorities wherever appropriate rather
than relying on consensus. The guide lines of level
3 committees would remain non-prescriptive in
character, but any national supervisor who believed
it is not appropriate to apply a recommendation to
a committee should give a clear explanation of why.
The implementation of the ECOFIN proposals
will definitely improve the Lamfalussy Process. And
in my view there are other possible improvements
to be favoured. The number of banks in the
“operational networks” should be increased. This
alone could contribute towards greater consistency
in supervisory practices and enhance supervisors’
co-ordinating roles in their own countries. Financial
Europe should also make regulatory convergence
a priority. It would be desirable if identical rules
applied to all banking groups, irrespective of the
country in which they operate. Level 3 committees
seem well equipped to establish common European
rules in line with general principles.
Apart from these changes, the search for
more room to manoeuvre could lead to the level 3
committees being placed under the "umbrella" of the
European Central Bank. This would be an equivalent
role to that of the Bank for International Settlements
(BIS) in relation to the Basel Committee on Banking
Supervision, and to some extent the lnternational
Association of Insurance Supervisors. As with the
BIS, it’s question of the ECB providing the framework,
infrastructure and financial and human resources to
enable level 3 committees to attain their objectives
while still fully respecting their independence.
134 | Europe’s World Spring 2008

POLICY DOSSIER: BANKING & FINANCE
Keeping separate the supervision of the financial
"twin peaks" _ banks and insurance companies on
the one hand, and the markets on the other _
can also be imagined. Be that as it may, such a
decision would encourage synergies among the
committees themselves, as well as between them
and the ECB. It would then become feasible to set
aside additional resources for the development of
projects to help entrench the European supervisory
culture, such as setting up a European institute to
train supervisors.
Decentralised supervision, far from being no
more than a theoretical model, is becoming a
reality reflecting a financial Europe that is diverse
yet increasingly integrated and open to the world. It
has so far been able to adjust to these developments
thanks in large part to the Lamfalussy Process. It is,
though, a pattern of progress that needs to be
carefully sustained.
Christian Noyer is Governor of the Banque de France.
(The original French version of this article can be found on
our website : www.europesworld.org)
Credit crunch pushes cross-border
watchdogs high on EU agenda
Europe lacks credible means to manage a cross-border banking crisis,
warns Nicolas Véron
As shockwaves from the US sub-prime turmoil
continue to reverberate around the globe,
market confidence in Europeans’ ability to
handle a financial crisis on this scale is in doubt.
Severe lapses in the regulation of banks – notably
in Germany and Britain – damaged the credibility of
national systems of supervision. And the European
Union remains ill-equipped to handle cross-border
crises sparked by increasingly interdependent EU
banks and by complex patterns of international
investment. At least there was one silver lining to
the cloud: the European Central Bank proved willing
and able to pump enormous amounts of liquidity
into money markets from the very beginning of the
crisis in August 2007.
But when the dust eventually settles, it is very
unlikely that Europe will return to financial market
regulation as usual. How different things looked in
October 2006 when the City of London celebrated
the 20th anniversary of its “Big Bang” liberalisation of
securities trading. Back then, many people working
in Europe’s financial markets and public institutions
felt they had good reason to be satisfied with
progress to date. Some verged on the complacent,
expecting Wall Street to decline and London to
dominate a global 24-hour financial market on which
the sun never set. Brussels had been busy during
these 20 years, too. EU financial integration policies
began in earnest in the 1980s, and the Commission
and Council made great strides in financial sector
reform. Among the milestones were the decisions in
1986-88 to suppress all restrictions on cross-border
capital flows, and the launch in 1999 of an ambitious
legislative action plan on financial services. The euro
was introduced without a hitch and quickly became
the world’s second currency behind the dollar. The
euro’s resounding success defied the doomsayers
who had prophesied that the EU could never become
a stable currency zone.
Spring 2008 Europe’s World | 135

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Perhaps less conspicuous, the EU’s decision to
adopt International Financial Reporting Standards
(IFRS) in 2000-2002 triggered an extraordinary move
towards the global harmonisation of accounting
rules. Meanwhile, the Commission’s steadfast
defence of competition in the banking sector –
particularly in Portugal, Germany, Italy and Poland
– ended an era of protectionism in the guise of
prudential control; this helped to spur cross-border
financial integration to an extent unprecedented in
developed economies.
With hindsight, it is clear that all these
achievements came about during a period of
remarkable stability in Europe’s financial markets.
Even during the 1992-93 dark days of the European
Monetary System, Europe looked like a safe haven
in an unsettled financial world. Many countries
outside the European Community suffered banking
crises, including close neighbours Norway, Sweden,
Finland and Turkey, plus many eastern European
nations during their transition from communism.
In contrast, the most serious failures for banks
inside the EC in the 1990s – including BCCI, Crédit
Lyonnais and Barings – had only a limited fiscal cost
and a negligible impact on economic growth. Later
there were scandals over corporate governance
in Asia and then in the US, notably after the dotcom
bubble burst in 2000-01 and the accounting
debacles at Enron, WorldCom and others became
public. But these events only encouraged Europeans
to think that the “old continent” had somehow
preserved higher standards than its peers.
Such fair-weather conditions on European
markets meant it had been plain sailing for
Europe’s financial regulators. The subprime
storm ended all that and now the EU is, for the
first time, really in troubled waters. It is far too
early to draw conclusions from the situation but,
from a public policy point of view, three points
can already be made.
First, the European Central Bank proved itself
to be an efficient lender of last resort to Europe’s
financial system. When in early August 2007 the
asset-backed commercial paper market started to
freeze, the ECB was quick to react and continued
to intervene as long as the inter-bank market
needed support. The ECB defied criticism that it
is unwieldy and bureaucratic, and demonstrated
it could act boldly and decisively in the face of
market upheavals. Banks in the eurozone and
beyond all benefited. In contrast, the Bank of
England’s reluctance to provide liquidity – because
of concerns about “moral hazard” – proved to be a
poor choice.
Second, national banking supervision in Europe
fell seriously short of requirement and the overall
credibility of the system is now in question. In
Germany, the authorities have been deplorably
tolerant of commercial banks’ involvement
in complex “asset-backed commercial paper”
investments, which were kept off their balance
sheets via so-called conduit operations in Ireland.
Even if the three German banks that were
most stricken by the credit crunch – Sachsen LB,
IKB and WestLB – had technically complied with
capital adequacy requirements, their “conduits”
represented very high risk factors at around 30%,
20% and 13% of their total assets respectively. Much
stronger supervisory responses were needed in
these circumstances. In Britain, the Northern Rock
meltdown highlighted problems between the three
public bodies responsible for financial stability: the
Treasury, the Financial Services Authority and the
Bank of England. Some commentators, including the
Financial Times and The Economist, said the whole
tripartite system introduced in 1997 was at fault.
In France, the rescue in November 2007 of CIFG, a
US-based “mono-line” insurer, by two cooperative
banking networks – Caisses d’Epargnes and Banques
Populaires – cast doubt on the risk management
abilities of their joint subsidiary Natixis.
Overall, it is clear that efficient bank supervision
cannot be taken for granted. Extensive soulsearching,
public debate and, eventually, reform
will be needed in all EU member states where
deficiencies have become evident. Policy changes
may have to include tougher rules on financial
firms to disclose their exposure to risks, not only to
official supervisors but also to the public.
The third and final lesson that can be learned
from the current financial turmoil concerns a long-
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POLICY DOSSIER: BANKING & FINANCE
standing but increasingly urgent problem. Europe
lacks credible arrangements for the management of
cross-border banking crises. Until recently, most banks
focused on their country of origin, so risks largely
arose under their national system of supervision.
Now Europeans banks have dramatically expanded
their operations across the EU. Ten years ago, nondomestic
assets were barely one-sixth of the total
European assets of the EU’s largest banks; today the
proportion has grown to one-third. By contrast, the
proportion of assets held outside the EU is almost
unchanged. Cross-border mergers and acquisitions
are likely to continue apace once the current market
turbulence is over. This degree of interdependence
significantly increases the likelihood of a major
cross-border banking crisis. Both financial theory
and past experience show that such crises cannot be
effectively managed by scattered national regulators
who face conflicting pressures. Without a framework
for more centralised supervision of a limited number
of major international banks, the cost of a future
cross-border crisis involving one of them is likely to
be larger than Europe’s economy can afford.
institutions high on the policy agenda. The exact
arrangements will have to be decided, but they
must allow quicker and better-informed decisionmaking.
A system built on a strictly limited mandate
could be both more efficient and less controversial
than some all-encompassing single financial
regulator. No doubt there will be difficult political
and technical issues to resolve, but the current
credit chaos has generated a fresh feeling of
urgency. Even Britain, an enduring opponent of EU
institutions for financial regulation, may decide that
its own interests as Europe’s financial hub would
be better served by reform, rather than today’s illadapted
cross-border supervision.
As Walter Bagehot, the Victorian editor of The
Economist, once famously said, “Money will not
manage itself”. The private sector cannot act alone;
it needs support from well-adapted public
institutions. An up-to-date system of EU supervision
is now more crucial than ever if Europe’s financial
system is going to serve its proper purpose.
There are therefore very good reasons to
put discussion about new EU-level prudential
Nicolas Véron is a Research Fellow at the Brussels
economic think tank Bruegel.
We’ve got to do something
about Europe’s crazy patchwork
of bank supervisors
Markku Pohjola calls for a single EU supervisor to take over
key national powers
The European Union lacks an efficient supervisory
framework for its vast and expanding financial
industry. The gap between what is needed and
what in reality is implemented is widening all the time.
Over the past 20 years, the drive to develop
Europe’s single market has been flanked by a
number of financial innovations. Economic and
Monetary Union (EMU) created the single currency.
Then, to pave way towards European financial
integration, the Financial Services Action Plan
(FSAP) was launched in 1999 with the aim of
creating a regulatory framework for a single financial
area. A White Paper on financial services policy
Spring 2008 Europe’s World | 139

covering 2005-2010 was published by the European
Commission in the hopes of speeding things up.
Clear progress has been made; financial
institutions across Europe have begun to realise
the benefits to be had from economies of scale.
In the Nordic countries particularly, overcapacity
in the banking sector and improvements in cost
effectiveness have led the industry to consolidate.
This consolidation started within individual Nordic
countries and in the 1990s, after national markets
became more or less saturated, crossed borders.
The speed at which the industry itself acted soon
overtook that set by the regulators and supervisors.
Elsewhere in Europe there have also been great
steps forward. The European wholesale market for
financial services to large companies has been
largely unified. A whole range of financial services,
including the bond market, now functions well,
and the capital requirements for European banks
have been unified. The Single Euro Payments Area
(SEPA) is making progress, so the challenge that still
lies ahead is to extend these benefits to small and
medium-sized companies and the consumer sector.
So far, the retail-banking sector has remained outside
the integration process, but once that happens and
retail banking starts to enjoy all the opportunities of
the single market, liquidity will be enhanced and GDP
growth levels in Europe will improve.
The changes in the financial industry are
particularly evident in banking, where large European
and global banks have reaped impressive results.
At first, their cross-border operations were still
small compared to their home country activities.
That meant that that they were mainly supervised
in their own countries. But over the last decade,
major European banks have acquired foreign banks
through such mergers as the acquisition by Spain’s
Banco Santander of the UK’s Abbey National,
Italy’s UniCredito of Austria’s Hypovereinsbank
and lately the takeover of Holland’s ABN-AMRO.
All these have raised questions about prudential
supervision, chiefly whether there are sufficient
resources to check whether at this level the
institutions are financially sound. In the Nordic
countries, Nordea was created by merging four
major national banks, and some 70% of its business
is outside its native Sweden. This is a process that
is likely to accelerate.
Changes in the way these banks are now
organised have put extra pressure on supervisors.
Among other measures, banks have begun to
de-centralise essential functions to be carried out
in different countries, such as market and treasury
operations, liquidity and capital management, and
risk management have been re-located. Banks
nowadays create products and IT platforms to
serve their customers in all the different countries
where they operate, so it is hardly rational to
make separate prudential assessments of units in
these cross-border groups, be they subsidiaries
or branches.
More than 60% of banking assets in Europe are
now in the hands of fewer than 50 multi-national
European banks. In eastern Europe, the banking
sectors in most of the new EU member states are
owned by banks domiciled elsewhere in the EU. In
short, the main part of Europe’s banking assets,
liabilities and risks are concentrated in these large
banks. The current de-centralised supervisory
framework for financial institutions, with several
independent ”host” supervisors for subsidiaries, and
the parent bank’s home supervisor as primus inter
pares, is clearly unsatisfactory. Capital adequacy
and liquidity risks have to be assessed on a group
level, rather than country by country, and how
capital and risks are divided between countries is
less important.
Under EU law, the home supervisor deals with a
bank’s operations as a whole – meaning the parent
company and its subsidiaries. But the tools and
powers available for home country supervisors are
deplorably inadequate. Recent attempts to remedy
this under the Capital Requirements Directive have
been disappointing from a banking point of view,
even though it was quite plainly the best that
could be achieved politically. For different EU
countries hold a variety of views on prudential
supervision, and their financial institutions are
far from unanimous about what should be done.
The European Commission seems to be doing its
best, but progress so far has been all too slow for
Europe’s competitiveness to be well served.
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POLICY DOSSIER: BANKING & FINANCE
Host community supervisors look at business
units in isolation from the international group to
which they belong. They have their own national
rules and regulations to apply, and every financial
supervisory authority (FSA) in Europe has its
own practices and traditions. And even when
implementing directives, EU member countries are
often tempted to “gold-plate” them by introducing
some extra rules. This adds to their complexity and
cost and compounds inefficiency. Even where there
is good communication and understanding between
national supervisors, as in the Nordic countries and
the Benelux, improvements still need to be made.
Europe should have a single supervisor with the sole
right to make decisions on a consolidated level.
The recent history of Nordea shows that real
integration is likely to take time. The regulatory
banking infrastructure includes such building blocks
as supervision, deposit guarantee, the lender of last
resort and emergency liquidity assistance. These are
interlinked and stakeholders include central banks,
FSAs, national treasuries and deposit guarantee
funds. Nordea tried to get the deposit guarantee
rules changed with the aim of creating a level playing
field in which a cross-border merger would not
distort competition between banks. The Brussels
Commission showed sympathy and understanding,
but the outcome was, as expected, that it passed
the problem on to national governments to search
for a solution.
Commission officials also implied that no
major changes to these building blocks should
be expected in the next 5-10 years, as they are so
interlinked that change to one affects all the others.
For instance, the supervision of deposit guarantees
can be improved gradually or through a “big bang”
together with other major issues. But whichever
route is taken would need several years, and from a
commercial standpoint this would be unacceptable.
From a pan-European perspective, though, it means
that market integration in financial services will
continue to be slow and that the competitiveness
of European banks will suffer accordingly.
Europe’s financial industry wants a supervisory
framework that will foster market integration and
create greater financial stability. It should be costeffective,
transparent and competitively neutral,
while also providing for crisis management. So
what would such a model look like and how would
it be achieved, when it is only the EU’s member
governments that have the power to bring it about?
Money talks, of course; taxpayers’ money. EU
member governments obviously want to minimise
the risk of being called on to save a cross-border
bank in trouble, so who would have to take the
lead in such a situation? Would it be the home
country FSA, with its responsibility for consolidated
supervision, even though it would have only limited
powers? What should be the role of the host
supervisors? Would they try to ring-fence the losses
to mean only those in their own country? What role
should central banks and national treasuries play in
a cross-border European banking collapse, and is
it even possible to deal with such a situation on a
purely national basis?
There appears to be no practical alternative to
a European FSA whose duty would be to supervise
multi-national financial institutions. It would have
the sole power to pursue prudential supervision of
multinational banking groups, including all their
subsidiaries and branches within the EU and
globally. This would not spell the end of national
supervisors, as in all likelihood many national
FSAs would work as partners of the European
supervisor. National banks would continue to be
supervised by national FSAs, and consumer
protection would also remain local and be subject
to national supervision. The problem is that at
present there is a lack of convergence and
coherence between national supervisors, with the
gap between what is needed and what in reality is
being implemented widening all the time. And
that’s because perceived national interests still
have the upper hand over the wider interests of an
integrated European marketplace.
Markku Pohjola is Deputy Group CEO of Nordea,
the Nordic and Baltic Sea region banking group.
Spring 2008 Europe’s World | 141

Pitfalls that Europe’s booming
insurance industry must sidestep
The EU’s insurance industry is doing brilliantly, both in the Union and
globally, outstripping American efforts. But Gérard de la Martinière
warns that its competitive advantages could be eroded if the spirit of
the industry is not safeguarded
The insurance sector is used to being highly
regulated, so it was fully able to cope
with the tornado of new regulations that
accompanied the European Single Act after it
came into force in 1987. More than a dozen
directives resulting directly from it have since
re-shaped the European insurance industry by
harmonising national legislation and abolishing
cross-border barriers. A single insurance
market is a reality and its creation has led
to deregulation and improved competitiveness.
What must undoubtedly strike any impartial
observer today is the modern nature of European
insurance regulation – especially when compared
with the United States – and the power and
competitiveness of our major insurers.
Large European insurance groups occupy the
top places in the international league tables not
just by size but also because of their very high
levels of profitability and their financial strength.
And above all, they are – unlike the vast majority
of their American counterparts – involved in a
process of internationalisation in which they have
established and consolidated their positions in
countries far beyond Europe. The vanguard made
up of names like Axa, Allianz, Generali, Prudential
and Aviva has since been joined by other large
private insurers and also by large mutual groups
like Groupama, Talanx and Mapfre as well as by
bank insurers like BNP Paribas Assurance, Fortis
Assurance and HSBC Insurance. To put it simply,
European insurance is today as powerful as it is
influential throughout the world.
So with the European Parliament, the
Commission and the Council of Ministers all now
contemplating various aspects of reform of the EU’s
financial services rules, some of which could have
an impact on insurance, it is worth taking a look at
how any changes might affect our business.
The success of Europe’s insurance industry is
due both to strategic choices by its members and
to the EU’s favourable regulatory environment.
Ever since the early 1990s, insurers have had total
freedom over pricing and contracts, unlike in the
vast majority of American states, where there
are administrative controls over both. American
insurers operating in a number of different states
are subject to controls in each, whereas in Europe
a company simply comes under the control of
the authorities of its country of origin. And in the
financial sector, American authorities still require
the collateralisation of commitments taken by the
insurers, while we Europeans have finally done away
with this costly process.
Europe’s very real competitive advantage
is maintained, and even strengthened, by
reviews of financial regulations. One that is
being undertaken by the insurance industry at
the moment is called Solvency II and uses the
“Lamfalussy process”, a system of monitoring
regulations for financial services named after
the chairman of the EU committee that created
it, Alexandre Lamfalussy. It is composed of
four levels, each focusing on a stage in the
implementation of legislation.
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POLICY DOSSIER: BANKING & FINANCE
The first level is the original law, with its
core values and guidelines on implementation.
At the second level, committees and regulators
advise on technical details of the new law, with
recommendations voted on by representatives of
member states. The third level is where national
regulators work on coordinating new regulations with
other nations, and the fourth involves compliance
and enforcement of the new rules.
Regulations worked out under the Lamfalussy
Process have proved to be both coherent and in line
with the development of new financial techniques.
They are easily reviewable in the long term, and are
well-suited to local needs. They are the result of
wide consultation between the parties concerned
during the entire period when standards are drawn
up, as well as effective coordination between the
relevant public authorities, which means that they
are adequately harmonised throughout the EU.
Solvency II will be a major reform. Following
the introduction of Solvency I in the early 1970s,
sophisticated risk management systems have
progressively been developed, and these will be
reflected in Solvency II’s updated regulations for
insurance firms in the European Union. In essence,
the needs of capital insurers should in future be
adjusted more accurately than in the past to what
is necessary to guarantee optimum protection of
the insured parties. The interest now being shown
in these reforms by the Japanese, Chinese and
American markets has convinced us that Europe was
right to improve its insurance regulation. If necessary,
we are even prepared to advance further, for Europe
must not rest on its laurels. Competitive advantages
are swiftly eroded in today’s fast-changing world.
Two possible pitfalls need to be watched out for: a
failure to act due to self-satisfaction, and conversely
excessive legislation or intervention that is against
the real interests of the industry.
The risk of intervention is at present particularly
high. The reform of international accounting
standards applicable to insurance is going to
place a heavy workload and financial burden on
the industry as it prepares for its introduction in
2012. Before then, it would be preferable if the
Brussels authorities did not overload the boat with
other reforms that would have a substantial impact
on the insurance industry. Desks in the European
Commission are now overflowing with projects that
directly concern insurance, including legislation
covering insured parties, the establishment of a
guarantee fund, new contract law, and, indirectly,
environmental civil liability and age discrimination.
This profusion of projects serves to draw attention
to the number of EU bodies the insurance industry
has to deal with. These include the Commission’s
Directorate-General (DG) for the Internal Market,
its Legal Affairs DG which deals with cross-border
legislation, the DG for Health and Consumer Protection,
and finally DG Competition. The Commission needs
to think carefully about intervening in the insurance
market, bearing in mind the spirit of an industry that
in essence has as its few basic requirements the
preservation of equal competition and the opening up
of markets to all players.
However, to maintain a high degree of
competition in the European insurance industry,
other large-scale reforms will be needed in due
course. For example, the Commission will have to
consider setting up a centralised control of the large
pan-European insurance groups, providing a system
of insurance guarantee scheme or even aligning
the prudential regulations that are applicable to
pension funds to those of insurance.
The most pressing current issues, meanwhile,
include the European insurance industry’s important
meeting in Zurich in March to adopt Solvency II.
This reform, like those that have preceded it and
which were aimed at creating a large unified
insurance market, is a real opportunity to reinforce
the competitiveness of the European industry.
Gérard de la Martinière is President of the French
Insurance Association.
Spring 2008 Europe’s World | 143

What Europe’s future financial
marketplace will look like
The mosaic of a Single EU financial market is visible but unfinished,
reports Manfred Weber, Chief Executive of the Association
of German Banks
Konrad Adenauer, Germany’s first post-war
leader once said: “European unity was a
dream of a few people; it became a hope for
many. Today, it is a necessity for us all.” He could
easily have been speaking about the current efforts
to turn European financial services into a genuine
single market. Despite great progress integrating EU
financial markets, barriers still remain in some key
areas like retail services, bank takeovers and mergers
and tax harmonisation, to name but a few. Creating
a single financial market would help to boost
economic growth and prosperity in every member
state. It would also increase consumer choice, open
a host of new investment opportunities, strengthen
the EU banking sector and make Europe a centre
for financial innovation.
So what will the single European financial
market of the future look like? Three features
will be essential. First and most important,
there must be a level playing field within the
European Union. Second, consolidation of the
European banking sector needs to be extended,
with all protectionist barriers or other obstacles
to mergers and acquisitions eliminated. And
third, the European market place should be fully
integrated into the global network of financial
centres, particularly those in the United States
and Asia. If you imagine the single European
financial market as a large mosaic, it would still
look incomplete today. Some important pieces
are already in position; and an overall pattern
is visible. But certain vital parts are still missing,
and it is these pieces that European politicians
now need to start putting in place.
The Financial Services Action Plan, which was
launched in 1999 and implemented in stages,
focused mainly on the securities markets. It boosted
competition and innovation for professional traders
and encouraged institutional market players, in
particular, to trade across EU borders. As a result,
considerable progress has been made in the
“wholesale” securities sector. Retail customers,
however, were largely ignored. But the aim of
creating a “European home market” should by no
means be reserved solely for wholesale market
players. Not only do retail customers deserve
the chance to buy products and services from all
member countries, it would also be very much in
the banks’ own interest, since retail banking in the
EU offers enormous potential. According to surveys
by the European Commission, more than 10% of
European banking and insurance customers would
like to use foreign products and services, but only
5% of these customers currently have an account
with a foreign bank. The figures for credit cards are
even lower – only around 3% of Europeans have a
card from a non-domestic provider. About the same
number make private provisions for their retirement
with a foreign bank, and only 1% of retail customers
takes out a mortgage in another EU country.
The reasons for this reluctance to buy foreign
financial services are clear. Of course there are
“natural” barriers, like different languages and
national mentalities, and these obstacles cannot
be overcome swiftly. Doing so will be a gradual
cultural and social process. But there are also far
more significant “man-made” barriers, particularly
those created by different national legislation in
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POLICY DOSSIER: BANKING & FINANCE
the fields of investor and consumer protection.
These regulations can differ widely from country to
country. What information requirements do banks
have to comply with? What formalities do customers
have to complete if they want to open an account
in another EU country? Additionally, consumers will
not find any uniform standards over loans or other
financial guarantee agreements in the EU. The result
is obvious; a lack of uniformity is preventing both
banks and consumers from doing more cross-border
business. This is where policymakers must act;
only harmonised rules and EU-wide standards will
eliminate costly and time-consuming compliance
with different national regimes.
Another missing piece in the EU’s financial
market mosaic is the harmonisation of tax laws.
It is not a question of aligning tax rates as, on
the contrary, these can and should be determined
by competition. The aim of harmonisation is to
make cross-border trade easier for business. For
example, if there is no standard way to determine
taxable income, or off-set losses, it is hard for firms
– including banks _ to sell their products in other
member states or to optimise their cross-border
corporate structures.
Despite such headaches, significant progress
towards a single financial market is being made
in some areas. The technical conditions required
for the Single Euro Payments Area (SEPA) have
been put in place by banks working together in
the European Payments Council. Customers can
for the first time make all their euro payments as
safely, efficiently and conveniently as they do at
home. The payment products they use are based
on uniform pan-European procedures. The SEPA is
just one of several measures designed to support
the growing mobility of European consumers. The
banks’ corporate customers also benefit because
all SEPA payments are streamlined.
An efficient and strong harmonised European
financial market also needs the centralisation of
supervisory competences, embedded in a system of
European supervisors. An EU-level supervisor cannot
of course be created overnight, but convergence of
national regulations should be driven forward and
closer cooperation between national authorities
should become a priority. Otherwise, national
authorities cannot respond properly to cross-border
developments. One major step toward an EU-wide
system of national financial supervisors would be
the creation of a “European supervisory culture” as
the Commission has suggested. Ultimately, the aim
should be to create a single institution responsible
for supervising large banks that operate across the
EU, with national regulators responsible only for
domestic banks. The European System of Central
Banks could serve as a model.
Centralised financial supervision in Europe
would offer a number of advantages: it would avoid
the need for banks to duplicate reports to different
authorities, and would allow financial rules and
supervisory practices to be harmonised while also
eliminating distortions to competition. The resulting
synergies would help to cut the cost of regulation.
European finance ministers are due to discuss this
issue at their ECOFIN Council meeting in April.
ECOFIN also needs to look at ways to remove
the remaining barriers to cross-border mergers
and acquisitions, so that through consolidation
EU banks can grow big enough to compete more
effectively in the global markets. Although direct
legal obstacles have been eliminated in Europe,
such indirect obstacles as taxation – which can
make a merger unprofitable – persist. Some national
governments have a part to play, too. Germany, for
instance, offers a notable example of the problems
created when a country is largely by-passed by
the global banking trend towards consolidation.
When measured against the size of our national
economy, most German banks are still too small;
they trail their international rivals both in terms of
market capitalisation and total assets. Germany
needs three or four big banks to take their place
among the market leaders in Europe and to be
at the forefront of the consolidation process.
In other countries, policymakers set course for
modernisation of the banking sector years ago and
have since reinforced their financial institutions’
competitiveness to the benefit of customers and
banks alike. But the “three pillar” structure of the
German banking system is a drag on growth. While
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POLICY DOSSIER: BANKING & FINANCE
public banks can – and do – buy private banks, the
reverse is blocked by law. It is a political fact of life
that clearly distorts competition.
While there is much for the EU – and Germany
– still to do, it would be wrong to focus solely
on Europe. The financial industry has operated
globally for many years, and the activities of
European companies and banks are not confined
to the EU. That is why EU financial policymakers
need to make sure the Union has a strong
and, above all, united voice on international
bodies. The EU should not have to adapt to
rules that have already been negotiated at the
international level; we ourselves must be active
in setting the rules in the first place. In bilateral
talks about regulating financial markets, the EU
should also strengthen its negotiating stance.
In this context, efforts to promote transatlantic
economic integration are particularly welcome;
mutual recognition of financial market standards
in the EU and the US would certainly improve
efficiency and increase growth.
An integrated single market in financial
services has a host of opportunities to offer
Europe’s consumers and businesses. It would
serve as a platform for innovation and increased
competitiveness, and would boost Europe’s
global role by enabling our banks to compete
harder on the worldwide market place. Many
pieces of the puzzle are already in place, so our
cry should be “come on, Europe, let’s finish what
we’ve started.”
Manfred Weber is Chief Executive of the Association
of German Banks.
E.W. ADVISORY BOARD MEMBERS
EGMONT (Royal Institute for International Relations) is an
independent think thank based in Brussels.
As a study centre, EGMONT carries out research in a number of
fields that are considered a priority for Belgian diplomacy, such
as ‘European Integration’, ‘Security and Global Governance’
and ‘Central Africa’.
EGMONT also acts as a forum for the exchange of ideas and
opinions on international politics and serves as an interface
between diplomats and civil society. It achieves its objectives
by organising conferences, debates and seminars on its own
premises and abroad.
In addition to research and conferences, EGMONT has developed
specialised programmes for foreign diplomats and young
professionals interested in international and European affairs.
Since 2002, EGMONT similarly offers the “Youth and Europe”
Programme, consisting of educational sessions aimed at high
school students (17-19 years/old) and meant to develop their
understanding of the European integration process.
EGMONT - Royal Institute for International Relations
Rue de Namur 69, B-1000 Belgium
Email: info@egmontinstitute.be
Tel: +32(0)22234114
Fax: +32(0)22234116
www.egmont-institute.be
Spring 2008 Europe’s World | 147

EUROPEAN PARLIAMENT SPOTLIGHT
“WE ARE A MORE DIVERSE SOCIETY THAN WE WERE”
Graham Watson, leader of the Alliance of Liberals
and Democrats for Europe group
convergence of market rules and supervision
on both sides of the Atlantic. If you can
achieve that, you will create more certainty
and trust in the system.
The EU has often been criticised for being
too distant from its citizens. What would
be your plan to bring the EU closer to its
citizens?
What should the EU be doing to improve
the global competitiveness of Europe’s
financial services and banking sector?
There’s still so much to do to complete
the internal market in financial services.
The European Parliament is discussing the
consumer credit directive at the moment,
but we’ve been discussing it for seven years
now. A Single European Payment Area – which
would let you use the same debit and credit
cards throughout the Union - is certainly one
important cross-border service we need to
create. We also need more transparency in
financial markets, especially as far as credit
rating agencies and their fees are concerned.
The explosion in financial services has been
good for the European economy, but there
is a need for better oversight. However, as a
liberal, I will never argue in favour of the sort
of regulation that some socialists would like. I
think the Transatlantic Economic Partnership,
for example, offers a way to improve the
I’ve never entirely bought the idea that the
EU is distant, although it certainly is true
that the EU doesn’t communicate very well.
The European project is still not well defined
or explained in a way that is intelligible to
the average voter; the EU connects with
governments, not citizens. What we need is
a coordinated effort in Brussels and national
capitals to make citizens aware that many
EU policies improve their daily lives – such
as environmental protection and consumer
protection. Also, EU competition policy allows
fairer prices for basic services such mobile
phone roaming, air tickets, electricity etc. The
EU also needs good communications with the
people all the time, not just when countries
have to ratify a treaty. This is a job for every
MEP who should go out and talk to their
constituents. It’s not money that is needed;
it’s a change in attitudes. You have to make
the EU – i.e. the member states themselves -
more evangelistic on behalf of the Union.
The EU is the biggest development and
humanitarian aid donor in the world. What
should Europe be doing to emphasise this?
148 | Europe’s World Spring 2008

I’m not in favour of going out and saying that
we’re great and the US is awful. Everyone
knows that we tie far less of our aid than
other international donors. The important
thing is to make sure that other EU policies
dovetail with our aid and development
policies. Trade is clearly the area where the
EU can provide the most tangible benefits
to developing countries, and our policy must
include the abolition of export subsidies and
tariff barriers. We have come under fire from
the WTO for discriminating in favour of former
colonies. The new generation of agreements,
the Economic Partnership Agreements, need
to respect world trade rules, but still accept
that the relationship will remain asymmetrical
for the time being.
Migration is also a big issue. Why do we
have migrants? It’s because people vote
with their feet. I have always said that
we can either take developing countries’
goods or their people.
The EU has a 40% share of total international
humanitarian assistance. We are doing a lot
with this money, but we should concentrate on
better delivery. Development Commissioner
Louis Michel has done a lot, but there’s still
room to improve coordination between the EU
and member states’ activities.
With 2008 being the European Year of
Intercultural Dialogue, what should its
concrete aims be and how could they be
achieved?
We should recognise that we are a more diverse
society than we once were. With 12 more
member states, we have brought nine million
Roma into the Union - the same number of
people that live in Sweden. Since we need
to import more and more labour because of
demographics - falling birth rates and ageing
populations - we’re going to have to work
harder to promote a multicultural society. Also,
when we talk about secular societies, we tend
to confuse the term “secular” with the idea
that people have no religious belief at all. Faith
is a legitimate part of the human condition, so,
even in secular societies, you need a dialogue
between the state and churches of all faiths.
In Europe, we must insist that people accept
the republican model of loyalty to the state
while, at the same time, countering racism and
xenophobia. We also have to make sure that
we use cultural diversity as a continued source
of dynamism.
What timeframe do you see for EU
enlargement in the Western Balkans?
What are the main stumbling blocks and
how should they be resolved?
You can’t fix an artificial timetable for the
western Balkans. Croatia is making good
progress and will probably join the EU within
the next five years. But it might be too
optimistic to expect them to meet their
own goal of becoming a member before the
European elections in 2009. We hoped that
Macedonia would make progress more quickly,
but it hasn’t.
We favour offering EU accession to the
countries of the western Balkans as a long-term
goal and an incentive to lay down their arms
and find peaceful means of cohabiting in our
common space. But, since too rapid change
can also be counter-productive, we thought
the way forward was to offer EU accession
within a flexible timeframe. The trouble is, if
you look at Bosnia or Serbia, there are signs
of stagnation. We now need real political
progress and an improved climate. I always
thought enlargement was a win-win situation
for the EU and countries of the region, but it
has to be managed very carefully.
Graham Watson was interviewed for Europe’s
World by journalist Simon Taylor. This section
is supported by the ALDE Group (http://www.
alde.eu)
Spring 2008 Europe’s World | 149

3
Section
THE DEVELOPING WORLD
Why we need to look hard
at the NGOs’ flaws
No one could deny that the mushrooming NGO
sector does good work in providing on-the-ground
humanitarian relief. But Robert Glasser, Secretary
General of CARE International, says that evaluations of
their effectiveness “have been patchy at best”
When disaster strikes, nongovernmental
organisations are
among the first on the scene. It’s
a pattern that has become increasingly
familiar. The United Nations Development
Program (UNDP) estimates there are now
more than 37,000 international NGOs
following the surge in their numbers in the
1990s when major donors started to rely on
them more and more.
Inevitably there have been problems.
Both the Rwandan genocide in 1994 and
the 2004 Indian Ocean tsunami saw chaotic
competition between hundreds of NGOs as
they all scrambled to help. Yet there have
also been landmark victories. More than
1,400 NGOs operating in 90 countries were
able to exert sufficient political pressure
to get 123 countries to ratify the treaty
banning land mines; it earned the campaign
organisers the Nobel peace prize. It’s not
just the number of NGOs that is making
a difference, but also the trend towards
trans-national alliances to achieve common
goals collectively. But the sheer scale of this
disaster relief “industry” – plus the longerterm
development efforts of NGOs – is
raising serious issues about how to measure
their performance.
The public are not alone in asking these
questions. Major donors and even the NGOs
themselves also to learn lessons, quantify
150 | Europe’s World Spring 2008

outcomes and understand the long-term
effects of their actions. Aid beneficiaries
need to know whether or not outside
interventions have been useful. In the last
few years, the leading development and
humanitarian NGOs have devoted much
energy to investigating their own impact in
crises ranging from droughts and floods in
Africa to the tsunami.
Among the questions being asked by
NGOs and by UN and national donors, has
been how to prevent past mistakes from
being repeated. There are few clearly defined
international rules on what an NGO actually
is. Flexibility allows NGOs to be innovative
in ways that organisations like the UN often
cannot. But the same lack of control also
leads to unpredictable consequences. In
one recent case in Chad, the French NGO
L’Arche de Zoé tried to smuggle children out
of the country without obtaining permission
from either their parents or the government.
Less dramatic, but potentially more serious,
are occasions when an inexperienced group
leaps into a situation which it is unable to
handle.
The wake-up call for most NGOs came
after the Rwandan genocide, when hundreds
of small organisations tried to set up ad
hoc operations in refugee camps in the
Democratic Republic of the Congo and in
Tanzania. As they jostled for space, some
camps turned into staging posts for armed
factions. In the ensuing chaos, an estimated
50,000 refugees died from cholera. Many
attempts to provide relief proved either
redundant or ineffective. There was also
mayhem in the relief efforts that followed
the Indian Ocean tsunami. At one point,
COMMENTARY
By Michael Hammer
That's right! If the
NGOs don’t embrace
reform, outsiders will
force it on them
Robert Glasser reveals the growing
awareness amongst NGOs that they need
to come to grips with their impact on
international aid and policymaking. Yet to many
NGOs his demands will be uncomfortable; he’s
asking them to shed the halo of the do-gooder
who is beyond reproach, to move from their
sphere of unquestioned support to become
subject to scrutiny, and to engage pro-actively
with critics who are often unconvinced by
NGOs’ performances and claims to legitimacy.
The push that Glasser tries to give from the
inside is important; lack of accountability can
do very real damage to the people that NGOs
are seeking to help. NGOs must wake up to
the fact that they work alongside other actors
in global governance, of which aid delivery is
just a part, who stand in direct competition
with them, and in many ways are ahead in
the game of stakeholder accountability. In
addition to Glasser’s welcome drive for more
accountability within the sector, NGOs must
give up their understanding that they form an
special rules different to those valid for others.
Today, organisations from all sectors –
inter-governmental, non-governmental and
corporate business – provide global public
services ranging from safe water to health
care and security for millions of people, and
Spring 2008 Europe’s World | 151

more than 400 NGOs were on the ground in
Aceh, Indonesia, competing for resources,
personnel and funding. Many of the lessons
that had been learned during the Rwandan
crisis were forgotten or simply ignored. The
confusion was caused mostly by smaller
NGOs with little or no experience in dealing
with disasters.
The relief community did eventually take
on board lessons from both Rwanda and
the tsunami. The situation in Indonesia led
the UN to adopt a new “cluster” system to
improve coordination. And after a review of
the Rwandan debacle, 400 NGOs and UN
organisations working in 80 countries got
together in the Sphere Project to develop
a common humanitarian mandate and a
E.W. ADVISORY BOARD MEMBER
handbook of standards. This outlines the
minimum performance required of any NGO
working in a disaster zone. At the same time,
leading NGOs created the Active Learning
Network for Accountability and Performance
in Humanitarian Action, known as ALNAP, to
exchange the latest ideas on accountability.
It was followed by the Humanitarian
Accountability Project, which evolved into
the Humanitarian Accountability Partnership-
International. This currently includes 18
NGOs as full members and focuses on
reporting back to the people who have
been directly affected by a disaster and who
received humanitarian aid.
As the number of post-intervention
reviews increased, some of the biggest
NGOs appointed full time staff to improve
the effectiveness of their evaluations. Seven
of the largest NGOs have also joined forces
in the Emergency Capacity Building Project,
funded by the Gates Foundation, to explore
inter-agency collaboration on assessments
and “after action” reviews. This has helped
create a rudimentary framework for evaluating
the impact of NGOs’ humanitarian work, but
there is still considerable debate over what
really needs to be evaluated, and how.
Over the last decade or so, there has
been a major shift in the focus of NGO
evaluations. Rather than simply looking at
project inputs and outputs, the emphasis
has turned towards measuring the overall
impact of an operation. The basic idea is
to find out if the lives of the people on
the receiving end were changed for the
better in any sustained way. More and
more donors are also insisting that NGOs
provide measurable proof that they make
152 | Europe’s World Spring 2008

a difference. While this sounds fine in
theory, in practice there are drawbacks. By
demanding quantifiable results, donors may
force programme managers to choose easily
achieved targets in preference to actions
which – though less measurable – accord
with sound humanitarian principles. Or
reporting of aid programmes may be skewed
to keep donor funds flowing. The greatest
danger is that humanitarian relief will be
tailored to meet the demands of donors,
rather than being dictated by the type of aid
that is needed on the ground.
There are other pressures on NGOs
too. If they take too much account of the
demands of local beneficiaries, they may
lose sight of the bigger picture. For instance,
food aid may prevent an immediate famine,
but it can also undercut local farmers and
so contribute to future starvation. Thus
NGOs would rather reduce the emphasis
on measuring results of their programmes
in favour of a more balanced mixture of
evaluation methods.
Still, there is no doubt that, until recently,
the record on evaluating responses to
humanitarian emergencies has been patchy
at best. There are many reasons for this.
CARE, as both a relief and development
agency, can take a long-term approach to
disasters, matching emergency relief with
a rehabilitation and recovery phase. But
this is not an option for NGOs which focus
only on emergency responses. Once their
allotted time is up – or their funds run
out – they tend to pack up and leave.
Even for those NGOS that stick around,
determining the impact of their relief efforts
in the middle of a crisis is either difficult
COMMENTARY
Michael Hammer
many are involved in policy formulation and
evaluation. We are thus witnessing a rise in
cross-sector integration of service delivery,
policy development and decision-making, yet
this has not yet been matched by emergence
of common accountability principles.
The problems of providing relief in the wake
of the Indian Ocean Tsunami have provoked
calls for new standards and new methods
of certification for organisations involved in
humanitarian efforts. The longer NGOs delay in
themselves developing new or better standards
of accountability to their stakeholders, the
louder will be the calls for vigorous outside
regulation. This threat stems directly from a
failure of many NGO to pro-actively engage
in the accountability debate and move beyond
they previously enjoyed. Glasser is right to push
the NGOs on this.
There are also some very strong incentives
for the NGOs to engage more with the other
aid actors across all sectors. In our Global
Accountability Report we at the One World
Trust analyse every year the capabilities of
30 powerful organisations from a viewpoint
of stakeholder accountability. We look at four
key dimensions of accountability: transparency,
participation, evaluation and complaints &
responses. The NGOs rate best in terms of
participation, but their transparency and
complaints-handling capabilities are often
much less developed than those of other
organisations in other sectors. And both
intergovernmental and non-governmental
organisations lag behind transnational
corporations when it comes to handling
Spring 2008 Europe’s World | 153

or well-nigh impossible. Emergencies are
chaotic; staff and resources are stretched,
and the local population is very unlikely to
be able to provide meaningful feedback.
Even if you manage to conduct an on-thespot
assessment, you’re unlikely to be able
to gather much pre-crisis baseline data,
so comparisons are complicated. And, all
too often, events move too quickly to be
measured accurately. Also, until recently,
donors who were willing to pay for relief were
less likely to finance follow-up evaluations.
The result is that emergency relief
evaluations often rely on little more than
guesswork and assumptions. A 2004 report by
the Humanitarian Policy Group cited a survey
carried out in Ethiopia after UN agencies said
that widespread famine had been averted
in 2000 by humanitarian efforts. The claim
sounded credible until the subsequent survey
showed that the crude mortality rate in the
area had actually risen to six times the normal
base rate. Most of the deaths were from
communicable diseases which malnourished
people may well have contracted after
crowding into feeding centres.
The HPG therefore recommended very
long-term monitoring of humanitarian
MATTERS OF OPINION
What Europeans think
of development aid
According to a Europe-wide survey of public attitudes
towards development aid, the two main motivations
for rich countries to provide overseas aid are: self-
stability,
The Eurobarometer survey highlighted the fact that
few EU citizens appear to be aware of multilateral aid
initiatives and policies, even though Europe – the EU
and member states combined - is the largest provider
aid in 2006.
EU providing aid - compared to their own national
government – was that the EU could be active in
co-operation programmes covering practically all
developing countries, a similar number of people
found it difficult to form an opinion on the issue. Five
percent saw no added value at all.
WHO HAS HEARD OF THE UN'S
MILLENNIUM DEVELOPMENT GOALS?
Don’t know
Yes, and know what it is
2% 4%
14%
Yes, but don't know
what it is
Questioned early in 2007, halfway to the deadline
set by the international community to reduce poverty
and disease in the poorest countries of the world by
heard of them.
Source: Eurobarometer 2007
80% No
EU27
154 | Europe’s World Spring 2008

esponses in future, and said that success
or failure should be judged in a broad
context rather than by a narrow focus on a
specific project. Many people who survive
an earthquake or a flood, for instance, may
soon face another crisis if the disaster also
destroys their only means of earning a living.
New and more sophisticated analytical tools
are needed to understand these long-term
effects, along with sufficient training to
make sure that new methods are applied
properly in the field. A recent innovation
has been the Coping Strategy Index, devised
by the World Food Programme and CARE,
which analyses the way people cope with
short-term food crises while also taking into
account their future vulnerability to hunger.
NGOs are now able to get closer than
ever to local communities and offer a voice
to some of the most disenfranchised people
on earth. These NGOs also operate in
politically sensitive environments that are
closed to more formal institutions. The
world’s leading NGOs advise the UN and
help to shape its current reform efforts; they
are also on hand whenever the UN High
Commissioner for Refugees, the World Food
Programme and other international donors
need to feed thousands of refugees.
COMMENTARY
Michael Hammer
bureaucracy, inter-governmental organisations
frequently have the best transparency policies
and management systems.
The most important lesson is that everyone
can learn from others. For NGOs, there is no
others outside their own sector. The more
NGOs lock themselves in their own world of
evaluation, with standards that apply only to
themselves, the greater the outside pressure
will be to regulate and force more openness.
This would be a waste of the innovative and
creative capacities of a sector that has a vital
contribution to make a more accountable
global governance.
NGOs do the lion’s share of the world’s
humanitarian work, so some mistakes are
certainly made along the way. But as we
deepen our experience of humanitarian
relief and development, we learn the lessons
of the past and understand how much more
there is to know.
Robert Glasser is Secretary General of CARE
International.
Michael Hammer is Executive Director of the
One World Trust.
Spring 2008 Europe’s World | 155

Regulating Brussels’ legion
of lobbyists
With some 15,000 lobbyists in Brussels, it's not
surprising that debate over the rules that should
govern them is growing heated. Alexander Stubb,
the European Parliament's rapporteur on lobbying,
explains the difficulties
Back in the 1970s, most members of
the European Parliament were only
too pleased when a lobbyist dropped
in for a chat. In those days, MEPs had little
power and plenty of time. Now that the
Parliament has real legislative clout, its
corridors are packed with professionals trying
to win MEPs over to their way
of thinking. Today, Brussels
hosts around 15,000 lobbyists
from 2,500 organisations,
up from around 400 lobby
groups in the 1970s. There
are law firms, think-tanks,
international companies
and non-governmental
organisations. There are lobbyists for
producers and consumers, industrialists
and green campaigners. You name it and
someone over here is bound to be lobbying
on its behalf. So it’s hardly surprising that
rules for lobbying is a hot topic in Brussels.
The question we must ask is what sort
of rules we should have in order to make
lobbying more transparent?
For some people,
the term “lobby”
still has negative
connotations. They
think it’s a shady
activity
For some people, the term “lobby” still
has negative connotations. They think it’s
a shady activity carried out in smoke-filled
rooms. This image is unfair and outdated.
Today, most lobbyists are experts in their
field and represent their clients’ interests in
a professional manner. They are part of our
modern pluralistic democracy,
keeping MEPs informed on
subjects they might otherwise
lack adequate knowledge
about. Unlike Commissioners,
with their army of officials,
or government ministers
who have national civil
servants to brief them, MEPs
have to get by with the help of only a
couple of assistants. Lobbyists provide
vital information and expertise. It is up to
Europe’s elected decision-makers to listen,
learn and then make up their own minds.
In the majority of member states there
are no detailed rules on lobbying at the
parliamentary or governmental level. On the
156 | Europe’s World Spring 2008

other hand, in the US a lobbyist needs to
read a 577 page manual to get everything
right. The EU is somewhere in between.
The European Parliament, for example, has
a voluntary register of lobbyists, mainly for
security purposes, and the Commission is due
to publish one this spring. The Commission
wants the two institutions to share a common
register in future and most stakeholders would
prefer such a one-stop-shop. It also makes
sense from the point of view of the public,
who tend to blur the distinction between the
European Parliament and the Commission.
However, as the rapporteur on EU lobbying
for the European Parliament, I need to keep in
mind the fundamental differences between the
two institutions. So, in a forthcoming report, I
am going to propose a joint working group to
consider the administrative implications of a
common register.
There is also a debate on whether
registration should become mandatory. This
has implications for the types of penalty
that could be imposed on transgressors. In
the current voluntary system, the highest
possible sanction is expulsion; anything else
– fines, for example – would require a legal
base to enforce. For the lobbyist, expulsion
even from a voluntary register damages
their credibility and therefore is an effective
deterrent. While there is scope to improve
the way that regulations are supervised,
from my perspective the argument between
voluntary and mandatory registration is
rather academic. Credible lobbyists register
anyway and the Parliament’s present scheme
is therefore, de facto, obligatory.
The Commission’s new register will also
introduce rules on disclosing financial data.
COMMENTARY
By Rinus van Schendelen
Yes, and while we’re
at it let’s not forget the
EU’s institutions and
member governments
In an open and free society – in a democracy
– nobody can stop people from pursuing
their own values of interest. In the public
domain people mainly do so through different
sorts of organisations that collectively become
lobby groups once they try to influence the
political decision-making process. That they
flourish in Brussels, as capital of the EU, at least
indicates substantial democracy in Europe, and
also the increasing relevance of Brussels.
Every lobby group from Volkswagen to
Greenpeace, is driven by selfishness. That is not
a problem; one lobby group may be a danger
to democracy, but thousands are a blessing
as they compete with each other. They deliver
a diversity of information and support to the
then take the driver’s seat. If a system has an
open entry and a transparent process, private
vices can produce public virtue. But if it does
not, so that a limited number of lobby groups
regularly have their way to the disadvantage
the politicians and officials, and indeed of
democracy. There are two solutions that can
prevent this latter situation. One is to stimulate
more and more lobby groups, by making the
system even more open and transparent to all.
The second is institutional checks and balances
to limit power positions. All this is hallowed
Spring 2008 Europe’s World | 157

Professional consultancies and law firms,
for example, will be required to declare the
turnover linked to lobbying EU institutions,
plus the relative weight of major clients.
"In-house" lobbyists and trade associations
will have to estimate the costs associated
direct lobbying of EU institutions. NGOs
and think-tanks will need to disclose their
overall budgets and a breakdown of their
main sources of funding.
The Commission believes that this sort
of financial disclosure will indicate the
level of influence that a lobby group can
be expected to have. This might be true,
but we should avoid the misconception
that money equals influence. NGOs with
limited resources can be as effective as rich
multinational companies. Over the REACH
chemicals regulation and software patents,
for example, public sector lobby groups
were more influential than the private
sector.
I believe that for most politicians, it is
the strength of an argument that counts,
not how much money is spent on promoting
it. Certainly, European decision-makers need
information about the sort of organisations
that are backing different interest groups.
When lobbyists visit the offices of an MEP,
they are already expected to disclose who
and what interests they represent. But we
still need to clarify exactly what financial
information is really useful to help us balance
our judgements. No doubt MEPs will have
plenty to say on this subject in forthcoming
debates.
E.W. ADVISORY BOARD MEMBERS
158 | Europe’s World Spring 2008

How detailed should the register in the
end be? Should voluntary working hours,
relevant especially concerning the NGOs,
be disclosed? These questions lead easily
to accusations of bureaucracy. We want
to avoid the US system. This is also the
Commission's intention. In the US lobbying
is directly linked to political decision-making
through funding. In Europe there is no such
link. EU lobbying is not US lobbying.
Personally, I feel that transparency is
a two-way street: if we require greater
transparency from lobbyists, then we – as
legislators – should be more transparent
as well. That is why I have proposed that
each piece of EU legislation could include
a footnote naming all the organisations
whom the parliamentary rapporteur has
listened to when preparing that law. I think
that such a “legislative footprint” would
help interested parties to cross-check the
information which fed into the law-making
process. Critics of the idea say it would be
difficult, if not impossible, to decide which
lobbyist had actually been heard, which
would expose rapporteurs to accusations
that they were giving false information or
had conducted an unbalanced enquiry.
Some feel that this jeopardises the
independence of a parliamentarian. In
addition sometimes valuable information is
provided confidentially. And again, critics are
afraid of unnecessary bureaucracy. These,
too, are all subjects for discussion.
However, debate over practical questions
should not mask the underlying principle that
whatever method of regulation we adopt, it
must apply equally to all. It does not matter
if someone comes from Greenpeace or
COMMENTARY
Rinus van Schendelen
wisdom dating back to US “founding father”
James Madison’s Federalist Paper No 10.
The current proposals from Commissioner
Siim Kallas and the European Parliament’s
The first solution lies in their hands, while the
second largely comes from the treaties. Kallas
and Stubb evidently see lobby groups as a
fact of democratic life, and focus not so much
on openness as on transparency. They both
prefer social control of lobbying by competitors
and by the mother of all controls, the mass
media, rather than by introducing new laws.
Registration and a code of conduct are their
preferred tools, and I strongly support that
approach. Stricter regulations would function
as thresholds, protecting the insiders and
keeping newcomers outside. I said as much
at the first European Parliament hearings on
Some outstanding issues nevertheless remain.
One is the question of financial disclosure as
part of lobbyists’ registration. There is no clear
correlation between money and influence, only
between intelligence and influence. In any case,
can Greenpeace be described as poor, or is it,
thanks to its volunteers, wealthy? Financial
disclosure can strengthen the legitimacy of
both the lobbying and the decision-process,
but could also disclose that many NGOs are
sponsored by a government or by business,
and so would inform Commission officials
and MEPs about the real interests that may lie
behind a position. A second issue is voluntary or
to say, thanks of course to social control, that
voluntary registration is in practice mandatory.
And a third and less evident issue is lobbying
Spring 2008 Europe’s World | 159

160 | Europe’s World Spring 2008

McDonald’s, a trade union or employers’
federation, a think-tank or a firm of lawyers;
when they are trying to influence an MEP’s
position on a piece of legislation, they are
all lobbyists. And if we don’t treat them as
equals, we are on a slippery slope towards
controlling free speech.
Equality, therefore, requires us to
agree upon a definition of “lobbying”. The
Commission defines lobbying as “activities
carried out with the objective of influencing
the policy formulation and decision-making
processes of the European institutions.”
Rule 9(4) in the Rules of Procedure of
the European Parliament says lobbyists are
"persons who wish to enter Parliament's
premises frequently with a view to supplying
information to Members within the framework
of their parliamentary mandate in their own
interests or those of third parties". Both
definitions are broad and both have the
benefit of treating all lobbyists as equals.
Lobby groups can be seen as equals in
another sense too: not one of them can take
political responsibility away from
parliamentarians. It is we who have the
democratic mandate to decide whose
information will influence our decisions; it is
a responsibility that cannot be out-sourced.
Lobbying, when done properly, is an essential
part of the parliamentary process in Europe:
the more transparent the system, the better
for European democracy. So it is vital that
we write clear rules for our lobbyists today
to avoid misunderstandings and populist,
anti-EU cheap shots tomorrow.
Alexander Stubb is a member of the European
Parliament and the rapporteur on lobbying in the EU.
COMMENTARY
Rinus van Schendelen
proposals. In a career of advising many of
them at EU level, I have never noticed any
substantial difference between them and any
other lobbyists. Why not include them too?
Finally, all these proposals cover only the
“sender’s” side of the lobbying process. On the
“receiver’s” end, the EU institutions could also
contribute to greater transparency. The
Commission, which in volume terms is the main
EU legislator, does little to make public its green
and white papers, its legislative drafts under
comitology committees. The European
Parliament, although the most open of the EU
institutions, is largely silent about its many
agenda-building intergroups and about what
happens under conciliation. As to the Council, it
is the oyster of Brussels. Stubb’s idea for an
inter-institutional agreement on transparency
deserves to receive widespread support.
Rinus van Schendelen is Professor in political
science at the Erasmus University Rotterdam
and author of “Machiavelli in Brussels: The Art
of Lobbying the EU”.
Spring 2008 Europe’s World | 161

Bush's legacy will be NGOs with
a truly global vision
This has been a dispiriting decade for NGOs on both
sides of the Atlantic, says veteran activist
Jean-Paul Marthoz. He foresees a new global era for
civil society organisations, even though he warns that
the Bush administration's eight years "will not easily
be unravelled"
A
year from now, the Bush administration
will be history. Opinion polls around
the world assessing the unpopularity
of the current US president suggest that the
departure of one of the most controversial
administrations in American history will be
greeted with a deep sighs of relief, particularly
among “liberal” European NGOs.
The war in Iraq, the Bush administration’s
“opting out” of major international human
rights and humanitarian law conventions as
well as its dogged opposition to the Kyoto
climate change protocols have seriously
deepened the gap between Washington
and the dense network of European civil
society groups. Meetings between these
NGOs and official US representatives
have been tense, but few. Dissent, even
from well-meaning and middle-of theroad
voices, has been coldly rebuffed.
The “entente cordiale” that had generally
prevailed during the Clinton years now
seems light-years away.
Will this chilly climate warm up with a new
team in the White House? The answer will
depend on who’s at the helm in Washington, and
a lot can happen before the polls in November.
A new terrorist attack or an economic meltdown
might change all the parameters.
The wider question is whether a real divide
exists between Europe and America when
it comes to assessing relations between
civil society and Washington? European
NGOs have mostly been treated by the
current US administration just like their US
counterparts. Whatever their field of activity
– the environment, global justice, peace,
human rights – the overwhelming majority
of NGOs on both sides of the Atlantic have
been submitted to the loyalty test famously
set by President George W. Bush: “Either
you are with us, or you are against us”.
Most left-leaning or liberal NGOs have ever
since dealt with the US government under
the assumption that they would be seen as
adversaries or even enemies.
162 | Europe’s World Spring 2008

In spite of Europe’s conventional
discourse on common values, there is no
such thing as unanimity in the European
NGOs approach to the US. Conservative,
middle-of-the-road or liberal NGOs all hope
for completely different results from the
coming presidential election.
In defiance of the Bush era’s turbulences,
courteous transatlantic dialogue has been
maintained as best as possible by such
“Washington establishment” institutions as
the German Marshall Fund,
the Aspen Institute and,
in the security policy area,
the Center for Strategic and
International Studies (CSIS).
In the non-governmental
universe, the Washington-
Brussels relationship has thus
been dominated by groups or
personalities firmly opposed
to the current administration.
Former Vice-President Al Gore has attained
an almost god-like stature in Europe with
his dedication to the campaign against
environmental Armageddon. US-based
organisations like Human Rights Watch or
Human Rights First! have been welcomed
as the acceptable face of America by
European progressive and liberal circles.
These US groups’ harsh criticism of the Bush
administration has provided Europeans with
a sustained flow of solid information to
slam George Bush as well as an alibi against
accusations of anti-Americanism.
The liberals have not had a monopoly
on political activism in Brussels. A number
of right-wing groups have found the Bush
years quite helpful for their own outreach in
US unilateralism has
become a much
more entrenched,
bipartisan and
institutionalised
phenomenon than
many Bush-bashers
want to accept
Europe. Helped by a surge of conservatism in
some European countries as well as by pro-
Bush governments in some of the newcomer
EU members, they have been building
increasingly powerful networks across the
Atlantic. European and US conservative
Christian groups have rallied to apply
pressure on the European Parliament and
repeal the “liberal consensus” on matters
like reproductive rights or the theory of
evolution. Neo-conservative intellectuals have
strengthened their transatlantic relations in
the wake of the Iraqi war and
banded together to push for
more aggressiveness against
Iran and more leniency
towards Israel.
Most leaders of European
NGOs are keenly aware of the
impact that US political and
intellectual debates can have
within the EU. In the last 50
years many “European” discussions on both
left and right, have in fact been framed by
US authors or activists. During the swinging
Sixties and most of the morose Seventies,
US influence was mainly liberal: the US
student counter-culture influenced the 1968
revolutionaries in France and Germany; the
writings of Rachel Carson and Ralph Nader
inspired our European ecological groups and
John Kenneth Galbraith, Michael Harrington
and Irving Howe became intellectual icons
in social-democratic circles.
But by the early 1980s, it was the Reagan
conservative revolution that was being
exported to Europe, and it helped shift
the centre of gravity of European politics.
The French “New Philosophers” drew most
Spring 2008 Europe’s World | 163

of their thinking from the writings of US
public intellectuals and neo-cons like Irving
Kristol, Norman Podhoretz and Allan Bloom.
European apostles of the “free market,
free mind” ideology found most of their
inspiration in US think tanks. Ironically, the
European backlash against the “Washington
consensus” is also made largely in America.
Anti-globalisation and anti-corporate groups
here in Europe have found their Messiah
in US radical academic Noam Chomsky,
and the new progressives have turned to
New York Times columnist and Princeton
economist Paul Krugman for incisive and
well-argued alternatives.
If in November 2008 the Democrats
win both the White House and Congress
there is bound to be a new atmosphere in
Washington. Among the main beneficiaries
will be America’s NGOs. The legion of
experts and policymakers currently “parked”
in liberal think tanks during their years in
the wilderness, will find positions in the next
Democratic administration.
Will European NGOs be able to join the
party? Yes, to the extent that there will be
a friendlier team in Washington. But the
change is bound to be limited. Historically
there has always been an asymmetry in
the capacity of US and European NGOs
to affect policies in each others’ political
arenas. While both the US government and
America’s private foundations have a wellestablished
tradition of funding European
NGOs, the European response in that
field has been close to nought. Most EU
civil society organisations’ invisibility in
Washington contrasts with the presence
in Brussels of such strong US groups as
AmCham, the EU-American Chamber of
Commerce in corporate matters, with other
US-based NGOs having acquired influence
in EU institutions that at times overshadows
that of native European groups.
Brussels-based NGOs of US parentage,
together with transnational groups with a
strong American presence like the International
Crisis Group and Human Rights Watch, will play
an active role in the re-shaping of US-EU civil
society relations. They know both sides of the
street, are close to the Democrats and have
developed lobbying skills on Washington’s K
Street and in the corridors of the Congress
that could very efficiently be applied to the
Brussels power game.
What no one yet knows, though, is whether
a new Democratic administration would really
be a break with the recent past? Mainstream
NGOs in the US have for years been pleading
for more enlightened and principled American
leadership on key world issues, yet starryeyed
optimism is definitely not on their
agenda. The Democrats’ victory in the 2006
mid-term elections has not produced the
“liberal surge” that many NGOs expected. The
Democrats’ acceptance of Michael Mukasey,
the Bush nominee as the new US Attorney
General – a man who is reticent about calling
waterboarding illegal – has been widely seen
as a capitulation, not to say a bad omen for a
future Democratic administration.
The eight years of the Bush presidency
will not easily be unravelled. Observers
point out that although a more positive
EU-US relationship can only emerge with
the return of “liberal internationalists” like
the Clintons to the White House, they also
164 | Europe’s World Spring 2008

emphasise that US unilateralism has become
a much more entrenched, bipartisan and
institutionalised phenomenon than many
Bush-bashers want to accept.
Does it matter? Although the US
undoubtedly remains the world’s only superpower,
many NGOs tend to think that it is
less so today than in the 1990s, when Bill
Clinton’s Secretary of State Madeleine
Albright spoke of America as “the
indispensable nation”, and former French
foreign minister Hubert Védrine theorised
about the US “hyper-puissance”. Confronted
with a Bush administration bent on
exempting itself from major international
obligations, and ready to gamble US
credibility in ill-fated adventures, both
European and American NGOs have learnt
to live without the US government. They
have broadened their advocacy outside of
Washington Beltway and, after trying to
engage with an apparently more responsive
European Union, they also have set their
sights more distantly still. Recently at the
end of a long strategy meeting one leading
US group concluded that whatever the US
presidential election may bring, its own
advocacy focus should shift to a multi-polar
strategy embracing China, India, Russia,
Brazil and Turkey, and their growing impact
on the planet.
Jean-Paul Marthoz is Editorial Director of Enjeux
Internationaux and a former Director of Human
Rights Watch.
E.W. ADVISORY BOARD MEMBERS
ITALY’S OLDEST AND MOST COMPREHENSIVE
INTERNATIONAL AFFAIRS THINK-TANK
Founded in 1934, ISPI
international politics and economics
and over 70 short courses every year)
ranking international personalities
ispi.segreteria@ispionline.it
www.ispionline.it
Spring 2008 Europe’s World | 165

SPONSORED SECTION
VOLVO AND SAFETY:
A CRASH COURSE
Safety has been a core value at Volvo
ever since the company was founded in
1927. Over the past eight decades, we
have worked hard to improve vehicle
safety, helping protect drivers and
pedestrians, and reduce the number of
road accidents.
Safety permeates every aspect of our
operations. And the new products have
had an effect. Accident statistics reveal that
engineering solutions such as better safety
belts, airbags have made a strong contribution
to halving the number of traffic fatalities in
Europe over the past 30 years.
A tradition of innovation
Pioneering safety innovations have made Volvo
a world leader in vehicle safety. Our work has
set standards across the automotive industry
on a broad range of safety issues:
in most types of road vehicle and a legal
requirement in most countries. But back
in 1959 we created a sensation when we
became the first vehicle manufacturer in
the world to fit three-point safety belts as
standard.
launched in 1969, and over the years our
reseachers have visited the sites of thousands
of accidents. The collected information is
meticulously analyzed and the research is
then used in product development. One
example is the Electronic Stability Program
(ESP), which reduces the risk of skidding
on slippery roads and rollovers in sharp
curves.
safety details were introduced on our
trucks and buses, for instance the impactabsorbing
steering wheel, the Electronic
Braking System (EBS) and three-point seat
belt with electronic locking. One model after
the other has been introduced, each safer
than its predecessor.
Today’s challenges
We continue to devote ourselves to the
ongoing development of safer vehicles and
transport systems. And there is always more
to be done: although road deaths in the EU
have fallen by more than 17% since 2001,
they are still too high. About 40,000 people
died on European roads in 2007, and the EU
is currently set to miss its target of halving
the total number of fatalities from 50,000 to
25,000 by 2010.
Our work has shown that investments in
‘passive safety’ – safety belts, airbags,
bodywork technology etc – produce results,
but they are not enough. We must also look at
active safety, to prevent collisions occurring in
the first place.
166 | Europe’s World Spring 2008

Fewer accidents
You might think that vehicle safety is all about
vehicles. But it is more about human beings.
Research shows that driver behaviour causes
between 70% and 90% of accidents. One of
the single most important causes of road
accidents is a very human failing: distraction.
At Volvo, we believe we can reduce and, best
of all, prevent accidents before they occur. It is
not enough for vehicle manufacturers to build
safer machines. If we are to influence human
behaviour, we need an integrated effort in
which manufacturers, users and society work
together. We are working on that through our
Advanced Driver Assistance System (ADAS).
Here are two examples:
Volvo is researching a system to warn the
driver that he is tired, the Drowsy Driver Alert.
A camera keeps a constant check on the
degree to which the driver’s eyes close. The
image is analysed by a computer program. If
other systems also indicate that the driver
really is tired, the driver is alerted.
automatically adapts a vehicle's speed to slowmoving
vehicles in front. The system warns
the driver if the distance is suddenly reduced
more rapidly than it can be compensated for
using the limited braking capability currently
integrated in the system. If necessary, the
computer itself can brake the truck.
Fewer injuries
Our products need to function reliably and
effectively, and behave in a predictable manner
even in complex situations. If an accident
should occur nevertheless, our aim is to limit
its effects as far as possible.
The vehicle structure and the interiors of
Volvos are designed to minimize injury to
the driver and other parties involved during
accidents. Cab strength and restraint systems,
such as the safety belts and airbags, serve to
protect drivers and passengers.
Accidents involving trucks result in more than
300,000 injuries in the EU each year. Of these,
54% of involve car occupants – and 65% of
truck-car accidents involve the front of the
truck. These figures suggest we need to work
on vehicle crash compatibility, which is why
we have developed a deformable truck front
protection zone, or ‘soft nose’. We have also
equipped Volvo trucks with Underrun Protection
Systems to minimize the consequences to all
involved in head-on collisions.
The Road Ahead
As long as there are human beings, there will
be accidents. And if an accident does occur,
everything possible must be done to minimise
the consequences.
Volvo’s safety programmes aim to ensure
the people who use our products can do so
without placing their own safety, or that of
others, at risk.
We are proud of our know-how and we believe
we have helped improve the global traffic
environment. And we pledge to continue to
work to help make traffic throughout the world
even safer.
This section is sponsored by the Volvo Group
Representation to the EU.
For more information, please contact Dirk De Muynck,
Director of Communications (dirk.de.muynck@volvo.
com).
Spring 2008 Europe’s World | 167

168 | Europe’s World Spring 2008

Developing a new Euro-Africa
partnership
The continents of Europe and Africa are outgrowing old prejudices that
in many cases stem from the colonial era. Nathalie Delapalme argues
that both are moving toward a more equal partnership capable of
dealing with their shared problems and ambitions
The relationship between Europe and
Africa has for a long time been focused
mainly on trade and development aid
stemming from the colonial past. It is now
becoming a more balanced partnership,
reflecting awareness that the future will be
one of shared risks and common goals.
Europe’s perception of the African continent
is moving progressively away from the old
relationship deeply marked by history, and is
instead focusing on geographic proximity.
In this new century, the real gap will be less
between richer and poorer countries than the
one now widening between ageing countries
preoccupied by their own security, and
young countries obsessed by their economic
prospects. The real risk is of a world in which
the prospects of the latter would still be
perceived as running counter the security
of the former. The reality is that the security
and growth of the European continent will
depend more and more on the stability and
economic development of Africa.
A few somewhat self-evident facts are
worth keeping in mind. No continent is
closer to Europe than Africa and not just
through geography, but through history,
shared languages, and mixture of peoples
and cultures.
Africa is the continent where both major
risk and potential are concentrated. First,
there are the migratory pressures that are
often bluntly presented to European public
opinion as Africans seeking to escape north,
to prosperous Europe; the abiding image
is of clusters of people hanging on to the
railings of Spain’s north African enclaves
of Ceuta and Melilla. Today, two thirds
of the African continent’s inhabitants are
under 25. Their employment prospects
and living standards look dim in the short
term and are virtually non-existent in the
medium term. Two-thirds of African states
are among those 50 countries around the
world where demographic growth between
now and 2010 will be greater than 2%. The
Spring 2008 Europe’s World | 169

African population is already two and a half
times greater than Europe’s population, but
the average yearly income of a eurozone
inhabitant is, at $27,350, ten times that of
an African, for whom the average is $2,540.
Sanitary security is also at stake, with
Africans having the highest proportion of
transmissible diseases in the world. Equally
problematic is the environmental balance,
with rapid desertification, deforestation, the
progressive drying up of large rivers and the
increasing threat that plant diseases now
represent in what is still a predominantly
agricultural continent.
Africa’s threat of terrorism, a recent
reminder of which was the cancellation of
the Paris-Dakar rally, is not new and long
predates the attack on the twin towers in
New York in September 2001. There was
the UTA crash in Ténéré desert in 1989,
and then the attacks in Dar-es-Salaam and
Nairobi in 1998.
But if Africa’s risks are high, its potential
is just as great. To begin with, there are
the continent’s natural resources. Significant
rises in the price of raw materials, particularly
those relating to energy and mining, seem
to be here for the long term. Africa’s soil
conceals potential treasures that are still
widely unexploited, because of limited
industrial and marketing structures and
the various crises that have shaken major
producers. Nevertheless, Angola, Democratic
Republic of Congo and even southern Sudan
are expected to use their mineral prospects
to attract many “new friends”.
Strong demographic growth is,
meanwhile, a resource for African countries.
Even though it may mean very real economic
and social risk in the short-term, it also
holds out the promise of expanding markets
in terms of consumption and infrastructural
development. Since 2000, average economic
growth in the African continent has been
running at more than three times the
average of the European continent – 4.8%
on average for Africa, versus 1.4% for the
eurozone. Nineteen African countries are
among the 50 countries that achieved the
greatest growth in the past 10 years. And
above all, the increase in average African
incomes, which first started to show growth
in the mid-1990s, is now accelerating.
Africa’s considerable potential has not
gone unnoticed. Development aid from
traditional donor governments has on the
whole decreased, but the African continent
is instead rapidly winning new and more
diversified partners. Large foundations, and
above all, sovereign wealth funds are now
investing heavily there. The involvement of
“emerging sponsors” – first and foremost
China, but also India, Brazil and even Iran
and Venezuela – is marked by a strong
emphasis on political solidarity and, a key
point, further emphasis on the sovereignty
of partner states, which in practice means no
conditions whatsoever as regards political
or economic governance.
China for instance has recently lent
$5bn to the Democratic Republic of Congo
to finance infrastructure construction – by
Chinese companies – which is repayable in
mining rights. There are now 700 Chinese
companies present in Africa, and they have
already made more than $8bn-worth of
investments there. At the first China-Africa
170 | Europe’s World Spring 2008

summit in Beijing in the Autumn of 2006,
China announced the creation of a $5bn
development fund, and also opened up the
Chinese market free of duties to 440 African
products while setting up 4,000 grants a
year for the benefit of African students.
United States investors, which with the
end of the Cold War had seemed eager to
pull out of the African continent, are now
heavily re-investing. Their aim is to improve
the security of their energy supplies, and to
counter the threat of terrorism, to enlarge the
scope for the promotion of Christian values
and democracy and to offer an alternative
to the growing Chinese presence.
In this increasingly competitive
environment, the relationship between
Europe and Africa must be based essentially
on the logic of mutual interest. Europe is
once again mobilising interest in Africa, but
with a profoundly changed approach. There
is no longer the sort of fatigue towards
Africa that reflected public opinion in those
major European countries that were once
colonial powers.
Europe’s new relationship with Africa
is based on a shift towards the shared
management of common goals rather
than meddling in African domestic affairs.
Whether in Zimbabwe or in Ivory Coast,
interventions by former colonial powers
seem more often to have fuelled crisis than
solved it. If anything, such interventions
have had the opposite effect of promoting
greater national, and regional solidarity.
Spain, Germany and Nordic countries are,
at the same time, showing growing interest
in the African continent as too, somewhat
unexpectedly, are the EU’s new member
states. The Slovenian presidency is, for
instance, proving passionate about the
Darfur issue.
Among the major topics of joint interest
to Europe and Africa, the most visible
is migration. Conferences in Rabat and
Tripoli in 2006 brought together at the same
level countries of origin, transit countries
and those of destination. These meetings
focussed on the links between migration
and development, and on the European side
attempted to raise awareness that irregular
migration also disrupts the population
balance of African countries. Spain, as until
fairly recently a country of emigration, is
playing a vital role in highlighting this issue.
The European Union is beginning to
dismantle the wall that long separated
development aid policy from security
policy, and now favours a close relationship
between the two, and especially in Africa.
The EU appreciates the urgent need to
link security and development when trying
to resolve regional crises. That is why the
“Peace Facility” was set up in 2004, to
finance peacekeeping operations carried
out by the African Union. That’s also why
Operation Artemis was initiated in the
summer of 2003 in the Democratic Republic
of Congo as the first European military
operation outside European territory and
independent of NATO support. The EUFOR
operation in eastern Chad is also a result
of this approach. That said, if the EU is
to speed up the process of dealing with
crises, it needs to emphasise, and prove,
to the protagonists of a conflict that peace
dividends will quickly outweigh any rewards
Spring 2008 Europe’s World | 171

172 | Europe’s World Spring 2008

from a war. Nor does the EU need to wait
for the end of a crisis before mobilising its
development resources.
The adoption at the EU’s Lisbon summit
last December of the EU-Africa Joint
Strategy, originally launched as a “Strategy
for Africa”, exemplified Europe’s profound
change of approach. Energy, climate
change, migration, employment, mobility,
and democratic governance are among the
major partnerships that reflect this new
logic of shared Euro-African interests.
economic partnership agreements; It will
not revolutionise overnight the relationship
between the two continents, but it has the
merit of laying down the principles of
exchanges between partners that, if not
equal are at least complementary. It will at
very least enable us to assess our collective
ability to build a “Euro-African space”.
But it is a joint strategy that still has to
be implemented. It has yet to make much
progress on the difficult question of
Nathalie Delapalme has been an adviser on African
and development issues to three French Ministers of
Foreign Affairs.
E.W. ADVISORY BOARD MEMBERS
The Austrian Study
Center for Peace and
Conflict Resolution
– ASPR (www.aspr.ac.at) was founded
in September 1982 as an independent,
non-profit and non-partisan
organisation. It aims to contribute to
the promotion of peace and peaceful
conflict transformation and to the dissemination of practical
ideas for peace. The ASPR was the founder of the European
University Center for Peace Studies (EPU) and established a
European Peace Museum in Schlaining Castle. The ASPR has
become active in various peace-building training programmes
and projects. For these and other efforts the ASPR was awarded
UN “Peace Messenger” status in 1987 and in 1995 the ASPR
and the EPU were awarded the UNESCO “Prize for Peace
Education” and, in 2002, the UNESCO UniTwin Award.
Mannheimer Zentrum für Europäische
Sozialforschung
The MZES is an interdisciplinary research institute of the University of
Mannheim. In close association with the Faculty of Social Sciences it
investigates political and societal developments in European states and the
European Union. Research is organized within two research departments
and their respective foci.
A. European societies and their integration
B. European political systems and their integration
The research is supported by a well-established infrastructure. It includes
the Europe Library, the data archive Eurodata. Research at MZES leads to
many publications and numerous databases that are available for downloading
at the MZES home page.
Contact information:
Universität Mannheim
Mannheimer Zentrum für Europäische
Sozialforschung (MZES) - L7,1 - D-68161 Mannheim
Germany
Phone: +49/(0)621-181- Fax: +49/(0)621-181-2866
E-mail: Direktorat@mzes.uni-mannheim.de
http://www.mzes.uni-mannheim.de
Spring 2008 Europe’s World | 173

174 | Europe’s World Spring 2008

4
VIEWS FROM THE CAPITALS
Section
VIEWS FROM THE CAPITALS
VIEWS FROM THE CAPITALS
VIENNA
Disgruntled
Austrians ignore
EU’s economic
benefits
By Sonja Puntscher
Riekmann of the Centre
of European Union
Studies at the University
of Salzburg
Austria’s banks, industry
and energy utilities are
doing very well out of their
new business operations in
eastern and central Europe.
The Austrian economy as
a whole is thriving, thanks
in large part to the EU’s
expansion into Austria’s
neighbouring states.
Unemployment, debt and
inflation are all noticeably
low so it seems rather
churlish that only about a
third of Austrians approve
of EU membership, the
second lowest score after
the UK and well below
the two-thirds majority
who backed accession in
1995. Austrians appear
to find the workings of
the European Union so
incomprehensible that
no amount of economic
success can brighten their
sullen mood.
Time and again, Austrians
have been dismayed when
their country was outvoted
in the Council of
Ministers, or when rulings
by the Commission or the
European Court of Justice
appeared to contradict
Austrian interests.
Hackles were raised most
recently by demands for
open access to Austrian
universities, potentially for
all EU citizens. Austrians
are also bewildered by the
way multi-level governance
in the EU directly impinges
upon the national legal
and political order. This
is partly due to a lack of
understanding about EU
rules and procedures,
but also results from
disappointment over the
false promises made at the
time of the 1994 accession
campaign. Perhaps
more profoundly, the
overwhelming majority of
Austrians don’t intuitively
accept the supremacy
of European law – a
characteristic they may well
share with people in other
member states.
Recent history also plays
its part in explaining
current attitudes. Neutrality
became the guiding
principle of foreign and
security policy after 1955,
when Austria regained
full sovereignty after
occupation by the wartime
Allies. The country
then entered an era of
what one commentator
described as “imagined
splendid isolation”. For
all practical purposes,
this period ended when
Austria joined the EU and
co-operation within the
emerging European polity
became the determining
factor of Austrian politics.
The people, however,
hardly seem to notice the
significance of this seachange.
The consensus
over the benefits of EU
membership began to
crumble soon after the
1994 referendum on
accession. Euroscepticism
has increased more or less
Spring 2008 Europe’s World | 175

continuously ever since,
reaching a high around
2000 when some EU states
imposed sanctions against
Austria after Jörg Haider’s
far-right Freedom Party was
invited to join a coalition
government. According to
Eurobarometer and some
national opinion polls,
euroscepticism has now
stabilised at a high level
with only 36% of Austrians
now supporting EU
membership.
How has Austria’s political
elite reacted to this popular
discontent? The answer
is complicated by the
shifting political alliances
of the country’s coalition
governments, and by the
twists and turns in EU
politics. Today, under a
new grand coalition of
social democrats and the
conservative People’s Party,
the situation is that the
eurosceptic far-right, having
returned to opposition,
is trying to fuel public
hostility towards the Union
by asking whether the
Reform Treaty should be
put to a referendum. This is
ironic, as they themselves
had previously ratified the
now defunct Constitutional
Treaty by parliamentary
vote. But the other
political parties – as well
as leading Austrian legal
scholars – agree that the
new treaty does not entail
a fundamental change of
the Austrian constitution
and can therefore be
ratified by parliament. The
government, meanwhile,
has launched an
information campaign to
explain the constitutional
base and decisionmaking
mechanisms of
the Union in the hopes
of reviving public support
for Europe. Like other EU
governments, it seems to
be engaged in “integration
by stealth”, employing
soothing rhetoric about the
general need for European
cooperation.
Debate over the Reform
Treaty is, however, likely to
dominate the political
scene for some time to
come, fanned by Austria’s
“yellow” press. For many
people, sovereignty is still
the main issue, with the
focus on justice and home
affairs, water resources and
– since the use of nuclear
power in Austria was ruled
out by referendum in 1978
– the future of atomic
energy in Europe.
DUBLIN
How the EU
underpinned
peace in Ireland
By Etain Tannam of
Trinity College Dublin
Nearly a year after the
resurrection of the
Northern Ireland Assembly,
relations between Dublin
and Belfast have never
been so good. And it is as
well to remember just how
important the European
Union has been to their
rapprochement. EU support
for the peace process
was less obvious than the
efforts of politicians in
Northern Ireland, Britain
and the Republic of Ireland,
but Northern Ireland’s
recent past should serve
as a reminder that the
EU can do much to aid a
reconciliation process.
Northern Ireland’s unionist
and nationalist parties
agreed in March 2007 to
share power in a devolved
Assembly, and to support
institutionalised crossborder
cooperation with
the Republic. Europe’s role
in reaching this settlement
was multi-faceted. Britain
and Ireland both joined
176 | Europe’s World Spring 2008

the EEC in 1973 at a
time of renewed Anglo-
Irish efforts to resolve
the long-running Ulster
conflict. Europe’s postwar
experience had served
as a model of how old
enemies could overcome
past hatreds, putting the
common good above
conflict and perceived
self-interest. The idea of
a Europe of the Regions,
together with a new
emphasis on devolution
in the UK, provided a
forum for Northern Ireland
to cooperate with the
Irish Republic, Wales and
Scotland within an EU
framework.
Then, in 1999, the North-
South Ministerial Council,
created as part of the
Good Friday peace accord,
closely resembled the EU’s
Council of Ministers thanks
to its joint secretariat of
civil servants administring
cross-border policies in
designated areas. At the
same time, the voting
system used to elect
northern Irish politicians to
the Assembly, the D’Hondt
system, was adopted from
the EU.
unionist and nationalist
politicians a place to mix
socially, and also a place to
lobby jointly for Northern
Ireland’s interests. John
Hume, a moderate
Catholic MEP from Ulster
and champion of the
peace process, used the
Parliament to promote the
EU’s role and to highlight
the lessons that Europe
could teach about conflict
resolution.
EU financial incentives
played a vital role too.
From the late 1980s,
The peace process in Ireland
presents fresh evidence that
Europe’s post-war model of
reconciliation and prosperity is
still relevant today.
regional aid together with
even larger sums from
the “peace packages”
after 1995, underpinned
Europe’s commitment
to finding solutions
to Northern Ireland’s
problems. EU funding also
introduced the concept
of conditionality: without
evidence of meaningful
cooperation, EU money
would be withheld.
VIEWS FROM THE CAPITALS
areas, with special units
of Irish civil servants
harmonising a range of
cross-border policies.
For example, new health
arrangements allow
people living near the
border to use each other’s
ambulances and other
emergency services. They
can also register with
doctors in general practice
on each side of the
border. Businessmen and
politicians from both sides
increasingly work together
to boost US investment;
and in the EU, joint
lobbying over CAP reform is
well established.
Northern Ireland and the
Republic of Ireland are still
separate, but their
policymaking in some
specific areas has changed.
Europe’s influence has had
a direct impact on Dublin’s
relationship with Belfast.
The peace process in
Ireland presents fresh
evidence that Europe’s
post-war model of
reconciliation and
prosperity is still relevant
today.
During these years, the
European Parliament gave
Belfast-Dublin relations
are now dynamic in many
Spring 2008 Europe’s World | 177

VILNIUS
Nostalgia appeal
could brighten
Lithuania’s dismal
political landscape
By Mantas Adom nas
of the Institute of
Democratic Politics
A tectonic shift taking
place among Lithuania’s
centre-right parties has
the potential to transform
the Community’s political
landscape in time for this
year’s general election.
The opposition
Conservative party is
amalgamating with fellow
centre-right parties and is
in coalition talks with the
Liberal Movement, which
is popular with students
and young entrepreneurs.
But there is far more
than traditional party
politics going on. The
Conservatives are also
trying to form a broadly
based alliance comparable
to the popular Saj dis
movement that brought
Lithuania to independence
20 years ago.
This alliance goes under
the working title “The
Right Alternative”, and the
Conservatives want to bring
a number of popular nonpolitical
organisations into
it. They have nominated
a highly respected human
rights lawyer, K stutis
Cilinskas, as a candidate in
a parliamentary by-election,
and although a non-party
member he beat the leader
of the populist Labour Party,
Viktor Uspaskih. Encouraged
by this, the Conservatives
have been talking to
other prominent public
figures to see if they, too,
might stand for election
on a centre-right ticket.
“Celebrity” candidates
could go a long way towards
restoring a modicum of
public confidence in the
parliamentary process,
which has been damaged
by factionalism and
government indecision
in the face of economic
downturn.
Not that Lithuanians could
yet be described as excited
by political news. The
newspapers could spare
no more than a few lines
for the announcement
that the Homeland
Union - the official title
of the Conservative party
- had joined up with the
nationalist Tautininkai
Union to be amalgamated
as the Christian Democrats.
Few Lithuanians appear
to think it is a significant
move, perhaps because
neither the Tautininkai
nor the Conservatives did
well at the last general
election in 2004. Sceptics
inside the opposition
party fear the merger will
simply compound the
Conservatives’ reputation
as an old-fashioned
“mothball party”.
But if the Christian
Democrats can retain
the 5% of the national
vote they won in recent
municipal elections, they
could return members to
parliament next time around
and significantly boost the
Conservatives’ 17% of seats.
The Christian Democrats
appeal to church-goers
and the rural population,
useful constituents if The
Right Alternative is to win
widespread support. The
value of the Tautininkai
Union is largely symbolic;
it is heir to the dominant
party of the inter-war
republic and a nostalgic
reminder of times past for
the older generation. The
Liberal Movement currently
holds nine of the 141 seats
in the Seimas, Lithuania’s
parliament, making it a
valuable potential coalition
partner that would bring
younger voters into the
178 | Europe’s World Spring 2008

alliance. Add in some nonparty
celebrities and the
Conservatives hope to have
a winning formula for the
general election, which is
due in the autumn.
So what will The Right
Alternative be up against?
Lithuania is at the moment
run by a weak coalition
government, led by the
Social Democrats with
just 22% of the seats in
the Seimas. The country is
on the brink of explosive
inflation and a sharp
slowdown in economic
growth, and is suffering
from rampant corruption
and shortages of labour
due to mass emigration
since Lithuania joined the
European Union. Yet the
government’s response has,
by and large, been to throw
up its hands in despair and
leave much-needed public
sector reforms on hold.
But elections in Lithuania
are never simple two-horse
races. There are a total
of eight party factions
in the highly fragmented
parliament, spanning the
political spectrum from
populist fringe through to
the centre-left and centreright.
Nor is there any
guarantee that this will
change at the next election;
the centre-right would
need 40% of Seimas seats
to guarantee a controlling
stake and the right to
form the next government.
Emigration has leached
the country’s younger
and more self-reliant and
enterprising generation
away, and the remaining
population is more inclined
to support populist and
leftist parties. The rise
of populism seems to be
the price that Lithuania
must pay for European
integration and the free
movement of labour.
A united centre-right front,
led by renowned individuals
and promising a solid reform
package, might be enough to
win over the undecided
voters who constitute up to
a third of the electorate.
There are recent precedents
for such a shift in other
Baltic countries that have
elected centre-right
governments. The key to
Lithuania’s next election
seems to lie in whether The
Right Alternative can present
a credible front, and
overcome the perceptions of
parliamentary incompetence
and political stagnation that
dominate politics today.
VIEWS FROM THE CAPITALS
LISBON
Portugal’s EU
presidency success
masks worsening
domestic unease
By António Figueiredo
Lopes of the Institute for
Strategic and International
Studies (IEEI)
Despite all the kudos
Lisbon earned from
getting 27 signatures
on the EU’s Reform
Treaty last December,
institutional change was
really a sideshow for the
Portuguese presidency.
The socialist government
of Prime Minister José
Sócrates wanted the new
treaty dealt with quickly so
that EU leaders could get
back to the fundamental
economic issues of the
Lisbon Agenda.
Portugal particularly
wanted to make progress
on the structural and
education reforms
essential for Europe to
create jobs and profits in
the world’s most vibrant
new economic sectors. The
key issue for the Lisbon
government is of course
how long will it take for
EU reforms to produce
tangible results?
Spring 2008 Europe’s World | 179

180 | Europe’s World Spring 2008

Portugal’s priorities for its EU
presidency in part reflected a
strategic vision for the future.
The Lisbon strategy – which
in 2000 promised to make
the EU the world’s most
competitive knowledgebased
economy by 2010
– was formulated the last
time the Portuguese held the
presidency. But the Lisbon
government’s priorities for
the presidency this time
around were also dictated
by the severity of the
country’s economic crisis.
Portugal is scraping along
the bottom of Europe’s
economic league tables, with
minimal GDP growth that
is slower than both the EU
and eurozone averages. The
Portuguese in part blame the
EU for their predicament.
Lisbon is bound by the
eurozone limits on public
expenditure, and is finding
this particularly painful in
a period of low growth.
Some sectors of Portuguese
society also claim that the
European Central Bank’s
concern over price stability
is excessive, and is costing
the eurozone dearly in terms
of job creation. Thus the
Portuguese see Europe both
as a yardstick for measuring
the depth of Portugal’s
economic crisis, and also
partly as the cause of their
troubles.
Europe is, nevertheless,
also seen as a source of
solutions. The debate over
which European socioeconomic
model is most
successful at generating
growth and employment
has been going on for
years. The ruling Socialist
Party won an absolute
majority in parliament in
2005 on a platform that
advocated a reformist
“third way”. The socialists
said that Portugal needed
a strong government to
address key problems
with bold reforms, while
maintaining balance over
social concerns.
Since then, the Sócrates
government has delivered
a number of significant
reforms and effectively
tackled the public deficit.
But slow growth and the rise
of unemployment that is
traditionally low in Portugal,
has led to growing street
protests, including a general
strike in May of last year.
Although the strike was seen
by most observers as only a
limited success, social unrest
is now casting doubt over
whether the government can
hold on to power until the
next elections in 2009. The
political waters have been
further agitated by recent
changes in the leadership of
VIEWS FROM THE CAPITALS
the main opposition party,
the centre-right PSD. With it
came a reversal of position
regarding a question of
immediate concern to both
the Portuguese and the
rest of Europe. Instead of a
referendum on the Lisbon
Treaty, the new leadership
of PSD, after some initial
hesitations, decided to side
with the government in
supporting parliamentary
ratification.
The decision not to call a
referendum is fine. The leftist
and the opposition
protested vocally, alleging
the socialist had reneged on
their electoral promise to
put the constitutional treaty
to the vote. Opinion polls
suggest that the Portuguese
would have supported the
treaty in a referendum. The
EU remains popular here,
despite economic worries.
The move was primarily
justified by the government
and by Portugal’s President,
Aníbal Cavaco Silva, in terms
of the wider context and the
need not to delay or disrupt
the ratification process so
that Europe can move on to
more urgent business. The
President does not hold
executive powers but must
approve any referendum.
The prestige of his office,
plus the political legitimacy
Spring 2008 Europe’s World | 181

granted by universal suffrage
and his credentials as a
former leader of PSD, who
served as prime minister for
over a decade, means the
BUCHAREST
One year after
EU accession,
Romanians still
resist anticorruption
efforts
By Sabina Fati, columnist
at the Romanian daily
newspaper Romania
Libera
Just one year into
Romania’s membership of
the European Union, the
government’s pre-accession
promises to stamp out
corruption sound hollow.
The country’s overloaded
court rooms don’t
concern themselves with
high ranking corruption
cases. Judicial reforms – a
condition of Romania’s
entry into the democratic
club of Europe – have been
reversed; anti-corruption
prosecutors have been
subjected to harassment on
the orders of the political
elite; the government
froze the Commission
that was supposed to
advise the president
on whether certain
President could either fan
the flames of protest against
the government or act to
quietly dismiss the
referendum on Europe. He
government ministers
should be prosecuted, in
order to protect current
or former members of the
cabinet of Prime Minister
Calin Tariceanu. And so
the list goes on. Political
interference in the nation’s
system of justice continues
to be ingrained in Romania
and our parliamentarians
seem unaware that – by
The National Integrity Agency
was meant to search out toplevel
corruption. However, the
law establishing the ANI offered
a general amnesty for past
corruption
defending the status quo
- they prevent the country
from getting out of its
corrupt and provincial
backwater and into the
democratic mainstream of
Europe.
The fate of the National
Integrity Agency (ANI) is
an example of the state of
judicial reform in Romania
today. It was created in
response to pressure from
the EU and was meant
to search out top-level
corruption by checking
chose the latter course of
action.
the assets of high-ranking
dignitaries. However, the
law establishing the ANI
offered a general amnesty
for past corruption; any illgotten
gains will become
lawful, the counter will be
reset. As a result, longstanding
members of
parliament, who profited
from the ambiguous
legislation that was passed
at the beginning of the
post-communist era,
will no longer have to
provide the ANI with any
explanation about where
they got their fortunes.
Today, the ANI is an empty
shell subordinated to the
political elite.
Parliament even tried
to modify the Code of
Criminal Procedure to help
those under suspicion. Had
it been passed, the new
code would have required
suspects to be told that
their houses were about
to be searched; their
communications could
not have been intercepted
before a criminal
investigation started and,
even then, only after
182 | Europe’s World Spring 2008

suspects were informed
that an investigation was
underway. These provisions
could have been applied
retrospectively to trials
already taking place. That
would have made certain
evidence inadmissible,
including evidence of
terrorist offences at the
trial of Omar Hayssam,
a Syrian involved in the
kidnapping of Romanian
journalists in Iraq in
2005. Other provisions
of the code would have
reduced sentences for
fraud, when it involved
less than 8m, and limited
criminal investigations to
a maximum of six months,
except under exceptional
circumstances. This would
have prevented most
money laundering enquiries
that required checks
abroad, which tend to take
years rather than months.
The proposed criminal
procedure code disturbed
both Romania’s European
partners and its Atlantic
allies. The US ambassador
to Romania publicly
expressed his amazement
at the way the law had
been conceived. The
government in Bucharest
only backed down due
to diplomatic pressure
and “hotline” messages
from Brussels. Its attitude
to the criminal code
raised questions over
Bucharest’s ability to meet
even minimal standards
of propriety set by the
EU. Romanian politicians
seemed happy to ignore
the threat to EU internal
security – and to the NATO
alliance – from proposals
which were, first and
foremost, designed to
shield themselves from an
effective judicial system.
Resistance to the idea
that Romania’s judiciary
should be fully functional is
not confined to just a few
politicians. Most members
of parliament boycotted
the reforms put forward by
the former justice minister,
Monica Macovei, and
most are trying to find a
pretext to dismantle the
National Anti-Corruption
Department. The majority
of parliamentarians also
voted against a prosecution
request to be allowed
to search the house of
a former prime minister,
Adrian Nastase. Other
important prosecutions
have been sent back to
the prosecutor’s office
by the judges, including
one involving former Vice-
Premier George Copos
of the Conservative Party
VIEWS FROM THE CAPITALS
and another against
businessman Dinu Patriciu,
a friend of the current
prime minister. It would
appear that a fear of justice
has created a unity of
purpose which transcends
party lines.
All such cases highlight the
discrepancy between the
official promises made at
the time of Romanian
accession to the EU in
January 2007 and the
political class’s continued
inability to march in step
with the rest of Europe.
These days, the
government only talks
about Europe when it
wants to explain away
mistakes or to brag about
some achievement wellreceived
in Brussels - or if
the country looks set to
lose funds or credibility
over some lapse in
compliance with EU
legislation. Perhaps the
subject of EU membership
was exhausted during the
electoral campaigns before
Romania’s admission. In
any event, one year on,
Romanian politicians are
still behaving like
outsiders.
Spring 2008 Europe’s World | 183

SPONSORED SECTION
CYPRUS LOOKS FORWARD TO MAJOR ECONOMIC
BENEFITS THROUGH THE ADOPTION OF THE EURO
By Michael Sarris, Minister of Finance, Republic of Cyprus
expand, as transaction costs and exchange
rate risks will be reduced. Moreover, economic
activity can benefit from the boost provided
by low interest rates. Indeed, our efforts to
adopt the euro have already benefited the
economy, through reduced interest rates and
increased FDI and other capital inflows.
The economy of Cyprus has performed
well during the last decade, in spite of a
challenging external environment. The positive
macroeconomic performance during the recent
years enabled Cyprus to join the European
Union as a full member on 1 May 2004 and
subsequently the Exchange Rate Mechanism
II (ERM II) on 2 May 2005. The successful
participation of Cyprus in ERM II led to the
decision of the European Council, on 21 June
2007, to allow Cyprus to join the euro area
as of 1 January 2008. These achievements
were possible because the government
implemented sound economic fundamentals
and prudent macroeconomic policies.
Cyprus is well placed to benefit from the
adoption of the euro. The euro area is Cyprus’s
largest trading partner and trade relationships
with euro area member states are expected to
enhance even further with the introduction of
the euro. Profitable business opportunities will
The adoption of the euro on 1 January 2008 is
expected to strengthen economic growth and
foreign investment, through the improvement
of entrepreneurial environment and the
strengthening of confidence that international
markets and investors place in the Cypriot
economy.
More specifically, the benefits that will arise
for business firms from the adoption of the
euro are:
to the convergence of interest-rates at the
levels of the eurozone.
in transactions in euro.
markets of the eurozone.
quality and lower prices.
further improvement of the business climate,
due to the embedment of price stability as
well as the strengthening of confidence that
international markets and investors will now
place in the Cypriot economy.
184 | Europe’s World Spring 2008

The prospects for 2008/9 appear to be
favourable. The improvement of the
macroeconomic indicators is expected to
continue, reflecting the course of convergence
with the EU economy. Macroeconomic stability
enables us to implement our development and
social visions.
The basic fiscal targets of the Government are
included in the recent Stability Programme
2007-2011. The national medium-term
objective of a small deficit of 0.5% of GDP
is now revised to a balanced budget, a very
positive development which will further
contribute towards reducing the public debt.
Public debt is expected to continue following a
downward trend to below 50% by 2009.
The elimination of fiscal deficit in 2007 is
expected to contribute to keeping inflation
at low levels, leading to higher growth and
investment activity, more and better jobs
and maintaining the purchasing power of
employee’s wages. The rate of inflation is
expected to fluctuate around 2,5% in 2008.
The sectors of services will continue to be the
main fuel for growth and for the creation of new
jobs. In the labour market, the unemployment
rate is estimated to remain at low levels than
maintaining near full employment conditions.
The rapidly rising number of foreign and
Turkish-Cypriot workers is expected to address
any labour shortages and exert a dampening
effect on wages.
Growth is projected to remain close at around
4% in the next years due to: (a) the expansion
of private consumption and continued demand
for new homes among non-residents, (b) the
satisfactory investment of capital goods and
(c) the expected further increase in export of
services.
However, the growth outlook remains subject
to a number of risks. Most important are: (a)
the potential effects of higher oil prices, with
Cyprus dependent on oil imports for its energy
needs, (b) the possibility of a slow down of
growth in the rest of the EU, the primary
market for Cypriot exports of goods and
services, and (c) the effect on competitiveness
of the continued appreciation of the euro
against most major currencies. Tourism, which
accounts for around 15% of GDP, is vulnerable
to regional geopolitical events and increasing
competition from cheaper Mediterranean
destinations.
Over the longer term and with the adoption
of the euro, the primary challenge is to
maintain economic competitiveness. The
absence of national interest and exchange
rate policies, following the adoption of the
euro, underscores the need to strengthen
the role of sound macroeconomic policies
to provide conditions of price stability. Key
to addressing the competitiveness issue will
be the implementation of structural reforms
associated with the EU’s Lisbon Agenda.
The envisaged reforms are expected to
safeguard both the continuation of high
growth and financial sustainability of the
social insurance and health care systems as
well as social cohesion. In this respect, the
introduction of income criteria on social policy
measures will allow the targeting of higher
grants to vulnerable social groups.
This section is sponsored by
the government of Cyprus.
Spring 2008 Europe’s World | 185

MOSCOW
Reciprocal respect
could calm the
troubled waters of
EU-Russia relations
By Fyodor Lukyanov,
Editor-in-Chief of Russia
in Global Affairs
Relations between Russia
and the European Union
are still described officially
as a “strategic partnership”
with a shared goal of
“integration”. In practice,
however, neither side
makes any attempt to hide
their irritation at the other.
The illusion that Moscow
would follow the European
model of development
began to fade back in the
days of Boris Yeltsin. Under
President Vladimir Putin,
it has become clear that
Russia is, in fact, heading in
a very different direction.
From Moscow’s point
of view, the European
model is based on selfrighteousness.
These
feelings stem in part
from the EU’s genuinely
outstanding achievements
in the field of European
integration, but they also
reflect a typically Old
World sense of moral and
cultural superiority. For
the EU, “normal” political
and diplomatic relations
are only possible when
Europe’s righteousness
is acknowledged by the
other side. However, the
EU’s complacent selfimage
is far from justified.
Although an economic
giant, it remains a political
midget. The formation of
a pan-European identity is
proceeding only with great
difficulty and – far from
becoming a United Europe
– national sovereignty
may even be experiencing
a renaissance. Certainly,
The next time that Russia
and the EU try to get a
dialogue going, the principle of
“reciprocity” is going to become
crucial.
national agendas currently
dominate any higher pan-
European programme.
The growth of these
internal difficulties in
Europe has coincided
with Russia’s rapid return
to the status of a great
power. Russia’s inability
to break with its past, or
its non-western national
psychology, had been
evident for many years.
However, it was the
opportunities presented by
the oil boom which really
put flesh onto the bones
of the Kremlin’s ambitions.
Moscow’s cautious
faith in its own abilities
quickly gave way to overconfidence
and euphoria
as power and wealth
flowed in from the global
market in hydrocarbons.
The new Russia won’t
make concessions – which
confuses the Europeans.
On one hand, the culture
of compromise is deeply
rooted in the EU’s internal
relations; on the other,
the Union is unwilling to
compromise with external
partners. When neither
side will back off, you soon
create gridlock.
Interestingly, not long ago
– from about mid-2005
to the autumn of 2006
– Russia and the EU
experimented with the idea
of putting aside questions
about their conflicting
values and starting to look
instead at issues of mutual
self-interest. It was obvious
that their economies
were complementary and
interdependent, so this
seemed a good starting
point. Russia proposed a
new definition of the word
“integration”, which had
previously been taken to
mean the harmonisation
of economic, political
186 | Europe’s World Spring 2008

and legal practices.
Russia suggested this
interpretation should be
replaced by the concept
of “asset swaps”. Gazprom
would purchase energy
distribution networks in
Europe, while European
companies would gain
access to Russian
hydrocarbon deposits.
But Russia and the EU
speak different languages
and “integration” means
different things; the two
sides were unable to agree
on any mutual interest and
the experiment proved
short-lived.
The next time that Russia
and the EU try to get
a dialogue going, the
principle of “reciprocity”
is going to become
crucial. This will be a
departure from the old
style of relations when, in
simple terms, both parties
launched sweeping yet
ill-thought-out attacks
on the other in an effort
to make their point. For
example, for many years
Brussels attempted to “tie”
Russia into EU legislation,
reflecting its usual tactic
of expansion into eastern
Europe. This met growing
resistance from Moscow,
which retaliated by closing
the doors to investment
from abroad, including the
EU. As Russia grew richer
and stronger, Moscow
decided that it could simply
buy whatever it needed in
the Old World and instead
tie the EU to Russia. In
response, the EU rushed
to protect its strategic
industries from Russia’s
grasp.
Adopting the principle of
“reciprocity” would,
therefore, offer the chance
for both sides to start
building relations afresh on
the basis of a more
constructive and evenhanded
approach. There
may even be a chance to
open a new period of
“reciprocal” relations soon
– once the Union has
consolidated its
institutional re-organization
under the new Reform
Treaty and Russia has
resolved the issue of a new
power structure. However,
both Russia and the
European Union will first
have to accept that neither
of them will be able to
influence the world by
themselves in future. A
mutual recognition of this
fact could transform their
troubled relations.
VIEWS FROM THE CAPITALS
STOCKHOLM
Fickle Swedes are
turning on their
government –
again
By Anders Mellbourn of
Halmstad University
Swedes are a pretty
hard bunch to please.
Just 16 months ago,
they dumped the social
democrats – the country’s
dominant political force
for 75 years – regardless
of international acclaim
for the “Swedish model”
of high-tech economic
expansion plus extensive
social security. Now public
support for the centre-right
government has dropped
to record lows, despite
accelerating growth and
falling unemployment.
Opinion polls have found
that Swedes are more
concerned about cuts
in welfare programmes,
particularly unemployment
benefits, than they are
encouraged by good news
on jobs. So what does all
this say about Swedish
politics?
Like most Europeans
these days, Swedes tend
to vote against rather
than for a political party.
Spring 2008 Europe’s World | 187

Traditional left-wing voters
abandoned the social
democrats when they were
perceived to have lost their
idealism, especially since
they also appeared to
take so little pride in their
own achievements. From
the late 1990s, Sweden’s
blend of technological
innovation, openness
and competitiveness –
together with a web of
reformed social benefits
– was hailed as a viable
alternative to stagnating
European welfare systems
or cut-throat Anglo-
American neo-liberalism.
Germans in particular
were impressed by the
benefits of the Swedish
model, more so than
“Blairite” New Labour in
Britain or the home-grown
Neue Mitte of Gerhard
Schröder. Swedish social
democrat leaders, however,
practically apologised for
their policies and promised
to revert to the true path of
welfare support when times
got better. The people,
meanwhile, focused on the
pain of reform, rather than
their country’s success, and
felt that more jobs ought
to have been created. In
September 2006, the social
democrats lost power to a
four-party alliance led by
the conservative Moderate
Party. The new coalition
promised more jobs and
less social exclusion, not
least among immigrant
communities. Conservative
mantras about welfare cuts
and tax reductions were
played down.
But the new government’s
honeymoon period didn’t
last long. Voters quickly
became sceptical about
the centrist rhetoric of the
ruling alliance, deciding
the coalition comprised
“true blue” conservatives
and pro-market liberals
rather than a new breed
of moderates. Personality
politics also played a
part. Prime Minister
Fredrik Reinfeldt may be
soft-spoken enough for
Swedish tastes, but he
seems generally considered
rather too laid back for
the job. The government’s
reputation for managerial
competence has also
taken several knocks.
Two ministers had to
resign in their first two
weeks in office because
of media revelations
about misdemeanours,
like refusing to pay public
broadcasting fees and
hiring nannies and cleaners
on the black market.
Other examples of the
government’s amateurism
over the past year have
further dented their
credibility as competent
managers of the country.
Of course, the previous
government’s competence
had also been questioned.
It suffered a particularly
serious blow in 2004/5
when a large number of
Swedish holidaymakers fell
victim to the Indian Ocean
tsunami and then felt
deserted by the authorities.
Swedes also lost patience
with the former prime
minister, Göran Persson.
He was branded as too
self-centred and even
blatantly non-egalitarian,
notably over his taste for
splendid mansions. Perhaps
significantly for the future,
when Persson announced
his resignation on election
night, support for the social
democrats immediately
rose. It has continued to
increase ever since, even
though voters have little
indication which way the
party is now heading.
Swedish attitudes towards
Europe give one final
insight into the skewed
relationship between policy
success and public
appreciation in this country.
Swedes used to be very
reluctant members of the
188 | Europe’s World Spring 2008

European Union. But 10
years on, opinion polls are
at last showing that a
majority of Swedes now
take membership for
granted. There is still little
real enthusiasm for Europe,
though, and very little
discussion of EU issues. In
VIEWS FROM THE CAPITALS
alignment is barely
discussed at home. Swedes
appear to have learned to
tolerate the EU, without
caring to know very much
about it.
ISTANBUL
Despite EU
reverses, Turkey’s
AK Party walks tall
By Beril Dedeo lu of
Galatasaray University
Turkey’s primary political
force is now the Party of
Justice and Development
(AKP). It returned to power
with a landslide victory
in last year’s general
elections and was able to
defy all opposition to its
choice of its deputy leader
Abdullah Gul as Turkey’s
new president. Given that
the AKP grew out of the
movement of political Islam
– and that its predecessor
parties were banned on
several occasions – the
party’s ascent marks a
radical departure for a
country built upon Mustafa
Kemal Atatürk’s strongly
secular foundations. AKP
politicians have had to
Brussels, for example,
Sweden wins praise for its
commitment to the
Common Foreign and
Security Policy and
common defence policies,
even though this
remarkable shift from
traditional Swedish nonadapt
to the democratic
values, and political and
administrative framework,
of the republic. After the
turmoil of elections last
year, the new government’s
priorities include a new
constitution and on-going
efforts to address the
Kurdish problem. Progress
on EU accession talks will
– as before – stay high on
their agenda.
The AKP’s early days in
power after they won
their first general election
in 2002 were marked by
the transformation of
traditional state structures
in preparation for EU
accession talks. These major
reforms didn’t create any
great backlash; intellectuals,
democrats and liberals,
plus the party faithful and
people in rural and urban
business circles, all lent
their support to the AKP's
efforts. The government
was encouraged by the EU
and received support from
the US. It also met with no
Russian obstructiveness.
During this time, Turkey
made overtures in the
Caucasus, central Asia and
the Middle East. Ankara also
won praise for supporting
UN peace efforts in Cyprus
– in stark contrast to the
country’s longstanding
policy of non-cooperation
over the divided island.
AKP-led reforms produced
dramatic social changes
– but also started to
upset Turkey’s powerful
military-bureaucratic
organisations. Alarmed, the
AKP turned back to its core
constituency and some
conservative elements in
the party began to plot
what critics construed to
be putative pro-Muslim
policies. Meanwhile,
tensions within the EU over
its continued enlargement
robbed the Ankara
government of valuable
Spring 2008 Europe’s World | 189

outside support. As the rift
with the EU widened, the
AKP withdrew further into
its political shell and began
to distance itself from
broad-based supporters.
The opposition accused
the AKP government of
abandoning Turkey’s
secular principles, which
mobilised forces who saw
themselves as guardians
of the republican order.
Meanwhile, the American
occupation of Iraq
provoked anti-western
sentiment in Turkey, along
with fears that events
in Kurdish northern Iraq
might benefit the illegal
separatist PKK in Turkey.
Antipathy towards the
west was strengthened
by the hostility shown
in some European
countries to Turkey’s EU
membership bid. This
encouraged a revival in
Turkish nationalism, a trend
that was supported by
republican ''establishment''
institutions and other
parties opposed to the
AKP. It quickly turned into
a sort of tribal battle within
Turkish society, directed
mainly against the country's
non-Muslim minorities and
the Kurdish movement –
which re-ignited Kurdish
nationalism too. It is
important to note, though,
that the mindset during
this period was more
nationalistic than religious.
During the run-up to the
2007 presidential election,
this domestic political
fault-line became plain,
and it also took on more
religious overtones. The
opposition Republican
People’s Party along with
army generals tried to block
the AKP’s nomination of
foreign minister Abdullah
The strong support for the AKP
allowed the new government
to put aside bogus arguments
about secular-versus-religious
politics
Gul for president. There
were also street protests
over the prospect that
Turkey’s first lady would
wear the Muslim veil. But
the AKP’s unprecedented
victory ended the crisis
and in August parliament
elected Gul as president.
The people’s strong support
for the AKP allowed the new
government to put aside
bogus arguments about
secular-versus-religious
politics in Turkey. But it still
had to respond to questions
about compulsory religious
lessons, the “religious
affiliation” section on
identity cards and whether
the veil should be banned
at Turkish universities. Since
ultimately these issues were
all connected with the drive
for greater democracy in the
country, the government’s
response was to incorporate
them into proposals to
change the constitution.
The government is also
concerned to resolve the
Kurdish problem. The latest
terrorist acts perpetrated
by the PKK may be
decisive, along with Kurdish
politicians’ response to
violence. Pressure for
unilateral military
intervention in the Kurdish
region of northern Iraq
appears to have been
circumvented – Ankara is
seeking an international
response involving Iraqi
authorities. More
important, Ankara is
renewing co-operation with
the US. Making progress on
EU accession will remain a
top priority for Turkish
foreign policy. After a
period of internal turmoil,
Turkey appears to be
regaining its confidence on
the international stage, and
inside the country too.
190 | Europe’s World Spring 2008

LONDON
Iron law of EU
politics makes
Britain a poor
European
By John Peterson
of the Department of
Politics and International
Relations at the University
of Edinburgh
Some Britons say that
Gordon Brown’s distaste
for matters European,
which was so apparent
during his long reign
as Chancellor of the
Exchequer, will fade now
that he’s Prime Minister.
Ian Kearns of London’s
Institute for Public Policy
Research offered an
optimistic view of Brown’s
“EU vision” in the last issue
of Europe’s World.
So is Europe about to get
what it has lacked ever
since the Single Market
project, the UK showing
leadership on issues that
matter? The answer is
almost certainly “no”. The
British debate about the
European Union has turned
sharply negative. Gordon
Brown’s “vision” of EU
policy is defensive, anxious
and unaccommodating – if
it exists at all.
Unfortunately for the
pro-Europe camp, Brown
is bound by one of the
iron laws of EU politics –
political leaders who are
weak domestically make
poor European partners.
And Gordon Brown faces
severe political problems at
home, all of which have a
European dimension.
First, he has defined
himself more in contrast
to Tony Blair than to the
opposition Conservative
party leader, David
Political leaders who are
weak domestically make poor
European partners. And Gordon
Brown faces severe political
problems at home, all of which
have a European dimension.
Cameron. The effect is to
alienate the Blairite power
centre within the Labour
Party, which was always
more pro-European than
Brown and his allies. It
also prevents Brown from
contrasting his own policies
with the Conservatives’
Europhobia, which
sometimes borders on
xenophobia.
Second, Brown committed
a terrible political
blunder when he allowed
VIEWS FROM THE CAPITALS
expectations to build that
he would call an early
election in autumn 2007.
Opinion polls had shown
his popularity on the
increase during the summer
when he competently
handled a series of crises,
including prolonged
flooding and a terrorist
attack at Glasgow airport.
But the polls quickly
turned against him after a
brilliant party conference
speech by Cameron and
a Conservative pledge to
roll back a much-hated
inheritance tax. Brown was
forced into a humiliating
retreat on the election
date. His climb-down
coincided with the EU
summit in Lisbon, where
Brown loudly defended
the various “red lines”
exempting the UK from
provisions of the Lisbon
Treaty, as well as a
ferocious campaign led by
the populist Sun newspaper
for a UK referendum on the
treaty. It looks as though
Brown will now have an
uphill struggle even to get
parliament to ratify the new
treaty.
Third, Brown as premier
robs the Labour
government of one of its
trump cards: Brown as
chancellor. His successor,
Spring 2008 Europe’s World | 191

192 | Europe’s World Spring 2008

Alistair Darling, seemed
a safe pair of hands until
he announced changes
in capital gains tax that
will discourage risk-taking
and long-term investment.
Darling’s decision
provoked furious domestic
opposition, even among
sections of the Labouraligned
trades unions.
These reforms will undo
much of Brown’s own tax
regime, which had been
presented as a beacon of
competitive tax rates to
promote entrepreneurship
in Europe. They are almost
entirely at odds with the
Lisbon agenda.
A fourth big problem for
Brown is brewing in the
north. His native Scotland
is now ruled by the Scottish
National Party, not Labour.
The SNP has consistently
been Britain’s most pro-EU
political party, apart from
the question of fisheries,
and stands by its old
slogan of “independence
in Europe”. It is committed
to holding a referendum
on independence and
has embarked on nationbuilding
policies designed
to prepare public opinion
for a split from England.
Events in Scotland
highlight Brown’s own
Scottish origins and play
badly in middle England
constituencies where the
next UK election will be
won or lost. Scotland’s
decision to end medical
prescription charges, for
example, has led some
English MPs to ask why
their voters should pay
higher taxes so that
It would be wrong to say there
is no chance that Gordon Brown
might have a change of heart
over Europe. But the chances
that he eventually will adopt
a great new pro-European
strategy are – for the moment –
slim to none.
Brown’s fellow Scots can
get medicines for free.
It would be wrong to say
there is no chance that
Gordon Brown might have
a change of heart over
Europe. Brown’s choice of
foreign secretary, David
Miliband, is thoroughly
European. He has floated
the idea that the EU might
be renamed the
“Environmental Union”
and provide the main
platform for British efforts
to deal with climate
change. On development
policy, too, Europe seems
the best route for Brown
to achieve his long-held
VIEWS FROM THE CAPITALS
aspiration to aid poor
nations, particularly in
Africa. It is still early days
for Brown’s premiership.
With a general election
ruled out before 2009, he
has plenty of time to
define his so-called
“vision for change”. So far,
however, the government’s
focus is very much inward,
rather than outwardlooking.
The chances that
Gordon Brown eventually
will adopt a great new
pro-European strategy are
– for the moment – slim
to none.
Spring 2008 Europe’s World | 193

Letters to the Editor
Europe’s World’s aim of stimulating debate on key issues draws many
thoughtful reactions from leading policymakers. We feature here a selection of
letters commenting on articles in our Autumn 2007 issue
Reform the CAP yes, but dismantle it at our peril
by Michel Godet
ADAM
FICSOR, State
Secretary
for EU
Affairs at the
Hungarian Ministry for
Agriculture and Rural
Development
Sir,
You have to keep your eye on
the big picture in today’s global
economy. But as Michel Godet
says, Europe should not make
too great a sacrifice at the altar
of trade liberalisation, especially
over agriculture. Farming may only
represent a fraction of world trade,
but it is still vital for the wellbeing
of our rural economies and
our citizens’ health. We cannot
therefore subscribe to any reform
of the Common Agricultural Policy
that might endanger food safety or
compromise consumer protection.
This is particularly relevant to
a country like Hungary, which
was once the bread basket of
Europe. Hungarian agriculture
has modernised rapidly since
1990 and our vast acres of
farmland hold huge potential
benefits for the whole of the
European Union. Bio-ethanol
and bio-diesel production, for
example, are real alternatives to
food crops; a switch to bio-fuels
would reduce the EU’s carbon
footprint as well as helping to
limit local overproduction of
edible grains. Bio-fuel crops
may also be a good way to
ease environmental pressure
from intensive food production,
especially now that compulsory
set-aside seems about to
disappear from the CAP.
I am not advocating that the
EU should turn a blind eye
to globalisation; that would
fundamentally flaw our policy
decisions. Dealing with the
complex processes of the
world economy clearly requires
openness and a willingness to
compromise. However, we must
never forget that the European
Union has a very positive
image for countries queuing
up to join, nor that they are
prepared to make considerable
sacrifices to belong. Hungary,
together with other candidate
countries, walked this long
road just a short while ago.
We know that the advantages
of membership do not come
easily; accession is preceded by
years of preparation and hard
work. For Hungary, a large chunk
of this time was invested in
establishing new administrative
and legal structures. These
were necessary both for us
to participate in the day-today
activities of the enlarged
Union and also to receive rural
development support and direct
CAP payments.
No doubt these agricultural
subsidies will continue to
decrease as the EU expands
eastwards and negotiating
pressures escalate in the WTO.
194 | Europe’s World Spring 2008

LETTERS
We accept that trade
liberalisation is necessary and
that it will bring us all visible
advantages. However, since the
US still plans to increase farm
support, it would be a mistake
to abandon a tough EU line at
the WTO all together. The
Hungarians, the French and
other hardliners strongly hope
that the Commission can get
our message across and
highlight to the world that there
is much more at stake than the
future of farmers alone.
If we get it right, we'll all be saying ''I'm a European''
By Simeon Saxe-Coburg-Gotha
MARIJA
PEJ INOVI
BURI , is a
member of
the Croatian
Parliament
Sir,
It seems that many people
in Europe have lately been
worried about how to protect
their own language and
culture. Globalisation is
seen as a threat to national
identity and these concerns
have inevitably been fuelled
by debate over closer EU
integration. Here in Croatia,
a country well advanced in
the negotiation process, I
would say that questions
of language and culture are
nearer to many people’s hearts
than discussions about the
economic and political benefits
of our EU accession. Evidence
that the European Union is
taking these issues more and
more seriously is, therefore,
particularly important to us.
Consequently, I read with great
interest Simeon Saxe-Coburg-
Gotha’s suggestions over
how to resolve the cultural
and linguistic tensions facing
Europe, and I support his
call for an ambitious EU-wide
strategy to strengthen a multilingual,
multi-cultural Union.
As Saxe-Coburg-Gotha says,
the EU already has a solid
structure in place to respond
to people’s anxieties. It now
needs to build upon past and
present achievements to refine
- rather than redefine - the
Union’s policies on language
and culture.
At the moment, these policies
are designed to ensure that
Europe’s many languages
survive both in both formal
and informal settings. The EU
also promotes a European
culture that neither endangers
national identity nor threatens
the cultural differences
between member states; it also
encourages local traditions
to continue. The success of
this approach over the past
half century has been such
that, despite the difficulties
encountered en route, a
multi-lingual and multicultural
Union is now a fact of
everyday life.
In future, we may find that
Europeans react against
globalisation by emphasising
those features that are unique to
their own culture. We therefore
need to make every effort
to explain that the evolving
European identity is no threat
to their national identity or local
traditions. Different cultural
values are complementary to a
European identity; they are not
mutually exclusive.
However, European citizens
could only be persuaded that
Spring 2008 Europe’s World | 195

this is the case if none of their
questions are left unanswered
and none of their concerns
ignored. In order to succeed,
the EU’s existing and wellfounded
official language
policy should be strengthened
through adequate support
for - and further development
of - translation services. EU
cultural policy should adopt
programmes that clearly
We should strive towards a
European identity based on
haute cuisine, where each
ingredient keeps its flavour
while bringing out the taste of
all the others.
promote diversity within a
European identity, and cultural
and linguistic messages should
be communicated to the
public in an open and inclusive
manner.
Perhaps the best way forward
can be summarised by a
metaphor. The EU never
intended to blend all our
different nations together in one
giant melting pot. Rather, we
should strive towards a
European identity that is based
on haute cuisine, where each
ingredient keeps its individual
flavour while also bringing out
the unique taste of all the
others.
HELGA TRÜPEL
MEP, Vice-
Chairwoman
of the
European
Parliament’s Committee
on Culture and Education
Sir,
I agree with Simeon Saxe-
Coburg-Gotha that the EU must
be multi-lingual if it is going to
get closer to its citizens. But I
think he left many important
questions unanswered. For
example, should education
policy set a target for the
number of languages that
our citizens ought to master?
Which documents and sessions
of EU institutions should be
translated into what languages?
You could argue that the current
23 official languages are not
enough. Perhaps the mother
tongues of our large Arabic,
Turkish and Russian-speaking
minorities need to be included
as well. What about Basque
and Welsh Europeans that do
not identify with their official
national language? If we are
going to create an effective
language policy, one which can
stop English from becoming
the dominant pan-European
language by default, such topics
need to be tackled now.
Saxe-Coburg-Gotha should
remember, too, that a multilingual
Europe by itself cannot
guarantee that Europeans will
take on a European identity. This
will only happen when citizens
believe that the EU is working
for them. Therefore we need to
communicate what the EU has
done for its citizens, and what is
still being done for them.
What's more, the average citizen
won’t feel they have a say in
"shaping this common future"
– as Saxe-Coburg-Gotha puts
it – just because they get free
access to information about
the Union in their mother
tongue. In order to strengthen
a sense of common European
identity, the substance of EU
communications must be
relevant to Europeans as well as
the language used.
So what messages should the
Union put across? For a start,
we could point out that EU
policies now touch the everyday
lives of almost 500m people.
From consumer protection, airpassenger
rights and the cost of
mobile phone roaming tariffs,
all the way to environmental
policies to mitigate the threat
of climate change, EU decisions
affect the daily life of us all.
European voters also need to
hear about the new instrument
that was introduced by the
Reform Treaty, the European
Citizen’s Initiative, which allows
new issues to be brought to
Brussels if one million citizens
196 | Europe’s World Spring 2008

ack the idea. Other good news
worth spreading includes the
strengthening of the European
Parliament under the Reform
Treaty, which guarantees
democratic representation in
Europe. Both the multi-lingual
institutions of the EU and
national-language media and
politicians must play their part
getting these messages across.
Finally, I would like to point out
how the European Parliament is
dealing with another subject of
Saxe-Coburg-Gotha’s article:
new social conflict in Europe.
Recent riots in the suburbs of
France and protests against
Mohammed cartoons published
in Denmark have made it clear
that Europe needs a new social
dialogue if it is to avoid "a
painful clash of cultures". In
2006, the European Parliament
adopted a resolution on
conflicts in a multi-cultural,
multi-religious and multi-ethnic
Europe; this was originally
tabled by my Greens/EFA Group.
The resolution said that free
speech, while of primary
LETTERS
importance, must not be
abused. Those exercising their
right to free speech must
respect the fundamental values
of democracy, pluralism and
tolerance, and must never incite
hate nor offend religious
minorities. If offence is caused,
the Parliament believes that the
victims must be given legal
means of redress at the national
and European levels.
How Europe should address the challenges of the “Asian century”
By Bela Kádár
MARKO
MIHKELSON,
Chairman of
the European
Union
Affairs Committee in the
Estonian Parliament
Sir,
It’s hard to dispute Bela Kadar’s
view that we are going to have
to rejuvenate the European
Union in order to keep pace
with our global competitors,
especially the emerging Asian
giants. But there’s no need
for excessive pessimism. I
doubt that any of the present
European leaders wants to
relegate the EU to a dusty
museum of economic history.
And the anticipated arrival of
the “Asian century” will shake
up the world economy, not just
Europe.
Indeed, I believe that intensified
competition from Asia will spur
the EU into renewed internal
market reforms and further
opening of our economies. The
Lisbon strategy to make the
EU the world’s most dynamic
knowledge-based economy
may well remain a pipe dream.
But that doesn’t mean that
“innovation” and the pursuit of
knowledge-based industries are
any less important ambitions.
Given sufficient political will,
both ideas can be put into
practice.
I also think that internal forces
are driving Europe towards a
fundamental reformation, as
well as external competition
from Asia. Since the fall of the
Berlin wall in 1989, Europe has
changed drastically. How far
away that divided continent
seems, polarized as we were
by our Cold War dependencies
on the Soviet Union and
the USA. In my opinion, the
European Union today is more
independent of mind than ever
before. Certainly, we need to do
more to regain a competitive
edge on world markets. But now
Spring 2008 Europe’s World | 197

the Reform Treaty has been
agreed by Europe’s leaders,
and so long as ratification
goes according to plan this
year, there is good reason
to hope that the EU-27 can
demonstrate greater efficiency
and determination.
European nations can also
be expected to close ranks in
the face of growing tensions
over global security, including
worldwide fears about energy
supplies. I see no other way
for Europe to counter these
ultra-serious challenges than to
unite behind a common policy.
In capital cities across Europe,
both large and small, you can
feel the need for the EU to
present a more united front in
an unstable world.
Personally, I am convinced that
the European Union can only
maintain its position in world
politics, let alone strengthen its
global role, if we develop a
common understanding of our
strategic objectives. This is a
prerequisite for implementing
collective measures that
correspond to the challenges we
face. To achieve greater internal
harmony, we also need a shared
sense of identity. This will be
hard to achieve so long as we
underline our differences; it
would therefore be useful to
develop a more unified
“narrative” of our combined
experiences as Europeans.
Ultimately, the EU will also have
to define the boundaries within
which we can agree upon a
shared European “self-image”.
We don’t yet know exactly where
these borders will be, nor if a
United States of Europe will
exist by, say, 2050. Only one
thing is certain, the
development of the European
Union does not stop today.
The flaws in Europe's democracy
By Jerzy Baczynski
ARJEN
BERKVENS,
Director of
the Alfred
Mozer
Stichting and Coordinator
of the European Forum for
Democracy and Solidarity
in Amsterdam
Sir,
It was refreshing to read Jerzy
Baczynski’s views on the ways
that newer EU member states
feel about the political roller
coaster that led up to last year’s
deal on the Reform Treaty. He
provided much food for thought
over the differences between
the opinions of political elites in
eastern Europe and perceptions
of events here in the west. But I
think his conclusions about the
political mood in older member
states were wide of the mark. In
particular, I want to take issue
with his belief that “old Europe” is
suffering from democratic fatigue
and that our people are hostile to
the idea of making the EU more
efficient and more responsive.
Baczinski states that the
“No” votes in France and the
Netherlands in 2005 to the
original constitutional treaty
were seen by many “eurosceptic
and populist parties in the
newcomer states” as a bloc to
further democratic development
in Europe. He concludes that
these “No” votes were a sign
that older members of the
Union had become hostile
“towards the idea of making
the EU institutions more
responsive and efficient.” I
totally disagree. I think the fears
that western Europeans were
expressing when they rejected
the constitution were a complex
198 | Europe’s World Spring 2008

mix, including worries about job
security, increased migration
and globalisation, along with
concerns about a loss of
national identity and the speed
of EU enlargement. Last but not
least, the “No” votes were a way
for individuals to complain that
they have no real influence on
European policies.
It is perhaps to be expected
that new and old member
states misunderstand the
democratic moods in each
other’s countries, given our
very different political histories.
I would certainly agree with
What our citizens want is more
European democracy, not less
Baczynski that economic
progress and political stability
remain the most appealing
features of EU membership for
the new democracies in eastern
and central Europe. Joining the
Union was indeed a chance
to “consolidate and protect
their infant democracies”
after the profound shocks to
their societies and economies
in the wake of the fall of
communism. The hardships and
disappointments suffered by so
many citizens were only made
bearable by the prospect of EU
membership.
Under such harsh
circumstances, it is no wonder
that eastern Europeans took
little interest in the real reasons
why western voters rejected the
constitution; we were, in a way,
living on two different planets.
However, if eastern Europeans
now want to understand the
problems surrounding EU
integration and enlargement,
they will have to come to terms
with what really motivates their
fellow EU citizens here in the
west.
They therefore need to
appreciate that, in older
western democracies, Brussels
is widely considered to be
an impenetrable fortress
of bureaucracy. Voters are
disenchanted with the sheer
complexity of the Union; they
do not feel represented by
European politicians and,
more and more, they consider
“Europe” to be an elitist project.
True or false, this impression
has led to widespread distrust
of EU institutions.
However, that does not mean
that western Europeans are
somehow tired of democracy.
What our citizens want is more
European democracy, not less.
Democratic fatigue does not
exist in today’s European
Union.
LETTERS
ALAN DUKES,
Director
General of
the Institute
of European
Affairs in Dublin
Sir,
Jerzy Baczynski says central
and eastern Europe found
that “Democratisation quickly
came to mean westernisation
that was often chaotic,
arbitrary and divorced from the
country’s psychological and
cultural roots.” He adds that
the democratic institutions
of these EU member states
lacked a sound base in civil
society and were held hostage
by political parties. While much
of this analysis is valid, it is
not peculiar to eastern and
central Europe. The region’s
post-communist experiences
have parallels in the histories of
Greece after 1981 and of Spain
and Portugal post-1986. Ireland,
too, suffered a civil war in the
wake of independence in 1922.
It seems that the path to
democracy is never smooth,
even when the principal obstacle
to its introduction has been
removed. It takes time for civil
society, including political parties,
to “construct” their relationship
with the new political order. A
period of instability is, therefore,
not unusual. In the early stages
of transition, actions that appear
Spring 2008 Europe’s World | 199

THE VIEW FROM CATALONIA
CATALONIA’S STRUCTURAL FUNDS FOR 2007-13
Catalonia is one of the most cosmopolitan
places in Spain, in part the result of its long
tradition of international commerce. In recent
times its rise to become Spain’s top tourist
destination has added to its international
character. The tourists may only stay for a
week or two, attracted to the Mediterranean
pleasures of the Costa Brava, but they leave a
flavour. Away from the beaches, there is a
thriving industrial sector. The stock exchange
in its capital Barcelona is the second most
important in the country after Madrid’s. But
Catalonia’s 7m or so people are aware that
nothing stands still in Europe.
Characteristically, they are now facing up to
the realities of changes in the Union’s
structural funds.
The European Union’s funds in support of its
cohesion policy are now being funnelled primarily
to member states that have joined since January
2004 – with much lower per capita GDPs than the
EU average. Resources for the whole of Spain are
being significantly cut back. Its economy has had
a positive trend in recent years.
The resources from the European Regional
Development Fund (ERDF) and the European
Social Fund (ESF) earmarked for Catalonia are
estimated to be around 40% lower than for
2000-06. This cutback is even more pronounced if
we take into account other resources that Catalonia
used to receive from the cohesion funds.
The resources for Catalonia for 2007-13 are
primarily to support the EU objectives of Regional
Competitiveness and Employment, to which both the
ERDF and the FSE contribute, and Territorial
Cooperation, to which only the ERDF contributes.
Catalonia may also receive resources from the
cohesion fund for other activities, although at
levels much lower than in 2000-06.
All the operational programmes (OPs) will be
“mono-funds”; that is, there will be specific ERDF
and ESF programmes. The OPs from which
Catalonia will receive funds are the following:
Catalonia’s ERDF OP for 2007-13 was formally
submitted to the European Commission on March
2, 2007. The Commission deemed it “admissible”
on March 9, 2007, meaning that it contains all the
elements required by Community norms, and it
was approved in December 2007.
Competitiveness and employment objective
2007-13: Resources earmarked for Catalonia. m
ERDF programmes
ERDF subsidy
ERDF Catalonia OP
679.07
Pluri-regional business RDI OP
79.82
Pluri-regional technical assistance OP 4.34
Total ERDF 763.23
ESF programmes
ESF subsidy
ESF Catalonia OP
284.71
Pluri-regional employment and adaptability OP 290.23
Pluri-regional fight against discrimination OP 32.60
Pluri-regional technical assistance OP 2.31
Total ESF 609.85
Total ERDF + ESF 1,373.09
Source: ERDF operational programme submitted to the
European Commission.
Public expenditures on this programme total
1,398.23m. The ERDF subsidy assigned is
679.07m, to be distributed as follows: 51.6% for
actions spearheaded by the Generalitat de
Catalunya; 24.5% for actions by local entities; and
the remaining 23.9% for actions by the Spanish
public administration.
200 | Europe’s World Spring 2008

The actions planned within the OP are mainly aimed
at achieving the Lisbon objectives, bearing in mind
that EU regulations state that at least 75% of the
expenditure in the Competitiveness and Employment
Objective must be addressed to them.
Thus, axis 1, Knowledge Economy and Innovation and
Business Development will take up more than half of
the resources of the OP (53.11%). Within this axis,
the main areas to be promoted are: technological
excellence; support for R&D centres; the transfer
of knowledge and technology; improved access to
financing for business development; and promoting
the information society and the use of information
and technology (ICT). The next axis, number 4,
covering Sustainable Local and Urban Development,
accounts for 20.9% of the resources. Axis 3, Energy
Resources and Access to Transport Services, and axis 2,
Environment and Risk Prevention, are earmarked for
16.74% and 8.36% of the resources, respectively.
The last in line, axis 5, Technical Assistance, has been
allocated 0.89% of the resources.
Catalonia’s ESF OP for 2007-13, submitted in March
2007 was also approved by the end of 2007. The ESF
subsidy assigned to this programme totals 284m,
with total financing planned at 568m. The national
counterpart is primarily the Generalitat de Catalunya.
Its chief goal is to rectify weaknesses in the labour
market in Catalonia, although it also includes
innovative and experimental activities.
Axis 2, Fostering Employability, Social Inclusion and
Equality between Women and Men, allocated 51.9% of
the resources, is the main axis in this OP. Axis 1,
Fostering Entrepreneurialism and Improving the
Adaptability of Workers, Companies and Entrepreneurs,
garners 24.6% and includes activities related to
outsourcing and promoting emerging sectors. Axis
3, Increasing and Improving Human Capital, with 13.2%
of the resources, includes actions to improve
young people’s professional qualifications and
their preparation for the job market. Axis 4,
Promoting Transnational and Inter-Regional Cooperation,
will receive 7% and axis 5, Technical Assistance, 3.2%
of the resources.
The cohesion fund, 2007-13
The resources approved for Spain for the cohesion
fund total 3,543m (in current terms). The state
submitted a pluri-regional programme for transport
and the environment, where no specific allocation
of resources was planned by the administrations
of the autonomous regions in the Competitiveness
objective. A reserve of 325m was made available
to municipalities with over 200,000 inhabitants in
the Regional Competitiveness and Employment regions,
including Catalonia, in order to finance
environmental projects.
The environment ministry will manage a project
aimed at eliminating chemical waste in the Flix
reservoir (first phase), with a subvention estimated
at around 110m. Investments are also expected
in the water sector in Catalonia amounting to
38.5m.
This is a summary of our autonomous community’s
planned participation in the 2007-13 cohesion
policy.
Still, despite the growth of the Catalan economy
the region has several significant shortcomings.
There are hopes that this situation can be remedied
using resources allocated in the period 2007-13,
which will mainly contribute to achieving the
Lisbon objectives, especially in research,
development and innovation (RDI).
The European Commission hopes that the
programming of the European funds will contribute
to a more intense development of the regions,
adding to their value. Regions such as Catalonia,
which belong to the Competitiveness and Employment
group, are the ones expected to help the EU as a
whole improve its ranking, internationally, in RDI
and the employment rate and other areas.
With one of the largest allocations of resources
within the Competitiveness and Employment objective
for the next seven years Catalonia will have to
work close with the European institutions to
achieve a successful programme in line with the
Lisbon objectives.
This section is sponsored by the Government of
Catalonia. For more information: www.gencat.cat
Spring 2008 Europe’s World | 201

to be incompetent may in fact
be the result of inexperience.
Either way, this often leads to
abuses of power and corruption.
However, it cannot be said that
these vices are unique to new
democracies. What is important
is that they are recognised as
faults and remedial action is
taken.
Baczynski also takes up the
theme of the “democratic
deficit” in the EU. He quotes
Timothy Garton Ash’s aphorism,
that: “Were the EU to apply
for membership of the EU, it
would not be accepted.” This
presumably means that the EU
does not meet the Copenhagen
criteria, which set down the
eligibility requirements for
accession, including institutional
guarantees for democracy,
human rights and the rule
of law. However, it is hardly
surprising that the EU fails to
meet its own accession rules.
The Copenhagen criteria were
designed to apply to states; the
EU is not a state, therefore it
cannot be judged by the same
criteria as states.
Where’s the democratic deficit?
I consider the “democratic deficit”
to exist at the level of national
parliaments, not the EU
To understand the nature of
democracy in the EU, it is
essential to remember that
member states are the primary
components of the Union:
the EU is a union of states.
Therefore democracy in the
EU means democracy between
these member states. And that
is assured by the institutional
provisions governing relations
between them, i.e. the Council.
The member states have adjusted
these relations in successive
treaties, all of which were
ratified – until the French and
Dutch referendums of 2005 - in
accordance with their respective
constitutional requirements. It is
national democratic institutions
that have the final say.
Furthermore, the democratic
structure of the European
Parliament, and its power of
co-decision with the Council,
constitutes an additional
element of democratic assurance
within the European Union. It is
an arrangement without parallel
in the internal structures of the
member states. So, where’s the
democratic deficit? As I have
argued in detail elsewhere, I
consider the “democratic deficit”
to exist at the level of national
parliaments, not the EU.
What France must do to regain centre-stage in Europe
by Thierry Chopin
ANGELIKA
BEER MEP,
member of
the European
Parliament’s
Committee on Foreign
Affairs
Sir,
The recent history of the
Reform Treaty says a lot about
the way the European Union
works. We drop the ambitious
title “constitution”, but keep
much of the content of the
old treaty. Every word has to
meet with everyone’s approval,
so the process is slow. That’s
just how it is. Yet, step by step,
the Union manages to align
national policies in areas that
were never dreamed of by its
founding fathers and mothers.
Why, then, does foreign policy
202 | Europe’s World Spring 2008

emain so obstinately outside
the European fold?
The answer seems to lie within
the national sensitivities over
international relations that are
felt by member states. Recent
actions by France over the
latest EU military mission to
Africa are a classic example of
what I call “national hijacking”
of our supposed Common
Foreign and Security Policy.
France has long-standing ties
with Chad - and troops on the
ground - but wanted to expand
EU engagement as violence
in Darfur overflowed into
neighbouring countries. The UN
Security Council authorized the
EU to send up to 4,000 troops
to help protect hundreds of
thousands of civilians in eastern
Chad and north eastern Central
African Republic. However,
despite the new force’s
European Security and Defence
Policy name-tag, France still
dominates the mission. Paris is
expected to provide at least half
of all the troops; the operation
commander may be Irish, but
the force commander is French
and their headquarters are in
France. Neither the mandate
for EUFOR Chad-CAR nor the
circumstances of its operation
has been clearly set out. Yet
they will come up against
unfathomable rebel groups,
paramilitary organisations and
local soldiers in a deeply volatile
part of Africa. This is typical of
the way the EU reacts ad hoc
But does any one country
deserve particular blame for
paying only lip-service to the
CFSP? I think not.
to international crises: a shortterm
strategy is devised at the
behest of a single country. This
is not a proper common foreign
policy.
But does any one country
deserve particular blame for
paying only lip-service to the
CFSP? I think not. The search
for common ground within
Europe’s divergent national
foreign policies is, after all,
almost as old as the European
Community itself. The 2003
European Security Strategy
marked a limited step toward
defining Europe’s common
interests and capabilities. But
it does not excuse member
states from working on a
more coherent strategy. In a
globalised world, with all its
challenges and conflicts, the
need for Europe to speak in one
voice is more urgent than ever.
Thierry Chopin makes many
valid points about French
attitudes towards the European
Union in his article. Clearly,
LETTERS
Nicolas Sarkozy began to see
the EU as another playground
for French interests immediately
he became president. This was
bound to irritate other member
states. However, we must ask if
France is so very different from
other EU nations in this regard.
For example, neither Poland nor
the Czech Republic works within
an EU framework when talking
about a missile defence shield.
Poland and Britain both shun
the Charter on fundamental
human rights. In the Balkans,
the EU has missed its chance to
unite behind a single policy and
looks set to run into the next
crisis.
Chopin says France has to
define its relationship towards
the EU. I would argue that
many member states still have
to do that – maybe even all of
them.
Spring 2008 Europe’s World | 203

How Europe could be a force for good in the Middle East
By Prince El Hassan bin Talal
JAMILA
MADEIRA
MEP,
member of
the European
Parliament’s Delegation
for relations with the
Mashreq countries
Sir,
Over the past 50 years, dialogue
has been the foundation of
Europe’s steady progress
towards peace, democracy and
respect for human rights. The
ability of EU nations to listen
to one another’s views is still
a vital guarantor of success
for the never-ending European
project. Prince El Hassan bin
Talal says this “heritage of
hope” could provide a model
for the great challenge of the
21st century: the reconciliation
of the western and Islamic
worlds. I agree completely that
our history can help Europe to
act as a mediator in the Middle
East. However, there is still a
lot of work to do before such
hopes become reality.
The desire to increase
multilateral dialogue was a
major factor behind Portugal’s
determination to host an
EU-Africa summit and to
improve EU-Mediterranean
relations during its presidency
last year. By setting these
priorities, Portugal aimed to
raise awareness of the issues
connecting Europe and her
southern neighbours, and to
bring forward EU concerns over
the fundamental principles of
peace, democracy and human
rights. Portugal’s objective was
not to reach unanimity on all
subjects; such over-ambition
would hardly be constructive.
Instead, the aim was to create
a framework that would be
favourable for further progress.
In this sense, the Portuguese
initiative can be considered a
success.
I believe that future
development of EU policies
towards the Mediterranean
and Africa requires us to look
beyond mere investment.
For more than a decade,
much of the huge EU aid and
development effort has been
wasted due to inter-regional
wars, which are often supported
by outside elements. When ever
a development partner breaks
its commitments to peace,
especially those in the Middle
East, the Union must stick to
its fundamental principles of
promoting peace, democracy
and human rights.
Therefore, I support Prince
El Hassan’s call for a Charter
for Stability to respond to
the concerns of people in the
Middle East over such vital
matters as land ownership,
the economy, demography
and supranational
cooperation. I also agree
that such a Charter must go
beyond short-term national
policies and cover all aspects
of investment in the region. A
Charter must also guarantee
the primacy of democratic
principles and respect for
human rights. Together with
full recognition by all parties
of the Palestinian borders of
1967, this Charter could help
assure a peaceful future for
the region.
Given the need for such a
holistic approach in the Middle
East – one which clearly
incorporates human rights – I
believe the alternative proposals
for renewed EU-Mediterranean
relations from French President
Nicolas Sarkozy are inadequate.
Sarkozy wants us to revitalize
discourse and action in the
region. But he fails to address
the critical issue of intraregional
relations, which
has seen some EU member
states tending to go-it-alone.
204 | Europe’s World Spring 2008

Moreover, Sarkozy seems
satisfied to consider investment
in infrastructure in isolation,
rather than taking on board
investment in people and
human rights too.
I believe that peace in the Middle
East requires us to travel in hope
in the company of people who
believe in a peaceful and
democratic future for the region,
and for us to maintain a steadfast
LETTERS
commitment to the values that
helped Europe to meet its great
challenge of reconciliation in the
20th century.
Reviving Europe’s universities
By Lykke Friis
RUTH
THOMPSON,
Director
General of
the Higher
Education Group at the
British Department for
Innovation, Universities
and Skills
Sir,
Lykke Friis clearly recognises
just how important it is to
modernise higher education
in Europe. Indeed, reform is
becoming more and more
urgent if our graduates want to
compete in the global market
and if the EU is serious about
creating a knowledge-based
economy as promised by the
Lisbon strategy. Two years
ago, the EU in Hampton Court
agreed that reform of higher
education was a top priority.
Yet progress since then has
been slow. It is now apparent
that we all need to take
positive steps to make sure
that essential changes actually
happen.
In the UK, we think that
autonomy is the key to
modernisation. Once universities
and other higher education
institutions are allowed to
govern themselves, we believe
that they will reform themselves.
As the Danish example in article
by Friis showed, autonomous
institutions are able to develop
their own “missions”, widen
their international outlook,
strengthen partnerships with
local communities and so
compete more effectively
worldwide. We therefore
consider it to be important that
each member state allows their
higher education institutions
greater independence.
More autonomous universities
can also seek out additional
sources of funding and reduce
their reliance on public money.
For instance, UK institutions
have considerable freedom
to set their own tuition fees
for undergraduates and are
encouraged to raise extra income
from alumni. In the US, state
universities as well as the Ivy
League raise hundreds of millions
of dollars in this way. It is a
lesson for all of us in Europe.
In the UK, we are committed to
expanding higher education to
deliver both the knowledge and
other skills that students will
need to find a good job once
they graduate. Reform of higher
education therefore needs to be
linked directly to the qualities
that are demanded in today’s
international labour markets.
We should encourage our
education institutions to talk to
employers and design courses
and qualifications that will help
modern businesses to grow.
Last but not least, as Friis says,
the whole EU budget needs
radical reform if Europe is to
respond effectively to
globalisation. Even though EU
education spending is due to
grow by over 50% between 2006
and 2013, this won’t be enough.
Agriculture and rural policy still
take up 45% of total EU
Spring 2008 Europe’s World | 205

EUROPEAN PARLIAMENT SPOTLIGHT
“IN LIGHT OF RECENT MARKET TURBULENCE, WE
NEED TO LAY THE FOUNDATIONS FOR A MORE
STABLE AND SECURE EU FINANCIAL MARKET”
Martin Schulz, President of the Socialist group
markets also depends critically on stronger
transatlantic dialogue, although cooperation
cannot increase at the expense of Europe’s
tough regulatory goals, including high prudential
standards, transparency and consumer rights.
What should the EU be doing to improve the
global competitiveness of Europe’s financial
services and banking sector?
The EU’s first step to improve the global
competitiveness of the financial sector must
be to complete the internal market for financial
services, with measures to encourage market
integration matched by new efforts to protect
consumer rights. The industry needs to develop
more pan-European financial products to meet
the demands of the EU’s increasingly mobile
citizens. And the EU needs to create an adequate
framework of supervision to ensure that these
products are portable and recognised by all
relevant regulators. Harmonisation on consumer
protection must, however, respect the diversity
of member states’ traditions and their varied
legal systems.
The EU should also eradicate fiscal barriers to
cross-border economic activity and prevent tax
competition which creates obstacles to crossborder
financial services. Further harmonisation
of the tax base and more fiscal convergence
would be a massive step forward in this regard.
The EU’s competitiveness on global financial
Certain issues demand urgent attention, notably
transparency for investors, markets and regulators,
valuation standards and risk management in the
financial sector. The EU, therefore, needs to
bring forward specific regulatory proposals on
hedge funds and private equity groups, rating
agencies and supervision. And, in light of recent
financial market turbulence, there should be an
in-depth review of the problems on the interbank
money markets and other related credit
crises. We need to learn all the necessary lessons
and lay the foundations for a more stable and
secure EU financial market in future.
The EU has often been criticised for being
too distant from its citizens. What would
be your plan to bring the EU closer to its
citizens?
The low turnout in the recent Romanian elections
for the European Parliament – at just 29%
of the voters - underlined how important it
is to involve people in EU affairs. The EU is
big, diverse and complex, which makes pan-
European communications a tough nut to
crack. All the different EU partners - politicians,
governments and the Commission – need to do
more to explain how the EU makes a difference
to people’s daily lives. Commissioner Margot
Wallström recently made an excellent start in
improving EU communications with her Plan D
_ for debate, dialogue and democracy. We also
have to find ways to make sure that Europe’s
206 | Europe’s World Spring 2008

leaders and politicians listen to the people.
And we have to stop the endless “blame game”
between Brussels and national governments as it
confuses everyone.
Many inter-institutional initiatives are underway
to help the EU communicate better, which are all
welcome. However, dialogue in Europe cannot
become a set of institutional arrangements.
Communications must be citizen-centred,
empowering people and providing them with
the information they need to vote meaningfully.
MEPs have a critical role in this respect. It is up
to each of us to translate the EU into something
relevant to the day-to-day experience of our
constituents. Here in the Socialist group, we
are developing our website (www.socialistgroup.
eu) to tell people about our work and to provide
an interactive space for them to reach us. We
also support the Party of European Socialists’
initiative to consult voters - for the first time ever
- about the content of the European election
manifesto (www.pes.org).
The EU is the biggest development and
humanitarian aid donor in the world. What
should Europe be doing to emphasise this?
As you say, the EU is the world's biggest spender
on humanitarian and development aid. If you
add together the resources provided by the EU
and its 27 member states, the sums of money
are very large indeed. A genuine common foreign
policy would make this contribution even more
valuable as well as more recognisable, and an
EU High Representative could bring all this
humanitarian and development support together
into one effective policy.
With 2008 being the European Year of
Intercultural Dialogue, what should its
concrete aims be and how could they be
achieved?
One of the most serious risks to the world right
now is the idea that a “clash of civilisations” is
inevitable and that the world's big religions and
cultures cannot live together. It’s an argument
that is being pushed by fundamentalists in the
Islamic world and in the west. This kind of claim
leads to armed conflict – even though it simply
isn’t true. In fact, the opposite is correct. You
enrich your own culture by learning from other
people's cultures. In order to learn from others,
you first have to learn about your own culture
and be confident about your own identity. You
also have to keep an open mind about other
cultures, and be prepared to respect their values,
rather than seeing them as a threat. That is the
idea behind intercultural dialogue; it is a dialogue
that brings peace and enrichment. It is the idea
behind our unique European project and it’s an
idea that’s worth exporting.
What timeframe do you see for EU
enlargement in the Western Balkans? What
are the main stumbling blocks and how
should they be resolved?
The EU's presence in the western Balkans is
significant and is, in part, a military presence.
I would prefer not to need to have soldiers
there. If Bosnia-Herzegovina, Macedonia and
Serbia follow the path to EU integration, then
we can start to replace those soldiers with
construction workers. It is only a matter of time
before countries in the western Balkans join
the Union. Individual countries will decide for
themselves about the pace of this process and
each country’s application will be judged by the
EU on its own merits. Croatia is already very
close to joining, although at this stage nobody
has a firm date. We need to offer all of the former
Yugoslavia states the prospect of membership;
indeed, the potential for accession has already
had a stabilising effect throughout the region.
However, it would be highly speculative to discuss
a specific time-frame for this at the moment.
And, in any case, the existing EU member states
need to ratify the Treaty of Lisbon as the Union
cannot take in any more new members under the
present treaties. We have wasted enough time on
institutional reform already.
Martin Schulz was interviewed for Europe’s
World by journalist Simon Taylor. This section
is supported by the Socialist Group (http://www.
socialistgroup.eu)
Spring 2008 Europe’s World | 207

expenditure, while the majority of
Structural and Cohesion Funds is
spent in richer member states.
Britain hopes that the 2008-09
review of the budget will lay the
foundation for more effective and
efficient EU spending and
promote research and innovation
so that we can all rise to the
challenge of globalisation.
How to stop development aid from doing harm
By Mick Foster
ROMANA
JORDAN CIZELJ
MEP, Vice-
Chairwoman
of the
European Parliament’s
Committee on
Development
Sir,
Mick Foster is right to stress
that aid programmes must
both be long-term and agreed
mutually between donors
and recipient countries if we
are to reach the Millennium
Development Goals on poverty
reduction, education and health.
The EU, as the world’s largest
donor of development funds, is
already applying both principles
to the way it manages over half
of the world’s total aid budget.
We strive to make our funding
more effective through better
coordination among EU and
outside donors. We also work
hand-in-hand with recipient
nations to achieve long-term
cooperation, which requires
lasting commitments on both
sides. All this is tied into the EU
Code of Conduct on the division
of labour in development
policy. The Code is embedded
in the principles of ownership,
alignment, harmonisation and
good management.
Today we can measure the
progress achieved by concerted
aid efforts. The proportion of
the world’s population living
in extreme poverty fell from
nearly one third to less than a
fifth between 1990 and 2004.
The numbers of the poorest of
the poor have levelled off in
sub-Saharan Africa and overall
the poverty rate has declined
by nearly six percentage points
since 2000. More children are
now in school in the developing
world. Enrolment in primary
education, for example, rose
from 80% in 1991 to 88%
in 2005. Child mortality has
declined worldwide, with targeted
intervention programmes saving
many young lives from the main
killer diseases and conditions.
Controls over malaria have
also been expanded. Even
women's political participation is
growing, albeit slowly. Therefore,
it is obvious that together we
can implement effective aid
programmes.
Despite such progress, bilateral
donors are still being criticised
for granting development aid out
of national, political, strategic,
security or economic self-interest.
I believe that a new global
development mechanism could
avoid such censure, especially if
it were to take over responsibility
for the most contentious issues.
For example, the decision to
suspend aid in the case of severe
human rights violations would be
more acceptable if it were taken
at an international level.
A new global aid instrument
could also guarantee recipient
nations a more dependable
income stream, one that was free
from short-term conditionality or
political interference from
individual donors. As Mick Foster
says, the current “stop-start”
approach is most unhelpful for
developing countries which are
trying to secure long-term
development for their people.
208 | Europe’s World Spring 2008

LETTERS
There’s a brave new Europe to be glimpsed in the Reform Treaty
By Jean-Dominique Giuliani
ANNELI
JÄÄTTEENMÄKI
MEP, Vice-
Chairwoman
of the
European Parliament’s
Committee on
Constitutional Affairs
Sir,
As Jean-Dominique Giuliani
says, Britain has dealt a serious
blow to European integration
by rejecting the Charter of Basic
Rights as part of the Reform
Treaty. The UK position not only
undermines the foundation
of the EU's commitment to
human rights, it also impedes
the development of a new pan-
European culture of respect for
human and social rights that
could have promoted greater
peace, democracy, justice and
solidarity. Therefore, I share
the opinion of British liberal
MEP Andrew Duff that Britain’s
opt-out is a serious political
misjudgement.
The UK also damaged the
Union’s ability to strengthen
its role on matters of internal
security by avoiding any treaty
commitment to greater police
and judicial co-operation. This
leads Britain another step away
from the rest of Europe and
reduces the chances that the
Union will be able to increase its
global influence in this area.
With regard to EU immigration,
I share Giuliani´s view that it
is vital to harmonise national
policies. However, I would
like to point out that it is also
important to give immigrants
the same basic rights as
other EU citizens, including
the right to vote - and stand
Britain has dealt a blow to
European integration by
rejecting the Charter of Basic
Rights. I share the opinion that
Britain’s opt-out is a serious
political misjudgement.
as candidates - in European
Parliament and local elections.
It is shameful that millions of
immigrants in Europe are denied
these basic rights. How can the
EU speak out on human rights,
and presume to lecture other
nations on their records, unless
it guarantees basic rights for all
at home?
I must, however, disagree
with another of Giuliani’s
conclusions. What makes
him think that economic and
monetary integration are largely
accomplished? Only 13 out of
27 member states belong to
the eurozone and, 20 years
after the launch of the single
market, whole sections of our
economies still need to be
opened fully to cross-border
trade. The EU services directive,
for example, was a good starting
point but no more. There are
still many obstacles to the free
movement of people, goods,
services and capital. Even on
the internet, only 6% of EU
shopping crosses national
boundaries.
We are already facing many
challenges that were unforeseen
when the single market project
began, including enlargement,
ageing populations, energy
security and climate change.
Perhaps, in an era of dramatic
global change, the single market
will never be complete. We will
certainly need a more flexible
approach as our international
boundaries continue to be
redrawn and the global market
throws up unexpected threats
and opportunities. Now the dust
is settling on the Reform Treaty,
perhaps the EU can at last turn
its attention to these fresh
challenges of the future.
Spring 2008 Europe’s World | 209

How and why Europe must embrace ethnic diversity
By Giuliano Amato
CEM ÖZDEMIR
MEP,
member of
the European
Parliament’s
Committee on Foreign
Affairs
Sir,
Giuliano Amato is right to
demand greater political vision
in Europe over our multi-cultural
future. But over-reliance on
studies from the US to analyse
the immigration situation
in Europe is misguided. We
cannot simply project US
“reality” onto Europe, not least
because of one remarkable
difference between the two
regions. Unlike people in the
USA or Canada, Europeans still
have trouble identifying even
second-generation immigrants
as citizens. We tend to define
them by ethnic origin, colour or
religion. The expression "a Turk
with a German passport" is a
telling example of this mentality.
It is crucial to change such
public attitudes if we are going
to create an atmosphere in
Europe in which immigrants
can more easily identify with
their adopted countries. You
cannot point the finger of blame
at government failures and
ignore the fact that immigrants
and their organizations have
responsibilities in the process,
too. Nevertheless it is clear that,
if we want to make progress,
European states must change
the tone of political discourse
on immigration and integration.
This holds especially true when
it comes to Muslims. Amato
makes an important point when
he reminds us that Muslims
are not the homogenous group
so often presented in politics,
public discussion and the
media. There are conservative
Muslims, fundamentalists,
secularists, women who wear
It is crucial to change public
attitudes if we are going to
create an atmosphere in Europe
in which immigrants can
more easily identify with their
adopted countries.
headscarves and those who
don’t. Some Muslims fast during
Ramadan, others never have
fasted but still consider their
identity to be connected to
Islam. I believe that recognizing
diversity is part of the answer to
Amato’s question, “How can we
bridge the gap between our own
communities and the growing
Muslim population?” It is a
precondition for establishing
basic dialogue with Muslims,
upon which cooperation can
be built. Furthermore, by
understanding the distinctions
within Muslim communities,
we would be better placed to
identify groups and individuals
who might become bridgebuilders
and those black sheep,
especially among young people,
who will resist integration.
When it comes to political
strategies, however, the
importance of education policy
cannot be overemphasised. It is
our basic responsibility to offer
migrant children equal
opportunities in our education
system. The OECD’s well-known
PISA study revealed a clear
correlation between parents’
socio-economic background
and their children’s success in
school. While this effect varies
among OECD countries, it is so
strong in Germany that some
experts even consider it
institutional discrimination.
Ultimately, Europe’s success or
failure in the integration
challenge will be measured by
its efforts to improve the
educational opportunities of
immigrant children.
210 | Europe’s World Spring 2008

Breaking out of the vicious circle of EU politics
By Daniel Cohn-Bendit
LETTERS
LENA EK
MEP, Vice-
Chairwoman
of the
European
Parliament’s Delegation
to the EU-Croatia Joint
Parliamentary Committee
Sir,
Daniel Cohn-Bendit says
European politicians suffer from
convenient bouts of amnesia
when faced with difficult tasks.
My diagnosis is different. I think
they are afflicted with paralysis,
an illness caused by fear of the
future and a lack of vision. Let me
illustrate my point with some of
the major challenges confronting
the European Union today.
Our “old” continent is struggling
to keep pace with strong
economic growth in developing
countries. These countries are
making great strides thanks to
the strength and vitality of their
people, who are determined
to improve their quality of life
through hard work and provide
their children with a better
future. Industries in developing
countries are striving to find
improved technologies and new
solutions to meet the people’s
aspirations. Meanwhile, in the
European parliament we often
meet lobbyists from “developed”
EU industries who are fighting
to keep obsolete technologies
going and politicians who want to
close EU markets to preserve the
"good old days". Rather than give
in to such retrograde requests,
we should instead work together
to increase our spending on
research and education, open
up our markets, share innovation
and transfer technology to
developing nations in order to
solve our common problems.
A similar fear of the future is
affecting the energy sector as
we enter a new era of climate
change. Economic history
demonstrates that energy
supplies strongly influence global
patterns of industrial production,
employment, finance and even
world political power. So the shift
away from oil and coal as our
primary sources of power will
also alter global financial flows.
This presents great opportunities,
but also implies that we need
to challenge the structures of
today. While this will frighten
many people, it is essential
to deal with global warming.
After all, each successive report
from the Intergovernmental
Panel on Climate Change
shows an increased threat from
accumulated greenhouse gases.
As this knowledge spreads, our
citizens will demand a new type
of energy policy, one that does
not rely on fossil fuels.
European politicians’ fears
about the future are also getting
in the way of EU enlargement,
especially Turkish membership.
All demographic statistics clearly
illustrate an alarming trend in
the age profile of Europe; the
proportion of young people in
Europe is diminishing, thereby
decreasing our relative importance
in the world. We have to face the
fact that the EU cannot afford to
exclude the youthful population
of Turkey; we desperately need
their workforce, productivity and
determination. It is a subject
that should be approached with
openness and tolerance, rather
than being stifled by political
phobias about change.
In his article, Cohn-Bendit - as
usual - strikes wildly at all targets.
While I share some of his
conclusions, I disagree over how
they should be achieved. A true
friend is a person who asks how
you feel and listens to your answer!
Then you can put aside your fears,
overcome your paralysis and begin
to take action once again.
Spring 2008 Europe’s World | 211

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212 | Europe’s World Spring 2008

Why tensions are high between
the Low Countries
By Laurens Jan Brinkhorst
HANS VAN
BAALEN,
Chairman of
the Dutch
Parliament’s
Association for Belgo-
Dutch Relations
Sir,
The Benelux - Belgium, the
Netherlands and Luxembourg - is
the size of a large EU member
state and can match countries
like France, Britain and Germany.
So Laurens Jan Brinkhorst is right
to say that close co-operation
between these Low Countries
would increase their influence in
an enlarged European Union.
Ratification of the Reform Treaty
will settle their differences
over EU institutional changes.
Belgium and Luxemburg
have hitherto favoured
more federalism, while the
Netherlands supported a more
intergovernmental route. These
distinctions will be irrelevant
once the new treaty is fully
ratified. It will then be time to
combine forces in the day-today
management of the Union.
Close Benelux cooperation
would help these three countries
to promote common interests
such as free competition in
a well-functioning common
market, a strong EU free trade
policy within the World Trade
Organization and effective
justice policies, such as counterterrorism
and mechanisms to
combat trans-national organised
crime. It could also help Belgium
to overcome internal quarrels.
The Netherlands, Belgium and
Luxemburg all have strong
track records in international
efforts to resolve conflicts and
disagreements. Our armed forces
play an important role within
NATO, the EU and the UN.
This, too, could be enhanced if
Benelux were united.
I believe that the first step
towards reviving the role of
Benelux would be for our troika
of ministers to formulate
common initiatives and
common positions within the
EU. This would strengthen the
position of all three Low
Countries, bringing benefits not
just to Belgium, Luxemburg and
the Netherlands but to the rest
of the EU as well.
LETTERS
Europe’sWorld
WHAT DID THESE
AUTHORS HAVE
TO SAY?
MICHÈLE ALLIOT-MARIE
GIULIANO AMATO
JOSÉ MARIA AZNAR
CARL BILDT
DANIEL COHN-BENDIT
KEMAL DERVI
ANNA DIAMANTOPOULOU
FRANZ FISCHLER
SUSAN GEORGE
BRONISLAW GEREMEK
ROMAN HERZOG
TOOMAS HENDRIK ILVES
JACQUES DE LAROSIÈRE
KRISTIINA OJULAND
MANUEL MARIN
NICOLAS SARKOZY
JACEK SARYUSZ-WOLSKI
JAVIER SOLANA
GEORGE VASSILIOU
HUBERT VÉDRINE
JAMES WOLFENSOHN
CONSULT BACK
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the only Europe-wide
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Spring 2008 Europe’s World | 213

Forum for Debate
Europe’s World publishes in each issue a number of Sponsored Sections
whose content is the responsibility of the sponsors. This forum offers readers an
opportunity to respond and comment on them.
In response to the Sponsored Section
by the Eastern Mediterranean University in EW Autumn 2007
By
CONSTANTINOS
ELIADES,
Ambassador
of the
Republic of Cyprus to
Belgium
Halil Guven, writing as a
university rector in the Turkish
occupied northern area of
Cyprus, wrote about the
violation of human rights of
Turkish Cypriots by what he
calls “Southern Cyprus”. I would
argue that the human rights of
all Cypriots – Turkish and Greek
– have been violated for 33
years now by the Turkish military
occupation of the northern
third of our island. There is no
“Southern Cyprus” or “Northern
Cyprus”, only the Republic of
Cyprus. Our state is recognised
internationally, with Turkey the
sole exception. It is only the
enforced division of the island
by Turkish forces, and Ankara’s
separatist policies, that keep
the Turkish community isolated
from their fellow Cypriots.
The academic institutions in
the north cannot be viewed as
legitimate universities for two
main reasons: most of them have
been built – more or less entirely
- on property belonging to Greek
Cypriot refugees, and these
The academic institutions in
the north cannot be viewed as
legitimate universities
institutions have never received
the owner’s consent for this
construction. Also, their curricula
have not been submitted for
approval and certification by the
Ministry of Education and Culture
of the Republic of Cyprus. I would
note that the European Union’s
Bologna Process for creating
a European Higher Education
Area by 2010, is only open to
sovereign and independent
states, so the Turkish Cypriot
secessionist entity is not
qualified.
The government of Cyprus
has of late proposed that
an independent authority of
Greek and Turkish Cypriot
experts could take charge of
the evaluation and approval
of Turkish Cypriot universities.
It was suggested that these
experts meet within the
framework of the bi-communal
technical committees foreseen
by the United Nations’
Gambari process. Were the
current impasse over the
Gambari process to continue,
a practical alternative system
could be decided by an ad hoc
group of experts from both
communities. This temporary
arrangement would be
designed to meet everyone’s
needs, pending a permanent
resolution of the Cyprus
question. The Turkish Cypriots,
however, declined to join such
a bipartisan group.
I would like to stress that
Turkish Cypriots are equal
214 | Europe’s World Spring 2008

FORUM FOR DEBATE
citizens of the Republic of
Cyprus, and have the same
rights and obligations. However,
Nicosia finds it unacceptable
that Ankara and the Turkish
Cypriot leadership continue to
try to establish the occupied
zone as a separate legal entity
and legitimise the de facto
division of the island.
In response to the Sponsored Section
by the Kashmir Centre.EU in EW Autumn 2007
By EMMA
NICHOLSON
MEP,
member of
the European
Parliament’s Committee
on Foreign Affairs and
Rapporteur for Kashmir
Last May, 522 members of the
European Parliament voted
overwhelmingly in favour of the
resolution “Kashmir: present
situation and future prospects".
For the first time, the Parliament
adopted a full-length resolution
on Kashmir which became a
touchstone for future policy of
the European Union; it will guide
the Parliament's and the Union’s
overall approach to the region
and its problems. For nearly 60
years, Jammu and Kashmir was
a region of conflict and a plaything
for regional powers such
as China, India and Pakistan.
The dispute claimed more than
80,000 lives. While travelling
in the region as parliamentary
rapporteur for Kashmir, I gained
invaluable insights into the
political, economic and social
conditions of one of the world’s
most troubled flashpoints.
One of the strengths of the
European Parliament is its ability
to produce resolutions based
on reports that have been
informed by intense observation
and analysis, and - even more
important _ on consensus
between political groups.
For the European Parliament,
the struggle over the Kashmir
resolution highlights the need
to rethink its policy on lobbying
organisations.
However, the Parliament is also
open to lobbying organisations
who try to influence the
political position and voting
behaviour of members. While
lobbying is not new, some of
the tactics now being employed
are startling. One particular
organisation has taken out
a series of advertisements
in Europe's World attacking
the Parliament's resolution
and my work as rapporteur.
On numerous occasions the
organisation claimed that
the original Draft Report and
the resulting Foreign Affairs
Committee Report were biased
and flawed. On the contrary,
the report was strengthened in
all its core features when put
to the final vote. It was a huge
success for all Kashmiris fighting
for democracy, human rights and
freedom from oppression on
both sides of the Line of Control.
This organisation claims to
represent Kashmir as a whole,
and to lobby for the interests
of all Kashmiris in Europe. In
reality, of course, Jammu and
Kashmir, as well as Gilgit and
Baltistan, contain disparate
political entities and geographic
regions, with numerous groups
holding different positions
and fighting for diverse
political rights; all of them
have a right to be heard. For
any one organisation to lay
claim to absolute authority
and knowledge of Kashmir is,
therefore, surprising. In fact,
Spring 2008 Europe’s World | 215

this organisation revealed
itself to be a political proxy
of the Pakistani government
in Brussels when it attempted
to erase any criticism of the
human rights situation in the
Pakistani-controlled regions of
Azad Jammu and Kashmir and
Gilgit and Baltistan.
The methods of this
organisation, especially the way
it tried to pressurise British and
other MEPs, raises questions
over the self-regulation of
lobby groups. Is it acceptable
that people can walk into
the Parliament and harass
MEPs to vote in favour of the
official position of a foreign
government? Most members
quickly saw through this
organisation; hardly any chose to
adopt the views of a military ruler
who has been widely criticised
for his record on human rights
and democracy. President Pervez
Musharraf’s latest attempts
to save himself by imposing
emergency rule in Pakistan will
not have made these MEPs
regret their decisions.
For the European Parliament,
the struggle over the Kashmir
resolution highlights the need to
rethink its policy on lobbying
organisations. Self-regulation is
not functioning adequately;
indiscriminate access for any
lobby group - particularly to the
offices of members - needs to
be re-examined. Only then can
we be confident that MEPs
really are hearing the voices of
those who most need to be
heard.
E.W. ADVISORY BOARD MEMBERS
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an independent centre for the analysis and development
of policies affecting the environment in Europe and
beyond.
We undertake research, policy advice and consultancy
work on several policy areas, covering issues such
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IEEP Brussels Office:
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216 | Europe’s World Spring 2008

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